Few Seats Remaining for December 2, 2020 Boot Camp!

The next Boot Camp this year will be on Wednesday, December 2, 2020. Course will be on ZOOM, so anyone in the world can join. Few seats remaining, so make sure to sign up now!
This one-day intensive program teaches participants key legal and corporate governance knowledge they need to responsibly serve on, report to, or analyze boards of Japanese companies, both public and private. The course consists of short lectures interspersed with time for interactive discussion and Q&A about real-life situations that occur on boards, and how to handle them. The course is usually good fun for everybody, since we learn from each others’ experiences, as well as from BDTI. The course covers topics such as:

  • Intro to corporate governance; the role of directors and the board
  • What is legally required of directors under the Company Law?
  • Important corporate law and securities law topics
  • Legal and liability issues, and how to handle them
  • Director duties and conflict-of-interest situations
  • Statutory auditors, internal control, and the audit process
  • The role of the board in strategy and risk management
  • Best practices, committees, and succession planning
  • Japan’s new corporate governance code
  • Changing “corporate governance culture” in organizations
  • The global wave of ESG investing

METRICAL: September CG Stock Performance

September stocks edged slightly higher after surged in the previous month. CG Top 20 stocks gained with solid outperformed against TOPIX and JPX400.

Stock prices kept positive return in September, followed by the rally in the previous few months.TOPIX and JPX400 closed slightly higher +0.52% and +0.11% respectively for the month. CG Top 20 stocks average climbed 2.28% for the month, increasing the outperformance against the both market indices.

METRICAL:Stock Prices of Family Companies and Investment Strategies

In the previous article, based on the study classified the 3 groups of the universe companies by the ownership of major shareholders: (a) Companies with major shareholders that hold >=50% of shares, (b) Companies with major shareholders that hold >=20% and <50% of shares and (c) Companies without major shareholders that hold >=20% of shares. A subsidiary and an affiliate company owned by a parent company or founder’s family company show superior performance in the key performance measures such as ROA and ROE and Tobin’s Q. In this point, it would be an effective way for a listed parent company to raise the return measures such as ROA and ROE of the parent company by consolidating the subsidiary or the affiliate company with relatively higher return. Such a case is increasingly occurred. We introduced investment strategies to buy listed subsidiaries (and affiliated companies) in anticipation of the acquisition of listed subsidiaries with high profit margins of the parent company.
At this time, on the contrary, we focused on family companies whose stock prices have remained lower. There are several purposes for going public, but if one of the purposes is the diversification of funding measures, the purpose wouldn’t’ be achieved in this situation where the stock price is low. There would be an option to reconsider listing on the stock market. From the management side, going private would be an alternative through MBO etc. The table below shows the family companies in our universe with Tobin’s Q less than 0.8, divided into 2 groups of family’s ownerships more than 50% or more than 20% and less than 50%. For a company that suffered low ROA and ROE, the low performance would be a reason for the low share price. However, some companies that have high ROA and ROE are traded at low. For a company in which there is no problem with return performance, but the share price remains low, it may be an option to consider “going private.” Aside from whether or not an investor actually acts such an effort in the engagement, this is an investment strategy to focus on such a viewpoint.

Foreign Direct Investment Law Amendments

“Earlier this summer, the Corporate Counselor covered amendments to Japan’s foreign direct investment laws that lowered the government approval threshold from 10% to a mere 1% for share acquisitions of publicly-traded companies that engage in a wide range of business activities deemed critical to Japan’s national security, unless an exemption applies. Attached for ease of reference is our June newsletter, which has been updated.
Our June newsletter specifically left for another day a discussion of the shareholder rights ramifications arising from the amendments to Japan’s foreign direct investment laws. This edition of the Corporate Counselor bridges this important gap.
The impact on shareholder rights arising from the amendments to Japan’s foreign direct investment laws is a game change for investments into Japan. The Japanese government now has veto rights over fundamental corporate governance rights throughout the investment cycle. The amendments apply retroactively, so overseas investors may no longer be able to effectively control their existing investments in Japan.”

Professors Bebchuk and Tallarita, “The Illusory Promise of Stakeholder Governance”

“Corporate purpose is now the focus of a fundamental and heated debate, with rapidly growing support for the proposition that corporations should move from shareholder value maximization to “stakeholder governance” and “stakeholder capitalism.” This Article critically examines the increasingly influential “stakeholderism” view, according to which corporate leaders should give weight not only to the interests of shareholders but also to those of all other corporate constituencies (including employees, customers, suppliers, and the environment). We conduct a conceptual, economic, and empirical analysis of stakeholderism and its expected consequences. We conclude that this view should be rejected, including by those who care deeply about the welfare of stakeholders.

Stakeholderism, we demonstrate, would not benefit stakeholders as its supporters claim. To examine the expected consequences of stakeholderism, we analyze the incentives of corporate leaders, empirically investigate whether they have in the past used their discretion to protect stakeholders, and examine whether recent commitments to adopt stakeholderism can be expected to bring about a meaningful change. Our analysis concludes that acceptance of stakeholderism should not be expected to make stakeholders better off.

