October 3, 2023

Engagement Agenda
Request for Dialogue with Investors toward The Implementation of Management That is Conscious of Cost ofCapital and Stock Price

The seven companies, namely The Dai-ichi Life Insurance Company, Limited, Meiji Yasuda Asset Management
Company Ltd., Mitsubishi UFJ Trust and Banking Corporation, Pension Fund Association, Resona Asset Management
Co., Ltd., Sumitomo Mitsui DS Asset Management Company, Limited and Sumitomo Mitsui Trust Asset Management
Co., Ltd. (in alphabetical order; hereinafter referred to as the “Participating Investors”), with The Institutional
Investors Collective Engagement Forum (hereinafter referred to as “IICEF”) as secretariat, have started sending
letters to the presidents of companies selected from among those listed on the TSE Prime Market by theParticipating Investors based on the market value of tradable shares, Price-to-Book value Ratio (PBR), etc.,
requesting appropriate information disclosure and collective engagement with the Participating Investors toward
the implementation of management that is conscious of cost of capital and stock price.
On March 31, 2023, the Tokyo Stock Exchange issued a notice requesting actions to implement management thatis conscious of cost of capital and stock price. The Notice also requests the disclosure on how dialogues withshareholders are conducted (hereinafter, the notice is referred to as the “TSE Notice”)1. The content calls for achange of mindset on the part of management to achieve greater corporate value, and requires active dialogue withinvestors based on disclosure.
The Participating Investors are institutional investors who invest broadly in Japanese stocks from a long-term
perspective, and who employ passive investment to continue to hold stocks or active investment to manage longterm funds in a stable manner. They would like to support companies that demonstrate strengths in their unique
technologies and/or products/services, create jobs, and strive to enhance their corporate value under a long-term
growth strategy. The content of the TSE Notice is what we also hope companies will proactively address.
The TSE Notice was reported by mass media, drew attention overseas, and elicited positive responses from thestock market on the expectation that many Japanese companies would initiate changes in earnest. However, as
media reports focused heavily on “PBR below 1x,” we have seen some companies explore one-off capital policy
measures or overemphasize non-financial information not linked to the profitability or growth opportunities of theirbusinesses, aiming to attract investors’ attention and induce ESG investment at any rate. Such efforts have not led
to the improvement of corporate valuation by investors. We also hear that there are companies that do not havesufficient systems for or experience in dialogue with investors and do not know how to work on it.
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Therefore, we have clarified how the Participating Investors perform corporate valuation and what kind ofinformation disclosure they expect from companies. We would like company management to review what they have
explained to investors so far and actively engage in dialogue with investors in reference to the following information.
***
1.

Information Necessary for Investors to Perform the Corporate Valuation(1) Basic perspectives of the Participating Investors
The Participating Investors manage long-term funds, such as pension funds and insurance funds, andinvestment trusts and other investment vehicles that contribute to the long-term asset building of Japanesecitizens. They are stakeholders who provide capital to companies in response to their capital needs, returninvestment results commensurate with the risks taken to fund providers, and consequently support theJapanese economy. Companies can enhance their corporate value (discounted present value of their future
cash flows)2 when their investment return (return on capital) exceeds their cost of capital (expected return)over the medium to long term. As a result, they can adequately reward their stakeholders, who are theirshareholders.
As investors are using various corporate valuation methods, there is no single way to cope with them.
However, the basic principle of corporate valuation is to compare “expected earnings” and “growth potential”
with “cost of capital,” which is the return expected by investors that reflects anticipated risks. Investors estimate
risks over their intended investment periods based on various factors, such as business activities and market
characteristics, management policies, and strategies. They further estimate whether “ROIC (return on investedcapital)” and/or “ROE (return on equity)” currently exceeds and is expected to exceed consistently in the future“WACC (weighted average cost of capital)” and/or “cost of equity (shareholders’ expected return)” after
considering these risks.
In other words, they calculate corporate value (discounted present value of future cash flows) to determine
stock price by comparing “expected earnings” and “growth potential” with “cost of capital.” Even if the current
earnings are high, the stock price would not rise unless future growth potential is promising. Also, even if bothcurrent earnings and growth potential are promising, the stock price would still not rise if the cost of capital ishigh due to high risks. If the cost of capital is high due to high risks that are inherent characteristics of its
industry, the stock price would not rise unless higher earnings and growth potential are expected.
It should be noted that “PBR (price book-value ratio)” consists of “ROE (return on equity),” an indicator ofDefinition of “Corporate value” from “Guidelines for Corporate Takeovers” by METI
“Corporate value” refers to a company’s assets, profitability, stability, efficiency, growth potential, and other company
attributes that contribute to the interests of shareholders, or the extent to which they do so. Conceptually, corporate
value is the sum of the present values of discounted future cash flows generated by a company.

