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Making Japanese Corporate Governance Relevant
Examples of Analysis and Ratings
Paul HoffTBLI ConferenceSeptember 2011
TBLI Roundtable Day 2 – Corporate Governance and Financial Integrity
内容
• Japanese Market Trends & Corporate Governance• HSBC 1998 Analysis of Japanese Corporate
Governance• Based on the CalPERS’ Principles of
Accountable Corporate Governance
• FTSE ESG Ratings• Meeting the needs of an increasingly
sophisticated investor class
Page 2
COMPANY CONFIDENTIAL ©FTSE International Limited 2011. ALL RIGHTS RESERVED. ANY INFORMATION REPRODUCED MAY ONLY BE DONE WITH FTSE’S PRIOR WRITTEN AGREEMENT.
Japanese Market Trends &Corporate Governance
Japanese Socio-Economic Background
• The Japanese post-war stock market eclipsed at the end of 1989 due to unusually lax lending for real estate investment, corporate financial risk taking and the typical market exuberance whereby market cap portfolios chase overvalued stocks.
• The collapse of the Tokyo Stock Market was the worst bear market in the 20th Century
• The problems which were derived from the Lost Decades - 失われた 20 年 – are still plaguing Japan in the 21st Century
• Japan has one of the world’s largest sovereign debts• The government is continuing deficit spending• … and now the demographic problem is rapidly
worsening
Page 4
COMPANY CONFIDENTIAL ©FTSE International Limited 2011. ALL RIGHTS RESERVED. ANY INFORMATION REPRODUCED MAY ONLY BE DONE WITH FTSE’S PRIOR WRITTEN AGREEMENT.
The Japan Bubble – speculation gone awry
Page 5
1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 20060%
10%
20%
30%
40%
50%
60%
70%Americas EU ex UK Japan UK Pac ex Jap
Regional Market Capitalisation Weights
COMPANY CONFIDENTIAL ©FTSE International Limited 2011. ALL RIGHTS RESERVED. ANY INFORMATION REPRODUCED MAY ONLY BE DONE WITH FTSE’S PRIOR WRITTEN AGREEMENT.
Japanese Debt Forecast
Page 6
COMPANY CONFIDENTIAL ©FTSE International Limited 2011. ALL RIGHTS RESERVED. ANY INFORMATION REPRODUCED MAY ONLY BE DONE WITH FTSE’S PRIOR WRITTEN AGREEMENT.
US & Japan Age Distribution: 2010 & 2020
USA Japan
Page 7
COMPANY CONFIDENTIAL ©FTSE International Limited 2011. ALL RIGHTS RESERVED. ANY INFORMATION REPRODUCED MAY ONLY BE DONE WITH FTSE’S PRIOR WRITTEN AGREEMENT.
HSBC Analysis of Japanese Corporate Governance - 1998
• In early 1998 – before the IT bubble – a report by HSBC stock market analysts looked at corporate governance as an area where Japanese companies might make some progress while the stock market continued to languish. They said,
“…one hope for the stock market is that Japanese companies will start to focus on improving corporate governance and shareholder value.”
• They pointed out that most Japanese companies were still run inefficiently
• And they recommended measures by which a company could be judged to care about shareholders’ interests
Page 8
COMPANY CONFIDENTIAL ©FTSE International Limited 2011. ALL RIGHTS RESERVED. ANY INFORMATION REPRODUCED MAY ONLY BE DONE WITH FTSE’S PRIOR WRITTEN AGREEMENT.
The CalPERS’ Principles - 1997
• The HSBC analysts used the 1997 version of CalPERS’ Global Principles of Accountable Corporate Governance as their starting point for measuring Japanese corporate governance.
• From the CalPERS’ demands the HSBC analysts looked at six measures of corporate behavior
1. The quality of board directors2. The independence of internal auditors3. The use of non-Japanese accounting standards; US GAAP,
etc.4. The quality of disclosure5. Employee stock options; October 19976. Share buy-back programs; April 1998
• Companies with market caps greater than JPY300bn were analyzed – the total number was 104 companies
Page 9
COMPANY CONFIDENTIAL ©FTSE International Limited 2011. ALL RIGHTS RESERVED. ANY INFORMATION REPRODUCED MAY ONLY BE DONE WITH FTSE’S PRIOR WRITTEN AGREEMENT.
