BDTI/METRICAL Joint Research Update: “CG Practice and Value Creation Linkage”-January 2020-

Topics

  • 50% INEDs increased 1 company (Yamada Consulting [4792]) to 85 (86 companies including Toshiba) from the previous month.
  • A significant positive correlation was found between board practices and value creation (ROE, ROA, Tobin’s q) in the following

(Positive correlation with actual ROE)

  • Ratio of female directors and ROE results
  • Incentive (compensation) plan factors and ROE achievements

(Positive correlation with actual ROA)

  • Incentive (compensation) plan factors and ROA achievements

(Positive correlation with actual Tobin’s q)

  • Adviser/Consultant Factor and Tobin’s q
  • % of independent directors and Tobin’s q
  • Stratification by % of Independent Directors

In this update, we see that the number of companies with a majority of independent directors on the board increased to 85 (86 companies including Toshiba) from 84 of the previous month.

  • >50% INEDs increased 1 company (Yamada Consulting [4792]) to 85 (86 companies including Toshiba) from the previous month. Higher % INEDs firms displayed superior average Tobin’s Q (2.3 vs. 1.7) and thus are “liked” by the market, but lower than average ROE (5.5% vs. 7.6%, act) and ROA (2.0% vs. 3.9%, act) at this time. Is this caused by CG flaws, restructuring, more active investment…?
  • Must analyze how ROE and ROA will change, especially at firms that raised % INEDs.
  • Companies with <=5 % of INEDs also keep superior performance and have fewer policy stocks. We suspect this is caused by presence of “large owners” aligned w/other investors.
  • Correlations: Board Practices and Performance

Secondly, a significant positive correlation was found between board practices and value creation in the following areas:

  • (Positive correlation with actual ROE)
    • Ratio of female directors and ROE results
    • Incentive (compensation) plan factors and ROE achievements
  • (Positive correlation with actual ROA)
    • Incentive (compensation) plan factors and ROA achievements
  • (Positive correlation with actual Tobin’s q)
    • Adviser/Consultant Factor and Tobin’s q
    • % of independent directors and Tobin’s q
  • Are these effects due to better CG practices, or temporary earnings boosts?…or perhaps “good firms copy other firms’ practices faster”? Hypothesis: # female directors reflects “willingness to change”
  • Scores of Compensation committee are negative correlation with ROA. Currently we do not find that many of the new committees formed and better practices (e.g. chair/majority of the members is comprised of INED) are having a positive impact.
  • Retired top management score is significant but correlation is positive (ROA and Tobin’s Q). However, not many company disclose # of ex-CEO advisors. Hypothesis: mainly only “quality” firms disclose

BDTI and METRICAL are continuing to collaborate on finding “linkages between CG practice and value creation.” METRICAL has recently updated the results of our analysis at the end of December 2019 for about 1,800 listed companies representing a market capitalization of more than 10 billion yen. In this analysis, by examining board practices (CG guidelines, practices, and composition of the Board of Directors) and specific actions (real actions by a company) separately, we try to identify statistically significant correlations with financial performance measures (ROE, ROA, Tobin’s q) for each of these respectively – i.e, for, board practices and action respectively.

For more information, please refer to the following website.
http://www.metrical.co.jp/

Download the full report: Linkage Between CG and Value Creation-01-2020

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