Summary of Proceedings of the First Management-Investor Forum. (2) Free discussion There was an exchange of opinions regarding the following topics:

Transcription

1 Summary of Proceedings of the First Management-Investor Forum 1. Date & Time: June 10, 2015, 9:15 a.m. 11:30 a.m. 2. Location: International Conference Room, Ministry of Economy, Trade and Industry Main Building (17F) 3. Agenda: (i) Creation of sustainable corporate value and evaluation (ii) The ideal relationship and dialogue between corporations and investors (iii) Ideal corporate information disclosure for sustainable creation of corporate value 4. Summary of Proceedings: (1) Introduction by Dr. Daishiro Yamagiwa, State Minister of Economy, Trade and Industry Since the inauguration of the Abe administration, government efforts have mainly focused on economic improvement. While macroeconomic indicators have shown visible signs of improvement, there is still a need for further effort in order to reinforce the trend and ensure that it continues. We have developed various mechanisms to improve the relationship between investors and companies, such as the Japanese Stewardship Code and the Corporate Governance Code, and our next step is to ensure that these measures will be fully utilized. One way for us to bring the two Codes to life is to help support a closer relationship between corporate managers and investors. We are holding this forum in the hope that it will aid in the development of such a relationship. We hope that you will support us by taking part in a discussion regarding ways to improve earning ability, and then share the lessons you learn through such discussions with audiences in both Japan and abroad. We believe that sharing such information leads to the strengthening of our nation s economy. (2) Free discussion There was an exchange of opinions regarding the following topics: (i) Discuss creation of sustainable corporate value and evaluation o Corporate managers and related participants indicated that for Japanese companies, an issue of concern is how best to strengthen their ability to generate earnings, such as raising capital efficiency. One issue is how to improve the ability of companies to generate earnings. The chemical industry in Japan has a per-worker productivity 1

2 and earnings before interest, taxes, depreciation, and amortization (EBITDA) that is about 70% that of the U.S. and European chemical industries. The major factor behind the improvement of return on equity (ROE) has been the weak yen, and it is difficult to say that management s perceptions of ROE has had major impact. Management are expected to commit their efforts to generate sustained gains in share prices by increasing capital efficiency. o Corporate managers also discussed their efforts to set ROE targets in order to get investors to understand their thoughts on improving corporate value. ROE is difficult to apply to front-line manufacturing operations, which is why emphasis has been placed on return on sales (ROS) in order to set direct targets. There are plans to set ROE targets in the next mid-term business plan for the next year. One participant expressed his desire to have in-depth discussions with investors who possess a mid- and longterm perspective. One participant said that his company provides investors with explanations of its business model raising corporate value by not only investing in upstream to downstream sectors within the same industry, but by also allocating sufficient capital to personnel. Therefore, he argued that ROE on its own is not necessarily an appropriate indicator of business conditions, and that it is important to have investors understand the company s activity and its actual situation, and have that tie in to greater ROE in the mid- to long-term horizon. o In response, some corporate managers expressed that their view of issues, such as corporate value, is different than that of investors. Although corporate managers maintain contact with overseas investors at least 3 to 4 times a year, it is often the case that management and investors cannot agree on a stance towards issues such as qualitative measurement of corporate value, or the ideal time frame or best indicators for evaluating the company. For example, one U.S. investor told a management team member to raise ROE by lowering their level of service. One participant suggested that in order to reduce these discrepancies between the point of view of management and investors, we must consider increasing visibility and transparency to the global standard, which would help investors evaluate various qualitative aspects of corporate value. While companies strive to meet the needs of many stakeholders, including customers, employees, and the local community, investors have 2

3 a different perspective from the company and only stress their needs, which is to increase share price and dividends. o Another participant said that we must also keep in mind that there are new companies that are growing in the current markets, including newly listed companies in the exchanges, and that we should not just simply accept a foreign model into Japan, but continuously review and revise such measures. While there is the view that the market capitalization of Japanese markets has not changed over the past 30 years, we must also keep in mind the changes in the major constituent companies of market capitalization in Japan. Not all of the companies are bad. There are good ones. We should not just simply accept a foreign model of a corporate governance code into Japan, but they ought to be reviewed and revised continuously. (ii) Discusss the ideal relationship and dialogue between corporations and investors o Both corporate managers and investors indicated that it is essential to possess a medium- and long-term perspective, not only a short-term one; the importance of discussions being based on a medium- and long-term perspective was stressed. One participant expressed views that both long-term and short-term investors are shortsighted when it comes to shareholder return, and that he would like them to take a more mid- to long-term view when evaluating the company. He also stated that companies and investors should discuss their issues more frequently. One participant noted that although she supports companies with medium- and long-term business strategies, there are many investors with a short investment horizon. This is likely because thanks to technological advances, investors have access to a lot of data but act without fully interpreting its meaning. This raises the necessity to hold a dialogue, which would allow investors to adopt a mid- to long-term perspective over time. She noted that Japanese corporations have a tendency to focus on overseas investors, but she would like them to create opportunities for dialogue with Japanese investors as well. Further, when supporting companies that have mid- to long-term business strategies, it is necessary to select ones who strive to make effective use of limited capital. While it goes without saying that it is important to ascertain whether a company has an achievable strategy, corporate managers should also understand that it is vital to consider the impact on the market (the so-called impact on beta). 3

