“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 […]

APEC Report: Corporate Governance Plus Market Development

In 2016,  Europacifica Consulting delivered the case study, Financial Services Sector Reform in Japan, for inclusion in the APEC Economic Policy Report, published in November 2016.

In the case study, we argued that corporate governance was a vital area of potential structural reform in PM Abe’s economic agenda, which at the time had yet to show clear results.  Since then, there have been clear signals of improvement in corporate Japan’s balance sheets and governance practices, as well as a rise in Return on Equity among many of Japan’s largest companies.

Signals of bona fide structural reform are comforting, but we underscore the importance of another of the report’s key arguments; that Koizumi-era reforms in the financial sector did not go far enough in engendering self-sustaining financial market reforms.  Both financial reform and investor education may go further to promote households’ move “from savings to investment”, in other words, a move toward greater household participation in financial markets.

The case study may be found in Annex A of the report.  The case study was also prepublished by Columbia University’s APEC Studies Center as well (link to report).

“Corporate Governance of Japan – Analysis and Prospects -” at BDTI Seminar held on October 2 2017

“Corporate Governance of Japan – Analysis and Prospects –” was presented at BDTI Seminar held on October 2 2017 “Corporate Governance of Japan – Analysis and Prospects -” was presented at BDT Seminar held on October 2 2017 as the update research of Corporate Governance of Japan at the BDTI Seminar in March and Goldman Sachs Securities Seminar in April 2017. The updated […]

September CG Stock Performance

CG Top 20 stocks raised its outperformance, hitting all-time high Top 20 CG Score Index continued outperformance for September 2017 in favor of stock market rally for September. CG top 20 stocks hit its all time high of June 2015 when Corporate Governance Code was launched. This would be due to a sign that an increasing number of long-term investors are coming […]

Paul Hastings: “In-House Counsel Guide to Ransomware Prevention, Preparedness, and Response”

 

“Ransomware is a variant of cyber-attack in which the perpetrators encrypt an organization’s data and then demand a monetary payment for the decryption key, usually in the form of cryptocurrencies such as bitcoin. Ransomware is most frequently delivered through phishing emails that corporate employees click through, introducing the ransomware onto the corporate network. By rendering critical data and systems inaccessible, ransomware can have severe operational consequences and can bring the business of even multinational companies to a halt.

Corporate Governance Rating Of Japan’s Companies (August 2017)

August CG Score inched up 0.7pt YoY

CG Rating Monthly Letter
1. CG Score attribution analysis (08/2016-08/2017)
CG score of core research universe of 489 companies for 1 year period from August 2016 to August 2017 rose 0.7 pt to 61.7 pt from 61.0 pt a year ago. Core universe increased 30 companies to 489 from 459 companies as JPX400 composites have been renewed in the month. The rise in average score keeps improving at modest rate, whereas the change in score from the previous month of 459 companies from July 2016 to July 2017 rose 0.8 pt.
We are reviewing CG enhancement in Japan before / after AGM in June 2017, but that shows modest improvement after AGM. The analysis will be released soon after review.

Why Secom is the Only Non-Financial Japanese Corporate Pension Fund to Sign the Stewardship Code

Yes, it is true.  Secom’s pension fund is the only one.  Following the report of a government study group urging private pension funds to sign the Stewardship Code, it is an open secret that many firms in industrial Japan are now waiting for either Panasonic or Toyota  to sign the Stewardship Code.  If one of these iconic companies’ pension funds signs,  it is said there will be an avalanche of other corporate funds that sign. Conversely, if neither of them signs, everyone can use that as an excuse for why they did not sign, e.g. “even mainstream companies like Toyota or Panasonic did not sign it yet.”.

Oddly, Japanese companies pride themselves on the strength of their covenant to employees, yet neglect employees’ pensions by failing to sign the stewardship code and report how they have handled those funds.  Why is this? Quite simply, Japanese companies are afraid that if their pension funds become more proactive, those same governance and proxy voting practices might come back and hit them in the face at their own shareholders meeting. What is in the best interests of employees’ pensions may not be in the self-interest of corporate executives. This breaks the most important link in the investment chain – asset owner voice.

Here is an article from Bloomberg focusing on this increasingly interesting situation:
https://www.bloomberg.com/news/articles/2017-06-26/an-unusual-manager-defies-peers-in-870-billion-pension-world

” “The only way you can explain this behavior pattern is to say that, let’s face it, senior executives don’t want active proxy voting and engagement in the market,” said Nicholas Benes, the Tokyo-based head of the Board Director Training Institute of Japan. He said they fear “blowback” at their own shareholder meetings. Judging by their actions, “they care more about that than they do about their employees’ funds,” he said.”