“Linkage Between Corporate Governance and Value Creation” (METRICAL/BDTI) – Update as of January, 2019

Our joint research – “Linkage Between Corporate Governance and Value Creation” – between BDTI and METRICAL has been updated as of January 31. The most important inferences are summarized below.

(1) Correlations: Board Practices
and Performance

Significant correlation between board practices and performance continues.

(a) ROE: Nominations Committee existence, the number of female directors and percentage of INEDs show a significant positive correlation.

(b) Tobins Q: Nominations Committee, retired top management “advisors” (ex-CEO “advisors”), and percentage of INEDs show significant positive correlation.

(c) ROA (actual): Compensation Committee existence (negative correlation), Incentive Compensation Plan disclosure, and retired top management (ex-CEO) serving as advisors show significant correlation.

Amended, Detailed Public Comment by Nicholas Benes to JPX re: “Review of the TSE Cash Equity Market Structure”

NOTE:  This public comment supersedes and replaces the one that I, Nicholas Benes, submitted on January 12, 2019)

As the person who initially proposed the Corporate Governance Code to the LDP in 2013 and 2014, and suggested a number of principles in it, I am well aware of its limitations in various areas and the fact that Japan has not yet attained the quality level for an equity market that is expected by global investors. In this sense I am very pleased that the JPX has decided to review its equity market structure and related standards.

Challenges and Realities

This indeed an important mission, for which is it essential to recognize and discuss the impact of a number of challenges that Japan faces in improving governance, efficiency, and trustworthiness of its equity capital markets. These challenges include:

Engagement in Japan: How to Discuss Director and Executive Education – the Most Necessary Thing!

Executive training is badly needed in order for independent directors to perform their expected role 

When I proposed to the LDP and the government in 2013 that Japan promulgate a corporate governance code, one of the most important principles that I advised should be included in it was a requirement for director and pre-director training.  To anyone who has ever sat on an average Japanese board, the need for this is obvious.  Without more training of both executives and external directors in Japan, it will continue to be very difficult for independent directors to perform the roles that are now expected of them. From personal experience, I know that it is simply not possible to convince engineers who do not understand finance that their company could very easily go bankrupt in two years.

ICGN Urges Japan to Focus More on Independent Committees and Director Training, Other Key Areas

We are pleased to note that against the backdrop of the recent events at Nissan, the Institutional Corporate Governance Network (ICGN)  has submitted a letter to Japan’s Council of Experts for the Follow-up of Japan’s Stewardship Code and Corporate Governance Code, stressing the importance of independent directors, independent board committees, director training, use of a “skills matrix”, capital allocation, disclosures, and a number of other issues that BDTI has been stressing for many years,  – ever since its establishment in 2009, in fact.   On the topic of director training, Kerrie Waring of the ICGN wrote:

” ICGN encourages the introduction of high quality training for independent directors in Japan to help build an understanding of what their role entails, particularly in relation to monitoring management and public disclosures. This would help ensure objective decision-making in response to business issues and in alignment with the company’s vision, mission and strategy. We also stress the importance of financial literacy to ensure that independent directors are able to challenge management on issues such as capital efficiency, the use of cross shareholdings and CEO remuneration.”  (emphasis added) 

How Many Shares are Actually Held by “Allegiant Shareholders [1]”?

By Ken Hokugo[2]
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.

Japan CG Top20 Stock Performance: Gap with Market Indices Widens (August 2018)

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.

BDTI Update to Supporters, June 2018

Notes: (1) On this page (at top right), you can sign up to receive our English Newsletter; (2) Sign up to receive the (separate) Japanese Newsletter here; (3) Anyone can support the “SEO” of our web site simply by mentioning BDTI on any web page with a link to this page; (4) For details about the chart, see the overview materials.

” Dear Supporter:   I am writing to update you, and to respectfully ask you or your institution to make a donation of 300,000 Yen or more this year, either as a Sustaining Donor or as a Corporate Participating Member. (As explained below in section 5, the latter category now allows donors which are investing institutions to receive 40% discounts on all BDTI courses/seminars that are open to the public, and to share these discounts with companies in their portfolio.)

TBS is Not the Only One – 33 Other Major Companies with Large Investments in Securities

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.

TSE: “Publication of Revised Japan’s Corporate Governance Code”(2018.06.01)

“Tokyo Stock Exchange, Inc. (TSE) has partially revised the Securities Listing Regulations pertaining to the revision of Japan’s Corporate Governance Code (hereinafter the “Code”) (*) with effect from June 1, 2018.
This revision is based on the proposals made by the Council of Experts Concerning the Follow-up of Japan’s Stewardship Code and Japan’s Corporate Governance Code (hereinafter the “Council”). Jointly operated by the Financial Services Agency and TSE, the Council made proposals to revise the Code in order to advance governance reform not just in form but also in substance through dialogue between companies and investors.

BDTI/METRICAL CG Research Update: “Linkage between CG Practice and Value Creation”

BDTI and METRICAL collaborate on researching the linkage between CG practices sand value creation. We have recently released our updated analysis as of April 2018 for the roughly 1,800 publicly traded companies with market capitalization exceeding about JPY10 billion.

In this analysis, by examining board practices (CG guidelines, practices, and composition of the Board of Directors) and specific actions (real actions by a company) separately, we try to identify statistically significant correlations with financial performance measures (ROE, ROA, Tobin ‘s q) for each of these respectively – i.e, for, board practices and action respectively.

We have observed a certain degree of improvement in board practices since the introduction of the Corporate Governance Code.  However, assuming that one of the key goals of the corporation is value creation, in order to improve the effectiveness of engagement and stewardship it is very important to regularly analyze the way in which such improvement (and specifically, which improvements) appears to lead to value creation.

We can summarize the results of our recent analysis as follows: