Author: Aki Matsumoto

Following on from my previous articles “How far has corporate governance progressed in 2021 (1)” and “How far has corporate governance progressed in 2021 (2),” I would like to take a look at how far efforts to improve corporate governance at listed companies have progressed in 2021. In this article, I would like to look at how much progress has been made by listed companies in improving corporate governance in 2021.

To briefly summarize the previous two articles, with regard to board practices, I reported that there was little improvement or only limited improvement in the evaluation items that were not specifically mentioned for improvement in the revised Corporate Governance Code, such as board chairmanship, female directors, and anti-takeover measures. In terms of key actions actually taken by listed companies, I reported that the effective use of cash and policy holdings and the clear articulation of growth strategies are likely to continue to be issues this year. Considering the fact that the percentage of foreign shareholders has slightly decreased while stock prices and valuations have risen, I can conclude that the effective use of cash and assets with growth potential may still be an issue, as it may be related to the sluggish growth of ROE and ROA.

This article will be analyzed in terms of how much each company’s market capitalization has grown. The table below shows the change in market capitalization of the 1,704 companies in the Metrical Universe that are comparable in December 2020 and December 2021. The median market capitalization of the 1,704 companies in the Metrical Universe as of December 2020 was 385,547 million yen, and the median market capitalization of the 1,704 companies in the Metrical Universe as of December 2020 increased to 421,138 million yen, an increase of 9.23% over one year.

The table below shows the median ROE and ROA of the 1,704 companies in the metrical universe as of December 2020 and December 2021. Since ROE and ROA are averages of the past three years, ROE and ROA as of December 2020 are slightly lower than the previous year, reflecting the performance of FY2020, which was significantly affected by the COVID-19 pandemic. Tobin’s q, on the other hand, has been rising on the back of higher stock prices.

I would like to take a look at how far efforts to improve corporate governance at listed companies have progressed in 2021. With the April 2022 reorganization of TSE’s market reclassification, the Corporate Governance Code was revised in 2021. As a result, we reconfirmed that the percentage of independent directors and the nomination and compensation committees, which were specifically mentioned as areas for improvement in the revised Corporate Governance Code, have improved. At the same time, efforts to improve the corporate governance of listed companies are also expected to move forward. I would like to have figures to see how far corporate governance has improved as a result of these efforts. In my previous article, I reported that there has been little or limited improvement in the evaluation items that were not specifically mentioned as items to be improved in the revised Corporate Governance Code, such as the chair of the board of directors, female directors, and takeover defense measures.

TSE reorganizes its market reclassification, the guidelines for “higher governance standards” required for the prime market, which is equivalent to the current 1st Section market, have been presented.

In this article, I would like to focus on the use of electronic voting platforms and disclosure in English. In the Corporate Governance Code revised in June 2021, Supplemental Principles 1-2 (4), 1-2 (4), and 3-1 (2) state that companies listed on the prime market are required to use electronic voting platforms and disclose information in English under “Use of electronic voting platforms and disclosure in English.”

The original text is as follows Supplementary Principle 1-2(4), “Listed companies should promote the creation of an environment to enable electronic exercise of voting rights (e.g., use of electronic voting platforms) and the translation of convocation notices into English, taking into account the ratio of institutional investors and overseas investors among their shareholders. In particular, companies listed on the prime market should be able to use electronic voting platforms, at least for institutional investors.”

Supplementary Principle 3-1 (2), “Listed companies should promote disclosure and provision of information in English to a reasonable extent, taking into account the ratio of overseas investors, etc. among their shareholders. In particular, companies listed on the prime market should disclose and provide necessary information in English in their disclosure documents.”

In summary, Supplemental Principle 1-2(iv) clearly states that companies listed on the prime market should make available an electronic platform to facilitate the exercise of voting rights and that English translations of convocation notices should be sent to overseas investors. Supplemental Principle 3-1(2) clearly states that companies listed on the prime market should disclose and provide required information in English in their disclosure documents.

Since supplementary principle 1-2(4) specifies the means of exercising voting as “electronic platforms should be made available,” companies listed on the prime market will have to be ready to use these by the next general shareholders meeting.　Since it is a recommendation to send convocation notices in English translation, it is an effort target since it is not as urgent as electronic platforms.　The supplementary principle 3-1 (2) states that companies listed on the prime market should disclose and provide required information among disclosure documents in English, but it does not specify what the required documents are, so it is left to the judgment of companies listed on the prime market as to which documents or information need to be translated into English.　One piece of information that I believe should be translated into English is the annual securities report.　Since this document is a legal document, it contains all the necessary information. Everything in this document, including the notes, should be translated into English.　There are times when we receive questions from overseas institutional investors about a particular company, and since there are many items that are described in the annual securities report (for information that is not described in the annual securities report, we have to ask the listed company in question), it would be a great convenience for overseas institutional investors if this document, which contains very useful information for investors, were translated into English. At present, there are very few listed companies that translate these documents into English.

I have reported on the status of information disclosure in English by listed companies. This time, as mentioned above, I would like to focus on the use of electronic voting platforms and English-language disclosure in accordance with the TSE Prime Market listing criteria.

The table below shows the use of e-voting platforms and English-language disclosure by companies in the Metrical Universe (as of October 2021) based on information obtained from TSE disclosure and corporate governance reports. According to the report, 64.7% of the 1,716 companies in the Metrical Universe are able to use the e-voting platform required for companies listed on the prime market under the supplementary principle 1-2(4), and 69.5% of the companies have translated their convocation notices into English, which is required as much as possible. For reference, apart from providing an electronic voting platform, 78.9% of the companies support the exercise of voting rights by electronic means.

As for the disclosure and provision of required information in English, which is required for companies listed on the prime market in the supplementary principle 3-1 (2), as mentioned above, it is not specified what the required documents are, but I will refer to the TSE’s data “Availability of English Disclosure Information by Listed Companies.” From the TSE data, we can see that the following 4 types of documents are disclosed in English: Earnings Reports in English, Corporate Governance Reports in English, Annual Securities Reports in English, and IR Presentations in English. 62.8% of the 1,716 companies in the Metrical Universe disclose Earnings Reports in English, 21.6% of the companies disclose Corporate Governance Reports in English, 11.5% of companies disclose Annual Securities Reports in English, and 66.6% of companies disclose IR Presentations in English.

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.