Japanese Companies Face Market Displeasure Over Corporate Governance
Japanese companies with directors serving on multiple boards are feeling the heat as the Tokyo Stock Exchange ramps up efforts to enhance corporate governance.
Updated Listing Guidelines
- In 2022, the TSE implemented stricter listing guidelines for firms in its Prime section.
- Companies in this section are now required to have at least one-third of their board members from external sources.
Current Situation
Many companies are rushing to comply with these guidelines by appointing directors who already serve on other boards.
- However, this has resulted in some directors being overstretched and unable to focus on maximizing shareholder value.
- Since April 2019, these companies have underperformed the market by 8.6%, while others have outperformed it by 3.5%.
Expert Opinion
Akemi Hatano, chief quants strategist at SBI Securities, believes that having directors on multiple boards may indicate weak governance.
- She estimates that 30% of the Prime section’s firms have directors serving on more than one board.
- Outside directors are meant to bring fresh perspectives and not merely agree with management.
Corporate Governance Reforms
Japan’s corporate governance reforms have been instrumental in driving the stock market to record highs.
- The aim is to diversify boardroom perspectives, address shareholder concerns, and enhance management objectivity.
Investor Dissatisfaction
Investors are not entirely satisfied, as some companies still restrict outside directors from directly engaging with shareholders.
Future Outlook
The TSE plans to release an updated report in November on how companies can better align with investor expectations.
- Over 95% of Prime section companies have complied with the guidelines, indicating a shift towards quality over quantity in corporate governance.
Analysis and Conclusion
Corporate governance plays a crucial role in shaping the performance and reputation of companies in the equity market. The presence of independent outside directors is essential in ensuring transparency, accountability, and effective decision-making.
- By adhering to the TSE’s guidelines, companies can improve their governance practices and build trust with investors.
- Investors should pay attention to how companies approach corporate governance, as it directly impacts their investments and the overall health of the market.
- As governance reforms continue, companies that prioritize quality in their board composition are likely to see long-term benefits in terms of performance and investor confidence.