Paul hoff

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


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


Japanese Debt Forecast

Page 6


US & Japan Age Distribution: 2010 & 2020

USA Japan

Page 7


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


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


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


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


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


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


Page 14


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


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


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)


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


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


R

New Supply Chain Labour Standards

Criteria


R

New Countering Bribery Criteria

New Climate Change Criteria

Strengthen Environmental

Criteria


R

Future criteria: Corporate

Governance, Health & Safety,

HIV/AIDS...

New Uranium Mining Criteria

New Nuclear Power Criteria

FTSE4Good ESG Ratings

Launch


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


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.


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


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


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

l

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


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


FTSE4Good Japan Governance Ratings compared to Global Governance Ratings

Page 30


Page 31

Japanese Good Practice needs to be converted to

Global Best Practice


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 : [email protected]

役職 : Japan Representative

Page 32


http://www.ftse.com/ri

mailto:[email protected]

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


http://www.ftse.com/

Business

Paul hoff