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Emerging Corporate Changes in Response to TSE's Request

Photo:the Tokyo Stock Exchange (TSE)

[QUICK Market Eyes] In March, the Tokyo Stock Exchange (TSE) requested companies to take "action to implement management that is conscious of the cost of capital and stock price." Following this request, changes have been emerging in Japan's leading large companies. In January 2024, the TSE will release a list of companies that have disclosed information in response to its request. Emerging changes in corporate governance momentum may further accelerate, leading to higher stock prices.

"Last week may be remembered as the week that showed that Japan's large companies are taking seriously the TSE's request for reform," Bruce Kirk of Goldman Sachs wrote in a report dated November 4. Behind this is the changing attitude of Japan's major corporations toward their cross-shareholdings.

When announcing, on November 1, its financial results for the April-September period of 2023, Toyota Motor (7203) indicated that it would continue to reduce its cross-shareholdings with other companies, review cross-shareholdings within the group, and make use of treasury stock and cash on hand as the core of its capital strategy. On the same day, Kyocera (6971) also stated that it would review its holdings in KDDI (9433), which account for about 30% of its total assets. Kyocera's previous medium-term management plan included increased capital investment by borrowing around JPY500 bn using KDDI shares as collateral. However, the company unveiled its intention to reconsider its continued holding of such shares and develop a new policy for the fiscal year ending March 2025.

Bruce Kirk of Goldman Sachs noted, "Concrete examples of fundamental change finally appear to be emerging, driven by a combination of top-down pressure from the TSE and bottom-up engagement from shareholders." Along with other corporate actions, "the momentum for reform is visibly improving," he said.

On October 26, the TSE unveiled its plan to publish, on January 15, 2024, a list of companies disclosing their action to implement management conscious of cost of capital and stock price. The TSE intends to compile a list of companies responding proactively to the TSE's request, hoping to encourage those that have not yet acted to take measures.

According to the TSE, as of July, 379 companies, or 31% of all companies listed on the Prime Market with a fiscal year ending March, disclosed information on their responses to the TSE's request. 242 companies, or 20%, let their initiatives be known; and 137 companies, or 11%, indicated a status of considering acting in response to the request. The remaining 856 companies, 69% of the total, did not release their responses. Most of the companies that made their answers known were those with a market capitalization of JPY100 bn or more and a P/B ratio of less than one.

As of mid-July, 31%of companies listed on the Prime Market and 14%of companies listed on the Standard Market disclosed "management initiatives that are conscious of cost of capital and stock prices".

Regarding disclosure status by PBR and market capitalization, companies with low PBR and large market capitalization are more advanced in information disclosure.

Reference: Disclosure Status by Industry (Prime Market).Disclosure progress is further along in industries with lower average PBRs.

The TSE will compile the initial list based on the status of corporate governance reports as of the end of 2023, and it will make it public at 3:00 p.m. or later on January 15, 2024. After that, a list will be compiled as of the end of each month and will be updated by the 15th of the following month. The list will come in Excel format, making possible sorting by issue code, etc.

Reference: Image of the Items on the List.List of Companies that Have Disclosed Information in Accordance with "Action to Implement Management that is Conscious of Cost of Capital and Stock Price"

Source: Tokyo Stock Exchange, October 26, 2023

The TSE received opinions from investors and companies to the effect that they would like the TSE to share information on cases of effective responses and excellent results among those who had responded to the TSE's request. To accommodate this desire, the TSE will release information on "good practices" in January 2024, depending on company size and circumstances. The TSE will compile key points of the actions taken based on investors' viewpoints and it will give examples that received high evaluations from investors.

Atsushi Kamio, Senior Researcher at Daiwa Institute of Research, expressed his expectation that the TSE's list publication will "make it easier for companies to see which corporations are taking actions, thereby further raising their awareness of their efforts." Regarding the release of information on good practices, he explained, "Many companies are looking for case studies of positive actions and results. This is a need for institutional investors as well."

According to one market participant, a hedge fund commented, "We initially thought that the TSE's request would have no impact on stock prices. However, we are now carefully checking the statuses of related initiatives because they will be reflected in prices." Amid the gradually growing market expectations concerning the TSE's request, it is worth watching to see if the list of initiatives and good practices, which will be released in January 2024, will further spur corporate actions.

(Reported on November 7)

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