Mr. Ghosn’s criminal cases are ongoing. But the criminal cases alone will not put a close to this entire ordeal. It is a matter of time for Nissan to face civil cases filed by investors. Due to Mr. Ghosn’s understated compensation, it is anticipated that a considerable amount of assets will flow out of Nissan. The largest part of this outflow will be accounted for the damages claimed by and awarded to investors in civil lawsuits. What amount of assets will flow out of Nissan? This memo is an attempt to estimate the probable size of these damages.
By Ken Hokugo
Director, Head of Corporate Governance, Pension Fund Association
Director, The Board Director Training Institute of Japan
There has always been confusion surrounding this topic. From the point of view of those who want to help foreign investors understand the realities of the Japanese market, the most troubling number that is thrown about is the seemingly magic number of “10% or less”. This number is frequently referred to by the media, with the source given as being the reports by a certain analyst at a research institute that is affiliated with a prominent securities firm.
Quite often, we encounter foreign investors who casually believe this widely-touted number of “10% or less” and therefore are not concerned very much (if at all) with the issue of “cross-shareholdings” in Japan, in light of recent improvements in Japan’s corporate governance. Needless to say, it takes a lot of energy to convince such investors that the reality of the Japanese market is different. In this post, I am not trying to scare foreign investors away from Japan’s stock markets, but rather trying to encourage them to invest based on an accurate understanding of the situation in the context of history, culture, and the overall current environment.
I was very pleased to see in the FSA’s updated list of signatories to the Stewardship Code, that Mitsubishi Corporation’s pension fund recently signed on. This makes five major non-financial corporate pension funds that have signed the S.C.: Secom, Panasonic, NTT, Eisai, and now Mitsubishi Corporation. Secom had signed from the start, but the others came after I urged the Prime Minister on this topic, and then the Minister of Health, Labour and Welfare (MHLW, in charge of corporate pensions), then wrote a proposal for a change of the regulations by MHLW…. which resulted in a joint study group between MHLW, the Pension Fund Association, pension experts, and the FSA (as observer) for the express purpose of encouraging pension funds to sign the S.C.
This major progress for Japan, and these companies should be commended. There is an extreme disconnect between the way in which Japanese companies claim to care about their employees (and often do! ) but so far, have not seemed to care about the assets (retirement funds) of those same employees. This is especially so when one considers that corporate pensions in Japan have no government guarantee, so as the company veers towards bankruptcy it first forces employees to agree to a big cut in benefits (a la JAL), and if it goes bankrupt and the pension is underfunded….well, “it is what it is”.
If anyone is interested, here is the “comply and explain” proposal that I submitted to the MHLW.
Representative Director, BDTI
CG Top 20 stocks continued solid performance in August
August stock prices have continued low trading volume. Topix and JPX400 indices tumbled in the middle of the month, but recovered toward the month end. Meanwhile, CG Top 20 prices also recovered their losses toward the end of the month. The gap between CG quality stocks and the market indices is widening. The stock price charts for in the indices and the composite of CG top 20 companies are shown in the following link.
In light of the attention AVI’s shareholder proposal is drawing toward TBS’ huge “non-core” shareholdings in Tokyo Electron, and the light this is shedding on the continued practice of cross-shareholdings in Japan, we thought it would be helpful to screen for companies with similar characteristics.
AVI’s argument draws on solid corporate finance principles that companies should not be diversifying for shareholders when they can do so for themselves in a more efficient manner. Moreover, even when the company is suited toward asset management and has a solid track record for this (e.g., Softbank), investors expect to see behavior that shows that the (quasi) asset manager is exercising judgement as such on an ongoing basis. In other words, the company should exhibit buying and selling activity dictated by profitability and outside forces. In such cases, shareholders tend to view and value the company more as an asset manager than as a company in the originally-stated industry, and therefore expect such behavior.
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.
This link to our report on our research results shows the interesting (changing) landscape for CG in Japan.
A while back I spent some time writing an engagement letter (in both English and Japanese) that I myself would use if I was the head of governance and proxy voting at an investing institution that held positions in more than a handful of Japanese companies, and did not have enough time to meet with all of them, say, six or more times a year so as to do detailed “engagement” mainly via face-to-face meetings. This actually includes most institutional investors, when you think about it. I thought it might be helpful for friends of mine.
It has always seemed to me that in order for engagement to be efficient, you need to write down in detail your suggestions for companies, and send it out to them as early as you can – giving them a year or more of lead time to put new practices in place, if that is what one hopes. Otherwise, in Japan very much gets “lost in translation”, and even less will reach the board. Many governance practices are new in Japan, and just referring to them verbally will usually not be sufficient to fully communicate. (As the person who proposed Japan’s corporate governance code in order for effective “stewardship” to occur, and having sat on a number of boards, I have done a lot of thinking about this topic.)
To me, therefore, “efficient engagement” means that: a) you will send a letter or letters to the company’s board, one that will be largely or wholly standardized; but b) you may meet, or may never meet with the company, as you choose. You do not have to have multiple meetings with multiple companies, which for most investing institutions would be a very inefficient way to “engage”, particularly if little is put in writing.
In 2016, Europacifica Consulting delivered the case study, Financial Services Sector Reform in Japan, for inclusion in the APEC Economic Policy Report, published in November 2016.
In the case study, we argued that corporate governance was a vital area of potential structural reform in PM Abe’s economic agenda, which at the time had yet to show clear results. Since then, there have been clear signals of improvement in corporate Japan’s balance sheets and governance practices, as well as a rise in Return on Equity among many of Japan’s largest companies.
Signals of bona fide structural reform are comforting, but we underscore the importance of another of the report’s key arguments; that Koizumi-era reforms in the financial sector did not go far enough in engendering self-sustaining financial market reforms. Both financial reform and investor education may go further to promote households’ move “from savings to investment”, in other words, a move toward greater household participation in financial markets.
The FSA has finalized its revision of the Stewardship Code. Perhaps the biggest change is that it now encourages signatories to disclose their voting records “for each investee company on a per-agenda basis”, something I proposed to the FSA in 2010 but was ignored. However as you can see below, this is a “comply or explain rule”, thus weakening it to some extent:
“Institutional investors should disclose voting records for each investee company on an individual agenda item basis. (If there is a reason to believe it inappropriate to disclose such company-specific voting records on an individual agenda item basis due to the specific circumstances of an investor, the investor should proactively explain the reason. Institutional investors should at a minimum aggregate the voting records into each major kind of proposal, and publicly disclose them.)”
Here is an article I wrote in 2001, about the topic in the title. It makes interesting reading some 15 years later. While I may have made correct call… obviously I was a bit too early! It has taken a lot more work, by many persons, for Japan to move as far as it has come in the past years…and the job is not done yet.
“Last month, the Life Insurance Association of Japan published a survey of 561 public companies and 122 institutional investors, focusing on corporate governance and investor relations practices. The results exploded some myths regarding the supposed lack of support for modern corporate governance concepts among institutional shareholders in Japan. Japanese investors are in effect saying: “We want transparency and clear accountability, independent outside directors on boards, and independent board committees.”
The very fact that the survey addressed these topics is a breath of fresh air. Japan’s institutional investor community is weighing in on the emerging debate over corporate governance. It is none too late. Although they should be the most directly motivated constituency, institutional shareholders had been conspicuously quiet. Like most of Japan’s institutional investors, insurance companies have feared a backlash if they took a stance opposed by certain senior executives and politicians. They feared imperiling governmental assistance with industry cleanup, as well as losing insurance and pension business from companies in which they hold stock.
Logic and hard realities are finally coming to the fore. And the investor community will become more vocal as competition heats up in the fund management industry. Investment advisor companies, known as (toshi komon ), compete on the basis of investment returns and prudent decision-making, and do not have other businesses that might fear adverse repercussions.