Supporting information for discussion

June 10, 2015（Wednesday）Ministry of Economy, Trade and Industry

Hand out 4

＜Table of Content＞

１．Background

２．Reference(Topics and issues discussed in Ito Review)

1

National wealthe.g. stock of financial assets

Reinvestments

Profits

Investments

Increase in earnings

Increase in spending

Capital gainsIncome gains

ReturnsInvestments

Companies

View of Management  Investor Forum

Investors

Financialinstitutions

○ Japan faces a rapidly aging and declining population, and thus it is critical to build and maintain its national wealth on a long-term basis. This can be achieved by improving the capital efficiency of its various limited resources, such as financial capital, human capital, and intellectual capital.

○ Japanese companies need to strengthen their earnings power and deliver sustainable value creation, which will drive returns on long-term investments. In other words, the overall optimization of the economy’s “investment chain” will contribute to a virtuous cycle and sustained growth for the Japanese economy.

2

Board of directors

Company management

stock exchange,sell‐side analysts  etc

Asset Management Companies 

(Asset managers)

Pension funds (Asset owners)

Beneficiaries

IndividualInvestors

Companies

p pMarket 

participants

Related Measures/Policy for Optimization of the Investment Chain

Employees

Institutional Investors

Ito Review “Competitiveness and Incentives for Sustainable Growth: Building Favorable Relationships between Companies and Investors”

Stewardship Code

・GPIF(the new policy asset mix, the reinforcement of the governance structure)・Pension system & operation

・NISA・ Defined contribution pension

・Amendment of Companies  Act・Corporate Governance Code

The Study Group on Promoting Dialogue Between Companies and Investors for Sustainable Growth・Review of  the shareholder meeting / corporate information disclosures   etc

JPX‐Nikkei Index 400 

Management‐Investor Forum(MIF)

3

Executive Summary of Ito Report

Concerns / Current state Proposal / Recommendation

Sustainable value creation through “collaborative creation”by companies and investors

Capital efficiency-focused management to raise corporate value

• Awareness of cost of capital• Strengthening CFOs• ”Japanese-style ROE management” – decomposition

of mid- to long-term increase of the ROE into management

Simultaneous realization of innovation and high profitabilityParadox of “continuously low profitability”

Continuously low profitability despite the capacity for innovation

Limits of “double standard management” - using two different sets of language for the capital markets (external) and for management (internal)

Japan’s “short-term management style,” is the result of poor guidance regarding capital efficiency, the growth of corporate value on a long-term basis, and other factors .

Thin foundation of long-term investors to support corporate value creation

An incentive structure that drives the Japanese stock market’s distinctive short-termism

Questionable abilities of analysts to assess corporate value

Japan, an “under-developed asset management nation” lacking long-term investors

Changing the incentive structure of asset managers and analysts

Shifting from passive investment to stock selection based on deep analysis

Cultivating individual investors as supportive long-term shareholders

Overall optimization of the investment chain

Fundamental difference in defining corporate value Lack of disclosure necessary to evaluate mid- to long-term

corporate value Lack of dialogue necessary to enhance mid- to long-term

corporate value

Establishing a “Management Investor Forum: MIF” to promote constructive dialogue between companies and investors

Corporate disclosure that promotes sustainable corporate value

Promoting true dialogue between companies and investors through “cooperation and tension”

Becoming a “dialogue-rich country” that pursues high-quality dialogue

Vicious cycle resulting from the absence of company and investor dialogue

4

Japan Revitalization Strategy and Japan Revitalization Strategy ‐ Revised in 2014

5

Policy Status

Japan Revitalization Strategy Japan’s Stewardship code Announced in Feb 2014

Amendments to Companies Act Enforced in May 2015

JPX‐Nikkei Index 400 Start of calculation in Jan 2014

Japan Revitalization Strategy – Revised in 2014

Corporate Governance Code Applicable from Jun 2015

The Study Group On  Promoting Dialogue between Companies and Investors for Sustainable Growth