4 One participant said that while his company s investment activities have tended to be short-term results oriented, it will work to stress medium-tolong-term investments and engagement in the future. He expressed his desire to deepen the understanding of the background of published plans and figures of investee companies through constructive dialogues with them. He also said that from a long-term perspective, ensuring financial soundness of investee companies is equally important as an increase of ROE and it would be detrimental to those companies if they lever ROE at the expense of their financial soundness. He said that it would be important to evaluate quality of ROE, which investee companies realize and to monitor the excess return over the cost of capital. One participant said that I believe that what is needed now is the ability of companies to explain clearly companies strategies to outside stakeholders.on the other hand, some investors have a shot-term perspective and ask for schemes that improve effectiveness and for capital reductions rather than aiming for long-term corporate growth.the background is that assets owners may have the tendency to assess asset managers based on short-term return. o Some corporate managers also pointed out that it is important for institutional investors to be aware of the Principles for Responsible Investment, instigate direct dialogues with companies, and deepen their understanding of management. A series of policies, such as the corporate governance code, were immediately translated into English and communicated to overseas parties, which is steadily generating results. One of the reasons why institutional investors have focused so much on short term return is because the Nikkei Stock Average has stagnated over the past 30 years, and few companies achieved their mid-term plan goals. It is also essential that institutional investors are aware of the Principles for Responsible Investment (responsibility to asset owners and the environment) and communicate with companies. Institutional investors should be more proactive for example, it is important that they do not simply rely on proxy advisory firms when exercising voting rights, and that they have direct discussions with the companies. Both management and investors grow through dialogue. One participant stated that her company created an investor guide, which has been helpful when holding discussions with investors. About 80% of shareholders are the type of shareholders that the company wants to work with, and even around the time of the collapse of Lehman Brothers, the company was able to obtain the understanding of their shareholders by 4

5 persistently communicating with them. o An institutional investor pointed out that it is important that asset owners investing in the mid- to long-term (individual investors, pension funds, etc.) examine issues such as how investment fund managers are incentivized through performance fees, compensation system, or investment evaluation period. One participant said that her company is also a long-term investor, and that she believes that it is important to examine whether the fee system, compensation system, and evaluation periods are providing appropriate incentives. For example, her company introduced a compensation system that is tied to investment performance, with in-house evaluation period of five, seven, and ten years. o Some institutional investors pointed out that some companies do not provide sufficient explanation to investors regarding points such as retained earnings and cross shareholdings that appear excessive and inefficient from the investors point of view. When looking at the Japanese economy as a whole, it is important to recycle cash and deposits held by companies and individuals through investments. Therefore, efforts must be made to promote investments to generate technological innovation and productivity growth. Corporations should also discuss their capital allocation policy with investors. Although companies must treat all shareholders equally, it is possible for them to select their shareholders by clearly publicizing their capital allocation policy, including shareholder return. For example, by clarifying whether shareholder returns will be primarily dividends or share buybacks, and by engaging with shareholders in a discussion of that policy, it is possible to attract shareholders who are a good for that company. Pension funds have an extremely long investment horizon. In order to improve corporate governance, such as raising ROE, consideration must be given to improvement and use of market mechanisms. In particular, it is necessary to enhance the influence of institutional investors other than cross shareholders, and increase the impact of their voting rights and engagement by working to unwind cross shareholdings and eliminating anti-takeover defense schemes. o Asset owners also said that perfunctory improvements in corporate governance are meaningless and that will be vigilantly observing the dialogue between investors and companies, to see whether it will degenerate into mere pro-forma responses. 5

