Author: Aki Matsumoto

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.

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

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.

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.