Report released in Apr 2015

Management‐Investor Forum Start in Jun 2015

Extract of “Japan Revitalization Strategy – Revised in 2014 ‐Japan’s challenge for the future‐” Section 2 Three Action PlansIn order to increase corporate profits through improvement of productivity and ensure that the

increased profits lead to increase of wages , reinvestment and the return of profits to shareholders, it isimportant – primarily for global companies – to achieve sustainable increases in corporate value by givingconsideration to the cost of capital and enhancing corporate governance.To that end, it is necessary not only to encourage companies themselves to act proactively but also to

implement initiatives to improve corporate profitability and productivity in a comprehensive manner.These initiatives will be implemented through the efforts of various investors to improve the investmentchain ― the series of investment processes leading up to the return of profits earned from investment tohouseholds ― in a way that leads to the creation of value in the long term and support extended byfinancial institutions as providers of funds to improve and strengthen the quality and sustainability of theborrower’s businesses.It is important to strengthen the favorable economic cycle by returning the benefits of economic growth

achieved through these initiatives throughout the economy via the expansion of employmentopportunities, wage increases, and increases in capital expenditures and distribution of dividends.

Japan’s Stewardship Code

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Japan’s Stewardship Code・ Principles considered to be helpful for institutional investors who behave as responsible institutional investors in fulfilling their stewardship responsibilities with due regard both to their clients and beneficiaries and to investee companies.

・ Implementation of “Comply or Explain” approach as to disclosure of the policy of voting activity,  constructive dialogue with investee companies.

・ Announced by Financial Services Agency in February 2014.

１．Development and disclosure of the policy on stewardship responsibilities２．Development and disclosure of the policy on conflicts of interest３．Appropriate monitor of investee companies４．Understanding in common with investee companies and solving problems through constructive engagement with investee companies

５．Development of the policy on disclosure of voting activity and its consequences

６．Periodic report towards clients and beneficiaries７．In‐depth knowledge and skills to make proper judgments

Corporate Governance Code

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１. Securing the Rights and Equal Treatment of Shareholders

Disclosure of the policy on securing shareholder rights and cross‐shareholdings.

２．Appropriate Cooperation with Stakeholders Other Than Shareholders

Dealing with sustainability issues and ensuring diversity including active participation of women.

３．Ensuring Appropriate Information Disclosure and Transparency

Active disclosure of business principles, business strategies and business plans etc.

４．Responsibilities of the Board

Promoting sustainable corporate growth, enhancing earnings power and capital efficiency by effective use of independent directors etc.

５．Dialogue with Shareholders

Measures and organizational structure aimed at promoting constructive dialogue with shareholders.

Corporate Governance Code・Fundamental principles for effective corporate governance.※“corporate governance” means a structure for transparent, fair, timely and decisive decision‐making by companies, with due attention

to the needs and perspectives of shareholders and also customers, employees and local communities.・Implementation of “Comply or Explain” approach to ensure the exercise of shareholder rights at general shareholder meetings, appropriate information disclosure and constructive dialogue with shareholders.

・ Its basic idea was discussed at “The Council of Experts Concerning the Corporate Governance Code” organized by Financial Services Agency and Tokyo Stock Exchange.  Announced in May 2015.

• In order to promote dialogue between companies and investors, the Government will conduct a study how the date of general shareholders’ meetings and the dates of record should be established within an international context, and industry groups will be asked to study guidelines for these. ・・・（１）

• Regarding companies’ information disclosure to investors, in order to study the practice of holistic and comprehensive disclosure by companies, study group comprising relevant government ministries/agencies and other organizations will be established without delay. ・・・（２）

• In order to promote the building of sound relationships between companies and investors from the perspective of the sustainable creation of corporate value, the Government will promote the establishment of a platform for discussion involving the business and investment communities and relevant organizations, to study how mid/long‐term information and integrated reporting should be disclosed , and how to promote constructive dialogue between companies and investors. ・・・（３）

Japan Revitalization Strategy - Revised in 2014

＜ Promoting dialogue between companies and investors for sustainable growth and corporate value creation ＞

