The Board Director Training Institute of Japan (BDTI)

METRICAL:Corporate Government Rating of Japan’s 1,800 Companies (July 2020)

So far, we have been conducting analysis focusing on the relationship between improvement of corporate governance and stock price and key performance measures (ROE, ROA). This is the reason that we are keeping close eyes on the enhancement of corporate governance in the perspective of long-term investors. In addition, we decided to analyze the key performance measures based on the past 3 years average ROE and ROA from this month, as maximizing the shareholder value for the long-term or sustainability is a common goal of public companies and shareholders.

It goes without saying that the stock price is one of the important indicators of a public company. In the previous monthly letter as well, I mentioned that the disclosure information of IRs and shareholder meetings is highly correlated with stock prices (Tobin’s Q), key performance measures (ROE, ROA), and comprehensive corporate governance scores. Information disclosure is a very important starting point for management transparency. In fact, the stock price also shows the results of efforts to disclose the above information. Metrical reshuffles the composites of the top 20 companies based on the total corporate governance score as of July every year and provides the performance comparison between CG Top20 stock prices and the stock market indices (TOPIX, JPX400) monthly. It was this month in July that we reviewed the 20 composite companies (the corporate governance score itself changes each month). Lately, the members of the composite companies of CG Top 20 changed from the limited large companies for several years ago, as we expanded the universe from slightly more than 500 companies to 1,800 companies and other companies are willing to improve the corporate governance. This year, 6 companies have been replaced since last year. The 4 completely new companies are Shionogi Pharmaceuticals, Meitec, Kenedix, Net One Systems and NSD. Kakaku.com and Omron returned to the top 20 club again, raising the scores.

July 8th “Director Boot Camp” Course Held by Video Conference! Next Course: September 3rd, 2020!

On July 3rd, in the midst of the Corona virus pandemic, BDTI held its English Director Boot Camp via a teleconference arrangement. The day-long intensive course was attended by 12 highly-experienced participants, including one Chief Digital Officer, one Consultant, one Managing Director and senior executives. The participants heard lectures about corporate governance by Nicholas Benes, and Andrew Silberman of AMT, and exchanged experiences and opinions. Despite the IT challenges everything went smoothly, with breaks for everyone to stretch their legs or review materials in more depth.

We are planning to hold the next course on Thursday, September 3, 2020. Sign up early! Please see a description of our director training course here or click the button below for further information.

METRICAL:June-Stock Market Changed Significantly Due to Concerns of Coronavirus. CG Top 20 Stock Price Outperform Against Topix and JPX400.

In June 2020, the stock market price continued to rise in the first half of the month, following the favorable sentiment that economic activity resumed from the previous month. Since the number of new coronavirus-infected persons has increased worldwide, it has become a nervous development from the middle of the month and has a large up and down amplitude.

Both Topix and JPX400 stock indexes have fallen slightly to -0.12% and -0.01%, respectively, over the past month. CG rating score Top 20 stock price is +0.47%, outperforming both stock indexes significantly.

Redesigning Corporations: Incentives Matter

By Nicholas Benes
(also published in the Harvard Law School Forum on Corporate Governance) 

The Birth of the Corporation: Public Interest Organizations

The evolution of the modern corporation is the fascinating story of a series of self-serving legal and societal mutations over hundreds of years, which have morphed the original concept and endowed corporations with freedom of activity, rights, and limitations on liability that would shock their original “inventors”.

As we all know, for many years most corporations were established by way of an exceptional “charter” by a sovereign, granted only in specific cases where: (a) large amounts of capital were needed (b) to conduct investments and activities that served public or national interests and had good profit potential, but (c) where the risks were so large that few parties would invest if their risk were not shared with many others and/or limited to the amount of money they invested.

In the 1600s and 1700s, the activities that sovereign nations felt met those requirements were the exploration of foreign lands on the other side of the globe, the creation and administration of colonies there, and conducting lucrative trade on long (and dangerous) sea routes to and from those colonies. Thus, the most well-known early corporations include organizations such as the British East India Company (the original “too-big-to-fail company), The Dutch East India Company, the Hudson’s Bay Company, and companies to construct the Erie Canal.

As the industrial revolution gathered steam, the need to raise large amounts of capital increased many times over. Driven by this need, the immense benefits of corporate status for raising financing became increasingly obvious and desirable to investors and managers: easy stock transferability vs. rewriting partnership agreements, separation of ownership from control, legal personhood that simplified large transactions such as loans and large investments (a single counterparty to deal with and sue), and the possibility of receiving a charter that conferred “limited liability” on shareholders. All of these made it much easier to raise funds in large amounts than any other form of business organization.

