Japan stock exchange adopts name and shame regime to boost corporate valuations

In Japan, roughly half of companies listed in the prime index have a price-to-book ratio of less than one, meaning the market values them below the stated worth of their net assets. Photo / Eugene Hoshiko, AP

Japan’s stock exchange is to introduce a radical new name and shame regime to drive better governance and higher valuations.

The Japan Exchange Group, which controls the Tokyo and Osaka exchanges, told companies in March that it wanted to see progress towards lifting corporate value — a critical catalyst in helping the country’s markets to reclaim the ground lost after their crash more than 30 years ago.

Hiromi Yamaji, chief executive of JPX, now says he intends to go further in making it clearer to investors which companies are meeting those goals, by for the first time publicly naming the listed companies that have complied with his requests.

“We will renew the list every month, but the first list will be published in January...that’s the plan,” he said in an interview with the Financial Times. “In Japan...peer pressure or nudge is a very important method to push people to go forward.”

This has been a breakthrough year for Japanese stocks, which have delivered decades of disappointment to domestic and global investors. The Topix and Nikkei 225 indices are both up by more than 20 per cent this year.

The weak yen is one big support, as is the emergence of long-dormant inflation, which is giving companies greater power to lift prices. Japan has also gained interest from global investors who are keen to bolster Asian exposure without taking on the geopolitical and regulatory risks associated with China.

But moves by the government and by market authorities to enhance board structures, draw in institutional and retail investment flows and push companies into more dynamic strategies have also helped.

Those efforts culminated earlier this month in a week-long series of meetings between Prime Minister Fumio Kishida and the world’s biggest fund managers.

Investors say that one missing element has been a clear sign that the stock exchange is genuinely pushing companies to improve their cost of capital, governance standards and engagement with shareholders. This has been a guideline rather than a requirement.

Yamaji highlighted earlier this year that roughly half of companies listed in the prime index have a price-to-book ratio of less than one — meaning the market values them below the stated worth of their net assets. Now the exchange intends to track companies that have disclosed plans to comply with the guidelines, in effect shaming the non-compliant.

“We are publishing the list of the companies’ actual names who did disclose [but] obviously we have only 3,300 companies listed on the prime and standard [markets]...you can subtract...it’s not a difficult calculus,” said Yamaji.

The exchange will also canvas and publish the views of investors about the measures companies have taken, such as lifting dividends, increasing share buybacks, selling non-core assets or improving communication with the market.

“A regularly updated list of all those companies that are doing what the [Tokyo Stock Exchange] is requesting them to do will bring Japanese corporate governance reform even further into the spotlight,” said Bruce Kirk, chief Japan equity strategist at Goldman Sachs. “This is likely to significantly increase the near-term pressure on the management teams who have yet to respond to do so by the end of the year.”

David Mitchinson at Zennor Asset Management said: “This name-and-shame strategy will increase pressure on most companies. As yet only 31 per cent of firms have formally responded, so the pressure from shareholders for those who have not will be intense.”

Yamaji noted that large companies with low price-to-book ratios tend to have made faster progress than smaller peers. The proportion of those companies that have responded jumps to 45 per cent for those with a market capitalisation of more than Y100 billion (NZ$1.131b).

But he warns that he expects more: “We will continue to reiterate that our request is not only for those companies who are being traded below...book. No, everybody is a target.”

Written by: David Keohane and Leo Lewis in Tokyo

© Financial Times