Collaborative Engagement in the UK: Much More Active

The 2022 report by the FRC in the UK, “The influence of the UK Stewardship Code 2020 on practice and reporting”, shows a stark contrast between the virtual absence of collective engagement in Japan as compared to the UK. A large proportion of asset managers in the UK are participating in a variety of collaborative engagements:

Some Quotes from the FRC’s report:

“Most respondents identified collaborative engagement (working with other investors) as an increasingly important escalation tool.”

“One of the things about collaboration is you don’t have to do all the work yourself. You are adding the value of your assets to the engagement and hopefully sending a better signal – that’s quite a lot of change in the sector in dealing with [ESG] issues.”  (Head of responsible investment, large UK asset owner)

Director Skills in Japan: The Picture Worth 1,000 Words

Take a look at the chart below, from materials recently published by the FSA’s Committee on the Stewardship Code and the Corporate Governance Code.  This is from an analysis of ALL directors (both executive and non-executive) at TSE1 firms that disclosed a skills matrix in 2019.  From left to right, the categories are: a) technology; b) finance and/or accounting; c) executive management experience; and d) global (international) experience.  Can you guess which country is the dark blue bar?  Yep, that low guy is Japan. Right across the board.

Director skill gaps in Japan - BDTI

Taro Kono, Could You Please Speak to the FSA and TSE?

The FSA and TSE have been assiduous in encouraging more engagement between investors and Japanese companies, and in highlighting the problems raised by the ever-increasing share of funds invested on a passive basis in the Japanese market – which is leading to a sort of “hollowing out” of meaningful feedback from institutional investors.  I would encourage anyone who reads Japanese to read the most recent Action Plan for corporate governance, especially including the reports by the Secretariat in the FSA’s May 16th meeting.  This is very commendable.

On the other hand, there is a stark contradiction between this stance and a big defect in the machine-readability of the Corporate Governance Reports (CG Reports)  submitted by Japanese companies to the JPX/TSE, which is regulated by the FSA . The defect renders a major portion of these reports almost entirely useless for rigorous analysis by computers… even though I pointed  it out some six years ago. In a word, the 11 (or more) different “disclosure items” required to included in CG Reports, which account for close to half of the meaningful information in each report, are all mashed together into one XBRL “barrel” that does not even have a standardized format.

Webinar: “Using High-Dimensional Corporate Governance Variables to Predict Firm Performance in Japan”

On June 13th, join us for a discussion showing the future of corporate governance analysis.  In this webinar we will introduce the results of leading-edge academic research to determine whether corporate governance practices and firm characteristics can be used to predict firm performance over the short-, mid-, and long-term. Earlier attempts at this research have always come with limitations or been focused narrowly on certain practices, but using BDTI’s detailed database focusing on Japanese corporate governance practices and important characteristics of all listed firms in Japan, researchers have been able to conclude that certain corporate governance practices and facts should be of interest to every investor.

Using BDTI’s High-Dimensional CG Big Data to Predict TSR in Japan (working paper)

This is the first draft of a working paper led by two respected Japanese academicians who used governance and firm-specific big data to predict future equity returns in Japan . Conclusion: “we constructed a prediction model of firms’ future TSR and used it to show that the investment strategy based on the model’s predictions could generate non-negligible improvement in returns. These results suggest that high-dimensional corporate governance variables contain informative signals associated with future firm performance over and above reliance on purely financial data.”

The research was conducted using BDTI’s detailed, Japan-specific time-series database for all listed companies in Japan. The results are consistent with the fact that every fund manager that has backtested our data so far has bought a license, and every licensee has renewed so far. It would seem that Japan’s square peg of three different governance structures and peculiar practices does not seem to fit into the standard “global” round hole framework used by other data providers.

METRICAL : CG Stock Performance (Japan) for April 2023

The solid U.S. stock market, which has settled down from last month’s financial system unrest, led Japanese stocks to move higher toward the end of the month.
The CG Top20 stock price index significantly outperformed both TOPIX and JPX400 for the second consecutive month.

The stock market rallied toward the end of the month on the strength of U.S. stock prices as U.S. stocks gradually calmed down from the financial system unrest triggered by the failure of the Silicon Valley Bank in the U.S. On the last day of the month, the Bank of Japan’s monetary policy meeting maintained monetary easing, and stock prices rose sharply.

Questions to Ask When Engaging with Japanese Firms

The recent focus on ESG has allowed certain firms to de-focus on “G” and appeal to all sorts of “ES” policies and plans in their IR materials.  This makes the job of investors harder in the sense that true sustainability and better financial performance are less likely to occur without good G in the first place, so one has to separate out the companies which are truly improving the quality of their governance in terms of its substance rather then just superficially assembling all the right boxes in the chart.