Appropriate management practices of Investee Companies

NOMURA ASSET MANAGEMENT ("NAM" or "we" hereafter) stipulates the appropriate management practices of investee companies in order for investee companies to enhance corporate value and achieve sustainable growth, which is a driver of investment performance, and actively encourages investees through stewardship-related activities.

i) Proper Efforts on Environmental and Social Issues

We believe that making proper efforts on global environmental and social issues from the perspectives of risk management and the pursuit of business opportunities will lead to increase in corporate value and sustainable growth. We also see such efforts as a prerequisite for a company to be accepted as a member of the society. Examples of issues that we consider are particularly important and efforts on them that investee companies need to make are as follows:

  1. (1)Identification of key issues (materiality): Identification of key issues by the management, responses to and disclosure of risks that are identified as key issues (e.g., data security, product liability, etc., as well as those listed in (2) through (6)), disclosure of business opportunities that are identified as key issues;
  2. (2)Climate change: Verification of business portfolio and promotion of technological innovation to respond to the climate change issue, information disclosure based on the final report published by the Task Force on Climate-related Financial Disclosures (TCFD), which is consistent with the Paris Agreement, setting of a net zero target for medium- to long-term greenhouse gas (GHG) emissions, approval of or commitment to science based targets (SBTs), measurement of GHG emissions and absorption including Scope 3 under the international standards for the accounting and reporting of GHG emissions, and introduction of internal carbon pricing;
  3. (3)Natural capital: Development of measures and goals for prevention of deforestation, marine pollution, or air pollution, sustainable use of water resources, timber, or marine products, reduction of waste, and promotion of recycling;
  4. (4)Human rights: Development of a policy on human rights at investee companies that is consistent with international norms, human rights due diligence or audits including supply chain, corrective action and relief mechanism, and disclosure of due diligence results;
  5. (5)Diversity and inclusion: Setting a medium- to long-term target for the percentage of women among board members, senior executives, or managers, a personnel system to prevent employees from leaving employment due to a life event, non-discriminatory development of human resources, and creation of a corporate culture that embraces diversity and inclusion;
  6. (6)Value creation to realize a well-being society: A management plan that incorporates the perspective of the resolution of social issues (including research and development and market strategies), measurement and disclosure of progress toward the resolution of social issues; and
  7. (7)Cooperation with stakeholders, such as participation in initiatives that are related to the issues listed above.

ii) Value Creation through Capital Efficiency

NAM believes that in order for investee companies to enhance corporate value and achieve sustainable growth, it is necessary for investees to create value that exceeds the cost of capital over the medium to long term by utilizing capital efficiently under proper risk management and constructing a business portfolio that has a high growth potential and is efficient. To this end, we consider that the following efforts are particularly important:

  1. (1)To formulate a growth strategy and an investment plan to create value that exceeds the cost of capital and to conduct proper progress management;
  2. (2)To verify the business portfolio against the growth strategy and replace businesses in the portfolio as necessary;
  3. (3)To sell assets that do not contribute to the creation of value that exceeds the cost of capital and, in particular, to reduce cross-shareholdings;
  4. (4)To implement group governance to enable the optimal allocation of management resources, etc.; If there is a listed company within the group, to regularly verify the reasonableness of maintaining a listed company within the group; to properly manage the conflict of interest with general shareholders; and to support the listed company's efforts to strengthen corporate governance;
  5. (5)To properly manage the risks associated with businesses, etc.;
  6. (6)To implement a capital structure and shareholder returns that reflect (1) through (5) above; and
  7. (7)To properly disclose information about (1) through (6) above.

iii) Adequate Performance of Corporate Governance Function

We believe that it is necessary for a company to have sufficiently functioning corporate governance as a prerequisite for value creation through the efficient utilization of capital and proper efforts on environmental and social issues. We postulate the appropriate corporate governance to realize this as follows:

  1. (1)The board consists of an adequate number of qualified and diverse members who have the ability and experience for supervising the execution of management on behalf of shareholders and functions effectively. If there is a concern about the conflict of interest with minority shareholders due to, for example, the existence of a controlling shareholder, the level of supervision, including the management of the conflict of interest with the controlling shareholder, is particularly high.
  2. (2)The audit committee, audit and supervisory committee or the board of auditors consists of qualified members who are capable of auditing directors' operations on behalf of shareholders and functions effectively.
  3. (3)Committees relating to nomination and compensation have been established, each of which consists of qualified and independent members and adequately fulfills the necessary roles and responsibilities in (4) and (5) below.
  4. (4)Standards and processes to determine whether the replacement of senior executives is required have been established, and a succession plan in case of such replacement has been formulated.
  5. (5)Compensation of senior executives is appropriate as their incentive and commitment for value creation through the efficient utilization of capital and proper efforts on environmental and social issues.
  6. (6)Executive compensation is appropriate in terms of management incentive and commitment aimed at enhancing corporate value.
  7. (7)Corporate governance systems are in place to ensure sufficient internal control in terms of compliance and internal auditing.
  8. (8)The company has not introduced anti-takeover measures. In our view, anti-takeover measures limit the rights of shareholders to buy and sell shares freely and unnecessary for listed companies unless there is a risk of significant impairment of corporate value and common interest of shareholders.

iv) Adequate information disclosure and a dialogue with investors

NAM believes that companies need to uphold their accountability through timely and proper public disclosure of the matters stated in 1. through 3. above in order for us to precisely grasp the state of investee companies and that they also need to engage in dialogues actively with investors to properly reflect investors' opinions in their business management.
If the companies are found to have engaged in any activity that is materially harmful to corporate value, we will request sufficient disclosure and explanations on investigations of cause, clarification of where responsibility lies, and the formulation and dissemination of effective recurrence countermeasures.