（１）

（３）

（２）

Accelerating industrial restructuring and venture businesses, promoting provision of funds for growth

2013FY 2014FY 2015FY 2016FY

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Schedule

The Study Group on Promoting Dialogue between Companies and Investors for

Sustainable Growth

Study group on general shareholders’ meeting

processes

Study group on corporate disclosures

3rd round

Report

1st round  2nd round

（Sept 24） （Dec 22） （Mar 26）

1st round

2nd round

3rd round

4th round

5th round

6th round

7th round

Report

ReportReport

4th round Release Report

（Apr 16） （Apr 23 ）

SeptSept OctOct NovNov DecDec2015Jan2015Jan FebFeb MarMarAugAug AprApr JunJun AutumnAutumn WinterWinter

Management‐InvestorForum : MIF (June 10)

2nd round2nd round

(TBC)

1st round

2nd round

3rd round

4th round

5th round

6th round

7th round

1st round  3rd round3rd round

Compile reports and publish by the end of fiscal year 2014.

“The Study Group on Promoting Dialogue Between Companies and Investorsfor Sustainable Growth”

[1. Intent and purpose]

Company-investor dialogue that promotes a framework for sustainable growth. Specifically, dialogue examining global best practices with regard to annual shareholder meetings and corporate disclosure.

[2. Council structure]

[4. Schedule]

The Study Group on Promoting Dialogue between Companies and Investors for Sustainable Growth

Study group on corporate disclosures

Study group on general shareholders’ meeting processes

• Discuss a desirable process for annual shareholder meetings, including reasonable annual shareholder meeting dates, dates of record, and notice period, referencing global standards.

• Discuss desirable corporate disclosure, such as practical solutions and other measures that lead to holistic disclosures by companies, referencing global standards.

[Chairperson] Kunio Ito, Professor (Hitotsubashi University)

[Chairperson] Kunio Ito, Professor (Hitotsubashi University)[Chairperson] Yasuhiro Ozaki, Professor (Waseda University)

[3. Study group members] Companies, investors, market participants, scholars and experts, policy-related parties (TSE,

ASBJ), various organizations and associations (Japan Federation of Economic Organizations, National Association of Kabukon, Japanese Institute of Certified Public Accountants, Trust Companies Association of Japan, Japan Investment Advisers Association, Life insurance association of Japan, and Japan Audit & Supervisory Board Members Association), related ministries and agencies (Ministry of Economy, Trade and Industry, Ministry of Justice, and Financial Services Agency)

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Fundamental Perspective Forward Direction

Dialogue in general

● Dialogue between companies and investors itself is not an objective but an important means to achieve the goal of sustainable growth and enhanced corporate value creation over the mid‐ to long‐term.

● In order to promote an environment for high‐quality dialogue, it is critical to comprehensively review each component  and strive an overall optimization.

● In such environment, it is also critical to alter  the mindset and behavior towards dialogue that are exhibited by companies, investors and various players who supports the process of dialogue.

Corporateinformation disclosure

● Basic principles of corporate information disclosure to promote dialogue

１） Effectiveness: information disclosure useful in evaluatingcorporate value

２） Efficiency: towards enhancing the quality of dialogue３） Synergy: interaction between disclosure and dialogue

● Framework for examining corporate information disclosure

１） Four angles （Q・C・T・W）① Quality of information（Q）② The scope and volume of information （C）③ The timing of disclosure（T）④ The methods of disclosure（W）

２） Four characteristics① Mid‐ to long‐ term and ongoing corporate information② Information on periodic results and financial standing③ Information necessary to execute shareholder rights④ Ad hoc information

３） Information users and their analysis① Differences between institutional and individual investors, time horizons between investors② Information easily understood by individuals ③ “Timely  Analysis” and “In‐depth Analysis”

１．Module‐based integrated disclosure system→ In this concept, while required disclosure information in its entirety 

would be recognized specific “modules (units of information components)” would be extracted based on investor needs and provided within an appropriate timing.① Information in its entirety is compiled on Website or as  an 

integrated report, including both required and voluntary disclosure information.

