Category: ESG

“Japan’s Unfinished Corporate Governance Reforms”, by Nicholas Benes

2019-12-04 posted by

My article on Japan’s unfinished reforms is online now. Lest the Abe administration and regulators “declare victory” when they are only half done, I describe seven specific measures that Japan needs to adopt in order to bring its market up to a global standard for a developed nation:

  1. Detailed rules for an independent committee
  2. A clear requirement for a majority of independent directors on the board
  3. Codifying the role and responsibilities of executive officers
  4. Consolidation of overlapping disclosure reports
  5. Protection of minority shareholder rights
  6. Enhancing transparency to reduce entrenchment and enhance inclusiveness
  7. Strengthening stewardship throughout the investment chain

I stress the reality that in all of these, strong political leadership from the Prime Minister and other senior parliamentarians will be needed. “Thus, is it essential that the Tokyo Stock Exchange (JPX/TSE) and the various regulatory agencies keep up reform momentum. However, one senses a desire from these groups to ‘declare victory’, and they have a tendency to not fully coordinate with each other. If Prime Minister Abe’s cabinet did more to make the key players coordinate their efforts in key areas, meaningful governance change (and protection of investors) would accelerate….

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Investing.com:“Japan is the Place to Invest” By Cumberland Advisors

2019-11-14 posted by

“ ….The OECD notes that, despite the current slowdown, the expansion of the Japanese economy that began in late 2012 is the longest in Japan’s postwar history and is projected to continue through 2020. The Bank of Japan’s forecast is similar, with a pick-up in growth expected in Japan’s fiscal year 2021. Continued supportive monetary policy with very low interest rates and large-scale government bond purchases, together with increased public investment and spending to offset the effects of the sales-tax increase, are expected to maintain the expansion. The new U.S.-Japan trade deal and the anticipated elimination of the threat of U.S. automobile tariffs are positive developments. If the current optimism about progress in trade talks between the U.S. and China proves to be justified, Japan’s economy would benefit significantly from the positive effects on the Asia region….“

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TIIP:”Sustainable Investing in Japan: An Agenda for Action”

2019-09-02 posted by

Executive Summary

More than a quarter of assets under management (AUM) worldwide are invested in “sustainable” strategies, strategies that consider environmental, social, and governance (ESG) factors in pursuit of financial sustainability and/or environmental or social sustainability. Investors – both individual and institutional and at all wealth levels – are increasingly interested in integrating these strategies into their financial plans and investment portfolios, and asset managers and global financial institutions are embracing the approach and expanding related services and product offerings.

Interest in sustainable investing and sustainably invested AUM are growing rapidly in Japan. But despite this enthusiasm and growth, few mainstream investors, financial advisors, and investment consultants in Japan are embracing the practice.

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METRICAL/BDTI：Ratings of 1,800 companies (July 2019 Update)

2019-08-05 posted by

In our July ratings, a more nuanced pictured emerged for Japanese companies. The significantly positive correlation of financial performance with the percentage of INEDs and the number of Female Directors disappeared this month, suggesting that an increasing number of non-superior performers are “copying” other companies in this respect, and/or have only only done so recently so no positive impact (should there be any) is discernible.

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Disclosure of Executive Compensation Required by New Cabinet Office Order… and Companies’ Responses

2019-07-22 posted by

On January 31, 2019, the Cabinet Office Order on Disclosure of Corporate Affairs was amended, and the format of for securities reports was changed. With regard to the securities reports for the fiscal year ending March 2019, it is said that the employees in charge of dealing with the new format were put under considerable stress and extra work. The most troubling item was probably the section on executive compensation.

The revision of the Cabinet Office Order was made in response to the Financial Council Disclosure Working Group (DWG) report published on June 28, 2018. Mr. Carlos Ghosn was arrested in November of the same year, and executive compensation, which has been a subject of much debate for some time, once again disturbed the public mind. The new format, modified under these circumstances, calls for broader and detailed information disclosure. However, the top executives of many companies view disclosure of compensation as undesirable, because it has carries the potential for divisiveness or embarrassment. Mr. Ghosn’s false statement of compensation was attributable to this sense of aversion. Not only him, but also many other executives, desire as a basic human emotion to avoid disclosure of the amount of their compensation.

What were these two contradictory vectors, – requirements from Cabinet Office Order, and the company leaders’ intentions – reflected securities reports? Although we should wait for the thorough analysis on many securities reports published at the end of June 2019, in this article I would like to convey the initial impression that I obtained by surveying a few of them.

