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  • Calling for Evidence and Information Concerning the Main Issues Presented in the “Competitiveness and Incentives for Sustainable Growth: Building Favorable Relationships between Companies and Investors” Project

Calling for Evidence and Information Concerning the Main Issues Presented in the “Competitiveness and Incentives for Sustainable Growth: Building Favorable Relationships between Companies and Investors” Project

With the secretariat operated by the Ministry of Economy, Trade and Industry (METI), the “Competitiveness and Incentives for Sustainable Growth: Building Favorable Relationships between Companies and Investors” project (chaired by Dr. Kunio Ito, professor, Graduate School of Commerce and Management, Hitotsubashi University) compiled main issues to be discussed, aiming to study challenges to be overcome in order to enhance the competitiveness of Japanese companies for their sustainable growth as well as to discuss approaches to the ideal capital market that would support such growth.

METI will convey these main issues to the world, and will also call for a wide range of evidence and information (e.g. data, examples and analysis) on the issues from companies, investors and other people involved in this field not only in Japan but also in other countries.

1. Outline

This project aims to address factors and incentive structures which hinder management and capital markets from enhancing long-term value creation, improving disclosure and engagement practices between companies and investors by gathering key players in and around the investment community, such as board members and senior executives of companies, institutional investors, and sell-side research analysts, etc.

After holding four meetings since its launch in July 2013, the project identified and summarized the main issues as below.

1) Definition of sustainable growth
2) Companies achieving sustainable growth
3) Incentives for boards and executives of companies
4) Capital discipline
5) Alignment of interest, incentives and management policies for corporate value creation between company management and investors
6) Incentives for investors
7) Challenges for analysts
8) Role and organization of institutional asset owners
9) Promoting mid-to-long-term investments
10) Conflicts of interest
11) Short-termism (companies, investors, market players)
12) Challenges concerning corporate disclosure and reporting
13) Disclosure for mid-to-long-term dialogues
14) How dialogue and engagements are conducted

METI will call for a wide range of evidence and information (e.g., data, examples and analysis) that should be referred to concerning the issues from people involved in this field not only in Japan but also in other countries.

While seeking evidence and information from all over the world, the following three working groups will conduct in-depth discussion on each issue and analyze information based on facts:

<Working Group 1>WG on Corporate Value Creation
<Working Group 2> WG on Investment Chain
<Working Group 3> WG on Short-termism and Disclosure

Based on evidence and in-depth discussions, this project plans to publish an interim report early 2014, gather feedback once again, and draw up a final report by the end of March 2014.

2. Project Background

In response to the financial crisis, there are global debates concerning the following issues: overcoming short-termism among investors and companies, strengthening corporate governance, and dialogues and engagement between companies and investors and review of information disclosure and reporting.

In the UK, for instance, the Kay Review examined and made proposals concerning the roles of capital markets and investors in order to enhance the long-term performance of UK companies, which has had an impact on debates at the EU level.
In the US, there are also ongoing debates on where “activist funds” show a strong presence. Issues of debate include: how companies carry out dialogues with shareholders and how to form long-term relationships with institutional investors such as pension funds.

In the field of corporate disclosure and reporting, new developments and initiatives have been seen recently. As for financial reporting, discussions are progressing on how to streamline and improve the disclosure content and methods, e.g. discussions on disclosure frameworks. Furthermore, reporting also on mid-to-long-term value creation of companies, including non-financial matters such as business strategies and risk information, are being discussed. “Integrated reporting,” for which an international framework is being developed, is one example of such attempts.

In Japan, where the macro economy shows improvement, major challenges for future growth are to improve the competitiveness of companies for mid-to-long-term value creation as well as encourage a virtuous cycle in which sustainable return can be expected in capital markets through investments in such companies.

Furthermore, global investors have recently showed increased interest in the Japanese market, gathering information and making evaluations of Japanese companies’ potential for future growth. In this context, it is necessary to discuss those issues, paying particular attention to and encouraging dialogues with international stakeholders including investors overseas during the process of this project.

With such a background of international debate and Japan’s challenges, the “Competitiveness and Incentives for Sustainable Growth: Building Favorable Relationships between Companies and Investors” project was launched on July 16, 2013.

Reference

Release Date

October 16, 2013

Division in Charge

Corporate Accounting, Disclosure and CSR Policy Office, Economic and Industrial Policy Bureau

Ministry of Economy, Trade and Industry
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