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Final Report of the Ito Review “Competitiveness and Incentives for Sustainable Growth: Building Favorable Relationships between Companies and Investors” Project

The Ministry of Economy, Trade and Industry (METI) has compiled into a final report the results of the past year’s discussions of the “Competitiveness and Incentives for Sustainable Growth: Building Favorable Relationships between Companies and Investors” Project. The project was chaired by Professor Kunio Ito, Graduate School of Commerce and Management, Hitotsubashi University, and hence the final report is known as the Ito Review.

The final report analyzes and makes recommendations with respect to the issues companies face in seeking to increase corporate value and generate on-going growth via investor dialogue and capital procurement. Key messages are the need for a shift to capital efficiency-focused management, optimization of the investment chain, and promotion of two-way dialogue between companies and investors. In particular, the final report recommends the establishment of a “Management Investor Forum (MIF)” as one means towards achieving these goals.

Key Recommendations of the Final Report

The key recommendations of the final report are as follows:

1) Sustainable Value Creation through ”Collaborative Creation” by Companies and Investors

Companies and investors should not perceive companies/investors or corporate value/shareholder value as being in conflict, and should seek to create sustainable value through “collaborative creation.”

2) A Capital Efficiency Revolution in which ROE Exceeds the Cost of Capital

“Japanese-style ROE management”, in which ROE is decomposed into accessible operational metrics that support a high level of motivation at the working level of the company, is needed to achieve mid/long-term growth in ROE. A value-creating company is one that has an ROE above its cost of capital, and while the actual cost of capital differs between companies, the first step in receiving recognition from global investors is for a company to commit to achieving a minimum ROE of 8%, while continually seeking to generate an ROE higher than 8%.

3) Reforming and Optimizing the “Investment Chain”

Overcoming problems such as the weakness and short-termism of the investment chain, i.e. the various paths and processes of capital flowing from its providers down to where companies deploy it towards business activities, and further reforming and optimizing this investment chain will lead to greater national wealth for Japan in the 21st century.

4) Becoming a “Dialogue-Rich Country” that Pursues High Quality Dialogue between Companies and Investors

A framework of disclosure that clearly conveys the corporate value creation process and high-quality “dialogue and engagement” are the two pillars necessary to establish a relationship of trust between companies and investors. This final report comprehensively examines matters such as the purpose of dialogue and engagement sought in Japan’s Stewardship Code, what kinds of issues should be the focus of dialogue, methods of dialogue, and the related attitudes and competencies required of companies and investors with respect to dialogue.

5) Establishing a Management Investor Forum (MIF)

A Management Investor Forum (MIF), comprised of company management, investors, industry participants, market participants, and other related parties, should be established to discuss issues such as mid/long-term disclosures and integrated reporting and the promotion of constructive dialogue between companies and investors. Continued discussion at such a forum should help lead to concrete policies and practices aimed at realizing sustainable corporate value creation.


Outline of the Project

This project gathered company management, long-term investors, and market participants1 to discuss key issues such as the globally-debated subject of capital market and corporate short-termism, dialogue and engagement between companies and investors, and information disclosure and reporting practices within a Japanese context. The project examined factual evidence to identify the causes and incentive structures that underpin problems and make proposals for positive solutions to support companies’ on-going profitability and growth.

Starting with the inaugural meeting in July 2013, in the past year the project had a total of sixteen full-participant general meetings, with further focused debate occurring within three subcommittees2 to incorporate information and evidence collected globally. In April of this year, an interim report was released that solicited further feedback, which served as the foundation for this final report.

1 For a full list of the project members, see Appendix(PDF:70KB) PDF File
2 Subcommittee on Corporate Value Creation, Subcommittee on Investment Chain, and Subcommittee on Short-Termism and Disclosure

Project Background

In response to the financial crisis, there has been international discussion, centered in the US and EU, that has focused on overcoming the short-termism of both companies and investors, strengthening corporate governance, enhancing dialogue and engagement between companies and investors, and improving corporate disclosure and reporting.

In the UK, for example, in 2012 the Kay Review analyzed and made recommendations with respect to the roles of capital markets and investors with the aim of enhancing the long-term performance of British companies, which has since influenced broader discussion within the EU. In the US, given the growing prominence of “Activists” or “Shareholders with a Voice,” the appropriate nature of dialogue between companies and shareholders and measures to enhance corporate relationships with long-term institutional investors such as pension funds are increasing focuses of discussion.

There have also been new developments globally in the information disclosure and reporting frameworks that serve as the critical foundation for dialogue between companies and investors. In financial reporting, both the US and the EU are considering streamlining the content and methods of disclosure. These discussions on disclosure go beyond purely financial metrics such as earnings and extend to management strategies and other non-financial matters that are critical to mid/long-term corporate value creation. “Integrated Reporting,” for which an international framework is aimed to be generated by the end of 2014, is one example of recent developments.

Within the improving macroeconomic environment of Japan, one key to ensuring continued economic growth is to establish a virtuous cycle by growing corporate earnings over the mid/long-term, which in turn will support on-going positive returns in the capital markets through investments in these increasingly profitable Japanese companies.

Not only Japanese domestic market participants, but also global institutional investors are extremely focused on the future direction of Japan’s markets and the relationship between Japanese companies and investors, and are monitoring Japan’s situation and rendering judgement. As such, it is important that issues being discussed globally be carefully considered in a Japanese context, and for these discussions to not only take place domestically but also involve global stakeholders by fully disseminating information throughout this project’s investigative process, inviting input, promoting dialogue, and ultimately conveying the attractiveness of Japan’s markets.

With both these international discussions and Japan-specific issues in mind, the “Competitiveness and Incentives for Sustainable Growth: Building Favorable Relationships between Companies and Investors” Project was launched on July 16, 2013.

Text of the Report

Release Date

August 27, 2014

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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