Governance Around the World: Japan (Video of Webinar)

In this webinar hosted by the Good Governance Academy of South Africa, the institutional characteristics of corporate governance in Japan were compared with other countries and the progress of the Japanese corporate governance reform since 2013 was highlighted. In particular, the changes that have occurred in Japanese companies and capital markets, as a result of recent reforms in corporate governance, were discussed, including by Genta Ando of METI, together with how these changes have been perceived in Japanese society. Finally, the actual state of corporate governance in Japan was reviewed considering Japanese company corporate disclosures, with commentary by Professor Mervyn King.

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.

METRICAL: How Far Corporate Governance Has Progressed in 2021 (4) – Change in ROA and ROE and Corporate Governance Practices

In my previous article, “How far has corporate governance progressed in 2021 (3),” I discussed the results of a correlation analysis between the percentage change in market capitalization as of December 2020 and December 2021 for 1,704 companies in the Metrical universe and the respective changes in Tobin ‘s q, ROA, and Metrical Score, respectively. The results of the analysis showed a significant positive correlation between the percentage change in market capitalization and the respective percentage changes in Tobin’s q, ROA and Metrical score, as shown in the table below.

In this article, I would like to focus on the question of why the percentage change in market capitalization has a more significant positive correlation with ROA than with ROE. As you know, ROA is a measure of a company’s earnings power, while ROE can be increased by changing the capital structure to match that earning power. This means that ROA can be directly impacted by improving business performance, while ROE can be increased without necessarily relying directly on improving business performance. In this article, I would like to examine whether there has been any change in the corporate governance practices of the companies whose ROA has improved (and thus whose market capitalization tends to increase).

The table below shows the percentage change in ROA for 1,704 companies in the Metrical Universe as of December 2020 and December 2021, correlated with each of the Corporate Governance Practices. The table below shows the results separately for Board Practices and Key Actions. There is a significant positive correlation between the cash holding score and the dividend policy score among the key actions that the company actually takes, and a significant negative correlation between the growth policy score and the rate of change of ROA in one year in 2021. It could be argued that a company is not motivated to change its board practices because of a one-year change in ROA. On the other hand, for key actions, we found that when ROA changed over the year, the company tended to reduce cash by increasing dividends. Although further analysis is needed to determine the significant negative correlation between ROA change and growth policy, it may be inferred that the cash accumulated in the balance sheet due to the increase in profits was used to return profits to shareholders through dividend increases, but the use of cash to invest in growth is still lacking in conviction.

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

METRICAL:How far has corporate governance progressed in 2021(3)

Following on from my previous articles “How far has corporate governance progressed in 2021 (1)” and “How far has corporate governance progressed in 2021 (2),” I would like to take a look at how far efforts to improve corporate governance at listed companies have progressed in 2021. In this article, I would like to look at how much progress has been made by listed companies in improving corporate governance in 2021.

To briefly summarize the previous two articles, with regard to board practices, I reported that there was little improvement or only limited improvement in the evaluation items that were not specifically mentioned for improvement in the revised Corporate Governance Code, such as board chairmanship, female directors, and anti-takeover measures. In terms of key actions actually taken by listed companies, I reported that the effective use of cash and policy holdings and the clear articulation of growth strategies are likely to continue to be issues this year. Considering the fact that the percentage of foreign shareholders has slightly decreased while stock prices and valuations have risen, I can conclude that the effective use of cash and assets with growth potential may still be an issue, as it may be related to the sluggish growth of ROE and ROA.

This article will be analyzed in terms of how much each company’s market capitalization has grown. The table below shows the change in market capitalization of the 1,704 companies in the Metrical Universe that are comparable in December 2020 and December 2021. The median market capitalization of the 1,704 companies in the Metrical Universe as of December 2020 was 385,547 million yen, and the median market capitalization of the 1,704 companies in the Metrical Universe as of December 2020 increased to 421,138 million yen, an increase of 9.23% over one year.