HSBC 1998 Findings
•Too many
•Too old
Board Directors
•Not independent; former employees and affiliate staff
•External became full-time staff
Auditors•Slo
w to improve standards internationally
•Driven by US listing
Accounting
•Wide range of opinion regarding disclosure and openness
Disclosure
•Poor response to new law
•Tax treatment unclear
Stock Options
•Fashionable
•Some poorly financed companies announced buy backs
Buy Backs
Page 10
COMPANY CONFIDENTIAL ©FTSE International Limited 2011. ALL RIGHTS RESERVED. ANY INFORMATION REPRODUCED MAY ONLY BE DONE WITH FTSE’S PRIOR WRITTEN AGREEMENT.
FTSE ISS Corporate Governance Index Series
FTSE ISS Corporate Governance Analysis• In 2004 FTSE and Institutional Shareholder Services created a
corporate governance methodology based on ISS’s proxy voting data
• FTSE and ISS used a set of common themes from a wide range of standards and codes
• OECD Principles of Corporate Governance• Sarbanes-Oxley Act 0f 2002 and implementation of SEC regulations• List Requirements of NYSE, NASDAQ• UK Combined Code: Principles of Good Governance and Code of Best
Practice (2003)• UK Best Practice on Executive Contracts and Severance (ABI and NAPF)• EU Winter Report 2002• French Combined Code (Vienot I and II, Bouton)• German Cromme Code• The Dutch Tabaksblatt Code• Tokyo Stock Exchange Corporate Governance Code• ICGN Corporate Governance Principles
Page 12
COMPANY CONFIDENTIAL ©FTSE International Limited 2011. ALL RIGHTS RESERVED. ANY INFORMATION REPRODUCED MAY ONLY BE DONE WITH FTSE’S PRIOR WRITTEN AGREEMENT.
FTSE ISS Corporate Governance Themes
Executive and Non-Executive
stock ownership
Compensation systems for Executive and
Non Executive Directors
Equity Structure
Structure and independence of
the Board
Independence and integrity of the audit process
5 Global Themes
of Corporate
Governance
Companies were rated against 5 corporate governance themes
Page 13
FTSE ISS Corporate Governance Themes
Executive and Non-Executive
stock ownership
Compensation systems for Executive and
Non Executive Directors
Equity Structure
Evaluates the structures and schemes that are in place for rewarding the Executive
and Non-Executive directors
Examines whether executive and non-executive equity ownership is aligned
with shareholders interests
Evaluates a company’s capital structure with respect to dual-class shares and restricted voting shares as well as the existence of any anti-takeover devices
COMPANY CONFIDENTIAL ©FTSE International Limited 2011. ALL RIGHTS RESERVED. ANY INFORMATION REPRODUCED MAY ONLY BE DONE WITH FTSE’S PRIOR WRITTEN AGREEMENT.
Page 14
FTSE ISS Corporate Governance Themes
Structure and independence of
the Board
Independence and integrity of the audit process
The composition and processes of the board are examined as well as the structure and independence of key
standing committees
Examines the audit process and the composition of the audit committee
as well as the fees and services provided
COMPANY CONFIDENTIAL ©FTSE International Limited 2011. ALL RIGHTS RESERVED. ANY INFORMATION REPRODUCED MAY ONLY BE DONE WITH FTSE’S PRIOR WRITTEN AGREEMENT.
Page 15
Calculating the CGI ratingFor each theme a number of indicators are used to evaluate their corporate governance ratings. Each indicator is assigned a score depending on its evaluation. A total of 60 indicators were used for 2,000 companies. Theme scores were then averaged.
Are shareholders permitted to call a special meeting?