② Each module is disclosed in response to  specific content and associated timing.

・ perspective of promptness, completeness, reliability, completeness,  and promoting electronification.

２．Sufficient information necessary to evaluate mid‐to long‐term corporate value

→ Toward Information disclosure which allows for a comprehensive understanding of how the basic nature of a company connects to its performance, financial position, and sustainable value creation.・ The company’s vision, strategy and governance.・ Company’s capital efficiency, performance, financial position and 

management view etc.

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Points of the report of “The Study Group on Promoting Dialogue Between Companies and Investors for Sustainable Growth” 1/2

Points of the report of “The Study Group on Promoting Dialogue Between Companies and Investors for Sustainable Growth ” 2/2

Fundamental Perspective Forward Direction

Processsurrounding shareholder meetings

● Basic principles and framework of process for shareholder meetings

１） Two angles：① Shareholder meetings as a decision making entity② Shareholder meetings as a meeting forum

Considering the above angles, process for shareholder meetings should be reviewed.

２） The whole process including shareholder meetings needs to be considered  a part of dialogue between companies and investors.

３．Conversion into dialogue‐based shareholder meeting process１） Necessary conditions for a dialogue‐based shareholder meeting process① Sufficient time for considering voting agenda items and engaging

in dialogue with companies.② Providing appropriate information to shareholders.

・ To secure  convocation notice period.・ Information which is integrated and easy to understand.・ Sufficient time for auditing is necessary conditions.

２） Securing time for dialogue and the consideration of agenda items, an making the process efficient① Setting of the shareholder meeting date from the perspective of 

securing sufficient time.② Making the process efficient though promoting the 

electronificatoin of information disclosures and exercise of voting rights.

３） Improving the environment for meaningful shareholder meetings① Participation by both institutional and individual investors.② Agenda items raised for resolution, the appropriate state for 

shareholder proposals.③ Improving dialogue before shareholder meetings.

Mindsetsand behaviors of companies, investors, and other parties involved in dialogue

● In order to connect dialogue between companies and investors to sustainable corporate value creation, it is essential to promote mutual understanding and strengthen the insights and capabilities of both parties.

● Industries supporting the shareholder meeting process such as trust banks, securities agents, consultants, and analysts.

● Solving practical problems in dialogue.

４．Mindset and behavior of companies, invetors and dialogue‐supporting industries towards promoting dialogue

１） To review practical problems and concerns in dialogue before shareholder meetings.

２） Measures for mindset and behavior towards dialogue.３）To strengthen the process of dialogue‐supporting industries and 

measures for sufficient information.12

＜Table of Content＞

１．Background

２．Reference(Topics and issues discussed in Ito Review)

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○ The concepts of “corporate value” and “added value” differ by company, and also among investors and analysts.

○ While corporate value generally is regarded as the discounted cash flow (DCF) of future cash flows or market capitalization as proxies of shareholder value/economic value, there is also a broader view that corporate value is the total value of all company’s stakeholders.

Sustainable growth Corporate value Added value

Sustainable growth:

Continuous increase in corporate value over the mid/long-term

Narrow

○ Shareholder value/Economic value▪ Market capitalization▪ DCF of future cash flows

○ Value creating companies = Companies generating returns above the cost of capital

○ Residual profits after;1) distributing value to respective

stakeholders other than shareholders

2) taking into account thecost of capital

Wide

○ Total value of stakeholders, such as shareholders, customers, employees, business partners, and society.

○ Total sum of the value distributed to respective stakeholders

<Varying Perspectives of Corporate Value and Added Value>

Challenge is creating a common consensus among companies and investors through dialogue, regarding how increasing value for all stakeholders will in turn lead to an

increase in shareholder value and ultimately corporate value over the long-term.

Different Views on Corporate Value and Added Value

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Conversion to corporate value management that recognizes the importance of capital efficiency ○ Improvement in capital efficiency including mid/long-term ROE is an important indicator of the cooperative

value creation between companies and investors. Companies that achieve returns greater than their cost of capital are value-creating companies.

