Japan's Ministry of Economy, Trade and Industry (METI) calls for evidence and information regarding favourable relationships between companies and investors in a project. The consultation is available at http://www.meti.go.jp/english/press/2013/1016_02.html. The METI's project has also developed a short paper explaining the public consultation, which is posted at http://www.meti.go.jp/press/2013/10/20131016001/20131016001-3.pdf.
Abenomics stimulates Japanese economy at least in the short term. However sustainable growth of Japanese companies in the mid/long term through cash inflow and long-term investment in the companies are also expected.
The project has outlined a number of questions on which evidence and information are invited, but it is also open to comments on other related issues. For your reference, the questions they have highlighted include:
1) Definition of sustainable growth
1. How "sustainable growth" and "competitiveness" of companies are defined.
2. Criteria on which “sustainable growth” and “competitiveness” of companies are evaluated.
2) Companies achieving sustainable growth
1. Examples of companies that have achieved sustainable growth
2. Things that companies achieving sustainable growth have in common.
3. How have Japanese companies achieved sustainable growth? What are the characteristics?
4. What are the challenges for companies and investors in achieving sustainable growth? What are the challenges in government policies for this end?
5. Characteristics and performance of M&A (mergers and acquisitions) of Japanese companies. (e.g. differences between projects in Japan and overseas, effectiveness and assessment of the projects, companies’ expertise in M&A )
3) Incentives for boards and executives of companies
1. Financial rewards (Remuneration) of executives and board members of companies and whether they are consistent with evaluation by the companies. How are they evaluated by investors and market players?
2. Non-financial incentives which motivate executives and board members of companies and whether they are consistent with evaluation of the companies. How are they evaluated by investors and market players?
4) Capital discipline
1. Recognition and importance of cost of capital and return on equity in managing and operating companies, in particular, in relation with capital discipline and development of corporate value.
2. Current conditions and appropriate levels of cash holdings
3. Whether, and how management systems for the company are functioning for management discipline and development of corporate value. (e.g. composition of boards, presence of outside/independent directors, and committee governance structure)
4. Current situation and evaluation of equity investment (e.g. cross-holdings and other equity investments) of companies.
5. Impact of voting by institutional investors on management.
5) Alignment of interest, incentives and management policies for corporate value creation between company management and investors
6) Incentives for investors
1. The structure of incentives (e.g. rewards) and evaluation of asset owners; their relationship with asset managers, beneficiaries, companies, and other players of the capital market; and systems and practices underlying such structures and relationships.
2. The structure of incentives (e.g. rewards) and evaluation of asset managers; their relationship with asset owners, companies, and other players of the capital market; and systems and practices underlying such structures and relationships.
7) Challenges for analysts
1. The roles that analysts (sell-side analysts and buy-side analysts) fulfill and the roles they are expected from their clients and stakeholders.
2. The system of rewards (fee and pay structure) for analysts and other incentives
3. Whether and how analysts are contributing to sustainable growth of the company as well as developing capital markets that support it.
4. The current status and evaluation of activities of analysts; analyst reports, rating for the covered companies and valuation methods.
8) Role and organization of institutional asset owners
1. Expertise of executives and employees in charge of operation at asset owner organizations.
2. Methods of evaluating asset managers by institutional asset owners.
9) Promoting mid-to-long-term investments
1. The current state and evaluation of the function and variety of Japanese capital markets and their players including mid-to-long-term investors.
2. The current status of individual investors in Japan who are making mid-to-long-term investments. Whether there is a need to increase such investors. Problems, challenges, as well as measures to implement to encourage such investments
3. The current status of concentrated mid-to-long-term investments by institutional investors in Japan. Whether there is a need to increase such investors. Problems, challenges, as well as measures to implement to encourage such investment
4. The current status of indexes and how new indexes should be developed for promoting mid-to-long-term investments.
5. Systems and practices that are incentives or counter-incentives for mid-to-long-term investments.
10) Conflicts of interest
11) Short-termism (companies, investors, market players)
1. How is short-termism defined?
2. The current status of timescales used by market players (e.g. asset owners, asset managers, analysts).
3. The current status of timescale used by companies
4. Whether and to what extent each time horizon has been shortening. Systems, practices, and business environments which have caused that to happen. Impact of short-termism on corporate management and operations and interactions of short-termism of companies, asset managers, asset owners and analysts.
12) Challenges concerning corporate disclosure and reporting
1. The current needs concerning corporate disclosure and reporting, the current status, and challenges. International comparison of disclosure and reporting in this regard.
2. The impact of quarterly reporting system on the management of companies as well as the evaluation process of investors, especially with regard to its influence on short-termism.
3. Evaluation and challenges of the existing system for information disclosure and reporting from the perspective of users' needs and the sustainable growth of companies.
13) Disclosure for mid-to-long-term dialogues
1. The current attitude toward disclosure by companies and its evaluation.
2. Items, contents and ways of disclosure and reporting that are required by investors in making mid-to-long-term investments.
3. The current status of how particularly important information is explained when conducting dialogues concerning sustainable growth and mid-to-long-term investments and its challenges.
4. The status and evaluation of existing efforts for integrated reporting as a means for mid-to-long-term dialogues. What are desirable ways for effective (integrated) reporting?
14) How dialogue and engagements are conducted
1. Commonalities and differences in viewpoints between companies and investors
2. Differences in terminology (e.g. long-term/short-term) between companies and investors, challenges and solutions for sharing common understanding of such terms.
3. The current status and evaluation of various occasions for dialogues (e.g. investor relations meetings, shareholders' meetings).
4. The quality of the dialogues and engagements between companies and investors and their challenges.
5. The current efforts for improving the quality of the dialogues (education and training) and the means for further improvement.
6. Systems and practices that prevent companies and investors from conducting dialogues.
Submissions to the project are due on 10 December.