Shareholders may call a special meeting
Shareholders may not call a special meeting
The company's disclosure documents do not specify if
shareholders are allowed to call a special meeting
Theme Indicator Evaluation
1
3
5
2
4
COMPANY CONFIDENTIAL ©FTSE International Limited 2011. ALL RIGHTS RESERVED. ANY INFORMATION REPRODUCED MAY ONLY BE DONE WITH FTSE’S PRIOR WRITTEN AGREEMENT.
Page 16
FTSE ISS Developed Index had low tracking error with the underlying benchmark
Page 17
Sep-99 Mar-00 Sep-00 Mar-01 Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-0460
70
80
90
100
110
120
130
FTSE ISS Developed CGI vs. FTSE Developed Backcast Index - September 1999 - 2004
FTSE ISS Developed CGI (USD) FTSE Developed Backcast (USD)
COMPANY CONFIDENTIAL ©FTSE International Limited 2011. ALL RIGHTS RESERVED. ANY INFORMATION REPRODUCED MAY ONLY BE DONE WITH FTSE’S PRIOR WRITTEN AGREEMENT.
PFA Voting Guidelines – 2001 to present
Pension Fund Association Voting Guidelines• Since 2002 the PFA has been exercising voting rights for their
Japanese equity holdings. The latest revision was November 2010.
• Shareholder rights are at the core of the guidelines and long term shareholder value is the main objective.
• The guidelines examine the appointment of directors and auditors, the remuneration of executives and capital policies.
• The guidelines require opposing reappointments and decreasing remunerations when corporations’ financial performance has been poor.
• However, no other engagement guidelines are included, nor is there any discussion of using corporate governance criteria for the selection of stocks and in making investment decisions.
Page 19
COMPANY CONFIDENTIAL ©FTSE International Limited 2011. ALL RIGHTS RESERVED. ANY INFORMATION REPRODUCED MAY ONLY BE DONE WITH FTSE’S PRIOR WRITTEN AGREEMENT.
FTSE4Good & Corporate Governance
FTSE4Good Index Series & Evolving Criteria
©FTSE International Limited 2011. ALL RIGHTS RESERVED. ANY INFORMATION REPRODUCED MAY ONLY BE DONE WITH FTSE’S PRIOR WRITTEN AGREEMENT.
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
FTSE4Good GlobalIndex Launch
StrengthenHuman & Labour
R
StrengthenHuman and Labour
Rights Criteria
StrengthenHuman & Labour
R
New Supply Chain Labour Standards
Criteria
StrengthenHuman & Labour
R
New Countering Bribery Criteria
New Climate Change Criteria
Strengthen Environmental
Criteria
StrengthenHuman & Labour
R
Future criteria: Corporate
Governance, Health & Safety,
HIV/AIDS...
New Uranium Mining Criteria
New Nuclear Power Criteria
FTSE4Good ESG Ratings
Launch
StrengthenHuman & Labour
R
New Breast Milk Substitute
Marketing Criteria
Page 21
Board Level Responsibility and ESG practices• Board level responsibility is measured as one of the
requirements for FTSE4Good ESG inclusion criteria
• Having Board/Senior level responsibility is key to the implementation of policies and procedures of ESG issues
Page 22
Critersdia Companies below FTSE4Good Index
inclusion level
Companies above FTSE4Good Index
inclusion level
Environmental Management
4.9% 28.8%
Countering Bribery 36% 77.4%
Percentage of companies with Board Level Responsibility for ESG issues
COMPANY CONFIDENTIAL ©FTSE International Limited 2011. ALL RIGHTS RESERVED. ANY INFORMATION REPRODUCED MAY ONLY BE DONE WITH FTSE’S PRIOR WRITTEN AGREEMENT.
FTSE4 Good ESG Ratings構成方法
©FTSE International Limited 2011. ALL RIGHTS RESERVED. ANY INFORMATION REPRODUCED MAY ONLY BE DONE WITH FTSE’S PRIOR WRITTEN AGREEMENT.
