Metrical: Equity Issuance and Performance, Corporate Governance

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.

METRICAL: CG Stock Performance – October 2021

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%.

METRICAL: Considerations for Nominating Committees

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.

METRICAL:Information Disclosure in English

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.

METRICAL: Diversity Has To Be Strong

This month, we will focus on diversity again. This is because I believe that diversity raises the bottom line of a company. Diversity is deeply related to S and G of ESG, and it has a great impact on the transformation of a company’s culture. On the other hand, it seems that many Japanese companies are more keen on “E” than “S” and “G” in their ESG initiatives, because “E” is an area that is relatively easy to tackle for Japanese companies that have a successful experience of setting technical numerical targets such as CO2 emission targets and improving the technical level through bottom-up efforts led by engineers to eventually achieve high targets. Even in the S and G areas, it should be possible to set clear goals and set timeframes for improvement without setting numerical targets. In several articles on diversity, I have mentioned the importance of respect for human rights, or in other words, understanding diversity, in order to build an environment where everyone can live comfortably, whether in a company or a society where various people are involved. On Thursday, August 19, I attended the analyst meeting of Monogatari Corporation (3097), which is engaged in advanced diversity initiatives as mentioned in my previous article, to discuss its financial results for the fiscal year ending June 30, 2021, and I would like to update you on the company’s diversity initiatives.

Monogatari Corporation is one of the listed companies that is proactively working on diversity. As of June 2021, the company had 126 employees from 13 countries (10% of the total workforce), an increase from 105 employees from 11 countries (9.5% of the total workforce) as of December 2020. In the past six months, the number of store managers with international (foreign) nationality has increased significantly from 4 to 18. In addition, the company is also working to support the activities of LGBTQ employees, with training for all employees starting with basic knowledge and how to respond in the workplace and sharing the idea of understanding and supporting all sexualities. Also, the company has introduced a “Life Partnership System” that allows same-sex partners to receive the same treatment as legal marriages within the company. In Japan, where same-sex marriage is not yet legally recognized, this system allows LGBTQ employees to receive the same treatment as legally married couples in the company.

METRICAL:CG Stock Performance (Japan): July 2021

The CG Top 20 continued to outperform both the Topix and JPX400 indices in July. The change in the Bank of Japan’s ETF purchase program may have had an impact.

Topix and JPX400 indexes were down -2.12% and -2.52% respectively in July. The top CG rating score, CGTop20, was flat, but outperformed both indices for the 4th consecutive month.

Topix and JPX400 indexes were down -2.12% and -2.52% respectively in July. The top CG rating score, CGTop20, was flat, but outperformed both indices for the 4th consecutive month.
The table below shows the period from April 2020, when the stock market is recovering from last year’s plunge due to the rapid spread of COVID infection, to March 2021, when the Bank of Japan announced a change in its ETF purchase program, and the period (b) after April 2021. CG Top20 underperformed against both indices in period (a), while it outperformed in period (b). It is unclear whether this is due to the effect of asset inflation caused by ultra monetary easing triggered by the COVID pandemic or the change in the Bank of Japan’s ETF purchase program, but I suspect it is because the stock market has started to reflect certain fundamentals more clearly. The outperformance of the CG Top 20 stocks suggests that the market has begun to value higher quality stocks.

METRICAL: Why Are Scandals Repeated In the Same Company?

The topic of this year’s annual shareholders’ meeting was Toshiba again. As many of you may have heard, an external report revealed that “Toshiba and the Ministry of Economy, Trade and Industry worked together to exert undue pressure on some of its shareholders over a personnel proposal by its largest shareholder, Effissimo Capital Management, which was rejected at the annual shareholders’ meeting last June. This led to the replacement of the proposal for the election of directors (proposed by the company) at the annual shareholders’ meeting, and the reappointment of the director who chairs the board of directors was rejected at the shareholders’ meeting. In the wake of the accounting scandal that broke in 2015, it was thought that Toshiba had revamped its governance structure, with 10 of its 11 directors now independent outside directors and the transition to a company with a nominating committee, but the scandal has struck again. In January this year, Toshiba IT Services, a subsidiary of Toshiba Corporation, was found to have window-dressed its accounts with fictitious transactions. In addition to Toshiba, Nissan Motor, Mitsubishi Motors, and other companies have been repeatedly involved in scandals in the past, hiding recalls and cheating on inspection data. Why are the scandals repeated?