The table below shows the median ROE and ROA of the 1,704 companies in the metrical universe as of December 2020 and December 2021. Since ROE and ROA are averages of the past three years, ROE and ROA as of December 2020 are slightly lower than the previous year, reflecting the performance of FY2020, which was significantly affected by the COVID-19 pandemic. Tobin’s q, on the other hand, has been rising on the back of higher stock prices.

METRICAL: How Far Has Corporate Governance Progressed in 2021? (2)

I would like to take a look at how far efforts to improve corporate governance at listed companies have progressed in 2021. With the April 2022 reorganization of TSE’s market reclassification, the Corporate Governance Code was revised in 2021. As a result, we reconfirmed that the percentage of independent directors and the nomination and compensation committees, which were specifically mentioned as areas for improvement in the revised Corporate Governance Code, have improved. At the same time, efforts to improve the corporate governance of listed companies are also expected to move forward. I would like to have figures to see how far corporate governance has improved as a result of these efforts. In my previous article, I reported that there has been little or limited improvement in the evaluation items that were not specifically mentioned as items to be improved in the revised Corporate Governance Code, such as the chair of the board of directors, female directors, and takeover defense measures.

“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.

2/7 “Director Boot Camp” Held by Zoom! Next Courses: 4/18!

On February 7th, BDTI held its English Director Boot Camp via teleconference. The day-long intensive course was attended by 10 highly-experienced and highly interactive participants. The participants heard lectures about corporate governance by Nicholas Benes along with a guest lecture by Andrew Silberman of AMT, and exchanged experiences and opinions. Even during a pandemic, training continued smoothly, with all participants chiming in with insightful comments and questions.

We are planning to hold the next course on April 18(Mon)2022. Sign up early! Please see a description of our director training course here or click the button below for further information.

METRICAL:TSE Prime Market Listing Criteria and Use of Electronic Voting Platform and Disclosure in English

TSE reorganizes its market reclassification, the guidelines for “higher governance standards” required for the prime market, which is equivalent to the current 1st Section market, have been presented.

In this article, I would like to focus on the use of electronic voting platforms and disclosure in English. In the Corporate Governance Code revised in June 2021, Supplemental Principles 1-2 (4), 1-2 (4), and 3-1 (2) state that companies listed on the prime market are required to use electronic voting platforms and disclose information in English under “Use of electronic voting platforms and disclosure in English.”

The original text is as follows Supplementary Principle 1-2(4), “Listed companies should promote the creation of an environment to enable electronic exercise of voting rights (e.g., use of electronic voting platforms) and the translation of convocation notices into English, taking into account the ratio of institutional investors and overseas investors among their shareholders. In particular, companies listed on the prime market should be able to use electronic voting platforms, at least for institutional investors.”

Supplementary Principle 3-1 (2), “Listed companies should promote disclosure and provision of information in English to a reasonable extent, taking into account the ratio of overseas investors, etc. among their shareholders. In particular, companies listed on the prime market should disclose and provide necessary information in English in their disclosure documents.”

In summary, Supplemental Principle 1-2(iv) clearly states that companies listed on the prime market should make available an electronic platform to facilitate the exercise of voting rights and that English translations of convocation notices should be sent to overseas investors. Supplemental Principle 3-1(2) clearly states that companies listed on the prime market should disclose and provide required information in English in their disclosure documents.

Since supplementary principle 1-2(4) specifies the means of exercising voting as “electronic platforms should be made available,” companies listed on the prime market will have to be ready to use these by the next general shareholders meeting. Since it is a recommendation to send convocation notices in English translation, it is an effort target since it is not as urgent as electronic platforms. The supplementary principle 3-1 (2) states that companies listed on the prime market should disclose and provide required information among disclosure documents in English, but it does not specify what the required documents are, so it is left to the judgment of companies listed on the prime market as to which documents or information need to be translated into English. One piece of information that I believe should be translated into English is the annual securities report. Since this document is a legal document, it contains all the necessary information. Everything in this document, including the notes, should be translated into English. There are times when we receive questions from overseas institutional investors about a particular company, and since there are many items that are described in the annual securities report (for information that is not described in the annual securities report, we have to ask the listed company in question), it would be a great convenience for overseas institutional investors if this document, which contains very useful information for investors, were translated into English. At present, there are very few listed companies that translate these documents into English.

