Our joint research – “Linkage Between Corporate Governance and Value Creation” – between BDTI and METRICAL has been updated as of January 31. The most important inferences are summarized below.
(1) Correlations: Board Practices and Performance
Significant correlation between board practices and performance continues.
(a) ROE: Nominations Committee existence, the number of female directors and percentage of INEDs show a significant positive correlation.
(b) Tobins Q: Nominations Committee, retired top management “advisors” (ex-CEO “advisors”), and percentage of INEDs show significant positive correlation.
(c) ROA (actual): Compensation Committee existence (negative correlation), Incentive Compensation Plan disclosure, and retired top management (ex-CEO) serving as advisors show significant correlation.
Based on this analysis, some board practices are significantly correlated with performance measures, and the correlation has continued over time. However, we must analyze more deeply why the existence of a compensation committee has a negative correlation with ROA. Are firms using committees to justify compensation that is not leading to results? – would be one hypothesis.
“Retired top management score” was newly added to the database in October 2018. It significantly correlates with ROE and ROA, although not many companies disclose the number of ex-CEO advisors. Our hypothesis is that only “quality” companies are choosing to disclose.
(2) Correlations: Key Actions and Performance
There is significant correlation between actions and performance.
(d) Lower “non-investment” stockholdings, growth policy, the presence of large owners, and takeover defenses show significant positive correlation with our three key performance measures.
(e) Cash holdings/sales appears to reflect that profitable companies simply generate more cash, so have more on hand.
(f) “Fewer or no large owners” of negative correlation suggests benefits from the presence of large owner(s).
(3) Stratification by Percentage of Independent Directors
(g) In general, when INEDs comprise a majority of the board, firms display superior performance as judged by our criteria, especially Tobin’s Q.
(h) The number of companies with >50% INEDs is only 76 companies, but these firms have superior average ROE (20.8%, actual) and superior average ROA (5.3%, actual).
(i) We must analyze how the increases in the percentage of INEDs is related to ROE and market value.
(j) Companies with <=5 % of INEDs also display superior performance. We hypothesize this is caused by the presence of “large owners” or founders whose interests are aligned with those of other investors.
(4) Stock Price Performance: CG Top20 Index Vs. TOPIX and JPX400
Stock prices of our “CG Top 20” have maintained their outperformance against the market indices of TOPIX and JPX400. Both market indices have performed about the same, but CG Top20 Index maintained superior performance in both bull and bear market environment.s