The Other Side of the Coin – Changes in Japanese Equity Price Formation From 2000-2021

by David Snoddy, CEO of Nezu Asia
SUMMARY

The nature of Japan’s relationship with equity market capitalism changed significantly from the first decade to the second of the 21st century. The first decade, particularly after the resignation of PM Koizumi in 2006, was often characterized by open conflict, with the most obvious examples being the arrest and conviction of shareholder activists Horie and Murakami, and the legal and regulatory attacks on both the consumer finance and leveraged real estate businesses (among others). However, approximately around 2011, the attitude of both government and the public morphed into something more resembling symbiosis than conflict. In the third decade of this century the symbiosis mode seems still to be ascendant.

Many of the top-down aspects of this shift have been well documented and discussed both in Japan and in the West – from the 2015 Corporate Code, to the 2014 Fiduciary Code and the emerging catalysts created by the rule set for Tokyo’s new “Prime” market. From the perspective of governance per se, there have been some concrete steps “backwards” (with the Toshiba drama a prime example). However, the cumulative effect of the change in the regulatory suasion regime in Japan is such that it is difficult to find equity market participants who believe that the governance environment in 2021, on average, is not noticeably more shareholder-friendly than it was 10 years ago.

Over the same period there has also been a dramatic shift in trends in Japanese equity price formation. This is not well documented or understood. But it is in fact the micro expression of the same impulses which are driving the “macro” changes in the regulatory regime. Since 2011, there has been a marked change in how the market “votes with its feet” – rewarding companies who conform to the new desired profile, and punishing those who don’t. Specifically, capital efficiency and, to a slightly lesser extent, revenue growth, have captured outsized returns.

The top-down changes in the regulatory regime are on one side of the coin. The bottom-up changes in price formation are the other side of the same coin.

The socio-economic function of equity capitalism in Japan is somewhat uncomfortably positioned between two massive sources of pressure. On the one hand, the aging of Japan’s society is slowly turning active employees into pensioners who, either directly or indirectly, depend on financial income to maintain their living standards. This economic pressure provides the core motivation for the changes in Japan’s approach to equity capitalism – both from the top and the bottom. One the other hand, there is a near-consensus social desire to protect and maintain the lifetime employment system, albeit only for a subset of employees. Predictably, these two pressures are often in conflict, which accounts for some of the peculiarities of “equity capitalism with Japanese characteristics.”

The social commitment to maintain the lifetime employment system predates all of the data to be presented here. The demographic challenges posed by the aging of society have been building for a generation or so, but it was only after 2011 that they resulted in a shift towards a noticeably more cooperative approach to equity markets.

Managing Human Resources in the Age of VUCA and Diversity — Advice from Levent Arabaci, Former CTRO at Hitachi

Japan has created a council to consider a “new form of capitalism”, stating that it aims to lead in the areas of “sustainability and human capital”. At the same time, the corporate governance code states that “in light of the importance of human resource strategies …companies should present their policies for human resource development and the internal environment development to ensure diversity.” Abroad, foreign companies continue to compete globally based on constantly refining their systems for managing HR, attracting and developing talent, and drawing on diversity as a source of competitive advantage.

Here in Japan, Hitachi has been a leader in this area under the leadership of the late CEO Hiroaki Nakanishi and Levent Arabaci, who until recently served as Chief Transformation Officer (CTRO) for Global Operations, and previously was the EVP of Human Resources starting in 2012.

In this webinar, Mr. Arabaci will describe the range of modern HR practices that Hitachi has put in place during the past 10 years, spanning areas such as talent mapping, career planning and development, performance evaluations, practices for promotions, and increases in diversity. BDTI Representative Director Nicholas Benes will interview Mr. Arabaci to identify the biggest challenges Hitachi has faced, and to reveal his concrete advice as to how other Japanese companies can overcome similar challenges.

