Advertisement

Synchronization of Non-financial Capital and Value Creation: Japan Should Show ROE of ESG

  • Ryohei Yanagi
Chapter

Abstract

Japanese companies prefer to discuss non-financial information such as ESG (Environment, Social, Government) and CSR (Corporate Social Responsibility) when they set agendas for talks with investors. Investors, however, want to discuss information in the financial statements. Both types of information indicate potential for growth and creation of corporate value, and they can be synchronized through market value added (MVA). The author specifies that MVA as defined as portion with PBR (Price Book-value Ratio) above 1 equals to Intangibles (non-financial capital such as ESG/CSR). The equation responds to assertions in Japan’s Corporate Governance Code (CGC), Stewardship Code (SC) and the Ito Review, which promote discussions of capital efficiency (i.e., improved ROE) and non-financial information in a broad sense. It is a sort of pursuing “ROESG (Return On ESG)” concept. In this context, the author provides empirical research proving this correlation with statistical significance between ESG and ROE as well as a global investor survey. The book’s three financial strategies bring investors and corporations together in a quantitative dialogue as shown in Chap.  4. This chapter suggests an agenda for that dialogue taken from results of the investor survey, and how to synchronize financial and non-financial value in a quantitative dialogue. The chapter includes the integrated report of Eisai (one of the largest pharmaceutical companies in Japan for which the author serves as CFO) as a case study and shows that financial and non-financial information can be synchronized by reporting the MVA and Equity Spread (ES) as evidenced by Yanagi (2017a). Overseas investors severely criticize Japanese corporate management, as the author proves through surveys, interviews, and quantitative analysis. However, remember one of the Aesop’s Fables “The North Wind and The Sun” anecdote. “The North Wind,” only criticism does not blow the conventional way of corporate governance in Japan. “The Sun,” constructive dialogue is the ideal and effective way to unbutton the old wears as The Sun got win through gentleness in the anecdote. Corporations and investors both must seek for a win-win. That is “Synchronization of non-financial capitals (ESG) and Equity Spread (or ROE)” as my value proposition. And this chapter is the author’s conclusion.

