NRI Papers
No.148 November 1 , 2009
  Principles Maximizing Enterprise Value Expected by Institutional Investors
— Engagement Activities and Issues Facing Japanese Companies —
 
Sadayuki HORIE and Sung-Yun KIM
   Institutional investors are involved in invested companies in diverse ways such as exchanging opinions with company executives about management policy in addition to exercising their voting rights and submitting shareholder proposals. In some situations, company executives ask their opinions about the strategy of business operations. These reciprocal interactions are known as "engagement activities." In recent years, an increasing number of institutional investors have been endeavoring to increase return on equity investments through these activities.
   Engagement activities differ from investor to investor depending on how they view enterprise value. This difference stems from viewpoints focusing on (1) market capitalization in the stock market, (2) business value or (3) intangible assets. Viewpoint (3) valuates the effects that intangible assets such as corporate culture and employee loyalty have on business performance, and is close to the way of thinking of executives. Investors who take this approach have much in common with the interests of a company's management team.
   With an increasing number of investors selecting target companies according to enterprise value from a long-term perspective, this shift of focus can be regarded as returning to the fundamental principles of investment behavior. In response, companies must also follow these principles in managing business activities. What are important under these principles include the maximization of business value and making the best use of intangible assets that contribute to higher management quality. For these purposes, trustworthy relationships must be established with core shareholders as part of the requirements essential to maximize enterprise value.
   When consideration is given to the limitations that Japanese investors present and the future current of investment activities, it is inevitable that Japanese companies need to deal with overseas investors. Companies as well as investors must act appropriately and remind themselves of the principles of a capitalist economy that lead to the increased productivity of society overall. By so doing, companies and investors must move forward together.
Contents
I Investors Have Diverse Purposes
II Engagement Activities
III Investors' Perspectives on Enterprise Value
IV Corporate Management Required to Follow Principles
V The Reality that Japanese Companies Should Reconsider

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