Next, we will be joined by Takeo Yamaguchi (ex-Hitachi) and Christiane Iwanoff of Olympus, two persons with extensive experience at HR management. The panel participants will share their experiences and perspectives, will consider additional issues that have arisen in recent years, such as the impact of WFH, addressing work-life balance, and building more diverse, innovative organizations.

Date:         June 1, 2022(Wed.)  12:00-14:30

Location:         Zoom Web Conference

Charge:       Free

“Oasis Announces “Women’s Director Training Scholarship” Initiative for International Women’s Day in Cooperation with BDTI of Japan” (Press Release)

(Text of the Press Release)

Investment firm Oasis to sponsor board director training courses through The Board Director Training Institute of Japan for all qualified women who enroll in March.

March 8, 2022, TOKYO – In honor of International Women’s Day, Oasis Management Company Ltd. (“Oasis”) and the Board Director Training Institute of Japan (“BDTI”) have announced a new month-long initiative to sponsor board director training courses for women.

Throughout the month of March 2022, Oasis will pay all costs for qualified women who enroll to take any of BDTI’s director training courses as described below. These Japanese and English-language training programs have been designed by leading experts in Japan to prepare candidates to serve as directors or executive officers in Japan.

The goal of the initiative is to equip highly qualified women leaders with the skills and training needed to succeed as board directors, and to proactively address the imbalance in board gender diversity in Japan by expanding the pipeline of board-ready women director candidates.

“Improving gender diversity on boards in Japan by adding qualified female directors is something we are focused on and believe will improve governance and competitiveness at Japanese companies,” Seth Fischer, the Founder & Chief Investment Officer of Oasis said. “We strongly encourage all women who are interested to take advantage of this opportunity to access BDTI’s excellent director education programs.”

“Capable, trained female directors bring significant benefits to Japanese boards and companies. We applaud Oasis’s leadership,” Nicholas Benes, BDTI Representative Director, said.

For further information, please contact BDTI at info@bdti.or.jp or 81-3-6432-2337.

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.

“Carbonwashing: A New Type of Carbon Data-related ESG Greenwashing” (Young and Schumacher)

“ Despite the increased attention and capital incentives around corporate sustainability, the development of sustainability reporting standards and monitoring systems has been progressing at a slow pace. As a result, companies have misaligned incentives to deliberately or selectively communicate information not matched with actual environmental impacts or make largely unsubstantiated promises around future ambitions. These incidents are broadly called “greenwashing,” but there is no clear consensus on its definition and taxonomy. We pay particular attention to the threat of greenwashing concerning carbon emission reductions by coining a new term, “carbonwashing.” Since carbon mitigation is the universal goal, the corporate carbon performance data supply chain is relatively more advanced than that of the entire sustainability data landscape. Nonetheless, the threat of carbonwashing persists, even far more severe than general greenwashing due to the financial values attached to corporate carbon performance. This paper contextualizes sustainable finance-related carbonwashing via an outline of the communication as well as the measurement, reporting, and verification (MRV) of carbon emission mitigation performance. Moreover, it proposes several actionable policy recommendations on how industry stakeholders and government regulators can reduce carbonwashing risks.”

Japan’s Corporate Governance Revolution: Halfway Through the Tunnel (Equities First/Nasdaq Report)

Over the past six years Japan has put in place a long list of corporate governance reforms, amounting to a virtual revolution in thinking at corporations, domestic institutional investment firms, and even society. However, because Japan is still only halfway through the “tunnel” of reform and thinking, much of the resulting value creation for investors and other stakeholders is yet to come. Key takeaways from this whitepaper’s data-driven review of Japan’s governance “revolution” include:

Tangible corporate governance reform has come to Japan, in the form of a robust Corporate Governance Code and Stewardship Code.
In tandem with government policy, advocacy by investor groups and pro-governance corporate leaders will continue these positive reforms in the years to come.
Japanese firms have “got the message” that a sea change has occurred: a majority of firms are hiring outside directors, establishing nominations and compensation committees, and reducing takeover defenses such as poison pills.
Japanese boards are starting to embrace global trends for incentive-based compensation, higher levels of diversity, and focus on returns and capital efficiency.
Cross-shareholdings and other “allegiant holdings” are being unwound as foreign and domestic institutions alike have become more proactive in their proxy voting strategies, making the market more attractive in general.
Merger and Acquisitions (M&As) and activism are on the rise, raising capital efficiency or managerial awareness of the need for it.
As a result of many of the above changes, Return on Assets (ROA) values in Japan are trending higher across the board.

