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Expectations for the market reconfiguration and enhanced visibility of non-financial value of Japanese companies

2022.01.11

Ryohei Yanagi

Ryohei Yanagi

Executive Vice President / Chief Financial Officer Eisai Co., Ltd.

Expectations for the market reconfiguration and enhanced visibility of non-financial value of Japanese companies
Ryohei Yanagi

Ryohei Yanagi

Executive Vice President / Chief Financial Officer Eisai Co., Ltd.

I expect that the recent reconfiguration of market segments will become a new starting point for sustainable enhancement in corporate value of listed companies. As Mr. Kentaro Hayashi, Listing Department Head of the Tokyo Stock Exchange, explained by using the term “three misunderstandings” in “Monthly Journal Capital Market (Gekkan Shihon Shijyo), September 2021”, the reconfiguration of market segments is not intended for reducing the number of companies listed on the Prime Market, or requiring full compliance with the Corporate Governance Code, and it does not mean that passive institutional investors will exit from investments in companies which select the Standard Market. Hence listed companies should keep in mind that the fundamental strategic intent in the reform hereof is “providing incentives for listed companies to sustainably create corporate value” and “ensuring the effectiveness of constructive engagement with Japanese/foreign institutional investors.” Then, without falling into taking a formalistic box-ticking approach, each listed company should consider flexible and creative responses depending on its industry-specific circumstances, company size, resources, lifecycle, characteristics and “corporate purposes” in addition to the materialities thereof. They only have to follow the “Comply or Explain” approach, aiming at “creating value”.

Especially from the viewpoint of “sustainably unlocking the corporate value”, I would like to raise a new way of thinking relevant to the future course of development, beyond the current Corporate Governance Code and principles to be applied to the Prime Market-listed companies. With that, I assume that “sustainable corporate value creation” implicitly refers to the connectivity with ESG/social impact as well as stakeholder capitalism. In the current era of stakeholder capitalism, we need to seek a new accountability mechanism. In this context, I would like to suggest my value proposition: integrating both ESG/social impact and corporate values as shown bythe “PBR model” which I asserted in my publication “CFO Policy, the 2nd edition (2021)”. This hypothesis mandates that the Market Value Added, which corresponds to the incermental portiont where PBR exceeds one (1) or market cap above equity book value, is “invisible value” at market valuation, and is related to ESG, social impact, and non-financial capitals. As a new and creative example of disclosure, Eisai studies the relationship between ESG and its PBR by using the multiple regression model, and indicates “employee value” by using impact-weighted accounts, for the purpose of engaging with investors from all over the world.

By international comparison, it is said that PBR of Japanese companies is inferior to that in other countries. Having said that, I believe that Japanese companies, essentially, have tremendous latent value in ESG and non-financial capitals. By unleashing the potential value through quantification, explanation, and disclosure, I consider it is highly probable that Japanese listed entities can boost PBR over the long run. It is my earnest desire that the market reconfiguration hereof will become a new catalyst or impetus for the listed companies to make their “invisible value” visible, and sustainably enhance corporate value.

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