I have reported on the status of information disclosure in English by listed companies. This time, as mentioned above, I would like to focus on the use of electronic voting platforms and English-language disclosure in accordance with the TSE Prime Market listing criteria.

The table below shows the use of e-voting platforms and English-language disclosure by companies in the Metrical Universe (as of October 2021) based on information obtained from TSE disclosure and corporate governance reports. According to the report, 64.7% of the 1,716 companies in the Metrical Universe are able to use the e-voting platform required for companies listed on the prime market under the supplementary principle 1-2(4), and 69.5% of the companies have translated their convocation notices into English, which is required as much as possible. For reference, apart from providing an electronic voting platform, 78.9% of the companies support the exercise of voting rights by electronic means.

As for the disclosure and provision of required information in English, which is required for companies listed on the prime market in the supplementary principle 3-1 (2), as mentioned above, it is not specified what the required documents are, but I will refer to the TSE’s data “Availability of English Disclosure Information by Listed Companies.” From the TSE data, we can see that the following 4 types of documents are disclosed in English: Earnings Reports in English, Corporate Governance Reports in English, Annual Securities Reports in English, and IR Presentations in English. 62.8% of the 1,716 companies in the Metrical Universe disclose Earnings Reports in English, 21.6% of the companies disclose Corporate Governance Reports in English, 11.5% of companies disclose Annual Securities Reports in English, and 66.6% of companies disclose IR Presentations in English.

METRICAL: Takeover Defenses② Stock Price Performance (Metrical Analysis Using BDTI Data)

In the previous article, “What Kind of Firm Adopts Takeover Defenses? (Metrical Analysis Using BDTI Data)” we used data from BDTI to analyze the performance and corporate governance practices of companies that have and have not adopted takeover defense measures. The results of the analysis showed that of the 421 companies found to have proposed anti-takeover measures at shareholder meetings since 2014, those companies that have not adopted anti-takeover measures now have superior performance in terms of ROE, ROA, and P/B, as well as in terms of the percentage of independent directors and the percentage of female directors as corporate governance practice metrics.

In BDTI’s data, 443 companies were confirmed to have proposed anti-takeover measures at their shareholders meetings since 2014, of which 10 were rejected and 433 were approved (see table below). As can be seen from the table below, once a takeover defense measure is proposed as an agenda item, it is usually approved. Whether the proposal is approved or rejected depends on the composition of the company’s shareholders, and mainly on the shareholding ratio of foreign shareholders. The TSE’s disclosure document “White Paper on Corporate Governance 2021” also states, “In terms of foreign shareholding ratio, the ratio of companies that have adopted takeover defense measures is lowest in the category of foreign shareholding ratio of 30% or more, at 2.7%, a decrease of 3.7 percentage points from the previous survey. The percentage of holdings in the 20% to 30% category was 9.2%, a significant decrease of 11.1 percentage points from the previous survey. Looking at the relationship with the ownership ratio of the largest shareholder, there was a tendency for the adoption ratio to be higher in the category where the ownership ratio of the largest shareholder is low, while the ratio in the category where the ownership ratio is less than 5% was 13.8%, a significant decrease of 9.5 percentage points from the previous survey.”

As shown in the table below, of the 433 companies that were confirmed to have proposed anti-takeover measures in their shareholder meetings since 2014, 421 are still listed on the stock exchange. Of these companies, 41% (173 companies) do not currently have takeover defense measures, and 59% (248 companies) still have takeover defense measures. As noted above, companies that do not currently have takeover defenses show superior performance and corporate governance practices. Furthermore, in terms of market capitalization, there is a significant difference between companies that do not currently have takeover defenses and those that still do.