FTSE4Good ESG Ratings
6 theme risks 6 theme scores
3 pillar risks 3 pillar scores
1 overall risk 1 overall score 1 sector relative overall score
3 sector relative pillar scores
• Bottom up analysis based on six ESG themes
• Risk assessment by theme & pillar and a scoring template
• Full coverage of the investible universe of developed stock markets
Page 24
Corporate Governance Theme; Risk and Scoring
Page 25
Risk
Scoring
0 1 2 3 4 5
低( 1)
All companies are classified as Risk Level 2 (Medium) for Corporate Governance.
中( 2)
Does not meet any indicators
NA
Meets one of the Good Practice indicators
Meets two of the Good Practice indicators
Must have a Code of Ethics & Meet Advanced Practice Scenario 1 or 2
Must have a Code of Ethics & Meet Advanced Practice Scenarios 1 and 2
高( 3)
All companies are classified as Risk Level 2 (Medium) for Corporate Governance.
COMPANY CONFIDENTIAL ©FTSE International Limited 2011. ALL RIGHTS RESERVED. ANY INFORMATION REPRODUCED MAY ONLY BE DONE WITH FTSE’S PRIOR WRITTEN AGREEMENT.
Corporate Governance Good Practice
Risk Level 2 (Medium)
Meets the following indicators:
• 33% independent directors
• Separate Chairman and CEO
• Audit committee, majority independent directors
• Disclose director remuneration
• At least one woman on the Board
Page 26
COMPANY CONFIDENTIAL ©FTSE International Limited 2011. ALL RIGHTS RESERVED. ANY INFORMATION REPRODUCED MAY ONLY BE DONE WITH FTSE’S PRIOR WRITTEN AGREEMENT.
Corporate Governance Best Practice
Risk Level 2 (Medium)
• Have a Code of Ethics
Advanced Scenario 1 – all of the following
• 33% independent directors
• Separate Chairman and CEO
• Audit committee, majority independent directors
• Disclose director remuneration
Advanced Scenario 2
• Over 20% of women on the Board and
• Two additional indicators from Advanced Scenario 1
Page 27
COMPANY CONFIDENTIAL ©FTSE International Limited 2011. ALL RIGHTS RESERVED. ANY INFORMATION REPRODUCED MAY ONLY BE DONE WITH FTSE’S PRIOR WRITTEN AGREEMENT.
HSBC 1998 vs FTSE 2011 CG scores
Page 28
Oil & G
as
Basic
Res
ourc
es
Basic
Res
ourc
es
Cons
truc
tion
Cons
truc
tion
Indu
stria
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Indu
stria
l
Indu
stria
l
Indu
stria
l
Indu
stria
l
Indu
stria
l
Indu
stria
l
Indu
stria
l
Indu
stria
l
Auto
mot
ive
Auto
mot
ive
Pers
onal H
ouse
hold
G...
Pers
onal H
ouse
hold
G...
Pers
onal H
ouse
hold
G...
Pers
onal H
ouse
hold
G...
Reta
il
Reta
il
Trav
el &
Leisu
re
Utiliti
es
Real E
stat
e
Tech
nology
Tech
nology
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
0
50
100
150
200
250
300
350
400
Corporate Governance Score HSBC
COMPANY CONFIDENTIAL ©FTSE International Limited 2011. ALL RIGHTS RESERVED. ANY INFORMATION REPRODUCED MAY ONLY BE DONE WITH FTSE’S PRIOR WRITTEN AGREEMENT.
FTSE4Good Japan Governance Ratings compared to Global Governance Ratings
Page 29
NC 5 4.6 4.4 4.2 4 3.8 3.6 3.4 3.2 3 2.8 2.6 2.4 2.2 2 1.8 1.6 1.4 1.2 0.80
50
100
150
200
250
300
350
400
450
500
Dev x Japan
Japan
COMPANY CONFIDENTIAL ©FTSE International Limited 2011. ALL RIGHTS RESERVED. ANY INFORMATION REPRODUCED MAY ONLY BE DONE WITH FTSE’S PRIOR WRITTEN AGREEMENT.
FTSE4Good Japan Governance Ratings compared to Global Governance Ratings
Page 30
COMPANY CONFIDENTIAL ©FTSE International Limited 2011. ALL RIGHTS RESERVED. ANY INFORMATION REPRODUCED MAY ONLY BE DONE WITH FTSE’S PRIOR WRITTEN AGREEMENT.
