Governance Briefing — March 31, 2023
The Tokyo Stock Exchange now expects listed companies to disclose cost-of-capital metrics and board-approved plans for improving valuation, capital efficiency, and investor engagement.
Executive briefing: On 31 March 2023, the Tokyo Stock Exchange (TSE) issued a notice titled Action to Implement Management that is Conscious of Cost of Capital and Stock Price, calling on Prime Market and Standard Market issuers to present concrete measures for improving capital efficiency, enhancing corporate value, and engaging investors on valuation gaps. The initiative urges companies with price-to-book ratios below one—or otherwise undervalued relative to fundamentals—to disclose board-approved plans for raising returns and optimising balance sheets.
Capabilities: What the TSE expects
The TSE’s notice outlines a multi-step process that boards should undertake:
- Identify cost of capital and current valuation metrics (P/B, ROE, ROIC, TSR) and assess factors contributing to discount.
- Set improvement targets aligned with mid- to long-term management plans, including capital allocation, business portfolio optimisation, and shareholder return strategies.
- Disclose progress and communicate with investors through enhanced English-language materials, briefings, and constructive dialogue.
The exchange emphasises that management should incorporate cost-of-capital awareness into strategy, capital budgeting, and performance evaluation systems. Companies are encouraged to review cross-shareholdings, improve governance of subsidiaries, and accelerate decision-making. TSE plans to monitor disclosures beginning with fiscal year 2023 securities reports and corporate governance reports.
Implementation sequencing: Building a capital efficiency roadmap
Phase 1 — Diagnostic. Assemble a cross-functional taskforce including finance, strategy, IR, and legal teams. Calculate weighted average cost of capital (WACC) using market data and stress-test assumptions. Map valuation drivers—business mix, profitability, capital structure, governance, ESG performance—and benchmark against domestic and global peers.
Phase 2 — Strategy formulation. Develop initiatives to close valuation gaps: portfolio reviews, divestitures, productivity investments, digital transformation, pricing reforms, and capital structure optimisation (buybacks, dividends, hybrid financing). Evaluate impact on ROE, ROIC, and cash flow. Set measurable targets for medium-term plans and align executive compensation with value creation metrics.
Phase 3 — Disclosure and engagement. Update corporate governance reports, securities reports, and investor presentations with cost-of-capital analysis, target metrics, and progress dashboards. Provide bilingual materials and hold investor briefings to explain strategy, risk management, and capital allocation. Implement feedback loops from investors and proxy advisors, adjusting plans as needed.
Responsible governance and oversight
The TSE underscores board accountability for overseeing capital efficiency initiatives. Boards should ensure independent directors play a central role in challenging management assumptions, vetting investment proposals, and reviewing capital policies. Audit committees or equivalent bodies must monitor execution, while nomination and remuneration committees align incentives with value creation.
Management should integrate cost-of-capital considerations into enterprise risk management. Scenario analyses should evaluate interest rate shifts, currency volatility, supply chain disruptions, and ESG risks. Transparent disclosure of sensitivity analyses helps investors understand resilience.
Companies must also enhance internal controls over data used in disclosures—ensuring accuracy of WACC calculations, segment profitability metrics, and sustainability indicators referenced in investor communications. Coordination with sustainability teams is important when linking capital allocation to transition strategies or climate commitments.
Sector playbooks
Manufacturing and industrials. Focus on asset utilisation, supply-chain optimisation, and portfolio rationalisation. Evaluate divesting non-core assets, consolidating production, and investing in automation to boost ROIC. Communicate progress on digital manufacturing and energy efficiency initiatives.
Financial institutions. Banks and insurers should articulate strategies for improving net interest margins, fee income diversification, and risk-weighted asset optimisation. Provide transparent stress-testing results and outline capital management policies aligned with regulatory buffers.
Retail and services. Highlight initiatives to enhance customer lifetime value, omnichannel capabilities, and cost structure improvements. Explain capital allocation between store refurbishment, e-commerce platforms, and shareholder returns.
Technology and startups. For growth-oriented issuers, emphasise pathways to profitability, investment discipline, and governance enhancements. Provide detailed roadmaps for R&D productivity, ecosystem partnerships, and global expansion.
Measurement and continuous improvement
Establish KPIs covering valuation and operational performance: P/B ratio trends, ROE/ROIC trajectories, free cash flow generation, and capital deployment efficiency. Track investor engagement metrics—meeting frequency, feedback themes, analyst coverage—and incorporate insights into strategy.
Implement quarterly reviews to assess progress against targets, adjust resource allocation, and escalate issues to the board. Use integrated reporting frameworks (e.g., ISSB, TCFD) to connect financial and sustainability performance. Document governance actions—such as board refreshment, incentive redesign, or policy updates—to evidence commitment to value creation.
The TSE will publish examples of best practices and may issue follow-up guidance. Companies that fail to respond risk reputational damage and potential scrutiny from investors and regulators. Proactive engagement can attract global capital and improve valuations.
Support, timeline, and regulatory dialogue
The TSE expects companies to begin disclosing cost-of-capital initiatives in securities reports for fiscal years ending March 2024, with interim updates encouraged via corporate governance reports and investor presentations. The exchange will review filings and may request supplemental information or meetings with issuers that lag peers.
Issuers can leverage resources provided by the Japan Exchange Group, including webinars, sample disclosure templates, and guidance on enhancing English-language materials to reach global investors. Engaging proactively with sell-side analysts and stewardship teams can help validate whether planned actions resonate with market expectations.
Corporate planning teams should integrate the TSE’s expectations into medium-term management plans, budgeting cycles, and scenario analysis. Linking capital efficiency metrics to sustainability targets and digital transformation roadmaps can create cohesive narratives for both domestic and international stakeholders.
The initiative encourages companies to publish Japanese and English disclosures in parallel and to explain how board deliberations incorporate investor feedback, reflecting the emphasis on transparency in the TSE’s supplementary guidance.
Investor relations and corporate planning teams should schedule regular reviews with audit and nomination committees so that capital efficiency targets inform executive evaluations and succession planning, reinforcing governance expectations in the JPX market reform agenda.
Sources
- Tokyo Stock Exchange — Action to Implement Management that is Conscious of Cost of Capital and Stock Price (31 March 2023).
- Tokyo Stock Exchange — Supplementary Explanation of the Action Programme (31 March 2023).
- Japan Exchange Group — 2023 Action Plan for Market Reform.
Zeph Tech helps Japanese issuers quantify cost of capital, design capital efficiency strategies, and communicate value creation plans that meet TSE expectations.
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