A Study of Cross-Shareholding

Cross share holding is still a big issue in Japan, as the cancellation of shares and return on shareholders equity remain slower to improve. This report shows this evidence clearly, using analysis of 500 companies of core research universe as of August 2016. Average ROE and CG scores for 50 largest cross share holdings/sales companies were lower than those for overall 500 companies. A half of 50 companies are banks and those holdings have not really decreased for a year. Due to accountability to shareholders, companies should disclose cost/benefit on the holdings that put downward pressure on ROE by earning only dividends. Detail is shown as link below.


Companies Improved CG Scores 09/2015-09-2016

Titlis updated companies in Japan improved CG scores from 09/2015-09/2016, following the previous posting of Attribution of change in CG score. Of 455 companies 7 companies removed takeover defense and many companies moved to improve board of directors at slower but steady pace. This is not enough but we should positively appreciate further effort in near future. Meantime share holding and share cancelation that would put positive pressure on return on shareholders’ equity have shown little improvement.


October 27th “Director Boot Camp” – Another Successful Program! Next Course: December 15th


On October 27th, BDTI held its English Director Boot Camp , attended by a number of experienced participants. Participants from various companies heard lectures about corporate governance and related topics by Nicholas Benes and Andrew Silberman of AMT, and exchanged experiences and opinions at a spacious, comfortable room kindly donated for our use by Cosmo Public Relations, a leading communications and PR firm in Tokyo.

We are planning to hold the next course on December 15th. Sign up early!

FT: “Companies fail to buy into Japan’s stewardship code”

“Minuscule adoption of code a hit to Abe corporate governance efforts”

“…..Nicholas Benes, one of the architects of Japan’s corporate governance code and head of the Board Director Training Institute of Japan said: “In order for the stewardship code to function as it was intended and be effective as hoped for, the most important part of the ‘investment chain’ that needs to be signed up are the end asset owners — a large proportion of which are corporate pension funds … they are the ones that dictate policy to the fund managers that have signed the code”.

Unless the corporate pension funds — as the biggest customers of the asset managers — are actively demanding better stewardship, fund managers would inevitably cut corners on engagement and proxy voting, Mr Benes added…. ”

Attribution Analysis of Change in CG Scores 09/2015-09/2016

Titlis has updated corporate its governance ratings for 500 major public companies in Japan as of September 2016. The CG scores improved 3/100 pts from a year ago,  steadily but at a slower pace than expectations at the inception of Corporate Governance Code. According to the attribution analysis of the changes in CG scores for a year, the category (factor) of the Board of Directors was the largest contributor and the categories of Incentive of Remuneration, Takeover Defense, and Share Cancellation also inched up scores.

Cross-shareholdings should be considered the effect of share price plunges. The resolution of cross-share holding is extremely slow. We should keep eyes on enhancement of CG.

”Do Institutional Investors Demand Public Disclosure?” by Stephen A. Karolyi and Andrew Bird

”Do institutional investors demand corporate disclosure? A central question in finance and accounting is whether corporate transparency benefits or hurts investors. This issue is complicated by the fact that information provision could affect groups of investors differentially. Public information may crowd out the private information advantage of some institutional investors; alternatively, investors, particularly those following more passive trading strategies, may not be information sensitive. However, even passive institutional investors may benefit from an increase in monitoring by other stakeholders following improved disclosure. Further, regardless of the preferences of institutional investors, whether or not they are able to affect corporate policy on this margin is unclear. This tradeoff is reflected in mixed empirical evidence on the relationship between institutional ownership and corporate disclosure.

To address this tradeoff faced by institutional investors, we analyze the revealed preference for corporate disclosure by institutional investors and the associated impact on the information content of corporate disclosure. Empirically, identifying a causal effect of institutional ownership on corporate disclosure policy is difficult because experimental settings and direct measures of corporate disclosure quantity and characteristics are scarce. We propose a two-part solution to these problems. First, we utilize exogenous changes in institutional ownership around Russell 2000 index reconstitutions in a regression discontinuity design to identify the effect of institutional ownership on corporate disclosure policy. Second, we directly measure the characteristics of corporate disclosure using a novel data set composed of all 8-K filings between 1996 and 2006.

“How Japanese Companies are Navigating the Corporate Governance Code” (Speech to CII)

Here is the short speech that I gave to the Fall 2016 Conference of the Council of Institutional Investors (CII),  on September 30, 2016.  On this video, my speech starts at the 36:00 minute point.   Below, I have reproduced the CII’s summary of my comments, and further below, the full text of my speech.

