Category: ESG

Communication Protocols for Acquisitive Strategic Investors with Board Nominees in Japan

2019-07-12 posted by

The Corporate Counselor – Insights into Japanese Corporate Law –

by Stephen D. Bohrer and Yusuke Urano, Nishimura & Asahi NY LLP

Summary: “Strategic investors owning more than 10% of the shares of a Japanese company often seek board appointment rights as a measure to protect their investment. Board appointment rights offer a strategic investor a number of significant benefits, such as permitting the strategic investor to obtain useful information about the business plans and key technologies of the company. Although the director nominated by a strategic investor could breach contractual commitments and fiduciary duties if such director relays certain confidential information to the strategic investor, it is inevitable in these arrangements that a strategic investor will obtain some key information that it ordinarily would not have obtained had its nominee not served as a director.

The receipt of confidential information is a double-edged sword for a strategic investor as such information can be very useful for investment monitoring and competitive purposes, but at the same time can result in a violation of Japanese securities laws if a strategic investor makes a purchase or sale while in possession of material non-public information (“MNPI”). Consequently, a strategic investor contemplating a securities transaction with a publicly traded portfolio company (a “Public Investee Company”) in which it has a nominee serving on the board should implement communication protocols to channel information flows to and from its director nominee and the Public Investee Company so the strategic investor does not breach Japanese securities laws (curiously, the prohibition under Japanese insider trading rules does not apply to a privately held company).”

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Corporate Governance in Japan: What Has Changed in the Past Three Years?

2019-06-03 posted by

I recently gave a presentation in which I tried to answer this question. Here are the top-line conclusions:

  • Investors are finding their voting voices
  • Now they need to find to find their asking voices
  • There is a way to tear down the “allegiant shareholder ” wall
  • Factors that correlate with superior performance include: >= independent directors, low “allegiant” holdings, >15% female directors, and age of firm <45 years
  • Activism is becoming more effective

These conclusions are based on a huge amount of time-series data we have collected. We are now building a comprehensive time-series database that includes not only financial data, but all text and numerical data from financial reports and CG Reports, as well as tabulated AGM voting results for each resolution. The data will be organized so that one can zero in on exactly the data one needs. Here is a simple example showing board practices parameters, historical AGM participation and CEO approval rates, and the trend of ownership of “allegiant shareholdings”:

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How to Demolish Japan’s Wall of Yes-Man Allegiant Shareholders

2019-02-13 posted by

By Nicholas Benes

The short story: it will not be so hard if institutional shareholders really want to topple it, and use the technique suggested here. But first, the background.



Background

This is still the biggest defect of Japan’s equity market, and recent reforms have only made a small dent in it. At the average listed company, between 35% and 50% of the stock is owned by such holders if one includes not only firms in “cross-shareholding” relationships but also firms that unilaterally hold stock in order to win business; most holdings by
banks and insurance companies; and parent companies, subsidiaries, and affiliates. Consistent with this estimate, when Japanese listed companies were asked, “what percent of your shareholders can you count to support management?” in late 2017, fully more than two-thirds of companies responded with numbers in the 30-60% range.

These “policy holdings” by “stable shareholders” represent a massive misallocation of capital that is being put at risk largely for the purpose of protecting executive teams at other companies. In 1967, Japan’s one of Japan’s most venerated managers and the founder of Panasonic, Konosuke Matsushita, minced no words in noting his concern about the then-recent rise of “stable” cross-shareholdings in these words: “If this situation continues, I think it is in no way desirable, because of the risk that once again a maldistribution of capital in our country will occur. I believe that this is not a sign of progress in capitalism; rather, it should be considered as a sign that we are moving backwards.”

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Corporate Governance and Audit Committee – An Indian Perspective

2019-02-10 posted by

The term governance refers to a system by which an organization is run. Corporate governance is the module for fixing a liability on corporate entity. Corporate Governance is the application of best Management Practices, Compliance of Laws in true letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders.

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“Linkage Between Corporate Governance and Value Creation” (METRICAL/BDTI) – Update as of January, 2019

2019-02-03 posted by

Our joint research – “Linkage Between Corporate Governance and Value Creation” – between BDTI and METRICAL has been updated as of January 31. The most important inferences are summarized below.

(1) Correlations: Board Practices
and Performance

Significant correlation between board practices and performance continues.

(a) ROE: Nominations Committee existence, the number of female directors and percentage of INEDs show a significant positive correlation.

