This excellent working paper by Naoshi Ikeda, Kotaro Inoue and Sho Watanabe describes their research that leads to the conclusion (similar to BDTI’s own research) that cross-shareholdings in Japan negatively impact risk-taking, investment for growth, and the frequency of restructuring activities. Conversely, when managers are monitored more heavily by investors and independent directors, they are positively affected.
BDTI and METRICAL conducted joint research regarding the governance structure/practices and related corporate actions that correlate with superior firm performance in Japan, and reported on the preliminary results at seminars hosted by BDTI on March 16th and by Goldman Sachs on April 4th. Our research is still underway, but the preliminary results are intriguing and provide useful guidance for the next stage of analysis.
BDTI and METRICAL believe that corporate governance is not functioning effectively unless it leads to superior strategy, fine-tuning of capital allocation and capital structure, and other value-creating corporate actions. Therefore, in our research we have sought to identify the apparent linkages and correlations between board practice, key corporate actions, and value creation.
In Phase 1 of our analysis, we studied the TOPIX100 Index composite (large 100 companies) to see whether scores we assessed for each company’s nomination policy, training policy, compensation policy, board evaluation policy, and the % of independent directors significantly correlate with ROA and ROE.
Cross share holding is still a big issue in Japan, as the cancellation of shares and return on shareholders equity remain slower to improve. This report shows this evidence clearly, using analysis of 500 companies of core research universe as of August 2016. Average ROE and CG scores for 50 largest cross share holdings/sales companies were lower than those for overall 500 companies. A half of 50 companies are banks and those holdings have not really decreased for a year. Due to accountability to shareholders, companies should disclose cost/benefit on the holdings that put downward pressure on ROE by earning only dividends. Detail is shown as link below.
According to this recently-published discussion paper by the Foreign Non-Life Insurance Association of Japan, risk management provides a better barrier against crises than maintaining cross-shareholdings with friendly firms. The paper puts corporate governance in the wider context of economic growth and security and highlights the fact that management of Japanese companies is often not organized so as to to use risk management solutions that can be provided by insurance. An example mentioned is that only around 17% of the losses from the 2011 Eastern Japan earthquake were recoverable by insurance, as compared with 75% recovery in the case of the Christchurch, New Zealand earthquake the same year.
The paper proposes supporting stronger corporate governance, fostering a culture of risk management and leveraging best industry practices.
Read the discussion paper here.
Source: Foreign Non-Life Insurance Association of Japan Inc.
Despite the fact that many folks are still pessimistic as to whether corporate governance reforms will bring a surmountable positive change to the Japanese economy, there has been some notable changes as the writer of this article, Louise Dudley, Hermes Global Equities Portfolio Manager, below puts it. It will take time and patience but will be worth it in the end.
In the article below, Mr. Mayajima Hideaki, a faculty fellow at the Research Institute of Economy, Trade and Industry ( REITI) reviews the characteristics of ownership structures in Japanese companies and examine what conditions are necessary to ensure the effective operation of the corporate governance code that has been in place for a year now.
He explains how institutional investors will increasingly play a key role in dissolving cross-sharing arrangements and increasing shareholder influence.
Below is an interview on the recent state of Corporate governance in Japan that was held early this month. The interview is between Mr. Miyajima Hideaki (Faculty Fellow, RIETI / Waseda University), interviewer and Mr. Colin Mayer (Said Business School, Oxford University), interviewee.
Mr. Mayer shares his opinions on the unique features of corporate governance in Japan, how to encourage companies to take risks, ownership structures, the role of outside directors, the comply and explain principle and the role of corporate governance in promoting strong economic performance.
An in-depth interview with Mr. Tsuyoshi Maruki, who established Strategic Capital, Inc. in September 2012, was one of the Founding Partners of M&A Consulting (Japan’s first activist fund), and once worked “on loan” at METI (when it was known as “MITI”).
”Wednesday marked a peak time for this year’s general shareholders meetings among major listed firms in the nation, with severe criticisms voiced one after another toward the management of companies involved in scandals, including Mitsubishi Motors Corp. Many shareholders also raised concerns about future business performances in response to Britain’s decision to leave the European […]