○ Conversion to “Japanese-style ROE management” where metrics such as ROE are included in on-site management targets.

○ Boosting earnings power and improving capital efficiency are prerequisites for securing funds to invest in human resources and intellectual assets and getting the Japanese economy to enter a virtuous cycle and achieve sustainable growth.

“Corporate value management” with mid/long-term (not short-term) ROE improvement as a core management target

Deeper recognition of the target ROE level and “capital costs”

Capital policies aimed at improving corporate value as well as accountability

Strengthening and fostering CFO candidates “Japanese-style ROE management” where

ROE is included in on-site management targets, such as business profit margins and asset turnover ratios

Challenges for Investors：Understanding corporate value management and enhancing

assessment capabilities

Capital Efficiency and Corporate Value Management

Challenges for Companies:Corporate value management

targeting capital efficiency

Deeper dialogue that does not impose ROE, but helps companies embed ROE in on-site targets and deepens understanding

Enhance the ability to assess mid/long-tem corporate value without concentrating on short-term earnings forecasts

Virtuous cycle for the Japanese economy, marked by enhanced earnings power and capital efficiency

15

Sustainable Growth

Sustainable value creation through “cooperative value creation” between companies and investors ○ Shareholders/investors that invest in companies to expect the cooperate value creation support the growth

of the companies. Accordingly, sustainable corporate value creation should be viewed as the result of cooperative value creation (cooperation) between companies and shareholders/investors.

○ Corporate management and business managers need to recognize the critical role of shareholders in supporting such cooperation.

○ Investors should not evaluate shareholder value in isolation, but rather assess sustainable corporate value creation while recognizing that customer value, employee value, business partner value, and community value generated by companies will all lead to the enhancement of long-term shareholder value.

Long-term investment

StakeholdersCustomer value Employee value

Business partner valueCommunity value

CompaniesManagement

Business managers

InvestorsIndividual investors

Institutional investors

Corporate ValueEnhancement

Cooperative Value Creation Between Companies and Investors

Increase shareholder value over the long term, above the cost of capital

“Cooperative Value Creation”

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Shifting to disclosures and dialogue and engagement that promote sustainable corporate value○ Integrated disclosures that provide investors with information to assess mid/long-term corporate value

creation, without an over-emphasis on short-term performance○ Corporate value creation through constructive dialogue and engagement between companies and

investors

Companies

Investors

Increase corporate value and the promotion of sustainable growth through dialogue and engagement

Enhance mid/long-term investment return by increasing corporate value and promoting sustainable growth through constructive dialogue (engagement) with companies.

Increase corporate value and the promotion of sustainable growth through dialogue and engagement

Enhance mid/long-term investment return by increasing corporate value and promoting sustainable growth through constructive dialogue (engagement) with companies.

Integrated disclosures that provides investors with information to assess mid/long-term corporate value creation

Comprehensive review is necessary, bearing in mind global trends, cost effectiveness, and promotion of dialogue.1) Review current disclosures

(e.g. yearly and quarterly disclosures and earnings forecasts)

2) Best practices for long-term and strategic disclosures

(Linking non-financial information, such as strategies, risks, and governance, to financial KPIs.)

Becoming a “Dialogue-Rich Country” that Pursues High-Quality Dialogue

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Dialogue and engagement means “purposeful dialogue” between companies and investors. The purpose and form of this dialogue has different stages.

Dialogue and engagement is “bidirectional dialogue” between companies and investors, and not one-way communication from companies.

Dialogue and Engagement

Purpose Stages

○ Mid/Long-term enhancement of corporate value

○ Promote an understanding of management policies and develop mutual trust

○ Gather information useful in exercising voting rights and to make investment decisions and proposals

○ Obtain shareholder input prior to shareholders’ exercising voting rights

○ Develop mutual understanding through two-way communication between companies and investors

○ Identify various business issues (i.e., engagement agendas). Progress to the discussion and resolution stage by maintaining close relationships (within the context of enhancing corporate value).

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