Discussion Forum

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:

Public Comment to the Proposed Revisions to Japan’s Governance Code – Nicholas Benes

by Nicholas Benes (as an individual)
April 30, 2018

1. Regarding the Overall Revision Process
2. Regarding Principle 2-6 (Activating the Function of Corporate Pension Funds as Asset Owners)
3. Regarding Principle 1-4 (“Policy Shareholdings”)
4. Regarding Principles 4-1③,4-3② and 4-3③ (Appointment and Termination of the CEO)
5. Regarding Principle 4-10① (The Use of Optional Structures)
6. Regarding Principle 4-14 (Training of Directors and Kansayaku)
7. Regarding Revision of the Machine-Readable Format of Corporate Governance Reports

(Note: This is a translation of a public comment which was originally written in Japanese and submitted in that form to the JPX/TSE.  The original version of the public comment is available here.)

1. Regarding the Overall Revision Process

I would like to express my thanks and appreciation for the hard work of the members of the Followup Committee with respect to this review of the Corporate Governance Code (the “CG Code”) . However,I would note that four years have elapsed since the initial drafting of the Code. As you know, in Germany there is a commission which monitors the effectiveness of the governance code on an ongoing basis, and proposes changes on a yearly basis if and as necessary.

April 10th “Director Boot Camp” …Next Course: May 22nd!

BDTI’s April 10th English Director Boot Camp was a great success, with active participation by a diverse group of Japanese and European persons! 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 coming!

The next course will be held on Tuesday, May 22nd. Sign up now to secure your spot!

Draft Revision of Japan’s Corporate Governance Code: Public Comment Period Begins

The Council of Experts Concerning the Follow-up of Japan’s Stewardship Code and Japan’s Corporate Governance Code (Chairman: Kazuhito Ikeo, Professor of Economics and Finance, Keio University) has  published its proposals for “Revision of the Corporate Governance Code” and  “Guidelines for Investor and Company Engagement”. Both are being put out for public comment until April 29, 2018.  Full information from the FSA is available here.   The documents themselves are available the links below.

Revision of the Coporate Governance Code and Establishment of Guidelines for Investor and Company Engagement(including Appendix1 and Appendix2)

(Appendix1)Japan’s Corporate Governance Code (Draft Revision)

(Appendix2)Guidelines for Investor and Company Engagement (Draft)

Networking forum for non-Japanese executives at Japanese firms and their Japanese counterparts

Recently, many major Japanese companies have been bringing non-Japanese executives to Japan to fill key roles in their global operations. Diversifying the ranks of senior executives is an important step forward for Japanese firms. But it also represents a significant change in terms of how communication and decision-making works at the highest levels of the organization.
Non-Japanese executives working in Japan have few chances to meet their peers at other Japanese firms. There are also few chances to have in-depth and meaningful conversations about the unique issues faced by Japanese companies in the process of becoming truly global entities.

Based on its long experience organizing forums for Japanese executives, the well-regarded Business Research Institute is establishing a new forum designed for non-Japanese executives in Japan and their Japanese counterparts to participate in together. This new forum will provide an important opportunity for networking and discussion. It will be held entirely in English, and will provide the opportunity for frank and in-depth exchange of opinions in a confidential setting.

METRICALs CG Analysis Now Covers 1,808 Companies, Up From 511, Yielding More Robust Results

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.

“Efficient Engagement” in Japan: A Sample Engagement Letter

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.

2018.05.10 Seminar ‘Practical Financial Analysis for Directors ~ As taught by an experienced institutional investor ~’

What do sophisticated investors expect of directors when it comes to financial analysis of their own companies? In this seminar, an experienced equity portfolio manager and CIO will cover the basics of “accounting for value” and financial analysis that all directors in Japan should know, including:

• Challenges faced using the accounting information produced by listed Japanese companies
• Cash Flow vs Accrual Accounting and how each relates to performance and valuation
• The limitations of traditional measures of performance, value and returns such as sales growth, operating margins, PER, PBR, ROE, etc.
• Key financial metrics that investors and independent directors should use to evaluate business performance
• How to reformulate your company’s financial statements for purposes of investment and valuation
• How to use analysis to drive and support decision-making

There will be simple case studies, and time allotted to Q&A. For maximum benefit, participants may wish to read “Accounting for Value” by Stephen Penman, either before or after the course. Our speaker will be Campbell Gunn, the former country head of T. Rowe Price in Japan. Mr. Gunn is a fund manager with 30 years of broad experience in Japan equity portfolio management, during which time his teams generated returns that were consistently superior to market indices. Currently he advises PacificData, a leading provider of analytical systems and integrated financial information on Japanese companies.

Please sign up early, as we expect this to be a well-attended event. (Use the link below.)

January 25th “Director Boot Camp” …Next Course: April 10th!

BDTI’s January 25th English Director Boot Camp was a great success, with active participation by a diverse group of Japanese and European persons! 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 […]