Page 31
Japanese Good Practice needs to be converted to
Global Best Practice
COMPANY CONFIDENTIAL ©FTSE International Limited 2011. ALL RIGHTS RESERVED. ANY INFORMATION REPRODUCED MAY ONLY BE DONE WITH FTSE’S PRIOR WRITTEN AGREEMENT.
お問い合わせ• FTSE4Good ESG Ratingsについてのより詳しい情報を希望する方は下記までご連絡ください。
ウェブサイト : www.ftse.com
名前 : Paul Hoff
Eメール : paul.hoff@ftse.com
役職 : Japan Representative
Page 32
COMPANY CONFIDENTIAL ©FTSE International Limited 2011. ALL RIGHTS RESERVED. ANY INFORMATION REPRODUCED MAY ONLY BE DONE WITH FTSE’S PRIOR WRITTEN AGREEMENT.
FTSE DOES NOT MAKE ANY WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, ABOUT THE INFORMATION PROVIDED IN THIS PRESENTATION. IN PARTICULAR IT DOES NOT WARRANT OR REPRESENT THAT THE INFORMATION IS ACCURATE, UP-TO-DATE, COMPREHENSIVE, VERIFIED OR COMPLETE. FTSE DOES NOT ACCEPT LIABILILTY FOR ANY ERROR, OMISSION IN THE INFORMATION OR FOR ANY RELIANCE PLACED BY ANY PERSON ON THE INFORMATION. FTSE SHALL NOT BE LIABLE FOR ANY CLAIMS OR LOSSES OF ANY NATURE, ARISING INDIRECTLY OR DIRECTLY FROM USE OF THE INFORMATION IN THIS PRESENTATION OR OTHERWISE HOWSOEVER ARISING (EXCEPT TO THE EXTENT REQUIRED BY LAW). FTSE SHALL NOT BE RESPONSIBLE OR LIABLE FOR ANY ADVICE GIVEN TO THIRD PARTIES, OR ANY INVESTMENT DECISIONS OR TRADING OR ANY OTHER ACTIONS TAKEN BY YOU OR BY THIRD PARTIES BASED ON INFORMATION CONTAINED IN THIS PRESENTATION. REPRODUCTION, REDISTRIBUTION AND TRANSMISSION OF THE INFORMATION CONTAINED WITHIN THIS PRESENTATION (OTHER THAN FOR YOUR PERSONAL USE OR AS EXPRESSLY PERMITTED BY FTSE) IS STRICTLY PROHIBITED.
© FTSE & EIRIS 2011. The FTSE4Good ESG Ratings are produced by FTSE International Limited (“FTSE”) and Ethical Investment Research Services Limited ("EIRIS") or their agents. The FTSE4Good ESG Ratings are produced using a methodology which is explained in detail on the website (www.ftse.com). Registration on the website (which is free of charge) is required in order to obtain access to the methodology. Please note: use of other methodologies may produce different results. All rights in the FTSE4Good ESG Ratings vest in FTSE and EIRIS. “FTSE®” and “FTSE4GOOD®” are trade marks of the London Stock Exchange Plc and The Financial Times Limited and are used by FTSE under licence. “EIRIS” is a trade mark of EIRIS. Neither FTSE nor EIRIS nor their licensors shall be liable (including in negligence) for any loss or damage incurred by any person and arising out of the use of or reliance upon the FTSE4Good ESG Ratings. Publication or distribution of the FTSE4Good ESG Ratings or the use of the FTSE4Good ESG Ratings to create financial products requires a licence from FTSE. Any disclosure or use of the methodology for any purposes other than as a user of the FTSE4GOOD ESG Ratings for information in their published form will require a written licence from FTSE and EIRIS.
Page 33
COMPANY CONFIDENTIAL ©FTSE International Limited 2011. ALL RIGHTS RESERVED. ANY INFORMATION REPRODUCED MAY ONLY BE DONE WITH FTSE’S PRIOR WRITTEN AGREEMENT.
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