The Board Director Training Institute of Japan (BDTI)

METRICAL:Post-COVID-19 Focuses on Family Companies

The environment surrounding our business is changing significantly in line with changes in social life due to the spread of the new corona virus infection. The biggest challenge for management is to adapt to these changes in the environment with a post-corona scenario in mind. We believe that one of the keys to adapting to these changes in a timely and flexible manner is management leadership. We expect to see a lot of interest in the relatively fast-moving family-owned companies. In the past, METRICAL research has shown that companies owned by founder’s families with 20% or more of their companies performing significantly better than average. We would like to focus again on the latest data. The following two charts show the distribution of ROE (actual for past 3-5 years) and Tobin’s Q between family-owned companies (those with 20% or more ownership) and the universe of 1,743 firms, with both ROE and Tobin’s Q being higher for family companies than for the universe of 1,743 companies’ distribution. It remains to be seen whether the family companies will be able to adapt to these changes at a rapid pace and achieve higher profitability, which will be reflected in their stock performance.

METRICAL:CG Stock Performance: November 2020

November stocks surged on global upswing.
CG Top 20 stocks under performed slightly against TOPIX and JPX400.

Stock prices rose Jumped in November on expectations of an economic recovery after Pfizer filed for a new coronavirus vaccine and further liquidity expansion following the U.S. FOMC meeting.

TOPIX and JPX400 indices gained 10.67% and 11.72%, respectively, during the month, while the CG Rating Top 20 ended the month with a 9.16% gain, which was not as large as the two indices.

METRICAL:CG Top 20 Stocks Fell With Underperformance Against TOPIX and JPX400

After an upward trend through the previous months, stock prices fell toward the end of the month in October on concerns about the rising number of coronavirus cases in Europe and North America. The CG Rating Score Top 20 stock indexes significantly underperformed the two indices. CG Top 20 stock prices fell 5.41% in October, while TOPIX and JPX400 closed down 2.81% and 2.75% respectively. However, the cumulative return of CG Top 20 stock prices kept significant outperformance against the both indices (see chart below).

Few Seats Remaining for December 2, 2020 Boot Camp!

The next Boot Camp this year will be on Wednesday, December 2, 2020. Course will be on ZOOM, so anyone in the world can join. Few seats remaining, so make sure to sign up now!
This one-day intensive program teaches participants key legal and corporate governance knowledge they need to responsibly serve on, report to, or analyze boards of Japanese companies, both public and private. The course consists of short lectures interspersed with time for interactive discussion and Q&A about real-life situations that occur on boards, and how to handle them. The course is usually good fun for everybody, since we learn from each others’ experiences, as well as from BDTI. The course covers topics such as:

  • Intro to corporate governance; the role of directors and the board
  • What is legally required of directors under the Company Law?
  • Important corporate law and securities law topics
  • Legal and liability issues, and how to handle them
  • Director duties and conflict-of-interest situations
  • Statutory auditors, internal control, and the audit process
  • The role of the board in strategy and risk management
  • Best practices, committees, and succession planning
  • Japan’s new corporate governance code
  • Changing “corporate governance culture” in organizations
  • The global wave of ESG investing

METRICAL: September CG Stock Performance

September stocks edged slightly higher after surged in the previous month. CG Top 20 stocks gained with solid outperformed against TOPIX and JPX400.

Stock prices kept positive return in September, followed by the rally in the previous few months.TOPIX and JPX400 closed slightly higher +0.52% and +0.11% respectively for the month. CG Top 20 stocks average climbed 2.28% for the month, increasing the outperformance against the both market indices.

