ESG

• Revisions to the Corporate Governance Code have increased the ratio of independent directors, and more companies have established voluntary nominating and compensation committees.
• On the other hand, the transition to a Company with US type 3 committees and an independent director chairing the board of directors has been slow in coming.
• Substantive improvements regarding the transition to a company with an audit committee and the establishment of a voluntary nominating and compensation committee should be carefully examined.

• Many companies have low valuations due to the fact that not few managers are concerned about maintaining public listing with the idea of prioritizing it over growth in shareholder interests.
• Many companies only minimally respond to formally aligning board practices with the criteria of the Corporate Governance Code, and very few are creating value through advancing their corporate governance initiatives.
• TSE data shows that OP Margin is neutral and Asset Turnover and Financial Leverage are both negative for ROE, so immediate share repurchases are the effective way in raising ROE.

• Stock price increases only at the “TSE’s request” are anticipatory, and conversely, the gap with JPX Prime 150 Index components, which attract the attention of overseas investors, may widen.
• “TSE’s Request” effect is that TSE has changed the game by making it easier to compare managers of different companies according to P/B, thereby increasing managers’ awareness of stock prices.
• Just as all companies worked to “conserve energy” and become more competitive during the oil crisis, many companies’ stock valuations will rise in environment where managers must change their mindset.

• China granted a six-month grace period for carmakers and dealers to sell off as many as 2 million new vehicles that will be out of compliance with new emission standards taking effect July 1.
• The move is intended to ease pressure on the auto market amid slowing sales and a brutal price war.
• The government said it will allow sales of vehicles produced under the old pollution standards to continue until Dec. 31, though automakers will have to apply more stringent requirements to newly built autos starting July 1.

Lucror Analytics’ ESG Scores are based on a 3-tiered scale and are adjusted for Controversies (if applicable).
We assess Nexans’ ESG as “Adequate”, in line with its “Adequate” Social and Governance scores. The company has a “Strong” score for the Environmental pillar. Controversies are “Immaterial” and Disclosure is “Strong”.

• TSE may be trying to dodge criticism that prime market, which includes many illiquid companies, has large gap with the concept of a “market that global investors can invest in.”
• JPX Prime 150 Index is expected to solve the problem of TOPIX buying up companies of low quality and not engaging with companies due to the large number of components.
• Neither index is expected to differ much in performance since they are both market capitalization-weighted indices, but the difference in component stocks compared to TOPIX will provide investment opportunities.

• Underlying Canon’s long-standing underperformance, which had frustrated shareholders, was the lack of diversity on the board, which gave domestic institutional investors an excuse to vote against re-election of inside directors.
• Canon’s voluntary Nominating Committee also has challenges: with Mr. Mitarai, CEO since 1995, chairing the NC, it’s hard to imagine that discussions and decisions are conducted with objectivity and independence.
• Although a female independent director might be hired at next AGM in response to the low approval rate for Mitarai’s reappointment, it’s not expected to make any significant changes immediately.

• While the listing criteria aren’t consistent with the initial concept of the prime market, “investment targets for global investors,” “transitional” companies that don’t meet those listing criteria are allowed listing.
• Delisting through TOB or MBO will lead to the metabolism of listed companies and maintain the quality of the TSE as an “investment target for global investors” market.
• It is not about bringing “transitional” companies into compliance with the listing criteria of the prime market, but about modifying the listing criteria to the original concept of the market.

• As for “liquidity,” one of the problems of TSE market restructuring, if the selection criteria for TOPIX components are raised, fewer companies will be forced to cling to prime market.
• Regarding “engagement” challenge, a solution is reducing the number of TOPIX components, since low fees and many portfolio companies of passive funds prevent investment managers from devoting resources to engagements.
• Regarding “sustainable growth” challenge, inflation would be a catalyst for learning from history, where an environment that forced all companies to change caused a change in the mindset of managers.

• Although many companies now disclose numerical targets in their mid-term management plans, only a few still use ROE or ROIC as numerical targets(15% 1,801 companies of Metrical Universe, March 2023).
• The fact that many companies that don’t include ROE or ROIC as KPIs indicates that the management wasn’t aware of the return  from the shareholders’ perspective or cost of capital.
• The 3-year mid-term business plan is built on the foundation of the actual project in progress and should be outlined to reflect its cash allocations and cash flow returns.

• The rapid spread of companies, especially large companies, disclosing the skills matrix was triggered by Supplemental Principle 4-11-(i), which was added to the Corporate Governance Code.
• While more companies focus disclosure on skills matrix of directors, it’s questionable whether these criteria have been validated to select those who can help expand the value of the company.
• The process should ensure that the nomination process is based on the skills needed to run the company, not on who is close to the president of the company.