New environment surrounding disclosure

In recent years, disclosures by listed companies have been dramatically changing. Listed companies are required to offer more advanced-level disclosure because they have diverse stakeholders. In the past two decades or so, various reforms on disclosure have been implemented in order to offer more beneficial information for investors.

For example, along with the introduction of the Corporate Governance Code in 2015, companies are now required to enhance the disclosure related to governance. Moreover, in recent years, disclosure of mid-term management plans and long-term visions, disclosure of human capital, disclosure of sustainability, disclosure indicating the status of responses to climate change, disclosure of non-financial information, have also been gaining attention.

In the first half of the 2000s, when I was a professional analyst of Japanese stocks, disclosure meant mainly financial information disclosed according to the format such as a securities report and earnings briefing. Thus, investors also analyzed companies mainly by such information and investigating the relevant industry. However, currently, people spend lots of time on analyzing information other than those above. Some companies arrange departments or people in charge of examining ESG and details of voting rights, apart from people who analyze financial information (conventional stock analysts).

These changes were triggered by dealing with the disclosure that is required by global standards in order to make it easier for foreign investors to invest in the Japanese share market. In addition, the financial crisis of the latter half of the 2000s, and the short-termism issue of companies and investors, which is noted as a cause of the crisis, are also related.

Short-termism can be translated as short-term oriented or short-sighted behavior. Since around the mid-2000s, because investors pursued short-term returns too much, the trend to demand short-term performance from companies had risen. Thus, it is pointed out that in order to record a short-term profit owing to the pressure from investors, companies sacrificed long-term investment and corporate value. In order not to repeat this mistake, since the financial crisis, the trend has changed in such a way that both companies and investors are trying to manage and invest from a long-term perspective.

However, for investors to invest long-term, companies need to sustainably create corporate value on a long-term basis. Moreover, it will be necessary to have a mechanism to monitor whether a company is appropriately choosing its investments, whether it is appropriately operating its business, whether it is appropriately allocating the profit generated from its business to stakeholders. Through such developments, governance has become more emphasized.

In addition, nowadays, the source of value creation by companies is shifting from traditional tangible fixed assets to intangible assets, and the importance of assets that are not shown on financial statements is also increasing.

For example, in the case of a company that is growing though M&A, disclosure of intangible assets such as goodwill is necessary. In the case of a company for which digital investments, DX, research and development are the driving force for growth, investors may want to know the details of its investments. Moreover, recently, disclosure of people who work at the company (= human capital) is also drawing attention.

ESG analysis worthwhile when a company has earning capability

The growing need for non-financial information is a global trend. In Japan as well, since fiscal year 2022, it has become mandatory to include sustainability information in securities reports that is required to be submitted by law. Furthermore, more companies are issuing integrated reports (creation and disclosure are voluntary) which indicate their mechanism of sustainable value creation by combining financial information and non-financial information.

However, I am personally concerned that because nowadays there is too much focus on non-financial information, time spent on conventional financial analysis, quantitative analysis, investigation of companies and industries themselves is decreasing.

Analysis of ESG and sustainability is important in itself. However, if only such information is evaluated and there is a failure to analyze the inherent earning capability of a company, it is like putting the cart before the horse. However much a company with low earning capability (= return on invested capital) focuses on ESG, investors cannot gain a return. I also think it is problematic that the disclosure itself is becoming a purpose for companies, and companies cannot afford to think about how such efforts would affect their corporate value.

The meaning of efforts on ESG and sustainability is firstly for a company to maintain its future market without damaging it, where it will run its business, and to grow sustainably. Secondly, it is organizing governance, to properly allocate corporate value to stakeholders, and furthermore, to create a favorable cycle for investors to invest on a long-term basis.

What is gaining the highest interest among the recent enhanced governance mechanism is the role of independent directors in the board of directors. For example, when the Corporate Governance Code was revised in 2021, its guideline indicated that the companies listed on the Prime Market “should appoint at least one-third (or a majority if necessary) of their directors as independent directors.”

