Discussion Forum

Great Analysis of the Larry Fink/BlackRock Letter

“Today, after more than a year of increasing pressure from climate activists, investors, legislators, and thought leaders, BlackRock CEO Larry Fink, in his highly-anticipated annual letter to CEOs and to clients, announced a sweeping new set of policies which aim to put climate change and sustainability at the center of BlackRock’s business model. BlackRock is the world’s largest asset manager with almost $7 trillion in assets under management as of Q3 2019. …..The announcement is a major shift for BlackRock, which previously had failed to take meaningful action on climate, and is a very important step in the right direction as the world faces increasing risk from climate change. Massive capital shifts away from fossil fuels and deforestation-risk commodities are necessary to mitigate the worst of the climate crisis and set the world on a path toward sustainability.

METRICAL: Does the Legal Structure of BoD Affect Japan’s Corporate Governance and Performance?

Public companies in Japan employ three types of legal governance structures for their boards. The three types of organizational structure are the Company with Corporate Auditors, the Company with an Audit Committee and the Company with Nomination Committee, etc. However, as shown in the pie chart below, very few companies use the Nomination Committee format. The number of companies shown below is based on Metrical’s research universe of 1,754 companies but the number of Companies with Nomination Committee, etc. would not be much different even if more smaller companies were included.

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

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.

Nicholas Benes: Public Comment on Revision of the Stewardship Code

1) Pension Funds
2) Other Types of Investors
3) “ESG Factors”
4) Debt Instruments

1) Pension Funds

The proposed revisions to the Stewardship Code do not make it clear enough exactly how corporate pension funds, or smaller pension funds of any type, can sign the Code and comply with it without bearing excessive cost, work, or confusion.  Because this is not sufficiently clear at present, to date only an extremely small number of the defined-benefit pension funds at listed non-financial companies in Japan have signed the Code (only about 10, out of a total of 700 or more such funds). As a result, a rather odd situation exists in that most Japanese companies claim to care for their employees deeply, but judging from their actions, do not seem to care much about employees’ investments or post-retirement quality of life – or even, to care about preserving shareholder value by reducing the cash infusions needed to keep their pension plan fully funded. This makes a mockery of the language in the Corporate Governance Code about stewardship (Principle 2.6 企業年金のアセットオーナーとしての機能発揮), and of the Stewardship Code itself.

Results of CFA Society Japan and CFA Institute survey regarding amendments to the Foreign Exchange and Foreign Trade Act

Almost 70% of respondents do not agree with the amendment and 86% showed their concern that the amendment might give a negative impact on the investment into the Japanese equity market.

Results of CFA Society Japan and CFA Institute survey regarding amendments to the Foreign Exchange and Foreign Trade Act

Specialist or Generalist Education and Careers?

It’s well known in Japan that entry to good universities is fiercely competitive, and then students mess around for four years, sleeping in lectures, putting more effort into club activities than study. As a consequence, the large employers who recruit hundreds of graduates every year mainly assess applicants on character and potential, and treat new hires as “trainees” to be developed, rather than contributors.

The Need to be “Applied” in Japanese Universities

Shigenobu Nagamori, the founder of Nidec is interviewed in the Nikkei Business series on how to “wake up Japan” about his latest acquisition – not a company this time, but a university – Kyoto Gakuen. He feels that Japan has become too brand name obsessed about higher education and that 18 year olds should not have their future decided simply on the basis of their standardised score for the university entry exams.

The Cause of Japan’s Low Productivity

In the Nikkei Business series on how to “wake up Japan, Senior Chairman and former CEO of Japanese leasing and financial services company Orix Yoshihiko Miyauchi sees three mistakes that have led to  Japan’s “lost three decades”:

  • Allowing an asset bubble to develop in Japan the first place
  • Not stabilising the economy after the asset price crash
  • Not restructuring the Japanese banking system quicker – real restructuring did not happen until the 2000s, 10 years after the crash.

As a result, Japanese companies were “like tiny boats on a big ocean,
using all their energy to avoid large waves. Rather than innovate or
grow, they focused on cost cutting”, says Miyauchi.