Category: Governance

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.

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.

After a sharp downturn at the beginning of the month, the August stock market gradually calmed down and recovered much of the decline by the end of the month.
In August, the CG Top 20 stock market outperformed both TOPIX and JPX400 for the fourth consecutive month.

The stock market in August, which started following the 0.25% interest rate hike decided at the Bank of Japan’s July monetary policy meeting, fell sharply in confusion from the unwinding of the yen carry trade due to the significantly rising Japanese yen. Thereafter, the yen gradually regained its stability, and the US equity market was strong after passing key events such as Fed Chair Jerome Powell’s speech at Jackson Hole and Nuvidea financial results, which led to a buy-back Japanese stocks rally.
The TOPIX and JPX400 indexes fell 1.96% and 1.23%, respectively, in May, while the CG Top 20 index outperformed significantly both indices up by 2.89%.

The composites of CG Top 20 stocks has been replaced as of July 1.
The CG Top 20 has been revised as of July 1. EBARA CORPORATION (6361), TechnoPro Holdings (6028), ENEOS Holdings (5020), INNOTEC (9880), United Arrows (7606), and Persol Holdings (2181) were newly added to the list, while H.U. Group Holdings (2146), Kao Corporation (4452), Kao (4452), Wacom (6727), K’s Holdings Eisai (8282), and Trend Micro (4704) were removed. (2146), Kao (4452), Wacom (6727), K’s Holdings (8282) Eisai (4523), and Trend Micro (4704) were removed. Details of the component stocks are shown in the table below.

In January 2024, Japanese stocks rose sharply as overseas investors bought Japanese stocks for the first time since June 2023. There has been no change in the composition of Japanese equities driven by overseas investors, who account for over 70% of the TSE’s trading volume. Meanwhile, since the TSE’s request at the end of March 2023, listed companies have been struggling to raise their stock price valuations (P/B). We have also seen an increase in disclosures from listed companies that seem to be expecting overseas investors to buy their shares. In this article, we will focus on the ratio of foreign shareholdings and analyze the trends in companies in which overseas investors invest. The contents of this article should be of interest not only to overseas investors, but also to listed companies.

The Metrical universe of 1,822 companies (as of January 2024) is divided into five groups (30% or more, 20% or more but less than 30%, 15% or more but less than 20%, 10% or more but less than 15%, and less than 10%) based on foreign shareholding ratio and analyzed for each category. The median foreign shareholding ratio is 15%; companies with 15% or more can be said to have higher foreign shareholding ratios. Also, as discussed in my previous article “Takeover Defense Measures and Foreign Shareholder Ratio,” there is a sort of threshold at 30%. When the foreign shareholding ratio exceeds 30%, it becomes more difficult for the company to secure 1/3 of the special resolution at the shareholders’ meeting, and thus the influence of foreign shareholders becomes stronger, which in turn can be expected to improve the company’s management.

The February stock market continued to be strong from the beginning of the month.
In February, the CG Top 20 underperformed both the TOPIX and JPX400 stock indices.

Supported by high overseas stock market prices in the U.S. and other countries, the Japanese stock market was also solid throughout the month, with the Nikkei 225 hitting its all-time high in 1989 on February 22. The stocks continued to be firm toward the end of the month.
The TOPIX and JPX400 indexes gained 4.83% and 4.75%, respectively, in February, while the CG Top20 stocks underperformed against both indexes, dipping -0.97%.

The composites of CG Top 20 stocks has been replaced as of July 1.
Wacom (6727), K’s Holdings (8282), Eisai (4523), NSD (9757), and Trend Micro (4704) were new additions, while Ebara Corporation (6361), Orix (8591), United Arrows (7606), Tokyo Gas (9531) and Hoosiers Holdings (3284) were removed. Details of the component stocks are shown in the table below.

Metrical provides monthly corporate governance assessments of approximately 1,800 companies, primarily prime market listed companies. This year, continuing on from last year, we would like to see how much progress has been made in corporate governance initiatives by listed companies over the past year.

We analyzed how much the 1,788 companies in the comparable Metrical universe improved in each evaluation category between December 31, 2022 and December 31, 2023. The table below shows the Metrical CG score, which is the overall corporate governance score, the average ROE and ROE over the past three years, the change in Tobin’s Q and foreign shareholding ratio in December 2022, December 2023, and change from 2022 to 2023, and the mean and median values.

Based on interest from participants overseas, BDTI held its English Director Boot Camp via teleconference on January 19th. The day-long intensive course was attended by highly-experienced and highly interactive participants all the way from Hong Kong, Papua New Guinia to Europe. The participants heard lectures about corporate governance by Nicholas Benes and there were lots of interactive discussion and Q&A about real-life situations on Japanese boards, and how to handle them. You get even more in the additional materials we provide in your thick binder.