ESG

• Even companies with high valuations and return on capital have room to further raise their return on capital and valuations because of cash allocation challenges.
• Companies whose valuations have not changed over the past year have low ROE and ROA, yet have high policy shareholdings. They have not taken steps to improve return on capital.
• As for whether many companies without high foreign ownership can raise their return on capital and valuations, strong will of management to achieve their goals is necessary.

• Companies with low valuations have lower ROE, ROA, and foreign ownership as well as inferior board practices and key actions. Conversely, companies with high valuations show the opposite relationship.
• Over the past year, companies that increased their valuations were those with already  high valuations, return on capital and foreign ownership that further improved their earnings and increased their valuations.
• This suggests that companies that have begun to make progress in management reform by improving board operations and clarifying management policies through engagement by overseas investors have achieved positive results.

• Although few shareholder proposals will be passed, companies that receive shareholder proposals and don’t like the attention are likely to seek compromise and come to terms with shareholders before AGM.
• Companies with low valuations have significantly lower ROE, ROA, market capitalization, and foreign ownership. In order to raise valuations, the first step should be to increase return on capital.
• Companies with higher valuations can be expected to have begun to steer their board operations in an improved direction. Policy shareholding reductions can be considered as seriousness toward management improvement.

• Companies with the ROE over 15% have higher market capitalization, foreign ownership, and Tobin’s Q, and naturally higher ROA, while the opposite tends to be true companies with low ROE.
• Groups with ROE above 15% have generally improved their corporate governance practices, but they still need to address their use of cash in order to further improve return on capital.
• It’s clear that companies with low ROE have the form of board practices but not the substance, and that they don’t have a clear policy for increasing return on capital.

Lucror Analytics’ ESG Scores are based on a 3-tiered scale and are adjusted for Controversies (if applicable).
We assess Ardagh Metal Beverage Packaging’s ESG as “Adequate”, in line with its Environmental, Social and Governance scores. Controversies are “Immaterial” and Disclosure is “Strong”.

• Toyota Group and non-life insurances, which recently announced reductions in their policy shareholdings, are well-known for their large holdings, but a look at total asset ratios reveals a different aspect.
• Companies with high policy shareholdings relative to total assets have lower ROE and ROA as well as foreign ownership, market capitalization, and valuations.
• These companies with inconspicuously held policy shares are reluctant to take corporate governance initiatives and face many challenges in both board practices and key actions.

• The “30% female board member goal” appears to be more about matching numbers with results rather than discussing the positive impact of diversity on the board.
• Over the past year, corporate governance improved only modestly for all listed companies, but few that improved their corporate governance raised the percentages of female board members and independent directors.
• Given the strong influence between improvements in governance and return on capital and foreign ownership, it’s difficult for a company to transform itself without the reach of overseas investor engagement.

• Even with the 9% increase in share repurchases, the high level of cash on hand will likely be further built up, given the increase in cash flow.
• Companies that have increased their valuations over the past year have further increased their valuations by growing their traditionally high valuations and ROE and ROA.
• Cash allocation is a major challenge for all companies. Many companies have a payout ratio of 30%, and they have too much cash on hand relative to sales.

• Companies in the 0% to 8% ROE group have low stock valuations and are in trouble because they are unable to step into value-creating management.
• Companies in this group, which includes many prime market listed companies, have done what is required by Corporate Governance Code, but could not take action to increase their ROE.
• The lack of significant differences in corporate governance practices for group with ROEs above 10% is due to foreign ownership not being significantly differentiated from other groups.

• Since companies with higher foreign ownership have better profitability and corporate governance practices, it can be inferred that the overseas investor engagement has improved the company’s profitability and corporate governance.
• If the company’s management has changed to value-creating management through the overseas investor’s engagement, the company isn’t expected to change to value-creating management in just one year after “TSE’s request”.
• Many companies that do not receive overseas investor engagement have more room for improvement in aspects of management strategy execution and will be evaluated over time for improvements in profitability.

• Companies with larger market capitalizations tend to have higher profitability and valuations, and those companies have higher foreign ownership.
• Given that board practices improved and that valuations, highly correlated with foreign ownership, are higher for companies with larger market capitalizations, this can be due to engagement of overseas investors.
• If this hypothesis is correct, the gap between the top and bottom market capitalization companies will widen further as it takes a certain time for engagement to pay off.