Furthermore, we show that embracing stakeholderism could well impose substantial costs on shareholders, stakeholders, and society at large. Stakeholderism would increase the insulation of corporate leaders from shareholders, reduce their accountability, and hurt economic performance. In addition, by raising illusory hopes that corporate leaders would on their own provide substantial protection to stakeholders, stakeholderism would impede or delay reforms that could bring meaningful protection to stakeholders. Stakeholderism would therefore be contrary to the interests of the stakeholders it purports to serve and should be opposed by those who take stakeholder interests seriously…”

Professors Bebchuk, Kastiel and Tallarita, “For Whom Corporate Leaders Bargain”

“At the center of a fundamental and heated debate about the purpose that corporations should serve, an increasingly influential “stakeholderism” view advocates giving corporate leaders the discretionary power to serve all stakeholders and not just shareholders. Supporters of stakeholderism argue that it would address growing concerns about the impact of corporations on society and the environment. By contrast, critics of stakeholderism object that corporate leaders should not be expected to use expanded discretion to benefit stakeholders. This Article puts forward novel empirical evidence that can contribute to resolving this key debate.

During the hostile takeovers era, stakeholderist arguments contributed to the adoption of constituency statutes by more than thirty states. These statutes authorize corporate leaders to give weight to stakeholder interests in considering a sale of their company. We study how corporate leaders in fact used the power awarded to them by these statutes in the past two decades. In particular, using hand-collected data, we analyze in detail over one hundred cases governed by constituency statutes in which corporate leaders negotiated a sale of their company to a private equity buyer.

We find that corporate leaders have used their bargaining power to obtain gains for shareholders, executives, and directors. However, despite the risks that private equity acquisitions posed for stakeholders, corporate leaders made very little use of their power to negotiate for stakeholder protections. Furthermore, in the cases in which some such provisions were included, they were largely practically inconsequential or cosmetic. We conclude that constituency statutes failed to deliver the benefits to stakeholders that they were supposed to produce.

Beyond their implications for the long-standing debate on constituency statutes, our findings also provide important lessons for the ongoing major debate on stakeholderism. At a minimum, stakeholderists should identify the causes for the failure of constituency statutes and examine whether adoption of their proposals would not suffer from a similar fate. After examining several possible explanations for the failure of constituency statutes, we conclude that the most plausible explanation is that corporate leaders have incentives not to protect stakeholders beyond what would serve shareholder value. Therefore, we argue, the evidence we put together indicates that stakeholderism should be expected to fail to deliver, as constituency statutes did: on the basis of the currently available evidence, stakeholderism should not be supported, even by those who deeply care about stakeholders.”

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.”

METRICAL:Corporate Government Rating of Japan’s 1,800 Companies (July 2020)

So far, we have been conducting analysis focusing on the relationship between improvement of corporate governance and stock price and key performance measures (ROE, ROA). This is the reason that we are keeping close eyes on the enhancement of corporate governance in the perspective of long-term investors. In addition, we decided to analyze the key performance measures based on the past 3 years average ROE and ROA from this month, as maximizing the shareholder value for the long-term or sustainability is a common goal of public companies and shareholders.

It goes without saying that the stock price is one of the important indicators of a public company. In the previous monthly letter as well, I mentioned that the disclosure information of IRs and shareholder meetings is highly correlated with stock prices (Tobin’s Q), key performance measures (ROE, ROA), and comprehensive corporate governance scores. Information disclosure is a very important starting point for management transparency. In fact, the stock price also shows the results of efforts to disclose the above information. Metrical reshuffles the composites of the top 20 companies based on the total corporate governance score as of July every year and provides the performance comparison between CG Top20 stock prices and the stock market indices (TOPIX, JPX400) monthly. It was this month in July that we reviewed the 20 composite companies (the corporate governance score itself changes each month). Lately, the members of the composite companies of CG Top 20 changed from the limited large companies for several years ago, as we expanded the universe from slightly more than 500 companies to 1,800 companies and other companies are willing to improve the corporate governance. This year, 6 companies have been replaced since last year. The 4 completely new companies are Shionogi Pharmaceuticals, Meitec, Kenedix, Net One Systems and NSD. Kakaku.com and Omron returned to the top 20 club again, raising the scores.

METRICAL:June-Stock Market Changed Significantly Due to Concerns of Coronavirus. CG Top 20 Stock Price Outperform Against Topix and JPX400.

In June 2020, the stock market price continued to rise in the first half of the month, following the favorable sentiment that economic activity resumed from the previous month. Since the number of new coronavirus-infected persons has increased worldwide, it has become a nervous development from the middle of the month and has a large up and down amplitude.

Both Topix and JPX400 stock indexes have fallen slightly to -0.12% and -0.01%, respectively, over the past month. CG rating score Top 20 stock price is +0.47%, outperforming both stock indexes significantly.