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Japanese Institutional Investors Need to Take Their Own ESG Medicine

2019-07-15 posted by

Does anyone have any theories as to why institutional investors that support director training in Japan are overwhelmingly foreign, and not Japanese?

The Board Director Training Institute of Japan (BDTI) was established as a “public interest” nonprofit in order to enable Japanese institutional investors to support something badly needed by their home market, director and governance training, on a tax-deductible basis…. so that such training could be offered at high quality yet low price, thereby spreading customs of governance/director training throughout Japan. However, after running BDTI for eight years since obtaining certification, we have noticed a disturbing but continuing reality: over time, more than 95% of BDTI’s donations from institutional investors have come from foreign institutions or fund managers, and less than 5% of donations to BDTI have come from Japanese institutions. Moreover, none of the Japanese institutional donors are “major” (top 30) investing institutions in Japan.

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Communication Protocols for Acquisitive Strategic Investors with Board Nominees in Japan

2019-07-12 posted by

The Corporate Counselor – Insights into Japanese Corporate Law –

by Stephen D. Bohrer and Yusuke Urano, Nishimura & Asahi NY LLP

Summary: “Strategic investors owning more than 10% of the shares of a Japanese company often seek board appointment rights as a measure to protect their investment. Board appointment rights offer a strategic investor a number of significant benefits, such as permitting the strategic investor to obtain useful information about the business plans and key technologies of the company. Although the director nominated by a strategic investor could breach contractual commitments and fiduciary duties if such director relays certain confidential information to the strategic investor, it is inevitable in these arrangements that a strategic investor will obtain some key information that it ordinarily would not have obtained had its nominee not served as a director.

The receipt of confidential information is a double-edged sword for a strategic investor as such information can be very useful for investment monitoring and competitive purposes, but at the same time can result in a violation of Japanese securities laws if a strategic investor makes a purchase or sale while in possession of material non-public information (“MNPI”). Consequently, a strategic investor contemplating a securities transaction with a publicly traded portfolio company (a “Public Investee Company”) in which it has a nominee serving on the board should implement communication protocols to channel information flows to and from its director nominee and the Public Investee Company so the strategic investor does not breach Japanese securities laws (curiously, the prohibition under Japanese insider trading rules does not apply to a privately held company).”

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Corporate Governance in Japan: What Has Changed in the Past Three Years?

2019-06-03 posted by

I recently gave a presentation in which I tried to answer this question. Here are the top-line conclusions:

  • Investors are finding their voting voices
  • Now they need to find to find their asking voices
  • There is a way to tear down the “allegiant shareholder ” wall
  • Factors that correlate with superior performance include: >= independent directors, low “allegiant” holdings, >15% female directors, and age of firm <45 years
  • Activism is becoming more effective

These conclusions are based on a huge amount of time-series data we have collected. We are now building a comprehensive time-series database that includes not only financial data, but all text and numerical data from financial reports and CG Reports, as well as tabulated AGM voting results for each resolution. The data will be organized so that one can zero in on exactly the data one needs. Here is a simple example showing board practices parameters, historical AGM participation and CEO approval rates, and the trend of ownership of “allegiant shareholdings”:

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How to Demolish Japan’s Wall of Yes-Man Allegiant Shareholders

2019-02-13 posted by

By Nicholas Benes

The short story: it will not be so hard if institutional shareholders really want to topple it, and use the technique suggested here. But first, the background.



Background

This is still the biggest defect of Japan’s equity market, and recent reforms have only made a small dent in it. At the average listed company, between 35% and 50% of the stock is owned by such holders if one includes not only firms in “cross-shareholding” relationships but also firms that unilaterally hold stock in order to win business; most holdings by
banks and insurance companies; and parent companies, subsidiaries, and affiliates. Consistent with this estimate, when Japanese listed companies were asked, “what percent of your shareholders can you count to support management?” in late 2017, fully more than two-thirds of companies responded with numbers in the 30-60% range.

These “policy holdings” by “stable shareholders” represent a massive misallocation of capital that is being put at risk largely for the purpose of protecting executive teams at other companies. In 1967, Japan’s one of Japan’s most venerated managers and the founder of Panasonic, Konosuke Matsushita, minced no words in noting his concern about the then-recent rise of “stable” cross-shareholdings in these words: “If this situation continues, I think it is in no way desirable, because of the risk that once again a maldistribution of capital in our country will occur. I believe that this is not a sign of progress in capitalism; rather, it should be considered as a sign that we are moving backwards.”

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