Out of more than 700 defined-benefit corporate pension plans in Japan, only five non-financial corporate pension plans have signed the SC. Second, a major portion of Japan’s asset owners are the companies themselves, in the form of direct “policy holdings” of the shares issued by other companies. Japan’s dual walls of “conflicted pension governance” and “allegiant shareholders” need to be torn down. Here is how it can be done.
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.
This link to our report on our research results shows the interesting (changing) landscape for CG in Japan.
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.
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.
(17-page report Ed Batts, Global Chair of Orrick’s M&A and Private Equity group.) – ”Corporate governance features have Executive Summary become increasingly prominent for public companies. This has accelerated as economic-oriented activist investors team with institutional investors to serve as catalysts for change. We are often asked by clients in the course of our practice:
What do other companies do?
We thought it would be useful to compare the three primary governance documents – certificate/ articles of incorporation, bylaws and corporate governance guidelines – of Silicon Valley and San Francisco Bay Area publicly traded companies.
We focused on three general areas:
• Board of Directors
• Shareholder Actions
• General Provisions
In this paper, HBS Professors Suraj, Srinivasan, and Vijayaraghavan analyze the period 2003-2013 and conclude that US managers often seek to avoid listing legitimate shareholder proposals in the proxy materials. This is a stark contrast to the situation here in Japan, where executives must include virtually any shareholder proposal in the proxy, even if strange or rude.
”As many institutional investors have concluded, prevailing governance policies and practices have not produced desired board refreshment, which these investors would support in order to strengthen expertise, promote diversity and provide fresh perspectives in the board room. At the same time, companies and investors alike appreciate that term and age limits, as they have been typically applied, may not be the solutions, because they force the arbitrary retirement of valuable directors.
”Abstract – A corporate governance system consists of a set of mechanisms which restrict managerial discretion. The constraints on managerial discretion in the Anglo-Saxon environment, considered as a benchmark, are usually described as being primarily driven by shareholder interests, whereas the French and Japanese systems are traditionally thought of as more stakeholder oriented. However, the increasing share of international ownership has had a significant impact on corporate governance in both countries over the last two decade
Glass Lewis has issued is policy guidelines for 2016 for the Japanese market, in both English and Japanese. It is a statement of the times that Glass Lewis made a Japanese translation this year, as they have not done that in previous years.