The Evolution of ESG Investment

“We are faced with a time of great change, as exemplified by the development of digital transformation (DX), changes in the socioeconomic structure, an increasing sense of crisis regarding global environmental issues, and changes in people’s mindsets. To seize these changes as an opportunity to achieve medium- to longterm economic growth and build a sustainable, human-centered society, the realization of “Society 5.0 for SDGs”—a concept originating in Japan—holds the key. Therefore, we conducted joint research toward the realization of Society 5.0 for SDGs with three parties representing the Japanese business community, academia, and investors, namely Keidanren, the University of Tokyo, and the GPIF. In the joint research, a series of discussions have been held with the shared recognition of the importance of stable medium- to long-term funding for companies, universities, and start-ups promoting problem-solving innovation for the realization of Society 5.0 for SDGs.

Accordingly, we have set an aim of realizing Society 5.0 and achieving SDGs by identifying the trend of now globally expanding ESG investment, further evolving it, and connecting it to the promotion of investment in problemsolving innovation. We then examined measures to achieve the aim. Specifically, we established four themes to promote investment in problem-solving innovation, and conducted research on specific initiatives of each player. At the end, through these discussions, we present a future action plan of the three parties for the realization of “Society 5.0 for SDGs.”

GoToData by BDTI: Japanese Disclosure, by All listed Firms, Now Easily Accessible in English!

Why wade through 100+ pages of unusable PDF-formatted Japanese jungle, when you can jump directly to the parts you want, read them in English, and quickly cut and paste both text and tables you want to analyze and compare? Why not save 70% of your time and conveniently review the official source documents submitted by all 3,600+ Japanese listed companies?  Click on the center of the image below to view in full screen “flipbook” mode, and contact us at info@bdti.or.jp if you are interested to know more. Qualifying parties may receive demonstrations and trial accounts.
Ready or not, Japanese disclosure has now entered the age of machine-readable digital data! The dream that I presented to Japanese lawmakers in February of 2014 [1] can now be realized: a world where a Corporate Governance Code requires detailed disclosure of the inner workings of companies’ governance black boxes, and that information is seamlessly available to all investors, thus making it possible for them to do the analysis they must do to be good “stewards”.  As a result, the Stewardship Code will be able to function in reality, not just in theory.

[1] 2月6日に自民党の日本経済再生本部の金融調査会に呼ばれて、コードの概念、政策としての位置付け、入れるべき内容の例を「日本経済の復活のため、コーポレート・ガバナンス・コードの早期制定を」というプレゼン資料を使って説明した。その後、議員らにさまざまなアドバイスと提供させていただいた。

The New Whistle-blower Protection Bill, from the Perspective of the Olympus Case

The current Whistleblower Protection Act was enacted in 2004 and was enforced in 2006. It was said that the scandals of the recall cover-up by Mitsubishi Motors and the disguised beef origin by Snow Brand Foods brought the new Act. However, from the beginning, it was criticized that the range of target facts was too narrow, prevention measures for retaliation were not effective, etc. Based on the supplementary resolutions of the Diet and the supplementary provisions of the Act, the Consumer Commission Whistleblower Protection Special Research Committee was established, and discussions were underway for revision. However, the speed was very slow. The Committee finally issued the report in December 2018. Public comments were solicited for the new appendix table to the Act regarding the target laws. The amendment bill was approved by the Cabinet on March 9, 2020. It is now planned to submit to the National Assembly.