In fact, according to academic research, some say that independent directors have a positive effect for corporate performance, while some conclude that they do not, and their impact is not clear.

However, according to my research (2021), it was made clear that companies with a higher rate of independent directors have better comprehensive disclosure (analysis of 2013-2018). Thus, it could be said that the current efforts to proactively increase the number of independent directors have some effect, and they are encouraging a favorable information environment for investors.

Improvement of disclosure will bring increases in analyst coverage and improvement of stock liquidity, and will ultimately lead to improvements in corporate value. It could be still half way through, but it is considered that being conscious about ESG, etc., will be beneficial for companies, investors, and other stakeholders going forward. In any case, it is important for companies to properly recognize the meaning of ESG for their main business and companies, and not only follow the trend as a formality.

Enhance analysts and make an investment-friendly country

My research covers, among disclosures, earnings forecasts (so-called management forecasts), which are disclosed by companies themselves. An earnings forecast is usually published at the beginning of the period, and if there are changes, it will be revised as necessary during the period. In Japan most companies disclose an earnings forecast. I think this is an excellent mechanism which other countries do not have.

On the other hand, from the perspective of companies, an earnings forecast is a backbreaking disclosure. Because of the continuous enhancement of non-financial information disclosure, etc., and in order to control short-termism, there is a movement to simplify this. To be more precise, what was traditionally uniformly required for every company to disclose, was left to a company’s discretion. Besides sales and profit, information related to capital investment and depreciation was recognized as information of the forecast, and it was also left to a company to decide whether it will disclose the information or not (implemented from fiscal year 2012).

This impact was not remarkable in the beginning. However, as a result, there are more companies which reduced the disclosure than those that enhanced it. Moreover, since the coronavirus crisis, how the disclosure is carried out has changed further.

So, suppose that companies stop disclosing the earnings forecast. Is there any information which can cover that? An analyst forecast, which is created when analysts affiliated with securities firms publish reports, can be an answer to this. Analysts who analyze companies and issue information from the perspective of external experts are very beneficial for investors at home and abroad.

However, according to my investigation when I wrote a study, while in the U.S. about 80% of listed companies had analyst forecasts, in Japan only about 40% of listed companies had analyst forecasts.

One of the reasons for this is that while in the U.S. direct finance has developed from the old times, and analysts were arranged as a necessary infrastructure, in Japan indirect finance has played a main role. Moreover, with trends such as economic stagnation and a shift towards passive management, it continues to be difficult for analysts to increase in number.

Traditionally, enhancement of analysts has been dependent on a securities firm’s and an asset management company’s own efforts. However, as part of the information environment organization of the financial market, in order to arrange an environment where it is easier for foreign investors to invest, it may be a good idea to consider efforts to enhance the role of analysts, led by the stock exchange and the government, toward the future.

Furthermore, in a recent movement surrounding corporate disclosure, there is a discussion about reassessing the quarterly disclosure of financial results that was mentioned in Prime Minister Kishida’s policy speech in October 2021 and elsewhere. Not limited to Japan, there is a tendency for companies to cease disclosure if the disclosure obligation is abolished. Thus, it should be reassessed in such a way that investors will not be disadvantaged. By the way, in Europe, the disclosure obligation of quarterly financial results was abolished. However, many companies seem to be continuing to disclose quarterly results.

So again, non-financial information such as ESG and sustainability is very important information. However, this are based on the major premise that the company itself has a business model and earning capability. Therefore, I think, foundational corporate analysis remains important.

Moreover, the management forecast, which is not seen abroad, is a system that Japan should be proud of. After its benefit is understood, I hope that it will continue to be developed in the future. At the same time, I think it is beneficial for both investors and companies to increase the number of analysts in Japan.

* The information contained herein is current as of February 2024.
* The contents of articles on are based on the personal ideas and opinions of the author and do not indicate the official opinion of Meiji University.
* I work to achieve SDGs related to the educational and research themes that I am currently engaged in.

Information noted in the articles and videos, such as positions and affiliations, are current at the time of production.