Corporate Governance Code Archives

What Needs to be Added to the “Action Program for Accelerating Corporate Governance Reform: From Form to Substance”

2024-08-23 posted by Nicholas Benes

Nicholas Benes
Representative Director, The Board Director Training Institute of Japan (BDTI)
(The following is my personal opinion and not that of any organization. This is a translation of the original article.)

As sent to prospective candidates to be the next Prime Minister, in no particular order:
Chief Cabinet Secretary Yoshimasa Hayashi, Minister for Foreign Affairs Yoko Kamikawa, Minister of Economy, Trade and Industry Ken Saito, Minister for Digital Transformation Taro Kono, Minister in Charge of Economic Security Sanae Takaichi, Secretary-General of the Liberal Democratic Party Toshimitsu Motegi, House of Representatives Member Shigeru Ishiba, House of Representatives Member Shinjiro Koizumi, House of Representatives Member Takayuki Kobayashi, House of Representatives Member Seiko Noda, House of Representatives Member Katsunobu Kato.

CC: Prime Minister Fumio Kishida, Deputy Chairman of the Liberal Democratic Party’s Political Research Committee Masahiko Shibayama, Parliamentary Vice-Minister of Health, Labor and Welfare of the Liberal Democratic Party Akihisa Shiozaki, Deputy Secretary-General of the Liberal Democratic Party Seiji Kihara, House of Representatives Member Kenji Nakanishi.

Japan’s Corporate Governance Code (CGC) and the investor Stewardship Code need to function as “two wheels” of a cart. I had advocated this since 2013, and when I had the opportunity to formally propose the establishment of the CGC to the Liberal Democratic Party in 2014[1], I insisted that the most important thing was to “promote the disclosure of information that enables one to verify governance structure and substance” at firms.

“Governance and oversight are more likely to function effectively on a board that has a majority of truly independent and qualified independent directors.” As of 2014, this dynamic had been recognized in many countries around the world. At the time, I thought that if companies disclosed their actual governance practices and stewardship by investors started functioning well, Japan, as a developed country, would naturally adopt a similar stance within the next five years or so.

Ten years later, however, there is still no serious discussion of these two issues in Japan. Now that global investors are paying more attention to the Japanese stock market, I believe it is time for us to confront these core issues and take the following steps to speed up Japan’s governance transformation.

AGM Season in Japan: Time to Encourage Director Training!

2023-06-08 posted by Admin

BDTI's Three-Course Package for Director Training

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…

Taro Kono, Could You Please Speak to the FSA and TSE?

2023-05-27 posted by Nicholas Benes

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.

Using BDTI’s High-Dimensional CG Big Data to Predict TSR in Japan (working paper)

2023-05-18 posted by Admin

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.

GoToData by BDTI: Japanese Disclosure, by All listed Firms, Now Easily Accessible in English!

2020-05-30 posted by Admin

Why wade through 100+ pages of unusable PDF-formatted Japanese jungle, when you can jump directly to the parts you want, read them in English, and quickly cut and paste both text and tables you want to analyze and compare? Why not save 70% of your time and conveniently review the official source documents submitted by all 3,600+ Japanese listed companies? Click on the center of the image below to view in full screen “flipbook” mode, and contact us at info@bdti.or.jp if you are interested to know more. Qualifying parties may receive demonstrations and trial accounts.
Ready or not, Japanese disclosure has now entered the age of machine-readable digital data! The dream that I presented to Japanese lawmakers in February of 2014 [1] can now be realized: a world where a Corporate Governance Code requires detailed disclosure of the inner workings of companies’ governance black boxes, and that information is seamlessly available to all investors, thus making it possible for them to do the analysis they must do to be good “stewards”. As a result, the Stewardship Code will be able to function in reality, not just in theory.

[1] ２月６日に自民党の日本経済再生本部の金融調査会に呼ばれて、コードの概念、政策としての位置付け、入れるべき内容の例を「日本経済の復活のため、コーポレート・ガバナンス・コードの早期制定を」というプレゼン資料を使って説明した。その後、議員らにさまざまなアドバイスと提供させていただいた。

Professor Hideaki Miyajima: Activist Shareholders and Companies: Improving the Effectiveness of Management Reform

2020-03-30 posted by Admin

“…the probability of the success of activism (as described above) accompanied by official requests for activity has not yet reached that of Europe and the United States but has risen to 40%. In addition, the cumulative abnormal return (CAR) when such requests are accepted is about 6%, the same as in the United States and Europe….

