Index Rebal Trades & Special Situations, Quiddity Advisors

Janaghan Jeyakumar, CFA

Index Rebal Trades & Special Situations

Quiddity Advisors

Pan-Asia Catalysts/Events

Event-Driven

<ul>
<li>Quiddity's "Who is Ready" series of insights aims to objectively identify names listed on the Tokyo Stock Exchange that are potential additions to the TOPIX Index in future.</li>
<li>This insight is a follow-up to <a href="https://www.smartkarma.com/insights/topix-inclusions-who-is-ready-dec-2022" target="_blank" data-smartkarma-citation="insights:85784" rel="noopener">TOPIX Inclusions: Who Is Ready (Dec 2022)</a>. </li>
<li>Our latest top pick for TOPIX Inclusion pre-events is <a href="https://www.smartkarma.com/entities/artspark-holdings-inc" target="_blank" data-smartkarma-citation="entities:20774:1" rel="noopener">Artspark Holdings (3663 JP)</a>. </li>
</ul>


Quiddity's "Who is Ready" series of insights aims to objectively identify names listed on the Tokyo Stock Exchange that are potential additions to the TOPIX Index in future.
This insight is a follow-up to TOPIX Inclusions: Who Is Ready (Dec 2022). 
Our latest top pick for TOPIX Inclusion pre-events is Artspark Holdings (3663 JP). 


TOPIX Inclusions: Who Is Ready (Jan 2023)

Executive Director, Metrical Inc

Aki Matsumoto

Executive Director

Independent Leading Corporate Governance Research

Metrical Inc

METRICAL INC. is an independent leading Corporate Governance research firm in Japan where Corporate Governance is increasingly recognized as an important element on corporate management in these days. Thus, CG research and solutions would become an essential component of global capital markets and play important to contribute to transparency of the markets and maximize shareholders’ value in Japan. 

METRICAL INC. provides Corporate Governance research and analysis including rating services, and  also offers investment research and IR services with solutions and customized profound research on CG and IR issues.

<ul>
<li>Shareholder returns, including dividend policy and treasury stock retirement/buyback and growth policies improved slightly. Still, cash allocations are weak in both shareholder returns and growth, so cash is piling up.</li>
<li>The policy shareholdings is decreasing year by year, but the holdings is so large that they still account for a large % of total assets, so cash is piling up.</li>
<li>Companies with ROEs above 12% achieved even higher returns, and Tobin's Q1.2-1.4 companies (with higher valuations than average) increased slightly. Investors may have valued companies that exhibit higher returns.</li>
</ul>


Shareholder returns, including dividend policy and treasury stock retirement/buyback and growth policies improved slightly. Still, cash allocations are weak in both shareholder returns and growth, so cash is piling up.
The policy shareholdings is decreasing year by year, but the holdings is so large that they still account for a large % of total assets, so cash is piling up.
Companies with ROEs above 12% achieved even higher returns, and Tobin's Q1.2-1.4 companies (with higher valuations than average) increased slightly. Investors may have valued companies that exhibit higher returns.


How Far Has Corporate Governance Progressed in 2021? (1) ~ Key Actions Section

<ul>
<li>The revised Corporate Governance Code and the inclusion of prime market listing criteria have resulted in significant improvements in % of independent directors and in the practices of Nominating/Compensation Committee.</li>
<li>Meanwhile, the chairmanship of the board of directors and the ratio of female directors, for which the Code didn't specify improvements or provide numerical target, are improving at modest pace.</li>
<li>There is the issue of whether the board/committees require independent directors to function fully independently, and the % of female directors indicates the seriousness of improving management and governance.</li>
</ul>


The revised Corporate Governance Code and the inclusion of prime market listing criteria have resulted in significant improvements in % of independent directors and in the practices of Nominating/Compensation Committee.
Meanwhile, the chairmanship of the board of directors and the ratio of female directors, for which the Code didn't specify improvements or provide numerical target, are improving at modest pace.
There is the issue of whether the board/committees require independent directors to function fully independently, and the % of female directors indicates the seriousness of improving management and governance.


How Far Has Corporate Governance Progressed in 2021? (1) ~ Board Practices Section

<ul>
<li>Since many companies struggle to meet quorum requirements for AGMs, many companies mail accompanying documents along with the voting form in paper form, even though Companies Act has been amended.</li>
<li>The use of DX, such as hybrid shareholder meetings and online voting, comes to mind to meet quorum requirements for shareholder meetings, and this will help reduce administrative costs.</li>
<li>The fundamental issue, however, is that there are many conventional AGMs with little appeal and little substance, such as few managers whom we would really like to hear speak live.</li>
</ul>


Since many companies struggle to meet quorum requirements for AGMs, many companies mail accompanying documents along with the voting form in paper form, even though Companies Act has been amended.
The use of DX, such as hybrid shareholder meetings and online voting, comes to mind to meet quorum requirements for shareholder meetings, and this will help reduce administrative costs.
The fundamental issue, however, is that there are many conventional AGMs with little appeal and little substance, such as few managers whom we would really like to hear speak live.


Is the Solution to the Problem to Make the AGM Attractive?

<ul>
<li>The government's application of human capital disclosure starting with FY3/2023 companies runs the risk of omitting process of fully discussing and internalizing concept of human capital with company's management strategy.</li>
<li>The government's policy change to make disclosure of quarterly financial results voluntary in exchange for mandatory disclosure of human capital will likely lead to a setback in information disclosure.</li>
<li>Various issues will likely emerge in the future: whether the 3 indicators mandated for disclosure correctly reflect the company's human capital approach and whether they can be compared among companies.</li>
</ul>


The government's application of human capital disclosure starting with FY3/2023 companies runs the risk of omitting process of fully discussing and internalizing concept of human capital with company's management strategy.
The government's policy change to make disclosure of quarterly financial results voluntary in exchange for mandatory disclosure of human capital will likely lead to a setback in information disclosure.
Various issues will likely emerge in the future: whether the 3 indicators mandated for disclosure correctly reflect the company's human capital approach and whether they can be compared among companies.


Isn't FSA Too Forward-Thinking to Keep up with the Global Trend in Human Capital Disclosure?

Japan

The TOPIX, also known as the Tokyo Stock Price Index, is a capitalization-weighted index of all companies listed on the First Section of the Tokyo Stock Exchange. The index is supplemented by the subindices of the 33 industry sectors. The index calculation excludes temporary issues and preferred stocks, and has a base value of 100 as of January 4, 1968.

TSE Tokyo Price Index TOPIX (TPX INDEX)

TOPIX Inclusions: Who Is Ready (Jan 2023)

Out of the 1,600+ TSE-listed names that are not part of the Prime market, around 100+ can satisfy most of the key conditions for a prime market...

Janaghan Jeyakumar, CFA

How Far Has Corporate Governance Progressed in 2021? (1) ~ Key Actions Section

This year, continuing on from last year, I would like to examine how far companies have progressed in their corporate governance efforts over the...

Metrical Inc

How Far Has Corporate Governance Progressed in 2021? (1) ~ Board Practices Section

This year, continuing on from last year, I would like to examine how far companies have progressed in their corporate governance efforts over the...

Metrical Inc

Is the Solution to the Problem to Make the AGM Attractive?

I would like to discuss the Nikkei article, "About half of listed companies will still mail convocation notices of AGMs accompanying documents as...

Metrical Inc

Isn't FSA Too Forward-Thinking to Keep up with the Global Trend in Human Capital Disclosure?

I would like to discuss the issues on the Nikkei article, "Human Capital Disclosure to Begin in Fiscal Year Ending March 31, 2023 for 4,000 Listed...

Metrical Inc