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earnings capability, and “PER (price earnings ratio),” an indicator of growth potential (PBR = ROE × PER).
Accordingly, a company can increase its PBR by raising the earnings and/or the growth potential of its business.
PBR below 1 is often said shockingly to mean that the company is worth more by dissolving. However, it simply
means that the stock price as perceived by investors is low, and it does not mean that dissolution is desired byinvestors. If the management believes that the current stock price of the company is undervalued and the fairvalue should be higher, it should explain how the company plans to improve earnings, continue to grow, andreduce the cost of capital. If investors are convinced that the explanation makes sense, stock price valuations,such as PBR, will likely rise.
Therefore, as stated in Principle 5.2 of Japan’s Corporate Governance Code 3 , companies should, after
identifying their cost of capital, formulate a medium- to long-term growth strategies and explain clearly andconcretely to investors in easy-to-understand language and logic their earnings plans, capital policies,
business portfolio reviews, allocation of management resources, etc., to realize the strategies. Fair priceformation in the stock market can be expected if companies properly disclose information required byshareholders and gain shareholders’ understanding through earnings briefings and dialogues.
(2) Items of corporate valuation
As explained above, the basic principle of successful investor relations activities that lead to higher
corporate valuation is to explain measures to “increase profitability” and “growth potential” as well as
measures to “reduce the cost of capital,” such as appropriate risk management, capital policy, and improved
governance, to convince investors of their effectiveness and feasibility. Investors’ evaluation items can beorganized as follows:(i)

Does the company have earnings power?
・What is the source of value creation? What is the company’s business model? What is the company’srevenue structure?

・Has the company achieved the return on capital in excess of the cost of capital?

・

Does the company recognize the need to improve capital efficiency and is it working on it properly?

(ii)

Is the growth potential of the company convincing?
・What are the market characteristics and the competitive environment? Has the company seized
growth opportunities successfully?

・What is the company’s growth strategy? What are its growth drivers?

・

Has the company clarified necessary management capital? Can it secure intangible capital (humanresources, intellectual property, etc.)?

[Principle 5.2 Establishing and Disclosing Business Strategies and Business Plans]
When establishing and disclosing business strategies and business plans, companies should articulate their earnings plans
and capital policies, and present targets for profitability and capital efficiency after accurately identifying the company’s
cost of capital. Also, companies should provide explanations that are clear and logical to shareholders with respect to theallocation of management resources, such as reviewing their business portfolio and investments in fixed assets, R&D, andhuman capital, and specific measures that will be taken in order to achieve their plans and targets.
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Is the company’s portfolio management effective? Is its resource allocation appropriate?

・(iii)

Does the company have appropriate risk management in place?
・

What risks does the company face in its business operations and strategy execution?

・Does the company properly monitor and manage these risks?

(iv)

Attitude towards the capital market, capital policy, governance, corporate culture, top executives’commitment
・

Does the company pay full attention to shareholders? Does it adequately consider their interest? Is itwilling to engage in dialogue with them? Does the company actively disclose information?

・What is the company’s capital policy?

・Does its vision and purpose pervade the company? Is its corporate culture healthy and does it drive
value enhancement?

2.

・

Does the company’s governance function properly? Does it push forward strategy execution?

・Whether there is top executives’ commitment?