Companies that have been involved in scandals often set up independent or internal investigation committees to investigate the scandal, and then report the findings to the relevant authorities so that they can be used to improve the situation in the future. Why are scandals repeated without being applied to future improvements? There is not much research on this subject (perhaps because there are few companies outside of Japan that cause repeated scandals?) I found the concept of “Groupthink” by Janis, Irving, Groupthink: Psychological Studies of Policy Decisions and Fiascoes, 2nd edition (Boston: Houghton Mifflin Company, 1982) helpful. Groupthink is the tendency to act in a way that maintains group cohesion and comfort rather than making calm and objective judgments, resulting in poor quality solutions and objectively strange decisions. Groupthink is more likely to occur under the following circumstances: (1) the group is highly cohesive and isolated from the outside world, (2) there is no checking of opinions or provision of information in the process of considering a case, (3) there is a strong leader or influential person, and (4) there is excessive control, lack of time, and few clues. In Japanese society, where group cohesion is often prioritized over individual opinions and where peer pressure is strong, people tend to fall into the “Groupthink” described above, and as a result, I assume that it is not uncommon for objectively strange judgments and decisions to be made.

However, as mentioned above, Toshiba has reformed its governance system and now all but one member o

METRICAL:S (Social) in ESG

Recently, awareness of ESG (or SDGDs) is spreading among the society and stakeholders surrounding companies. There are more and more opportunities for companies to introduce their ESG initiatives in analyst meetings, CSR reports, and integrated reports. It is a good thing to deepen the understanding among society and all parties concerned. More and more listed companies are giving presentations on their ESG initiatives at analyst meetings to explain their financial results, following their financial reports and outlooks. In this context, I have some questions. One of them is that not a few companies are focusing on BCP (Business Continuity Plan) as their G (Governance) initiative. Secondly, as part of their S (Social) initiatives, they are focusing on social contribution activities. This time, I would like to discuss the latter S.

It seems that there are many listed companies that feel that S (Social) is somewhat obscure when they come into contact with the ESG reports of companies on a daily basis. As mentioned above, we often see cases where companies introduce their social contribution activities or efforts to improve the working environment (e.g., work-life balance, childcare and family leave programs) as examples of their S initiatives. Of course, such individual efforts are included in the S (Social) category, but I feel that for the sustainable growth of companies, we should pay more attention to the improvement of the social environment from a broader perspective. Companies are engaged in corporate activities in a society where people are related to each other in various positions. In order to promote the smooth operation and sustainable growth of corporate activities in such a society, I think it would be a good idea to communicate that the company is managing its business from the standpoint of respecting human rights from a broad perspective.

Some companies that have taken the lead in ESG initiatives are now expressing their basic stance on human rights. I think it is easier for many people to understand if they follow this basic approach to human rights and refer to individual initiatives. Many of the companies that take this approach are large companies with global operations. This is probably because they understand that understanding and respecting diversity and people’s rights is essential for conducting business, and that this will reduce business risks. However, many Japanese companies don’t take this approach and express their views on “human rights”, but only describe individual initiatives such as those mentioned above in their reports.

METRICAL:CG Stock Performance June 2021

As in the previous month, June stock market continued directionless trading and closed slightly higher in thin trading. The CG Top 20 significantly outperformed both the Topix and JPX400 indices.

Despite a temporary decline in the second half of the month, the stock prices continued to lack a sense of direction due to low trading volume and lack of material to take hold of throughout the month.
The Topix and JPX400 indices rose 1.17% and 0.82%, respectively, during the month of June, while the top 20 CG rating score stocks outperformed for the third consecutive month at 3.50%.
The CGTop 20 stocks composites will be reviewed at the end of June each year, and their performance will be measured using the new components from July 1.

METRICAL:CG Stock Performance (Japan): May 2021

May stock market continued directionless trading after an upturn at the beginning of the month. CG Top 20 stocks outperformed against both the Topix and JPX400 indices.

Stock prices opened higher at the beginning of the month on the back of lower US interest rates led by lower-than-expected US employment data, but subsequently kept directionless trading. Topix and JPX400 indices gained 1.42% and 1.78%, respectively, during the month of May. The CG Top 20 stocks outperformed for the second consecutive month with a 2.17% gain.