Author: Aki Matsumoto

In my previous article, “How far has corporate governance progressed in 2021 (4),” I discussed the correlation analysis of each measure of corporate governance practices with the respective rates of change in ROA and ROE as of December 2020 and December 2021 for 1,704 companies in the Metrical Universe. The results showed that when corporate governance practices are divided into board practices and key actions, ROA and ROE both showed significant correlations with key actions, but no significant correlations with board practices. ROA and ROE are both significantly correlated with key actions, but not with board practices (see table below). From this, we can infer that in the 2021 analysis period, the increase in company profits and the confidence of good performance did not provide an incentive to improve board practices. We have told you that the company may have had some other motivation to improve board practices.

May stocks closed the month recovering the price declines of the first half of the month as the U.S. stock market rallied in favor of a slowdown in the rise of inflation numbers. CG Top 20 stocks underperformed against both TOPIX and JPX400 indices in the bear market.

In the first half of the month, the stock prices slumped as U.S. stocks weakened due to concerns about rising U.S. interest rates. At the end of the month, U.S. stocks rose sharply on expectations that U.S. inflation numbers would peak out, and edged higher recovering the declines of the early the month. Both Topix and JPX400 indexes rebounded 0.78% and 0.82%, respectively, during the month of May. Meanwhile, the CGTop20 stock index, the top CG Rating Score, underperformed against both indices, sliding -0.19%.

In my previous article, “How far has corporate governance progressed in 2021 (3),” I discussed the results of a correlation analysis between the percentage change in market capitalization as of December 2020 and December 2021 for 1,704 companies in the Metrical universe and the respective changes in Tobin ‘s q, ROA, and Metrical Score, respectively. The results of the analysis showed a significant positive correlation between the percentage change in market capitalization and the respective percentage changes in Tobin’s q, ROA and Metrical score, as shown in the table below.

In this article, I would like to focus on the question of why the percentage change in market capitalization has a more significant positive correlation with ROA than with ROE. As you know, ROA is a measure of a company’s earnings power, while ROE can be increased by changing the capital structure to match that earning power. This means that ROA can be directly impacted by improving business performance, while ROE can be increased without necessarily relying directly on improving business performance. In this article, I would like to examine whether there has been any change in the corporate governance practices of the companies whose ROA has improved (and thus whose market capitalization tends to increase).

The table below shows the percentage change in ROA for 1,704 companies in the Metrical Universe as of December 2020 and December 2021, correlated with each of the Corporate Governance Practices. The table below shows the results separately for Board Practices and Key Actions. There is a significant positive correlation between the cash holding score and the dividend policy score among the key actions that the company actually takes, and a significant negative correlation between the growth policy score and the rate of change of ROA in one year in 2021. It could be argued that a company is not motivated to change its board practices because of a one-year change in ROA. On the other hand, for key actions, we found that when ROA changed over the year, the company tended to reduce cash by increasing dividends. Although further analysis is needed to determine the significant negative correlation between ROA change and growth policy, it may be inferred that the cash accumulated in the balance sheet due to the increase in profits was used to return profits to shareholders through dividend increases, but the use of cash to invest in growth is still lacking in conviction.

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%, […]