Raising the Bar: How Japanese Shareholders Can Hold Board Candidates Accountable
Newa
2023-11-28
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The Tokyo Stock Exchange's laudable endeavor this year to request action plans and targets for enhancing corporate valuations has engendered confidence regarding the inclination of Japanese listed businesses' management to accord greater importance to shareholder returns.
The TSE aims to promote this conduct by emphasizing the disclosure of action plans by listed businesses, thus exposing underperforming entities and drawing the attention of activist investors and other relevant stakeholders.
The decision made by Hiromi Yamaji, who assumed the role of TSE CEO in April, has garnered significant attention due to the potentially impactful nature of "naming and shaming" practices within the Japanese context. Approximately 40% of the companies listed in the TOPIX 500 index are currently experiencing share prices that fall below the book value of their assets. This observation suggests a significant possibility for positive price movement within the broader market.
However, the validity of Yamaji's initiative's fundamental assumption, which suggests that shareholders will collectively exert pressure on underperforming entities, is subject to scrutiny.
A significant number of domestic and institutional investors continue to cast their votes without due diligence for board director slates that are essentially nominated and controlled by the management. In numerous instances, a significant proportion of newly appointed directors exhibit a dearth of prior board experience or other specialized training that would equip them to effectively fulfill their role as directors, which entails safeguarding the interests of both shareholders and society at large.
The outcome is such that a significant proportion of directors on nearly all Japanese boards are comprised of the very executives that the board is tasked with supervising and monitoring. Approximately one-third of external directors have occupied their position for a duration of less than three years and have not before assumed any directorial responsibilities.
This phenomenon stands in stark contrast to other well-established markets where a robust pool of capable external directors has been cultivated. These individuals generally boast prior experience as chief executives or chief financial officers and have amassed considerable expertise during their tenure as independent directors. These directors establish the benchmark for prospective board nominees.
The aforementioned external directors frequently experience a sense of obligation to enhance their knowledge in order to stay abreast of evolving matters. According to a poll conducted by the National Association of Corporate Directors in 2020, it was found that the typical independent director in the United States dedicates an average of 33 hours per year to director education.
The TSE aims to promote this conduct by emphasizing the disclosure of action plans by listed businesses, thus exposing underperforming entities and drawing the attention of activist investors and other relevant stakeholders.
The decision made by Hiromi Yamaji, who assumed the role of TSE CEO in April, has garnered significant attention due to the potentially impactful nature of "naming and shaming" practices within the Japanese context. Approximately 40% of the companies listed in the TOPIX 500 index are currently experiencing share prices that fall below the book value of their assets. This observation suggests a significant possibility for positive price movement within the broader market.
However, the validity of Yamaji's initiative's fundamental assumption, which suggests that shareholders will collectively exert pressure on underperforming entities, is subject to scrutiny.
A significant number of domestic and institutional investors continue to cast their votes without due diligence for board director slates that are essentially nominated and controlled by the management. In numerous instances, a significant proportion of newly appointed directors exhibit a dearth of prior board experience or other specialized training that would equip them to effectively fulfill their role as directors, which entails safeguarding the interests of both shareholders and society at large.
The outcome is such that a significant proportion of directors on nearly all Japanese boards are comprised of the very executives that the board is tasked with supervising and monitoring. Approximately one-third of external directors have occupied their position for a duration of less than three years and have not before assumed any directorial responsibilities.
This phenomenon stands in stark contrast to other well-established markets where a robust pool of capable external directors has been cultivated. These individuals generally boast prior experience as chief executives or chief financial officers and have amassed considerable expertise during their tenure as independent directors. These directors establish the benchmark for prospective board nominees.
The aforementioned external directors frequently experience a sense of obligation to enhance their knowledge in order to stay abreast of evolving matters. According to a poll conducted by the National Association of Corporate Directors in 2020, it was found that the typical independent director in the United States dedicates an average of 33 hours per year to director education.
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