(b) Tobins Q: Nominations Committee, retired top management “advisors” (ex-CEO “advisors”), and percentage of INEDs show significant positive correlation.

(c) ROA (actual): Compensation Committee existence (negative correlation), Incentive Compensation Plan disclosure, and retired top management (ex-CEO) serving as advisors show significant correlation.

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BDTI/METRICAL CG Research Update: “Linkage between CG Practice and Value Creation”

2018-05-05 posted by 1 Comment

BDTI and METRICAL collaborate on researching the linkage between CG practices sand value creation. We have recently released our updated analysis as of April 2018 for the roughly 1,800 publicly traded companies with market capitalization exceeding about JPY10 billion.

In this analysis, by examining board practices (CG guidelines, practices, and composition of the Board of Directors) and specific actions (real actions by a company) separately, we try to identify statistically significant correlations with financial performance measures (ROE, ROA, Tobin ‘s q) for each of these respectively – i.e, for, board practices and action respectively.

We have observed a certain degree of improvement in board practices since the introduction of the Corporate Governance Code.  However, assuming that one of the key goals of the corporation is value creation, in order to improve the effectiveness of engagement and stewardship it is very important to regularly analyze the way in which such improvement (and specifically, which improvements) appears to lead to value creation.

We can summarize the results of our recent analysis as follows:

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Public Comment to the Proposed Revisions to Japan’s Governance Code – Nicholas Benes

2018-05-04 posted by 1 Comment
by Nicholas Benes (as an individual)
April 30, 2018

1. Regarding the Overall Revision Process
2. Regarding Principle 2-6 (Activating the Function of Corporate Pension Funds as Asset Owners)
3. Regarding Principle 1-4 (“Policy Shareholdings”)
4. Regarding Principles 4-1③,4-3② and 4-3③ (Appointment and Termination of the CEO)
5. Regarding Principle 4-10① (The Use of Optional Structures)
6. Regarding Principle 4-14 (Training of Directors and Kansayaku)
7. Regarding Revision of the Machine-Readable Format of Corporate Governance Reports

(Note: This is a translation of a public comment which was originally written in Japanese and submitted in that form to the JPX/TSE.  The original version of the public comment is available here.)

1. Regarding the Overall Revision Process

I would like to express my thanks and appreciation for the hard work of the members of the Followup Committee with respect to this review of the Corporate Governance Code (the “CG Code”) . However,I would note that four years have elapsed since the initial drafting of the Code. As you know, in Germany there is a commission which monitors the effectiveness of the governance code on an ongoing basis, and proposes changes on a yearly basis if and as necessary.

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Draft Revision of Japan’s Corporate Governance Code: Public Comment Period Begins

2018-03-30 posted by

The Council of Experts Concerning the Follow-up of Japan’s Stewardship Code and Japan’s Corporate Governance Code (Chairman: Kazuhito Ikeo, Professor of Economics and Finance, Keio University) has  published its proposals for “Revision of the Corporate Governance Code” and  “Guidelines for Investor and Company Engagement”. Both are being put out for public comment until April 29, 2018.  Full information from the FSA is available here.   The documents themselves are available the links below.

Revision of the Coporate Governance Code and Establishment of Guidelines for Investor and Company Engagement（including Appendix1 and Appendix2）

（Appendix1）Japan’s Corporate Governance Code (Draft Revision)

（Appendix2）Guidelines for Investor and Company Engagement (Draft)

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METRICALs CG Analysis Now Covers 1,808 Companies, Up From 511, Yielding More Robust Results

2018-03-15 posted by

As of February 2018, METRICAL now covers more than 1,800 companies, having increased its scope from 500 companies. Our research now covers all TSE 1st section companies that have a market capitalization greater than Yen 10 Billion, which is to say almost all TSE1 companies. METRICAL has analyzed the corporate governance of Japanese companies for three years, using 10 criteria and more than 20 sub-criteria. The analysis focuses on both board practices as well as the corporate actions that should be closely affected by CG practice and should ultimately improve financial performance of companies.

Ministry of the Environment: January2017 ESG Working Group Report

2017-12-04 posted by

” With the recent developments in ESG (Environment, Social and Governance) in our country, the Ministry of the Environment established a “Working Group on Incorporating Issues Regarding Sustainability into Investment” (ESG Working Group) in October 2015. Following discussion and debate over two fiscal years, the Ministry is pleased to announce that it has produced the […]

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