Finally, let us consider the keys to improving corporate governance in Japan in the future…..

Nikkei Asia: Activist Funds Defeated at Kirin and Toshiba Machine

2020-03-30 posted by Admin

“IFP’s challenge, however, highlighted weaknesses at Kirin, whose expansion has produced mixed results, analysts said. One of the director nominees recommended by IFP, corporate governance expert Nicholas Benes, won 35% of shareholders’ votes despite opposition from Kirin, suggesting some shareholders agreed the board needed more change.

Memo to Shareholders of Kirin HD, from a Director Candidate

2020-03-15 posted by Admin

Independent Franchise Partners (IFP) has submitted a shareholder proposal nominating Kanako Kikuchi (an experienced global pharmaceutical executive) and myself as independent directors. Glass, Lewis supports electing both of us, but it seems that ISS has “split the baby” and only supports me. If investors could vote for Ms. Kikuchi as well, it would greatly help ensure that the board makes a fully informed, objective and independent assessment of the strategy on an ongoing basis.

Both of us have no past relations with IFP, and take an approach that is completely agnostic and independent of IFP’s dividend proposal. We both believe that if shareholders do not opt for that proposal, – or in any case – it is most prudent to withhold any decisions about the strategy until such time as when we are on the board and can ask questions and are privy to all internal analysis and confidential information. Therefore, we would both join the board with no pre-decision(s) made before knowing all the facts. This is the only logical position to take as a truly independent director. I have informed IFP in no uncertain terms that my philosophy and legal duty is to answer to all shareholders, and that I may well not agree with positions that IFP has taken or may take in the future. IFP has no problem with this.

Many investors may not realize that unless Ms. Kikuchi is elected, there will be no one with global biopharma experience on this board just at the time when that skill set is most needed. Given the company’s proclaimed strategy to “bridge” into health science products (which could be a good one for all I know), this is not wise and is of great concern to me.

Correlation and Causation: Good Governance Practices and Firm Performance in Japan

2020-01-20 posted by Admin

On December 11, 2019, I gave a lecture on BDTI’s analysis about corporate governance practices and and firm performance in Japan. Since then we have added indicators of statistical significance to our materials. To view the entire presentation as translated into English, click here: Presentation to Securities Analyst Association 2019.12.11. Those who read Japanese can read the full speech here, and can download the Japanese version of the presentation materials.

Our methodology is shown on page 23 . Our analysis suggests that the adoption of the following practices leads is followed by (appears to cause) improvements in ROA compared to the average for a firm’s industry over the next two years. Please see the charts on the left side of each page:

Adding an nomination committee of some sort (p. 27)
Appointing an outside director as the chair of that committee (p. 28)
The combination of nomination committee with a board composition with >33% independent directors (p. 30)
Adopting a performance-linked compensation plan for executives (p. 29)

Various other factors that appear to correlate with superior performance, are shown on page 22, and page 34. We will explore the direction of causation with some of these later.

Governance Practices and Firm Performance in Japan – Preliminary Analysis of Causation

2020-01-06 posted by Admin

On December 11, 2019, Nicholas Benes gave a lecture on Corporate Governance Practices and Firm Performance in Japan at the Securities Analysts Association of Japan. It was generally well-received and covered the following topics:

An Introduction to BDTI
General Trends in Corporate Governance
Correlation Analysis on Relationships Between Corporate Governance and Firm Performance, and the Direction of Causation
Advice for Investors and Prospects for Future Research
Appendix: Preview of our internal corporate governance relational database

Of note were the three main themes that were discussed: (1) There are visible relationships between certain corporate governance practices and financial performance (2) the direction of causation is most important to confirm, and so far, BDTI’s analysis suggests that a number of specific governance practices actually do seem to “cause” improvement rather than simply serve as evidence that management wants to “look good”; and (3) this information is vitally useful for analysts and investors alike, in order to improve the effectiveness of investor engagement that enhances profitability, growth and stock performance in a win-win cycle.

Director, governance and compliance training

Tag: Corporate Governance Code