Many see Japan as a value play. The real opportunity is its high number of quality companies (250+ with >40% gross margins) that were historically mismanaged. Ongoing governance reforms are now unlocking the potential of these high-margin franchises.

For 30 years, Japanese firms retained profits instead of returning capital, accumulating huge cash and asset piles on their balance sheets. Now, the Tokyo Stock Exchange is pushing for buybacks and dividends, creating a powerful catalyst for value realization that is independent of new earnings generation.

A board member's role includes flagging strategic risks, including geopolitical exposure that could drastically limit future acquirers or prevent an IPO. Advising a CEO to relocate teams from a high-risk country is not operational meddling, but a core governance duty.

For years, Japan was a value trap: cheap companies with poor governance hoarded cash. The game changed when Prime Minister Shinzo Abe introduced stewardship and governance codes, creating a top-down, government-backed catalyst for companies to finally improve capital allocation and unlock shareholder value.

Superior returns can come from a firm's structure, not just its stock picks. By designing incentive systems and processes that eliminate 'alpha drags'—like short-term pressures, misaligned compensation, and herd behavior—a firm can create a durable, structural competitive advantage that boosts performance.

Investment research suggests the significant performance signal in governance isn't achieving a perfect score, but rather avoiding companies in the worst decile. The key is to steer clear of clear red flags—like misaligned boards or poor capital allocation—as this is where underperformance is most clearly correlated.

The Tokyo Stock Exchange has issued an ultimatum to companies: get your price above book value or be delisted. This is forcing an end to centuries-old practices of corporate cross-ownership and compelling companies to engage in buybacks and other shareholder-friendly actions, providing a powerful catalyst for the market.

When advising a Japanese company focused on societal good over profits, don't just push for buybacks. Frame improved financial performance (e.g., higher ROE) as the key to gaining the operational and financial flexibility needed to sustainably achieve their long-term societal and cultural objectives.

While many investors screen for companies with high Return on Invested Capital (ROIC), a more powerful indicator is the trajectory of ROIC. A company improving from a 4% to 8% ROIC is often a better investment than one stagnant at 12%, as there is a direct correlation between rising ROIC and stock performance.