Items That Should Be Explained during Dialogue with Investors
By explaining your “stories toward corporate value enhancement” carefully based on the investors’
evaluation items for corporate valuation listed above, you can help investors better understand your stories
and lead to fair corporate valuation. As explained in the letter, “Investor Recognition of Sustainability Issues
and Request for Clarifying Your Stories toward Corporate Value Enhancement (Investor Expectations for theDisclosure of Non-Financial Information),” sent from IICEF to the presidents of all companies listed on the TSE
Prime Market in 2022, a “story toward corporate value enhancement” means a method of explanation of
initiatives toward corporate value enhancement summarized as a story ensuring consistency of each item listedabove.
The table below summarizes examples of a “story toward corporate value enhancement,” items that should
be explained therein, and relevant items of corporate valuation listed above.
[Explanation items for appropriate corporate valuation (items to be incorporated in your story)]
Story toward Corporate Value
Investors’
Key explanation items
Enhancementevaluation items
1) Medium- to long-termManagement vision, corporate mission and(iv) Corporatemanagement vision, mission, orpurpose
culturepurpose that the company should・ Recognition of corporate culture
achieve
2) Current business model, sources Business model(i) Does theof value creation andcompany have・ Description and characteristics of products
competitiveness, revenue structure,
earnings power?
and services, degree of contribution by(ii) Is the growthmarket environment
business unit
potential of theRevenue structurecompany
・ Revenue and cost structure, stream of cash
convincing?
flow generation, contractual terms andconditions that have a significant impact onrevenue structure
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Market environment
・ Specific description and size of markets(customer type, region, etc.)
・ Competitive situation, positioning, share, etc.
Source of competitiveness and competitive
advantages
・ Growth drivers, such as technologies,
intellectual property, business model, knowhow, brand, human resources, etc.
3) Material sustainability issues that Identified risks and measures to mitigate them (iii) Does thegive rise to risks and growthcompany have・ Key risks that may have a significant impactopportunities (materiality including,on the achievement of growth or execution appropriate riskin particular, financial materiality)
management inof business plans and measures to mitigate
place?
them
Growth strategy(ii) Is the growthpotential of the・Management
policyandmediumtolong4) Medium- to long-term strategy forcompany
term growth strategy
corporate value enhancement based
convincing?
・ Specific measures and management capitalon materiality including, inparticular, financial materiality to(research and development, capitalachieve the corporate vision,
expenditures, marketing, human resources,mission, or purpose
intellectual property, investments, etc.) toimplement the policy and strategy
5) Management resources,
especially intangible assets such as ・ Time frame for achieving the goals (vision,human capital and intellectualpurpose, etc.)
property, necessary for theexecution of the medium- to longterm strategy
6) Impact of financial materiality on Management indicators
future financial performance and・ Key management indicators (reason for
associated targets and KPIs
adoption as indicators, actual results, specifictarget numbers, etc.)
Profit plans, prerequisites and their progress
7) Governance for actively andDialogue with investors, information disclosure (iv) Attitude towardboldly promoting the issues listed
policy and capital policy
capital market,
above under appropriate risk-taking ・ Monitoring of cost of equity and WACC and capital policy,
and, in particular, governancegovernance, top
capital policy
related to sustainability initiatives
・ Recognition of capital market’s evaluation of executives’(sustainability governance)
commitment
the company
Governance policy, structure and initiatives
・ Appropriate risk-taking and active and bolddecision making, mechanisms and structure
to maintain discipline of themTop executives’ commitment
In order to prepare these stories, companies need to sort out a wide range of items, some of which may
require considerable time for internal discussion. However, rather than refraining from providing explanations
externally until all items are clarified, we recommend that companies start investor communication withthose items which have already been pulled together.
3.

Request for Collective Engagement with the Participating Investors
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Letters containing this agenda are currently being sent to the presidents of companies selected by theParticipating Investors from among those listed on the TSE Prime Market based on tradable share market
capitalization, PBR, etc. Dialogue with long-term investors who have significant experience in dialogue with awide range of companies and their management provides opportunities for companies to hear objective
opinions toward corporate value enhancement and to gain insights that may lead to the resolution of issues
that the management faces. We hope that the companies will use this letter as a reference, conduct collectiveengagement with the Participating Investors, and actively work on corporate value enhancement.
Actual meetings will be attended by one or two companies from among the Participating Investors as theirrepresentative(s) to listen to explanations from and ask questions to the company. Information obtained at themeeting will subsequently be shared among the Participating Investors. The collective engagement would be
more effective if explanatory materials are prepared for the meeting in line with the “explanation items forappropriate corporate valuation” listed above.
***[Introduction of IICEF and the Participating Investors]
IICEF was established, based on the Japanese Stewardship Code, to hold constructive collective dialogues (collectiveengagements) with listed companies in Japan by multiple institutional investors. IICEF serves as secretariat forcollective dialogues by institutional investors who invest in a broad range of Japanese equities. Institutional investors
participating in this Program emphasize sustainable growth of corporate values and operate with a strong awarenessof stewardship responsibility. All of them invest in a wide range of Japanese equities from long term viewpoints
through passive investment and stable active investment of long-term assets. The Participating Investors, with IICEF
as secretariat for collective dialogues, adopt agendas common to Japanese companies, send letters that summarize
the investors’ mindset, its context and requests to the companies as common views, and hold meetings with themanagement. The objective of these collective dialogues is to enhance long-term corporate value creation and its
sustainable growth, not to pursue short-term shareholder returns.
Contact information:
Secretariat of Institutional Investors Collective Engagement Forum
Representative Executive Director: Yuki Kimura, Administration Manager: Naomi Yamazaki, Executive Directors:
Ryusuke Ohori and Hiromitsu Kamata
Address: Tokyo Entre Salon, Shinmaki-chou Building Annex 1, 3-2-14, Nihonbashi, Chuo-ku, Tokyo 103-0027 JAPANE-mail: info@iicef.jp
Website: https://www.iicef.jp
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