Message to JR Kyushu Shareholders

Fir Tree Partners submitted a shareholder proposal nominating me as an outside board director for JR Kyushu. This all began as Fir Tree, the largest and longest holding, active shareholder of JR Kyushu since its IPO, was working in dialogue with the Company to find suitable new board candidates. I accepted the nomination because I believe the current needs of the JR Kyushu board fit well with my previous professional experience as well as my knowledge base. In particular, my experience as both analyst and corporate executive should be helpful as I am in favor of dialogue between investors and companies.

In mid-April, I was surprised to learn that JR Kyushu management, after spending months screening and interviewing the various candidates, ultimately decided to reject all candidates that were under consideration with Fir Tree. At this time, Fir Tree asked us to be their shareholder candidates for this year’s annual meeting. Even though being elected to a board as a shareholder proposal candidate is still rare in Japan, I decided to accept the role because I feel strongly about the importance of good governance and the role of completely independent outside directors. As I learned more about JR Kyushu in the past few months, I have concluded that I can add to the JR Kyushu board the diversity, perspective, and expertise that I have developed as an analyst, fund manager, investor relations professional and corporate executive in charge of governance matters. To this end, I believe I can help JR Kyushu in addressing the current challenges caused by Covid-19 as well as fulfill its full potential.

I would also like to publicly state that I am completely independent from Fir Tree and have told them directly that at all times. Fir Tree approached me through the help of a third-party search firm. I previously knew nobody at Fir Tree. There is no financial arrangement between us. I will remain independent from Fir Tree should I be elected as a director of JR Kyushu. I will consider Fir Tree’s opinions as no more or less important than those of any other shareholder, large or small.

If elected to the JR Kyushu board, I would be completely open minded and unbiased. I would review all board matters carefully in consultation with the other board members, management, and shareholders utilizing both public and non-public information in order to form my own opinions. I would endeavor to make well informed decisions that are best for all stakeholders.

Example of UK Pension Voting Policy – Japan Still Has Far to Go

The London Borough of Camden Pension Fund recently updated its voting guidelines. I thought it might be interesting for Japanese readers to see how detailed such guidelines by foreign pension funds are.  It is interesting to note that if you applied these voting criteria to most Japanese companies, almost none of them would pass muster, and the result we would be that many resolutions (and many directors) would not be approved.  Japan is still far, far behind the level of “stewardship” and expected governance practices in many other countries.

London Borough of Camden Voting Guidelines 2020

Very few pension funds in Japan (none that I know of) have voting policies at anything near this level of detail.

 

METRICAL: Corporate Governance Report in English

The AGM season for the March fiscal year end companies is approaching as most of Japanese companies hold it in June, while some companies cannot have finalized the financial reporting yet due to the spread of novel coronavirus infectious diseases (COVID-19). In recent years, an increasing number of companies have moved the date of the AGM up from the end of June (historically majority of companies have held it on Thursday of the last week in June), and many companies are providing and disclosing notices of convocation of general meetings of shareholders in English. Also, although the articles of incorporation must be changed, an increasing number of companies are allowing electronic voting. These are very good initiatives for shareholders and investors. Metrical evaluates how the companies enhance the IR information disclosure as well as such above items as the AGM/IR criteria. For reference, the correlation between AGM/IR factor and key performance measures such as ROE (actual), ROA (actual) and Tobin’s Q is shown below. Especially in Tobin’s Q, the significant positive correlation of this factor is remarkable. Obviously, a company with a higher AGM/IR scores, such as higher IR information disclosure and accessibility to annual general meeting of shareholders would be traded at a higher share price in the market. This result could encourage those who are in charge of IR at a public company above all.

METRICAL: May – Stock Prices Rose Sharply and CG Top20 Stock Price Rises

The market price in May 2020 was favorable to the resumption of economic activity and continued to rise sharply from the previous month. The stock market rose sharply for the second straight month following the rise in US stock prices, which was greatly appreciated by the news of the progress of the new corona vaccine clinical trial. Both Topix and JPX400 stock indexes have risen 6.75% and 7.17%, respectively, over the past month. CG rating score Top 20 stock price is 3.54%, underperforming both stock indexes.

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