ESG

• Since TSE’s request, more companies have used ROE or ROIC as KPIs in mid-term management plans, but even now, more companies only indicate targets for sales, operating profit, etc.
• Larger companies have been the first to raise ROE; the key will be for smaller companies, which have been slower to improve their ROE, to raise their ROE.
• Many companies have only just begun to reduce their policy shareholdings and strengthen shareholder returns, and are still in the process of addressing the core issue of increasing profit margins.

• If a company hasn’t improved its return such as ROE, it’s difficult to buy its shares until the plan is more certain that cash flow will expand in the future.
• Since cash flow margin must be raised to increase cash flow, the ultimate goal is to achieve sales growth while raising the profit margin on sales.
• Cutting costs alone isn’t enough; cash must be used for investments that will lead to future growth, so cash must be used for growth investments as well as stock repurchases.

• The reason why investor engagement is effective is in the exercise of voting rights. Engagement is considered to have been effective around 2014, when foreign ownership exceeded 30%.
• Engagement is generally effective in the funds entrusted to GPIF, according to the results of the study. GPIF should raise fees to allow investment managers to engage in fruitful engagement.
• This tends to be a generic question for passive funds. If we expect engagement to be more effective in the future, we need to increase the number of active funds.

Lucror Analytics’ ESG Scores are based on a 3-tiered scale and are adjusted for Controversies (if applicable).
We assess Casino Guichard-Perrachon’s ESG as “Adequate”, in line with its Environmental score, while the Social pillar is “Strong”. We assess Governance as “Weak” due to a lack of data following the company’s recent debt restructuring, which led to a change of control. Controversies are “Material”, while Disclosure is “Strong”. 

• The problem with cross-shareholdings is not simply that they weigh heavily on ROE and ROA improvement, but also that they do not create tension in management.
• The degree of seriousness of the company’s efforts to reduce policy shareholdings is a measure of the improvement in return on capital. The level of seriousness must be monitored.
• The fact that there are inappropriate entries in the items required of prime market listed companies indicates that many companies are not suitable for prime market listed companies.

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

• While it’s commendable that more companies are publishing their skills matrices, it’s not enough to verify that the skill items are useful in expanding the value of the company.
• Since management strategies vary from company to company, the skills required to formulate and execute a company’s strategy are not likely to be the same as those of other companies.
• Director candidates should be selected based on the skills needed to expand the value of the company in future and skills that complement the skills lacking in the current directors.

• The reversal of foreign and cross-held shares in shareholding ratio is the main catalyst for today’s change. Companies with high foreign ownership gradually accepted the proposals of overseas investors.
• The issues of low profit margins, high policy shareholdings, excess cash on hand, and consequently low ROE are still unresolved in many companies, while some companies did successful through engagement.
• More companies will seek compromise with shareholders by enhancing shareholder returns in the face of the fact that the gap between cost of capital and return on capital wasn’t filled.

• For companies facing challenges in maximizing sustainable shareholder returns, it is not a bad idea to rethink management strategies for corporate value growth in the quiet environment of going private.
• MBOs began to attract attention as managers became more aware of the listing costs. TSE’s request last March was the product of making companies even more aware of the costs.
• It is not easy for a company that has not been recognized in the marketplace for many years to increase its stock valuation in a short period of time.

• Many Japanese managers have little idea that what belongs to shareholders is net profit and not free cash flow. This has created two problems.
• If Japanese companies, mostly manufacturers, use dividend payout ratios as a criterion for shareholder returns, cash on hand will not decline even if shareholder returns are increased to some extent.
• The inability to move beyond the concept of allocating investment and shareholder returns based on increases or decreases in cash may be the reason for the unclear cash allocation policy.

• Companies with higher foreign shareholdings have superior board practices, suggesting that overseas investor engagement played an important role in improving management that resulted in return on capital.
• Clues to changes in management reform can be found in the percentage of independent board members, the percentage of female board members, and policy shareholdings/total assets.
• While the substance of the goals is important, the focus has shifted to management’s strong will to achieve the goals to raise valuations and return on capital.