TOKYO -- Japan's new corporate governance code, implemented in June, is changing the way Japanese companies draft their midterm management plans. No longer merely non-binding targets but commitments to shareholders, midterm management plans are becoming an increasingly important tool to communicate with the market.
On Feb. 15, a Monday, the share price of Japanese ink-maker DIC surged 11% from the previous trading day as investors reacted favorably to the midterm management plan the company released over the weekend. The plan is the company's first to set a return on equity target and to show funds being put aside for acquisitions and other strategic investments.
DIC's plan "shows clearly how it will grow through buyouts," said Takato Watabe, an analyst at Morgan Stanley MUFG Securities.
Midterm management plans can also spur selling. Chemical maker Showa Denko set a goal of boosting its ROE from the current 2% to 9% by the end of 2018. With the company cutting its earnings forecasts three times in December 2015, however, an analyst at one Japanese brokerage expressed skepticism about the plan.
Showa Denko said it aims to grow through "individualized businesses" but was criticized for not providing specifics. The chemical maker's share price is currently just over 70% of what it was before the announcement.
About 80% of the companies comprising the Topix 500 index release midterm management plans. About 40% of them include ROE targets in these plans, complying with investors' wishes.
Below passing mark
There is plenty of room for improvement. "Few midterm management plans got passing marks," said Tokushi Yamasaki, chief analyst at Daiwa Securities, "because they either lack concrete goals or are considered less than feasible."
Yamasaki ranked 200 major companies based on ROE targets, prospects for cash flow and other indicators. He scored the companies on a scale of 1 to 100. Only 41 companies were given passing marks of 70 or higher; 60 companies scored below 10.
The new corporate governance code positions midterm management plans as commitments to shareholders, not as nonbinding goals. "Should the company fail to deliver on its midterm business plan," the code says, "the reasons underlying the failure as well as the company's actions should be fully analyzed, an appropriate explanation should be given to shareholders, and analytic findings should be reflected in a plan for the ensuing years."
The Marui Group's revised midterm management plan, released in November, is held in high regard by institutional investors. In the plan, the department store operator reviewed its balance sheet and noted changes in its business structure. The plan calls for reducing total capital costs from around 4% to 2-3% by putting lower-cost debt financing over shareholder equity, which requires relatively higher costs.
In addition, it clearly states that the group is to meet shareholders' expectations by ensuring returns on invested capital are greater than capital costs. "We tried to explain our corporate value from shareholders' perspectives," President Hiroshi Aoi said.
This year will be a difficult one for Japanese companies; the figures upon which they base their midterm management plans, such as interest rates and exchange rates, are expected to fluctuate.
Junichi Sakaguchi, head of corporate research at Sumitomo Mitsui Asset Management, will be focusing on something else, anyway. "Managers' messages regarding growth," he said, "are more important" than whether companies make good on their plans.