Japan’s corporate value drive: turning up the heat
by Jane Moir, ACGA
As the TSE takes stock of its campaign to improve company valuations, ACGA’s Head of Research Jane Moir looks at issues to emerge and what comes next
Since January, the Tokyo Stock Exchange (TSE) has put companies on notice by publishing a monthly list of issuers with plans to enhance shareholder value. By mid-August the contingent failing to make the cut had noticeably dwindled.
On the prime board 78% of companies have disclosed plans, with a further 7% indicating theirs are “under consideration.’’ Altogether, 86% of prime issuers have complied to some extent, a significant increase from the 49% reported at the end of December 2023. On the standard market, 44% of companies have disclosed or considered plans, up from 19% six months previously.
The headline figures are a compelling indictment of the initiative, but a recent report published by the TSE’s Listing Division suggests the underlying reality is more nuanced. This is shaping its view on how to take the campaign to the next level.
A sincerity gap
The 19 August report lifts the hood on the statistics through a series of interviews conducted during the summer. TSE sought input from more than 60 companies, domestic and overseas investors, securities firms, trust banks, consulting firms and think tanks. TSE has also hosted seminars.
On the positive side, in some corners there is a sense that corporate attitudes are changing. The catalogue of metrics and measures used in the boardroom to judge corporate value is expanding. Companies are more open to dialogues with investors. Disclosure is improving.
A theme to emerge however is a gap between companies taking an earnest approach to the process, and those skimming the surface. An anonymous overseas investor quoted in the report noted: “there is a polarization between companies that are sincerely committed and those that are superficially committed.’’
This can result in issuers simply disclosing information once (to make the list) without any update—or improvements. TSE thus plans to classify companies into three groups: those making independently genuine efforts, those who could do better, and companies not disclosing at all. The second group (described by one investor as the “volume zone”) will be TSE’s priority focus moving ahead.
Great expectations
Market feedback suggests the TSE has a significant task ahead. Some investors cited inappropriate goals being set by companies, for example setting ROE targets too low or putting overly ambitious timeframes in place. Other companies appeared laser focussed on improving unprofitable businesses, rather than thinking of how to exit them. Short-term perspectives are seen by some as an issue: for example, companies touting shareholder value plans which boost their share price rather than considering how to optimize the balance sheet and capital allocation.
Cross-shareholdings can also be a flash point. One domestic institutional investor lamented the lack of plans being disclosed by companies to allocate cash from sales of strategic holdings, urging greater disclosure in the medium and long term.
Reliance on past mid-term management strategies rather than fresh ideas has also been noted, for example where a company states that it will “continue to improve PBR by implementing the measures outlined in the medium-term management plan.’’
Improving dialogue between corporates and investors likewise is a challenge. Companies can delay disclosure of their plans, or come up short on details, for fear of being criticised by investors—or avoid speaking with them altogether.
Requests for dialogue with independent directors are still being refused at some companies, while there was also frustration expressed that despite having sincere plans to improve shareholder value, some corporates still do not take the time to talk with investors. Investor relations issues—including a lack of dedicated staff—remain pervasive at some companies.
As we noted in our CG Watch Japan report, while companies have easily accessible and comprehensive IR pages on their websites, one thing lacking is the names and contact details of their IR team, “a simple thing to do and best practice in other markets.”
Moving on up
Besides the new classification of companies into three groups, TSE has set out provisional plans to up the ante on disclosure and corporates’ communication with investors.
In early November, it plans to update case studies it publishes which give examples of companies who are meeting investor expectations—and it will draw attention to (anonymous) examples where these are not being met.
Prior to that, in late September the TSE will announce details of a quality upgrade to the list of companies disclosing plans on shareholder value: this would come into effect in early 2025. It envisages deadlines for companies still considering their plans—it was suggested in the feedback that these companies are no different from those not disclosing at all.
There would also be more detail required on how companies are updating their plans, suggesting a shift towards greater quality, rather than the quantity of corporates making the list.
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