Trustnet Magazine Issue 31 July 2017 | Page 32

/ HENDERSON /

In the past , Japanese firms have tended to hoard cash on their balance sheets , leading to either under-investment in capital expenditure and falling global market share , or overdiversification into competing firms and maligned business areas , creating highly fragmented industries where businesses resist mergers or become buried in a quagmire of non-core assets .

Cheap labour has compounded poor investment decisions – access to large pools of cheap available labour has reduced returns by encouraging management to needlessly add capacity .

The broader effect has been to produce low rates of return on equity ( ROE ), reducing profits and discouraging investors to the detriment of share price returns .

We believe this issue of shareholder value is now being seriously addressed . Since the country ’ s Prime Minister , Shinzo Abe , unleashed his ‘ three arrows ’ of economic reforms – often referred to as ‘ Abenomics ’ – Japanese firms have started to adopt much more western corporate thinking . Cross-holdings are being unwound and non-core assets sold ; boards are choosing to hand back cash where appropriate , as can be seen in rising dividends , pay-out ratios and share buy-backs ; and firms are now taking a much more cautious approach to labour investment amid increasing shortages .

A LONG-NEEDED SHAKE-UP The second area is corporate governance . Many firms have been guilty of nepotism and lacking in meritocracy in the past , where age and tenure has become the primary

driver of salary and progression . Mr Abe has taken aim at these areas as well , attempting to introduce greater boardroom checks and balances .

In 2014 , Japan ’ s financial regulator introduced the ‘ stewardship code ’ which directed asset managers and investors as to how they should engage with firms more responsibly ; in 2015 the government introduced the corporate governance code , encouraging firms to have at least two independent directors

120 % 100 % 80 % 60 % 40 % 20 % 0 % on their boards . The chart below demonstrates growing board independence .

The attempts of Mr Abe and corporates alike are very encouraging , and if firms continue to focus on the value they can create for shareholders , we expect increasing investor participation in Japanese stocks . Indeed , Japan ’ s stock market is attempting to revitalise interest in its companies for these reasons , creating an index of 400 leading firms with high investor appeal by departing from the traditions of simple market-cap weightings to include measures of corporate governance and profitability .

In the Bankers portfolio , our continuing focus will be on stock selection , seeking quality companies with strong drivers in place for future earnings growth . And with valuations appearing inexpensive both relative to history and wider markets , we expect good stock selection to add to performance for our investors for some time to come .•

INCREASING APPOINTMENT OF EXTERNAL DIRECTORS

Corporate governance will improve from the greater checks and balance

Percentage of firms with outside / independent directors

2004

Outside directors Independent directors

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source : MUMSS , from the Japan Association of Corporate Directors , as at January 2017

94.3 98 . 8 97.1 87.0

Note : Figures for years prior to 2016 are based on ( i ) corporate governance and ( ii ) research on corporate governance of the listed companies conducted by Japan Association of Corporate Directors . The figures for 2016 are based on corporate governance reports submited by listed companies as of July 14 , 2016 .

Before investing in an investment trust referred to in this document , you should satisfy yourself as to its suitability and the risks involved , you may wish to consult a financial adviser . The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested . Nothing in this document is intended to or should be construed as advice . This document is not a recommendation to sell or purchase any investment . It does not form part of any contract for the sale or purchase of any investment . Issued in the UK by Henderson Investment Funds Limited ( reg . no . 2678531 ), incorporated and registered in England and Wales with registered office at 201 Bishopsgate , London EC2M 3AE , is authorised and regulated by the Financial Conduct Authority to provide investment products and services .

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