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Category: Directorship
CG Stock Performance (Japan): December 2024
The December stock market fell back on the last day of the month, but edged higher on the back of the Bank of Japan’s decision to hold off on additional interest rate hike.
The CG Top 20 stock market rose in December, but underperformed both the TOPIX and JPX400 indices.
METRICAL:After TSE’s Request, the Key Is Whether the Company Can Deliver While Investors Are Still Hopeful
On August 30, 2024, the TSE published a document entitled “Future Measures Concerning ‘Measures to Achieve Management Conscious of Cost of Capital and Stock Price’.” I would like to provide an overview of this document below and discuss the issues that it addresses. Ⅰ．Review of one year since the request and future plans While […]
METRICAL: What Investors and Companies Should Do to Make Engagement More Effective ….
On June 7, 2024, the Financial Services Agency (FSA) disclosed a document regarding the “Action Program 2024 for Implementing Corporate Governance Reform.” I would like to provide an overview of “Substantiation of Stewardship Activities” in this document below and discuss the points raised in this document.
Substantiation of stewardship activities
Issues:
⚫It is pointed out that formal dialogues, such as checking boxes, are conducted, and that dialogues with constructive objectives based on a deep understanding of the portfolio company and two-way dialogues are not being conducted. Regarding collaborative engagement, it is also pointed out that it is important not only to collaborate but also to have meaningful dialogues focused on specific themes.
⚫It is also pointed out that effective engagement that integrates dialogue and exercise of voting rights is not being conducted, for example, because the divisions in charge of dialogue, exercise of voting rights, and investment management are separated and do not work together sufficiently.
⚫The report also pointed out that the authorities need to inspect actual efforts to comply with the Stewardship Code, since compliance with the Code has not been verified.
METRICAL: CG Stock Performance (Japan): October 2024
October stock prices rose toward the end of the month against the backdrop of a weak yen and strong U.S. stock market after the general election, after a decline due to concerns about the ruling party’s expected difficulties.
The CG Top 20 stock market outperformed both TOPIX and JPX400 for the sixth consecutive month in October.
October stock market began the month with a buy-back lead by higher U.S. stock market after a sharp decline at the end of the previous month. Thereafter, investors became more risk averse due to the view that the Liberal Democratic Party (LDP) would struggle in the general election. After the general election, the market rebounded and closed higher on the back of a relaxed sentiment, a weaker yen, and higher U.S. stock prices.
METRICAL: Companies with High Corporate Governance Practices Have High ROE, but Not Vice Versa
One year has passed since TSE requested companies to “manage their companies with an awareness of the cost of capital and stock price” (so-called “P/B raise”). As of the end of March, more than half (885) of the prime market listed companies had disclosed their measures, and more companies are expected to do so once the companies whose fiscal year ends in March begin to disclose their measures. In recent disclosures, some companies have broken down their ROE and indicated target values when referring to the cost of capital, partly as a result of TSE’s publication of good practices in disclosure materials.
What New Skills Will Outside Directors Need in the Future?~The Skills and Mindset Required of a CPA as an Outside Director~
METRICAL: CG Stock Performance (Japan): September 2024
September stock market was seen as a back-and-forth market, but a sell-off prevailed on the last trading day of the month, as investors were cautious about sooner-than-expected interest rates hike due to the launch of the new Ishiba administration.
In September, the CG Top 20 stock market outperformed both TOPIX and JPX400 for the fifth consecutive month.
The Japanese stock market, which had fallen until the middle of the month on fears of an early BOJ rate hike, recovered from the optimistic mood toward the end of the month, buoyed by the U.S. stock stocks rally and weaker yen, triggered by a large rate cut by the U.S. Fed. Later, the Japanese stocks fell back as sell-offs were triggered by the new Ishiba administration and the yen’s appreciation on the back of fears of an early rise in interest rates.
METRICAL:Engagement Keeps Widening the Profitability Gap Between the Top and Bottom Companies in Market Cap
I have discussed several times in my previous articles the widening gap between companies with large and small market capitalizations in terms of profitability and corporate governance initiatives. In this article, I would like to examine this issue. In my previous articles, “Increasing Profitability to Gain Support from Overseas Investors Is a Condition for Higher Valuation” and “Why Are Companies with High Corporate Governance Practices Ratings More Profitable?”, I stated that companies with high foreign ownership tend to have larger market capitalization and higher profitability. In addition, these companies also tend to have superior corporate governance practices. This is due to the fact that the companies have improved their profitability and corporate governance practices through years of engagement with overseas investors. Overseas investors have been calling for the need to improve the board of directors and the effective use of cash flow and cash on hand, including cash allocation, in order to increase corporate value. Based on our analysis to date, it appears that management is aware of the 30% foreign shareholding level as a threshold. Once this level is reached, there is a marked tendency to be forced to incorporate the opinions of overseas investors. It is expected that the engagement of overseas investors as a driver will further enhance the profitability and corporate governance of their portfolio companies (which tend to have large market capitalization). Thus, it can be inferred that the gap between companies with large market capitalization and those without will widen more and more.
METRICAL:Why Are Companies with High Corporate Governance Practices Ratings More Profitable?
In this article, I would like to discuss what trends are seen in companies with high corporate governance practice evaluations and what relationship there is between corporate governance practices and profitability and valuations of the companies.
Since February 2018, Metrical has evaluated a universe of approximately 1,800 companies using more than 40 evaluation criteria based on publicly available information such as annual securities reports, corporate governance reports, and financial statements, etc. which are updated on a monthly basis. Metrical also divides its corporate governance analysis into Board Practices and Key Actions. This is based on the hypothesis that for value creation, which is the goal of company management, improvements not only in board practices but also in board practices lead to decisions and actions (key actions), which in turn contribute to value creation. In other words, even if the composition of the board of directors and other aspects of board practices are formally put in place, they may not be utilized in management to create value. I believe that improvement of board practices should lead to actual actions and create value, which is what corporate governance improvement should be about. Below I discuss the relationship between the Metrical CG Score, which is evaluated based on this idea, and the companies’ profitability and valuations.