BDTI Update to Supporters, June 2018

Notes: (1) On this page (at top right), you can sign up to receive our English Newsletter; (2) Sign up to receive the (separate) Japanese Newsletter here; (3) Anyone can support the “SEO” of our web site simply by mentioning BDTI on any web page with a link to this page; (4) For details about the chart, see the overview materials.

” Dear Supporter:   I am writing to update you, and to respectfully ask you or your institution to make a donation of 300,000 Yen or more this year, either as a Sustaining Donor or as a Corporate Participating Member. (As explained below in section 5, the latter category now allows donors which are investing institutions to receive 40% discounts on all BDTI courses/seminars that are open to the public, and to share these discounts with companies in their portfolio.)

TBS is Not the Only One – 33 Other Major Companies with Large Investments in Securities

In light of the attention AVI’s shareholder proposal is drawing toward TBS’ huge “non-core” shareholdings in Tokyo Electron, and the light this is shedding on the continued practice of cross-shareholdings in Japan, we thought it would be helpful to screen for companies with similar characteristics.

AVI’s argument draws on solid corporate finance principles that companies should not be diversifying for shareholders when they can do so for themselves in a more efficient manner. Moreover, even when the company is suited toward asset management and has a solid track record for this (e.g., Softbank), investors expect to see behavior that shows that the (quasi) asset manager is exercising judgement as such on an ongoing basis. In other words, the company should exhibit buying and selling activity dictated by profitability and outside forces. In such cases, shareholders tend to view and value the company more as an asset manager than as a company in the originally-stated industry, and therefore expect such behavior.

TSE: “Publication of Revised Japan’s Corporate Governance Code”(2018.06.01)

“Tokyo Stock Exchange, Inc. (TSE) has partially revised the Securities Listing Regulations pertaining to the revision of Japan’s Corporate Governance Code (hereinafter the “Code”) (*) with effect from June 1, 2018.
This revision is based on the proposals made by the Council of Experts Concerning the Follow-up of Japan’s Stewardship Code and Japan’s Corporate Governance Code (hereinafter the “Council”). Jointly operated by the Financial Services Agency and TSE, the Council made proposals to revise the Code in order to advance governance reform not just in form but also in substance through dialogue between companies and investors.

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.

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)

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.

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).

“A New Dawn for Japanese Governance” by Frank Curtiss

Steady progress is indeed being made as a result of the efforts being made to improve corporate governance in Japan now that remarkable changes are  observed.  “Japan is the land of the rising sun, but as far as corporate governance is concerned, it has been more a land of false dawns over the past 15 years or so. However, some significant […]