What Correlates with Superior Corporate Performance? (Summary of Research)

BDTI and METRICAL conducted joint research regarding the governance structure/practices and related corporate actions that correlate with superior firm performance in Japan, and reported on the preliminary results at seminars hosted by BDTI on March 16th and by Goldman Sachs on April 4th. Our research is still underway, but the preliminary results are intriguing and provide useful guidance for the next stage of analysis.

BDTI and METRICAL believe that corporate governance is not functioning effectively unless it leads to superior strategy, fine-tuning of capital allocation and capital structure, and other value-creating corporate actions.  Therefore, in our research we have sought to identify the apparent linkages and correlations between board practice, key corporate actions, and value creation.

In Phase 1 of our analysis, we studied the TOPIX100 Index composite (large 100 companies) to see whether scores we assessed for each company’s nomination policy, training policy, compensation policy, board evaluation policy, and the % of independent directors significantly correlate with ROA and ROE.

2017 OECD Corporate Governance Factbook

Varieties of “Independent” Director in Asia 

As this working paper reveals, however, the meteoric rise of the ‘independent director’ in Asia is considerably more complex than it initially appears. Although the label ‘independent director’ has been transplanted precipitously from the US (in some cases via the UK) throughout Asia, who is labelled an ‘independent director’ (i.e., the ‘form’ that independent directors […]

February 17th Director Boot Camp – Another Successful Program! Next Course: April 20th

On February 17th, BDTI held its English Director Boot Camp , attended by a number of experienced participants. Participants from various companies heard lectures about corporate governance and related topics by Nicholas Benes and Andrew Silberman of AMT, and exchanged experiences and opinions at a spacious, comfortable room kindly donated for our use by Cosmo Public Relations, a leading communications and PR firm in Tokyo.

Thank you all for your active participation!

We are planning to hold the next course on April 20th. Sign up early!

 

”Global and Regional Trends in Corporate Governance for 2017” by Russell Reynolds Associates

”Russell Reynolds Associates recently interviewed numerous institutional and activist investors, pension fund managers, public company directors and other governance professionals about the trends and challenges that public company boards will face in 2017. Our conversations yielded a wide array of perspectives about the forces that are driving change in the corporate governance landscape.

”OECD Survey of Corporate Governance Framework in Asia”

”The Organisation for Economic Co-operation and Development (OECD) has recently released a report of a survey that was conducted based on the responses to a questionnaire on corporate governance frameworks that was disseminated to partner organisations in the 14 participating Asian jurisdictions in May 2016. These included Bangladesh, China, Chinese Taipei, Hong Kong, India, Indonesia, Korea, Malaysia, Mongolia, Pakistan, Philippines, Singapore, Thailand and Vietnam.

The survey which is a useful document to all stakeholders that are working towards  corporate governance reforms in the region is a reflection of current status of practices and standards. Role of stakeholders, disclosure of related parties, shareholder rights, board and ownerships structures are some of the key areas highlighted.”

Read the  full report here.

The Director’s Chair: The Many Roles of the Board Director

A personal perspective from 25 years in risk management

The world is getting smaller, more intense, and risks are amplified for the same reasons. All business operates within interlinked networks we refer to as an eco-system. The business eco-system has similarities to the ones found in nature, notably the mutual interdependence of many ostensibly autonomous participants, the flow of energy, information – and money – and the subtle interplay of supply chains. This interdependence and complexity – as well as the possibility of harmful predators, unanticipated disruptions, man-made or natural – provide a broad set of ongoing challenges for corporate management, in Japan and elsewhere. Collectively, we can categorize these challenges as risk management.

In this essay I will examine the multiple roles and tasks of the independent outside Director in a Japanese company with publicly listed shares, but these observations apply to many senior managers in supervisory roles. There is a saying, where you stand depends on where your sit. The independent Director sits near the top of the company’s decision-making and control apparatus but as a rule does not have executive or functional responsibility. He stands apart from active management in an oversight role. Let’s take a closer look at this role.

Sagami-FamilyMart UNY Holdings: Can a Board Justify Selling a Subsidiary to the Low Bidder?

