When Livedoor was delisted in the spring of 2006, its shareholder composition suddenly became a big issue. Why? Because the majority of its stock were held by a large group of funds (mainly hedge funds) who never thought that their stock would be delisted by the TSE so soon and become untradeable. Another large portion was held by a combination of ordinary institutional investors and a corporation or two. The rest was held by a very large number of individuals, many of whom had spend large amounts of their limited savings on the stock because the company had done so many stock splits that the low price made it easy to buy, and made it look cheap, at the same time.
As we enter summer, an extraordinary shift is taking place in the realm of corporate sustainability. A momentous occasion occurred on Monday, June 26th, marking a significant milestone in our journey towards a more sustainable and resilient economy. The International Sustainability Standards Board (ISSB), an independent entity operating under the esteemed IFRS Foundation, has introduced its groundbreaking inaugural standards: the IFRS S1: General Requirements for Disclosure of Sustainability-related Financial Information, and IFRS S2: Climate-related Disclosures. These transformative standards, set to come into effect on January 1, 2024, are poised to revolutionize the complex landscape of sustainability reporting, rendering it more accessible for businesses and analysts alike.
This unveiling of the IFRS Sustainability Standards is akin to the birth of a new language—one that distills intricate concepts into actionable insights. Are we standing on the precipice of a game-changer? All signs point to a resounding yes.
Imagine a shared vocabulary that empowers stakeholders to discern, compare, and evaluate companies uniformly, presenting a transparent and cohesive view of the corporate sustainability panorama. This is precisely the promise encapsulated by these pioneering standards.
By Helle Bank Jorgensen, CEO of Competent Boards
Two-thirds (66%) of poll respondents cited investor demand as the key driver of sustainable change in boardrooms. Other critical factors noted by respondents include: regulations; customer, employee and stakeholder demands; and board members’ fiduciary duty.
Unfortunately, every June at AGMs in Japan most investors approve the vast majority of director candidates –even first-time director candidates — without confirming whether they have ever received any form of director training to prepare them, or a “refresher” course on emerging issues and new best practices. Because of this, an increasingly large percent of directors in Japan have served less than three years (at least 30% in the case of outside directors!) in their very first director position, but have never even received basic training. METI and the FSA are starting to consider this as a major problem.
Serving as a director on a public company board is not the same job as serving as a lawyer, academic, or the head of global sales. It requires different knowledge, mindset and preparation. Raising PBRs, improving sustainability, DEI, and optimizing the business portfolio are not going to “happen” by themselves just because those topics appear in pronouncements and the press. They will only take root and consistently improve if the quality of Japanese boards increases. But right now, the average quality of boards is quite low, as can be seen from these…
The 2022 report by the FRC in the UK, “The influence of the UK Stewardship Code 2020 on practice and reporting”, shows a stark contrast between the virtual absence of collective engagement in Japan as compared to the UK. A large proportion of asset managers in the UK are participating in a variety of collaborative engagements:
Some Quotes from the FRC’s report:
“Most respondents identified collaborative engagement (working with other investors) as an increasingly important escalation tool.”
“One of the things about collaboration is you don’t have to do all the work yourself. You are adding the value of your assets to the engagement and hopefully sending a better signal – that’s quite a lot of change in the sector in dealing with [ESG] issues.” (Head of responsible investment, large UK asset owner)
Take a look at the chart below, from materials recently published by the FSA’s Committee on the Stewardship Code and the Corporate Governance Code. This is from an analysis of ALL directors (both executive and non-executive) at TSE1 firms that disclosed a skills matrix in 2019. From left to right, the categories are: a) technology; b) finance and/or accounting; c) executive management experience; and d) global (international) experience. Can you guess which country is the dark blue bar? Yep, that low guy is Japan. Right across the board.
The FSA and TSE have been assiduous in encouraging more engagement between investors and Japanese companies, and in highlighting the problems raised by the ever-increasing share of funds invested on a passive basis in the Japanese market – which is leading to a sort of “hollowing out” of meaningful feedback from institutional investors. I would encourage anyone who reads Japanese to read the most recent Action Plan for corporate governance, especially including the reports by the Secretariat in the FSA’s May 16th meeting. This is very commendable.
On the other hand, there is a stark contradiction between this stance and a big defect in the machine-readability of the Corporate Governance Reports (CG Reports) submitted by Japanese companies to the JPX/TSE, which is regulated by the FSA . The defect renders a major portion of these reports almost entirely useless for rigorous analysis by computers… even though I pointed it out some six years ago. In a word, the 11 (or more) different “disclosure items” required to included in CG Reports, which account for close to half of the meaningful information in each report, are all mashed together into one XBRL “barrel” that does not even have a standardized format.
This is the first draft of a working paper led by two respected Japanese academicians who used governance and firm-specific big data to predict future equity returns in Japan . Conclusion: “we constructed a prediction model of firms’ future TSR and used it to show that the investment strategy based on the model’s predictions could generate non-negligible improvement in returns. These results suggest that high-dimensional corporate governance variables contain informative signals associated with future firm performance over and above reliance on purely financial data.”
The research was conducted using BDTI’s detailed, Japan-specific time-series database for all listed companies in Japan. The results are consistent with the fact that every fund manager that has backtested our data so far has bought a license, and every licensee has renewed so far. It would seem that Japan’s square peg of three different governance structures and peculiar practices does not seem to fit into the standard “global” round hole framework used by other data providers.
The recent focus on ESG has allowed certain firms to de-focus on “G” and appeal to all sorts of “ES” policies and plans in their IR materials. This makes the job of investors harder in the sense that true sustainability and better financial performance are less likely to occur without good G in the first place, so one has to separate out the companies which are truly improving the quality of their governance in terms of its substance rather then just superficially assembling all the right boxes in the chart.