On October 26, 2023, the TSE released the “Publication of the List of Disclosed Companies Regarding “Measures to Achieve Management Conscious of Cost of Capital and Stock Prices.” I would like to provide an overview of this document below and consider the issues it discusses.
1. Future initiatives regarding “measures to realize management conscious of cost of capital and stock price”
Publication of the list of disclosing companies, and re-communication of the purpose and points to be noted.
Publication of a list of companies disclosing information in accordance with the request, with a view to informing investors of the status of companies that are taking steps to comply and to encourage their efforts. The list will be published on January 15, 2024, and will be updated monthly.
Prior to the start of the public announcement, listed companies were once again informed of the purpose and points to keep in mind regarding the request, along with the fact that the list will be made public. The listed companies will be notified on October 26, 2023.
Publication of key points of response and examples of initiatives
The report compiles and publishes several patterns of key points of responses based on investors’ perspectives and examples of initiatives that have gained high support from investors, depending on the size and situation of the company. [By January 2024]
Aggregation and dissemination of response status
The status of corporate disclosures and feedback from investors and others are compiled approximately once every six months. The next report is due in January 2024.
2. Publication of the List of Disclosing Companies
In order to inform investors about the status of companies that are taking steps to comply with the requirements and to encourage their efforts, we will start publishing a list of companies that have disclosed their information in accordance with the requirements as follows.
Disclosure Status Aggregation Method
In the “Disclosure under each principle of the Corporate Governance Code” section of the most recently filed corporate governance report or in the “Reasons for not implementing each principle of the Corporate Governance Code” section,
If the keyword “Actions to achieve cost of capital and stock price conscious management” is described, it is counted as “disclosed.”
If the keyword “Actions to realize management conscious of cost of capital and stock price (under consideration” is described, it is counted as “under consideration.”
*If none of the keywords are listed, they will not appear in the list.
3. Notes on the current request and the list
Subject of request
The request for “measures to realize management conscious of cost of capital and stock price” is a measure to promote constructive dialogue with shareholders and investors as well as efforts to realize medium- to long-term corporate value enhancement, and TSE requests all companies listed on the Prime and Standard Markets, regardless of P/B ratios, to respond to this request.
On the other hand, a review of the current state of disclosure shows that while progress has been made in disclosure mainly among companies with low P/B ratios, disclosure has been relatively slow among companies with high P/B ratios, leading to a misunderstanding among domestic and overseas investors that if a company’s P/B ratio is over 1x, it is unnecessary to respond to the current request.
Even if the company’s P/B ratio is already above 1x, please proactively consider and take actions to further improve it, taking into account the expectations of shareholders and investors, comparisons with domestic and overseas peer companies, and the status of indicators other than P/B ratio related to return on capital and market valuation.
Although this request does not specify a uniform format or document for disclosure, we request that when disclosure is made in any format, the fact that it has been disclosed and the method of viewing it be stated in the CG report so that investors know how to view it. However, there are some cases that are not mentioned in the CG Report (disclosed only in financial results presentation materials, etc.).
Considerations when disclosing “under consideration”
When disclosing “under consideration,” please explain in as much detail as possible the status of the consideration and the expected timing of disclosure for the sake of clarity for shareholders and investors.
Disclosure in English
If your company has made disclosure in English in accordance with this request, please include the keywords “[Measures to achieve cost of capital and stock price conscious management]” or “[Measures to achieve cost of capital and stock price conscious management (under consideration)]” in the CG report followed by the phrase “[Disclosure in English]”.
Discussion Point 1: “Publication of a list of companies disclosing information in accordance with the request, to begin on January 15, 2024, with monthly updates.”
The six items on the list are ticker, company name, listing market, industry, whether the company has disclosed or is considering disclosure, and disclosure in English. There is no summary of what kind of content was disclosed, so we can only distinguish whether the company has disclosed or not yet disclosed, which means that companies are moving toward the goal of “disclosure,” regardless of the content. About 30% of companies still report that they have disclosed, so it is expected that more corporate governance reports will be filed by the end of December. On the other hand, it is doubtful how many companies are brave enough to state “under consideration” in their corporate governance reports, since the number of companies stating “under consideration” in their corporate governance reports is conspicuous in the list and more investors are expected to be interested in the reasons for such statements. It is also conceivable that some companies will take no action for the time being (neither disclosure nor “under consideration”). Since this is only a “request” by the TSE and not a rule, no action can be taken until the information is ready for disclosure. It is also possible that some companies will take no action because they fear the risk of being criticized as “backward-looking” by stating “under consideration” or “lacking in substance” even if they disclose the information.
Discussion Point 2: “Several patterns should be compiled and published, depending on the size and circumstances of the company, regarding key points of response based on investors’ perspectives and examples of initiatives that have received a high level of support from investors.”
Good examples may be selected by the TSE with committee members. This may be of more interest to listed companies and investors than a list. This is because, especially for companies with poor disclosures, they would like to have hints on how to improve their disclosures in the following year. Therefore, the TSE’s announcement of good practices will serve as a mark of quality, and investors will be more likely to demand that a company disclose information in accordance with a certain standard. At this point, it is unclear whether the standard is an easy target for many companies or whether it is something that requires a jump, but I expect that it will have a positive impact on the company’s efforts in the next fiscal year and beyond.
Therefore, it will be interesting to see what is disclosed by the companies in the best cases. Since at least the cost of capital is likely to be clearly stated, this is a major step forward, as most companies that disclose will clearly state their cost of capital. And since many companies have been indulging in lower returns relative to their cost of capital, the key point is whether they can disclose measures (preferably short- and medium- and long-term measures) to close this gap and raise returns even higher. It is assumed that few companies can meet this challenge, and not many investors can suddenly believe in their measures. There is no other way for a company to gain the trust of investors except by accumulating a track record of performance with a report card of financial results. Building a steady track record after a big step forward is a long-lasting process.
In summary, I have discussed the outline and the issues discussed in TSE’s October 26th “Publication of the List of Disclosed Companies Regarding “Measures to Achieve Management Conscious of Cost of Capital and Stock Prices.””
Since the list of companies disclosing information based on the TSE’s request only shows “whether they have disclosed,” more companies are expected to disclose the information in their corporate governance reports by the end of December anyway.
TSE will publish good practices. Companies that have disclosed for the time being will refer to good practices because they want hints on how to improve their poor disclosures in the following fiscal year. For investors, it will be easier to demand improvements from the company based on the good examples. It will be interesting to see what level of disclosure is likely to be the standard for both companies and investors.
This is a major step forward, since at least the cost of capital seems to be clearly stated. However, the key point is whether the company can then disclose measures to close the gap between the cost of capital and the lower actual return and raise the return even higher. It is even harder work for a company to steadily build a track record with a performance report called financial results. Companies are finally just getting to the starting line of taking that first step.
Aki Matsumoto, CFA
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