Sagami Co. Ltd. (8201) is a Tokyo Stock Exchange First Section company, 56% of the shares of which are owned by FamilyMart UNY Holdings (8028), the holding company of the recent convenience store mega-merger between Family Mart and UNY (Circle K-Sunkus).  Sagami is a national chain of retail kimono stores established in the 1970s under the UNY corporate umbrella.  UNY converted Sagami into a “listed subsidiary” in the bubbly mid-1980s.

Needless to say, the kimono business is facing demographic and other headwinds.  Sagami’s revenues have declined steadily year to year.  At ¥100 a share, Sagami’s market capitalization is ¥2.87 billion.  By contrast, Family-UNY’s market capitalization is nearly ¥700 billion.  Sagami is a drop in the bucket.  Sagami’s thinly traded shares have bumped up and down between ¥50 and ¥80 over the last year.

Earlier this summer Family-UNY made the decision to dispose of Sagami as a non-core business.  Family-UNY entered into discussions with domestic private equity fund Aspirant Group in which it was agreed that Family-UNY would accept a discounted tender offer for its shares at ¥56 a share.  Part of the deal included an agreement by Family-UNY to forgive ¥1.6 billion of parent company loans to Sagami.  The tender offer expires on October 11, 2016.

Enter New Horizon Capital, a rival domestic private equity fund, which in September offered Family-UNY better terms– ¥70 a share.  Family-UNY has yet to indicate how it will respond to the higher bid, but recent news reports leave the strong impression of distress and hesitation within Family-UNY.

The fact that the situation is creating distress and hesitation should be viewed as evidence of progress in Japanese attitudes about corporate governance and shareholder rights over the last decade.  In 2004, in the much larger but parallel case involving competing bids by the Mitsubishi Tokyo Bank and Sumitomo Mitsui Bank for UFJ, the Japanese establishment and press were largely oblivious to the UFJ shareholder issues raised by Mitsubishi Tokyo’s pre-emptive bid that foreclosed a higher bid by Sumitomo Mitsui. (See p. 159 of the attached article for a more detailed description of that case.)

Paper by Naoto Isaka – When Are Uninformed Boards Preferable?

Abstract

In this paper, I analyze the optimal choice of board of directors using the dual role model of boards in Adams and Ferreira (2007). In my model, shareholders choose either an informed board that brings additional private information to the firm or an uninformed board that merely considers the inside information already available within the firm. The board then randomly chooses a good chief executive officer (CEO) with inside information or a bad CEO without such information, and the CEO decides whether to consult with the board when making a project decision. I show that shareholders generally choose the informed board to maximize firm value by utilizing the private information available to the board. However, the shareholders optimally select the uninformed board if the CEO is reluctant to communicate with the informed board for fear it will reject the CEO’s decision. The uninformed board is also optimal when the board has a sufficiently large private benefit of monitoring the CEO, the shareholders feel burdened by any conflict between the CEO and the board, or the firm is involved in many unrelated businesses, especially when the inside information is valuable and the firm needs many outsiders to observe useful outside information. I use some of these implications and casual observation of real-world data to discuss recent trends in the board structure of Japanese firms.

”Thoughts on the Business Roundtable’s Principles of Corporate Governance”

Following the release of the ”Commonsence Principles of Corporate Governance ”  by a diverse, twelve-member coalition of executives of major corporations, asset managers and one shareholder activist in America in July 2016, the influential Business Roundtable (“BRT”) recently released a set of corporate governance principles which are to provide guidance on governance disclosure.

Whereas the Commonsence Principles of Corporate Governance are mainly 8 recommendations on roles and responsibilities of the board, companies and shareholders, the BRT Principles extensively cover the key governance issues such as board responsibilities, roles of key corporate actors, committee responsibilities and other, elemental, governance concerns historically addressed by the organization.

In his article, Michael W. Peregrine, of McDermott Will & Emery LLP shares his thoughts on the BRT Principles that articulate these governance issues on  long term value sustainability, shareholder engagement, board diversity, committee practices and succession matters.

Read full article here.

Source: Havard Law School Forum on Corporate Governance and Financial Regulation