Author: Aki Matsumoto

In the previous article, “What Kind of Firm Adopts Takeover Defenses? (Metrical Analysis Using BDTI Data)” we used data from BDTI to analyze the performance and corporate governance practices of companies that have and have not adopted takeover defense measures. The results of the analysis showed that of the 421 companies found to have proposed anti-takeover measures at shareholder meetings since 2014, those companies that have not adopted anti-takeover measures now have superior performance in terms of ROE, ROA, and P/B, as well as in terms of the percentage of independent directors and the percentage of female directors as corporate governance practice metrics.

In BDTI’s data, 443 companies were confirmed to have proposed anti-takeover measures at their shareholders meetings since 2014, of which 10 were rejected and 433 were approved (see table below). As can be seen from the table below, once a takeover defense measure is proposed as an agenda item, it is usually approved. Whether the proposal is approved or rejected depends on the composition of the company’s shareholders, and mainly on the shareholding ratio of foreign shareholders. The TSE’s disclosure document “White Paper on Corporate Governance 2021” also states, “In terms of foreign shareholding ratio, the ratio of companies that have adopted takeover defense measures is lowest in the category of foreign shareholding ratio of 30% or more, at 2.7%, a decrease of 3.7 percentage points from the previous survey. The percentage of holdings in the 20% to 30% category was 9.2%, a significant decrease of 11.1 percentage points from the previous survey. Looking at the relationship with the ownership ratio of the largest shareholder, there was a tendency for the adoption ratio to be higher in the category where the ownership ratio of the largest shareholder is low, while the ratio in the category where the ownership ratio is less than 5% was 13.8%, a significant decrease of 9.5 percentage points from the previous survey.”

As shown in the table below, of the 433 companies that were confirmed to have proposed anti-takeover measures in their shareholder meetings since 2014, 421 are still listed on the stock exchange. Of these companies, 41% (173 companies) do not currently have takeover defense measures, and 59% (248 companies) still have takeover defense measures. As noted above, companies that do not currently have takeover defenses show superior performance and corporate governance practices. Furthermore, in terms of market capitalization, there is a significant difference between companies that do not currently have takeover defenses and those that still do.

Metrical updates its corporate governance evaluations every month for approximately 1,700 companies listed on the 1st Section of the Tokyo Stock Exchange with market capitalization exceeding approximately 10 billion yen. 2021 saw the revision of the Corporate Governance Code in line with the reorganization of the TSE’s market segments in April 2022. It is expected that initiatives to enhance the corporate governance of listed companies will also move forward. I would like to take a look at how far corporate governance has improved as a result of these efforts, with numbers.

The chart below shows Metrical’s evaluation of each criteria in December 2020 and their changes in December 2021, showing how far the corporate governance initiatives of listed companies have improved over the past year. Let’s take a look at them in order.

The first chart shows the distribution of the Metrical CG score, which is an overall assessment of a listed company across a number of corporate governance criteria. The distribution of the green bars in December 2021 is higher than that of the orange bars in December 2020, indicating that the score has shifted to the right. It can be assumed that listed companies have made progress in their corporate governance efforts, partly due to the revision of the Corporate Governance Code. Let’s take a closer look at the details below.

As shown in the table below, more than 90% of all TSE-listed companies have not adopted takeover defense provisions, and about 90% of the companies in the Metrical universe (which consists mainly of companies listed on the TSE 1st Section and slightly larger in market capitalization than all listed companies) have not adopted takeover defense provisions.

While companies that do not retain takeover defenses are now the mainstream, we looked at the performance and corporate governance practices of companies that have adopted takeover defenses and those that have not. The table below shows them. As you can see, the performance of companies without takeover defense measures is superior in terms of ROE (actual), ROA (actual) for the past three years on average and Tobin’s Q. In terms of corporate governance practices, other than the percentage of independent directors, companies were found to be superior in terms of the percentage of female directors and Metrical score.

Stock market declines in November. CG Top 20 stocks underperformed the index. Stock prices in November plunged sharply toward the end of the month, falling for the second month in a row, as investors grew wary of a new variant of the COVID-19, the Omicron virus. The Topix and JPX400 indices fell -3.60% and -3.44%, […]

Metrical has previously published “Retirement of treasury stock and performance, corporate governance” and “Dividend policy and performance, corporate governance,” and in the articles we have examined the relationship between share retirement and performance and corporate governance, and between dividend policy and performance and corporate governance, respectively (please contact us if you would like to know more). The current article on equity issuance is the third in a trilogy. Surprisingly, interesting analysis results were confirmed for each of these approaches.

To summarize the previous two articles, the stock retirement score is positively correlated with ROA (actual) and Tobin’s q, and companies that have retired their own shares three or more times have significantly better key performance indicators in ROE (actual), ROA (actual), and Tobin’s q. Similarly, in evaluating corporate governance practices (including actions), the Metrical Corporate Governance Score, the % of Independent Directors, the Equity Issuance Score, and the Dividend Policy Score, the 100 companies that have retired their own shares three or more times have significantly higher scores than the companies that have retired their shares less frequently. This confirms that these companies have a strong awareness of the need to improve their corporate governance, as these scores are significantly higher than those of the companies that have retired their own shares less frequently.

The Dividend Policy Score has a certain relationship with the Key Performance Indicators. Companies with a payout ratio target or forecast of less than 10% have the lowest ROE (actual) and ROA (actual) as key performance indicators compared to the group with the higher dividend policy score, while they have the highest Tobin’s q. In addition, companies with a payout ratio target or forecast of less than 10% have the lowest dividend policy score compared to the group with the higher dividend policy score in the Metrical Corporate Governance Score, Equity Retirement Score and Equity Issuance Score as an evaluation of corporate governance practices (including actions). These companies have the lowest Corporate Governance Score, Equity Cancellation Score and Equity Issuance Score compared to the group with the higher Dividend Policy Score. Therefore, it can be pointed out that these companies may have relatively low awareness of improving corporate governance.

Metrical evaluates the Equity Issuance Score according to the type of equity issuance (capital increase, CB, WB, preferred stock, etc.) and the frequency of such issuance. Specifically, if a company has never issued equity since 2000, the score is 0, and if it has subsequently implemented equity financing, the score is lowered according to the type of issuance. Specifically, the score is -2 for capital increases that directly issue new shares and -1 for equity financing that mitigates the dilution of shareholder interests, such as CB, WB, and preferred shares, and a negative score is added for each equity financing.

The number of companies with an Equity Issuance Score of 0 (no equity issuance since 2000) is 797, the number of companies with an Equity Issuance Score of -1 (has issued equity only once using CBs, WBs, preferred shares, etc. that are not directly dilutive) is 121, the number of companies with an Equity Issuance Score of -2 (has raised capital once or has issued equity twice using CBs, WBs, preferred shares, etc. that are not directly dilutive) is 557, and the number of companies with an Equity Issuance Score of -3 (has issued more equity than the above) is 69, the number of companies with an equity issuance score of -4 (has issued more equity than the above) is 118, and the number of companies with an equity issuance score of -5 or lower (has issued more equity than the above) is 54.

Stock market declines in October. CG Top 20 stocks significantly outperformed the index.

In a reversal of the previous month’s sharp rise, the stock market plunged in the first half of October, followed by a market stalemate ahead of financial reports starting at the end of the month. Topix and JPX400 indices fell -1.34% and -1.35%, respectively, during the month of October, while the CGTop20, the top CG rating score, outperformed both indices by a smaller margin, -0.41%.

Nominating committees are the most difficult issue in corporate governance practices. Since the election (nomination) of directors is a matter that involves personnel rights, and personnel is also a matter that has a great deal to do with compensation, the CEO is still deeply involved in this decision in many companies, especially in Japan where the board of directors is composed of many inside directors. It is not difficult to imagine that there would be resistance to delegating this decision-making authority to independent outside directors. To conclude, even if a nominating committee has been established, it is impossible to know whether the committee is functioning properly without a close examination of the substance of the committee. In order to check whether the nominating committee is functioning properly, the first point to be considered is whether the majority of the members of the committee are independent outside directors, and whether the committee is chaired by an independent outside director. However, a prerequisite for this is that the board of directors must be prepared to accept decisions on director nominations made through a transparent and objective process. This can be thought of as the board of directors itself being operated in a transparent and objective manner. As a measure of this, I would like to examine whether independent outside directors make up the majority of the board of directors. If the board of directors is dominated by inside directors, it is unclear whether the process of nominating directors is carried out in a transparent and objective manner, and it is also unclear whether the board of directors approves the proposed candidates for directors submitted by the nominating committee.

First of all, as shown in the table below, the current status of the nominating committees of all listed companies in Japan is as follows: of the 3,733 companies that submitted corporate governance reports out of the 3,784 companies listed on the Tokyo Stock Exchange as of October 1, 2021, 82 companies (2% of the total) are companies with nominating committees under the law. (2% of the total). There were 1,249 companies with audit committees and 2,401 companies with board of corporate auditors, of which 609 companies (49%) and 1,046 companies (44%) had voluntary nominating committees in their respective organizational forms.

I have previously written and reported on information disclosure in English. This time, I would like to think about information disclosure in English again. The BDTI and Metrical have repeatedly stressed the importance of information disclosure in English, and recently the TSE released the “Results of a Survey of Foreign Investors on English-language Disclosure”, so this issue is gradually gaining attention. The Tokyo Stock Exchange’s “Availability of English Disclosure Information by Listed Companies” provides information on the disclosure of information in English by listed companies. According to this information, there are three types of information disclosure in English: “Timely Disclosure Documents,” “Notices of General Shareholders Meetings,” “Corporate Governance Reports,” “Annual Securities Reports,” “IR Presentations,” and “IR Website English Links” based on disclosure information provided by listed companies.

According to TSE data as of June 30, 2021, of the 3,782 companies listed on the Tokyo Stock Exchange, 3,730 companies for which data could be compiled disclosed information in English for each item as follows. For IR Presentations and IR Website English Links, about half of the listed companies disclose information in English. The second most commonly disclosed item in English is earnings reports such as financial statements, with 38% of companies disclosing in English. The two reports with the least disclosure in English are the annual securities report (Yuho) and corporate governance report, with 6% and 11% of companies disclosing in English, respectively.