Keywords

Non-financial capital ESG CSR Intangibles Equity spread MVA RIM Synchronization 

References

  1. Agarwal, V., Liao, A., Taffler, R., & Nash, E. (2008). The impact of effective investor relations on market value. SSRN. Working Paper.Google Scholar
  2. Botosan, C. A. (1997). Disclosure level and the cost of equity capital. The Accounting Review., 72(3), 323–349.Google Scholar
  3. Cokins, G., & Shepherd, N. (2017). The Power of Intangibles. Strategic Finance, 2017(5), 32–39.Google Scholar
  4. Dhaliwal, D. S., et al. (2011). Voluntary nonfinancial disclosure and the cost of equity capital: The initiation of corporate social responsibility reporting. The Accounting Review, 2011(1), 59–100. CrossRefGoogle Scholar
  5. Fombrun, C., & Shanley, M. (1990). What’s in a name? reputation building and corporate strategy. Academy of Management Journal, 33(2), 233–258.CrossRefGoogle Scholar
  6. Ide, S., & Takehara, H. (2016). Analysis of infiltrating process to stock price by patent Information—Technical competitiveness as mid-term alpha driver. SAAJ Journal, 54(10), 68–77.Google Scholar
  7. IIRC. (2013). The international IR framework. International Integrated Reporting Council.Google Scholar
  8. Ito, K. (2014). Integrated report from the perspective of managerial accounting. Kigyo kaikei, 66(5), 83–88.Google Scholar
  9. Ito, K., & Sekiya, H. (2016). Constructing the theoretical model relevant to intangibles and corporate value. Kaikeigaku kenkyu, 42, 1–32.Google Scholar
  10. Japan Investor Relations Association (JIRA). (2014). Survey results of annual shareholder’s meeting and investor relations.Google Scholar
  11. JIRA. (2017). IR survey 2017. JIRA.Google Scholar
  12. Kaplan, R. S., & Norton, D. P. (1996, January–February). Using the balanced scorecard as a strategic management system. Harvard Business Review.Google Scholar
  13. Lev. B. (2001). Intangibles: Management measurement, and reporting. Brookings Institution Press.Google Scholar
  14. Nissay Asset Management. (2014). Management strategies to enhance corporate value in a Stewardship Code era. CHUOKEIZAI-SYA.Google Scholar
  15. Ohlson, J. (1995). Earnings, book values, and dividends in equity valuation. Contemporary Accounting Research, 11, 661–687.CrossRefGoogle Scholar
  16. Ohlson, J. (2001). Earnings, book values, and dividends in equity valuation: an empirical perspective. Contemporary Accounting Research, 18(1), 107–120.CrossRefGoogle Scholar
  17. Oshika, T. (2008). Management attitude to disclosure and responses of stock market—Stimulate general shareholders meeting and efficiency of accounting information. SAAJ Journal, 46(5).Google Scholar
  18. Oshika, T. (2013). Relevance of expenditure of human resource and corporate value—Does payment-cut contribute to improve corporate value? Waseda Commerce Report, 434, 289–311.Google Scholar
  19. Otokawa, K. (2000). Capital cost reduction effect for IR activity. Kaikei, 158(4), 543–555.Google Scholar
  20. Porter, M. E., & Kramer, M. R. (2011). Creating shared value. Harvard Business Review, 6, 8–31.Google Scholar
  21. Saka, C., & Oshika, T. (2014). Disclosure effects, carbon emissions and corporate value. Sustainability Accounting, Management and Policy Journal, 5(1), 22–45.CrossRefGoogle Scholar
  22. Sakurai, M. (2008). Corporate reputation. CHUOKEIZAI-SYAGoogle Scholar
  23. Suda, K. (2004). Strategies and effects of disclosure. Moriyama-shotenGoogle Scholar
  24. Tomizuka, Y. (2017). Are non-financial capitals connected with corporate value? Empirical research on Japanese healthcare sector. Kigyo kaikei, 69(7), 116–122.Google Scholar
  25. Yanagi, R. (2009). Financial strategies for maximizing corporate value. Doyukan.Google Scholar
  26. Yanagi, R. (2014b). Study for Japanese ver. Stewardship code and capital efficiency. Investor Relations, 2014(8), 48–62.Google Scholar
  27. Yanagi, R. (2015a). The ROE revolution and financial strategy. CHUOKEIZAI-SHA.Google Scholar
  28. Yanagi, R. (2015b). Eisai’s Integrated Report pilot study. Kigyo kaikei, 67(4), 106–113.Google Scholar
  29. Yanagi, R. (2015c). Corporate governance code and “Engagement with shareholders”—Implications of global investor survey and study for equity spread. SAAJ Journal, 2015(9).Google Scholar
  30. Yanagi, R. (2017a). ROE management and Intangibles. CHUOKEIZAI-SHA.Google Scholar
  31. Yanagi, R. (2017b). How are global investors looking at Japanese Companies? Implications from the global investor survey in 2017. Kigyo kaikei, 69(5), 108–114.Google Scholar
  32. Yanagi, R., Meno, H., & Yoshino, T. (2016). Study of synchronization for non-financial capital and equity spread. Gekkan shihon shijyo, 2016(11), 4–13.Google Scholar
  33. Yanagi, R., & Yoshino, T. (2017). Relation bet. Human/Intellectual Capitals and Corporate Value (PBR). Gekkan shihon shijo 2017(10) (No. 386), 4–13.Google Scholar
  34. Yanagi, R. & Michels-Kim, N. (2018). Integrating Non-financials to create value. Strategic Finance, 2018(1), 27–35.Google Scholar

Copyright information

© Springer Nature Singapore Pte Ltd. 2018

Authors and Affiliations

  1. 1.EisaiBunkyōJapan

Personalised recommendations