METRICAL:Stock Prices of Family Companies and Investment Strategies

In the previous article, based on the study classified the 3 groups of the universe companies by the ownership of major shareholders: (a) Companies with major shareholders that hold >=50% of shares, (b) Companies with major shareholders that hold >=20% and <50% of shares and (c) Companies without major shareholders that hold >=20% of shares. A subsidiary and an affiliate company owned by a parent company or founder’s family company show superior performance in the key performance measures such as ROA and ROE and Tobin’s Q. In this point, it would be an effective way for a listed parent company to raise the return measures such as ROA and ROE of the parent company by consolidating the subsidiary or the affiliate company with relatively higher return. Such a case is increasingly occurred. We introduced investment strategies to buy listed subsidiaries (and affiliated companies) in anticipation of the acquisition of listed subsidiaries with high profit margins of the parent company.
At this time, on the contrary, we focused on family companies whose stock prices have remained lower. There are several purposes for going public, but if one of the purposes is the diversification of funding measures, the purpose wouldn’t’ be achieved in this situation where the stock price is low. There would be an option to reconsider listing on the stock market. From the management side, going private would be an alternative through MBO etc. The table below shows the family companies in our universe with Tobin’s Q less than 0.8, divided into 2 groups of family’s ownerships more than 50% or more than 20% and less than 50%. For a company that suffered low ROA and ROE, the low performance would be a reason for the low share price. However, some companies that have high ROA and ROE are traded at low. For a company in which there is no problem with return performance, but the share price remains low, it may be an option to consider “going private.” Aside from whether or not an investor actually acts such an effort in the engagement, this is an investment strategy to focus on such a viewpoint.

Foreign Direct Investment Law Amendments

“Earlier this summer, the Corporate Counselor covered amendments to Japan’s foreign direct investment laws that lowered the government approval threshold from 10% to a mere 1% for share acquisitions of publicly-traded companies that engage in a wide range of business activities deemed critical to Japan’s national security, unless an exemption applies. Attached for ease of reference is our June newsletter, which has been updated.
Our June newsletter specifically left for another day a discussion of the shareholder rights ramifications arising from the amendments to Japan’s foreign direct investment laws. This edition of the Corporate Counselor bridges this important gap.
The impact on shareholder rights arising from the amendments to Japan’s foreign direct investment laws is a game change for investments into Japan. The Japanese government now has veto rights over fundamental corporate governance rights throughout the investment cycle. The amendments apply retroactively, so overseas investors may no longer be able to effectively control their existing investments in Japan.”

September 3rd “Director Boot Camp” Course Held by Video Conference! Next Course: December 2nd, 2020!

On September 3rd, in the midst of the Corona virus pandemic, BDTI held its English Director Boot Camp via teleconference. The day-long intensive course was attended by 8 highly-experienced participants, including one Chief Executive Officer, two Consultants, one Statutory Auditor, Managing Directors and senior executives. The participants heard lectures about corporate governance by Nicholas Benes along with a guest lecture by Andrew Silberman of AMT, and exchanged experiences and opinions. Even during a pandemic, training continued smoothly, with all participants able to review materials in more depth.

We are planning to hold the next course via teleconference on Wednesday, December 2nd, 2020. Sign up early! Please see a description of our director training course here or click the button below for further information.

Japanese Courts Must Backstop Protections for Minority Shareholders

“In all three transactions, minority shareholders face a decision. Either accept the offered price or resist, by refusing to tender their shares or petitioning a Japanese court to review the price. The most significant question facing Japanese corporate governance today is whether Japanese courts will intervene and backstop special committees and boards of directors that are not doing their jobs.”

Professors Bebchuk and Tallarita, “The Illusory Promise of Stakeholder Governance”

“Corporate purpose is now the focus of a fundamental and heated debate, with rapidly growing support for the proposition that corporations should move from shareholder value maximization to “stakeholder governance” and “stakeholder capitalism.” This Article critically examines the increasingly influential “stakeholderism” view, according to which corporate leaders should give weight not only to the interests of shareholders but also to those of all other corporate constituencies (including employees, customers, suppliers, and the environment). We conduct a conceptual, economic, and empirical analysis of stakeholderism and its expected consequences. We conclude that this view should be rejected, including by those who care deeply about the welfare of stakeholders.

Stakeholderism, we demonstrate, would not benefit stakeholders as its supporters claim. To examine the expected consequences of stakeholderism, we analyze the incentives of corporate leaders, empirically investigate whether they have in the past used their discretion to protect stakeholders, and examine whether recent commitments to adopt stakeholderism can be expected to bring about a meaningful change. Our analysis concludes that acceptance of stakeholderism should not be expected to make stakeholders better off.

Furthermore, we show that embracing stakeholderism could well impose substantial costs on shareholders, stakeholders, and society at large. Stakeholderism would increase the insulation of corporate leaders from shareholders, reduce their accountability, and hurt economic performance. In addition, by raising illusory hopes that corporate leaders would on their own provide substantial protection to stakeholders, stakeholderism would impede or delay reforms that could bring meaningful protection to stakeholders. Stakeholderism would therefore be contrary to the interests of the stakeholders it purports to serve and should be opposed by those who take stakeholder interests seriously…”

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