6 It is important that companies continually grow and that stock markets that value the corporations are efficient. While Japanese companies may be valued less than they are really worth, perfunctory improvements in corporate governance will probably not solve the problem. Therefore, as an asset owner, one investor mentioned a desire to monitor the discussion between investors and corporations, to see whether it will eventually fall into perfunctory responses. In addition, she wants corporate managers to focus on quality discussions with asset managers, and hopes that this will naturally prevent discussions from becoming pro-forma dialogues. One participant said that as CEO, he is already selecting which investors with whom he will hold discussions, and is substantively making progress with such elimination of pro-forma dialogues. The stance toward evaluating the stewardship activities of public pensions and asset owners is generating major changes in Japanese stock markets. In order to get the recent ROE-focused management in Japan to take root and become a sustainable movement, it is necessary to provide clear incentives to front-line operations that work to increase corporate value. In other words, what is more essential than governance is that corporation and investors are aligned in the same direction, towards firm value creation. (iii) Discuss ideal corporate information disclosure for sustainable creation of corporate value o Corporate managers indicated that they think it is important to promote independent communication such as integrated reports which have a mid- to long-term perspective, but that quarterly disclosure materials interferes with discussions with investors regarding their mid- to long-term vision. In the auto industry, companies make upfront investments because innovation is indispensable for their survival. However, providing quarterly explanations is extremely time consuming, and one manager would like to provide investors information at a slightly less frequent interval. There are hopes that improvements will be made to the disclosure system, including quarterly earnings projections. Companies and analysts/investors are forced to simply provide the same detailed information for their quarterly disclosure materials, which hinders constructive dialogues. Companies should be freed from the uniform obligation to disclose quarterly information, and the capital market should evaluate each company individually on how it discloses information. It is important that managers take the initiative and provide investors with corporate information by developing a story through various efforts 6

7 such as preparing integrated reports. Short-term vision is deeply rooted and should not be underestimated. Efforts should be made to change the system so that there is no longer a need to report on a quarterly basis. o Some investors expressed opinions that they do not want to have a discussion on short-term vision such as on a quarterly basis, but would rather discuss the company s long-term goals. It was also pointed out that discussions end up being about short-term issues because IR staff at companies cannot adequately explain the management s long-term vision. One long-term investor commented that he wants to discuss long-term issues and not short-term topics such as quarterly results, and welcomes disclosure of information via websites in order to ensure greater transparency. The investor stated that as his company has an engagement strategy, he believes that directly meeting and having discussions with management is highly rated. Investors have a tendency to discuss quarterly earnings figures with companies because IR staff are unable to get investors to understand the position of quarterly earnings within management s vision. o Corporate managers pointed out that in order to have a meaningful discussion with investors, it is necessary to have organized and integrated materials available for disclosure. One participant agreed that he would like to see integration of redundant disclosure material so that the company can efficiently communicate with their investors. He expressed desire to focus more on what companies are going to do, as most compnies are good at howto deal with their issues. Japanese companies provide more disclosure material than European and U.S. companies. One investor mentioned that he wants to discuss the hidden meaning behind the figures disclosed. Financial soundness is important, and companies should not leverage themselves to such an extent that it undermines the health of their balance sheet. ROE should also be considered from a long-term perspective. o Both investors and experts pointed out that disclosing information such as the relationship between long-term corporate value and ESG (Environment, Social, and Governance) or succession plans is important from a mid-to long-term perspective. The method managers use to show investors how ESG policies are tied to improving corporate value is extremely important. For institutional investors, taking a long-term perspective and examining information 7

8 disclosure on areas of focus will lead to valuable discussions for both parties. Training CFOs is an important issue, and it is vital to create and disclose succession plans related to training the next generation of leaders. (3) Closing Comments by the Mr. Ikuro Sugawara, Director-General of the Economic and Industrial Policy Bureau Our discussion emerged from the most important lesson learned from last year s growth strategy: that by reinforcing corporate governance, companies were able to strengthen their earnings abilities. I believe that even in the third leg of the growth strategy, the message is about getting companies to adopt a proactive stance. Now is the time to decide how to take advantage of all-time high earnings for mid- and long-term investments, including investments in technology, personnel, and M&As. Discussions with investors will play an important role in management decisions. Effective and proactive discussions which encourage bold, forward-looking investments play an essential part of the third leg of the growth strategy. Our hope is that you will incorporate opinions expressed today into your growth strategy going forward. Finally, I hope that this forum will be a catalyst for invigorating Japan s overall stock market, and I hope that we will continue to receive spirited opinions. 8