” Nick Benes, representative director for the Board Director Training Institute of Japan, said a sea change is underway in Japan in terms of companies beginning to comply with the Corporate Governance code, but there is still room for improvement. He reported that almost 80 percent of Japanese companies now have two or more independent directors and 40 percent of large companies have their own corporate governance guidelines, but beyond that, the reforms that companies say they have in place are lacking in substance. He estimated that 90 percent of firms say they comply, but have little evidence this is the case and few have actually changed their practices. Despite these setbacks, Benes said he remains optimistic that Japanese companies will move in the right direction because there is now broad awareness that “governance is good”. Additionally, disclosure has vastly improved and the number of votes opposing the re-election of directors is climbing. A video of this session is available here.


Text of Speech (and Slides)

“In 2013, I was lucky enough to propose to key congressmen in Japan, that Japan should have a Corporate Governance Code.  I then advised them, and then the Financial Services Agency, about the content of the Code.

So I am very pleased to have this opportunity to summarize the progress that Japanese companies have made so far in implementing the principles of the Code, based on my activities as consultant, independent director, “directorship” trainer, and policy advocate.

My main message to Committee members is this:

1)    A sea change is underway in companies, the media, the government, and the public. Because Japan is a “shame-based” society, the vastly enhanced disclosure required by the Code has created a strong virtuous circle.

2)    These changes represent a very big opportunity for foreign investors, but only IF they study the Code and the disclosures in detail, and then leverage the Code’s principles so as to make specific requests for better governance practices to Japanese companies they invest in, while also brandishing the possibility of consequences – such as not re-electing senior executives, – if progress is not made.

Here are some highlights “from the trenches” about what is occurring in Japan:

Sagami-FamilyMart UNY Holdings: Can a Board Justify Selling a Subsidiary to the Low Bidder?

Sagami Co. Ltd. (8201) is a Tokyo Stock Exchange First Section company, 56% of the shares of which are owned by FamilyMart UNY Holdings (8028), the holding company of the recent convenience store mega-merger between Family Mart and UNY (Circle K-Sunkus).  Sagami is a national chain of retail kimono stores established in the 1970s under the UNY corporate umbrella.  UNY converted Sagami into a “listed subsidiary” in the bubbly mid-1980s.

Needless to say, the kimono business is facing demographic and other headwinds.  Sagami’s revenues have declined steadily year to year.  At ¥100 a share, Sagami’s market capitalization is ¥2.87 billion.  By contrast, Family-UNY’s market capitalization is nearly ¥700 billion.  Sagami is a drop in the bucket.  Sagami’s thinly traded shares have bumped up and down between ¥50 and ¥80 over the last year.

Earlier this summer Family-UNY made the decision to dispose of Sagami as a non-core business.  Family-UNY entered into discussions with domestic private equity fund Aspirant Group in which it was agreed that Family-UNY would accept a discounted tender offer for its shares at ¥56 a share.  Part of the deal included an agreement by Family-UNY to forgive ¥1.6 billion of parent company loans to Sagami.  The tender offer expires on October 11, 2016.

Enter New Horizon Capital, a rival domestic private equity fund, which in September offered Family-UNY better terms– ¥70 a share.  Family-UNY has yet to indicate how it will respond to the higher bid, but recent news reports leave the strong impression of distress and hesitation within Family-UNY.

The fact that the situation is creating distress and hesitation should be viewed as evidence of progress in Japanese attitudes about corporate governance and shareholder rights over the last decade.  In 2004, in the much larger but parallel case involving competing bids by the Mitsubishi Tokyo Bank and Sumitomo Mitsui Bank for UFJ, the Japanese establishment and press were largely oblivious to the UFJ shareholder issues raised by Mitsubishi Tokyo’s pre-emptive bid that foreclosed a higher bid by Sumitomo Mitsui. (See p. 159 of the attached article for a more detailed description of that case.)

VIDEO: Global Agenda Debate – ”Abenomics at the Crossroads”

”Nearly 4 years have passed since Japanese Prime Minister Shinzo Abe launched the series of economic policies, dubbed “Abenomics”. It is centered on “three arrows”: Bold monetary policy to end the deflation, Flexible fiscal spending to stimulate the economy through large-scale public works projects, and Growth strategy to nurture industries. Today, Abenomics is drawing both praise and criticism. Though the profits of TSE’s First Section-listed companies hit record high for 3 straight years, the economy is still suffering from low growth rate. The unemployment rate dropped as 1 million jobs were created, but inflation-adjusted wages remain low. With the increasing social security costs due to the aging and shrinking population, government debt is ballooning. Can Abenomics revive the Japanese economy? 5 experts from economics, politics and business attend a Global Agenda forum at The University of Tokyo to discuss how the world rates the policies and what it expects from them……”