Executive Director, Metrical Inc

Aki Matsumoto

Executive Director

Independent Leading Corporate Governance Research

Metrical Inc

METRICAL INC. is an independent leading Corporate Governance research firm in Japan where Corporate Governance is increasingly recognized as an important element on corporate management in these days. Thus, CG research and solutions would become an essential component of global capital markets and play important to contribute to transparency of the markets and maximize shareholders’ value in Japan. 

METRICAL INC. provides Corporate Governance research and analysis including rating services, and  also offers investment research and IR services with solutions and customized profound research on CG and IR issues.

<ul>
<li>Despite disclosing "improvement measures," many companies have yet to see their stock prices rise sufficiently, which is one reason why an increasing number of companies announce enhanced shareholder returns.</li>
<li>2003 and 2013 were the starting point for monetary easing and excess liquidity helped raise P/B. Whether BOJ will head for the exit or continue easing is a major factor.</li>
<li>Since this stock price rally was brought about by an increase in P/E multiples, further stock price appreciation will require continued profit growth, i.e., an increase in ROE.</li>
</ul>


Despite disclosing "improvement measures," many companies have yet to see their stock prices rise sufficiently, which is one reason why an increasing number of companies announce enhanced shareholder returns.
2003 and 2013 were the starting point for monetary easing and excess liquidity helped raise P/B. Whether BOJ will head for the exit or continue easing is a major factor.
Since this stock price rally was brought about by an increase in P/E multiples, further stock price appreciation will require continued profit growth, i.e., an increase in ROE.


Higher P/E Is Driver for This Stock Rally. Profit Growth Is Necessary for Further Stock Rally

<ul>
<li>It's necessary to clearly present cash allocation policy to investors and communicate with them, but unless this policy is convincing and feasible, investors cannot envision an increase in corporate value.</li>
<li>Companies that use ROE or ROIC as KPIs and disclose their cost of capital are still limited. The low return on cash flow may be the reason behind this.</li>
<li>As TOPIX is correlating more rapidly with nominal GDP than with P/B after 2020, there's increasing need to communicate to investors that free cash flow will grow through cash allocation.</li>
</ul>


It's necessary to clearly present cash allocation policy to investors and communicate with them, but unless this policy is convincing and feasible, investors cannot envision an increase in corporate value.
Companies that use ROE or ROIC as KPIs and disclose their cost of capital are still limited. The low return on cash flow may be the reason behind this.
As TOPIX is correlating more rapidly with nominal GDP than with P/B after 2020, there's increasing need to communicate to investors that free cash flow will grow through cash allocation.


The Essence of the Matter Is the Low Return on Cash Flow Generated by the Company's Business

<ul>
<li>Metrical's research shows that % of female board members has significant positive correlation with ROE(2019), with ROA(2020), with ROA and Tobin's Q(2021), and with ROE, ROA and Tobin's Q(June 2023).</li>
<li>A measure of a company's seriousness about diversity is the ratio of internal executive directors. Female directors rely heavily on outside directors and are rarely promoted from within the company.</li>
<li>To bring value to a company, diversity must be built in at every workplace level, but fewer female employees than male are promoted to managerial positions in two-thirds of companies.</li>
</ul>


Metrical's research shows that % of female board members has significant positive correlation with ROE(2019), with ROA(2020), with ROA and Tobin's Q(2021), and with ROE, ROA and Tobin's Q(June 2023).
A measure of a company's seriousness about diversity is the ratio of internal executive directors. Female directors rely heavily on outside directors and are rarely promoted from within the company.
To bring value to a company, diversity must be built in at every workplace level, but fewer female employees than male are promoted to managerial positions in two-thirds of companies.


For Diversity to Be Perceived as Not Special, Managers' Recognition Needs to Move Toward DE&I

<ul>
<li>Metrical's past analysis also shows that a company's capital allocation to investors is effective in raising valuations, so a proper allocation between investment and shareholder return is a baseline.</li>
<li>The correlation analysis between TOPIX and nominal GDP suggests that the shift from deflation to inflation has triggered overseas investors to focus on the further expansion of company profits.</li>
<li>While average P/B and ROE have remained flat, the rise in P/E has boosted the stock recently. This suggests that further share price appreciation will require an increase in profits.</li>
</ul>


Metrical's past analysis also shows that a company's capital allocation to investors is effective in raising valuations, so a proper allocation between investment and shareholder return is a baseline.
The correlation analysis between TOPIX and nominal GDP suggests that the shift from deflation to inflation has triggered overseas investors to focus on the further expansion of company profits.
While average P/B and ROE have remained flat, the rise in P/E has boosted the stock recently. This suggests that further share price appreciation will require an increase in profits.


Companies Should Show a Path to Accelerated Profit Growth Rather than Shareholder Returns

<ul>
<li>There are concerns about the ability of female directors hired solely for the purpose of recruiting women directors without a reasonable director nomination process to demonstrate strength on the BOD.</li>
<li>Board diversity issues were considered a low priority until more institutional investors voted against the top management of companies with zero female directors at shareholder meetings.</li>
<li>Given the small population of full-time female employees and the relatively young age bias, it's likely that even in 2030, most female board members will be relying on outside talent.</li>
</ul>


There are concerns about the ability of female directors hired solely for the purpose of recruiting women directors without a reasonable director nomination process to demonstrate strength on the BOD.
Board diversity issues were considered a low priority until more institutional investors voted against the top management of companies with zero female directors at shareholder meetings.
Given the small population of full-time female employees and the relatively young age bias, it's likely that even in 2030, most female board members will be relying on outside talent.


Even if Proper Nomination Process Is Skipped, It May Be Considered Better than Zero Women Directors

Japan

The TOPIX, also known as the Tokyo Stock Price Index, is a capitalization-weighted index of all companies listed on the First Section of the Tokyo Stock Exchange. The index is supplemented by the subindices of the 33 industry sectors. The index calculation excludes temporary issues and preferred stocks, and has a base value of 100 as of January 4, 1968.

TSE Tokyo Price Index TOPIX (TPX INDEX)

Higher P/E Is Driver for This Stock Rally. Profit Growth Is Necessary for Further Stock Rally

I would like to discuss the issues on the August 7 Nikkei article, "Summer of Stocking Up on Super Undervalued Stocks: Stronger Shareholder Returns...

Metrical Inc

The Essence of the Matter Is the Low Return on Cash Flow Generated by the Company's Business

I would like to discuss the issues on the August 9 Nikkei Newspaper article, "Deloitte Launches Specialized Team to Support P/B Improvement for...

Metrical Inc

For Diversity to Be Perceived as Not Special, Managers' Recognition Needs to Move Toward DE&I

I would like to discuss the issues on the July 9 Nikkei Newspaper article, "Money for Companies with Active Women's Activities."

Metrical Inc

Companies Should Show a Path to Accelerated Profit Growth Rather than Shareholder Returns

I would like discuss the issues on the July 24 Nikkei article, Companies Improve Value by Honing the Art of Interacting with the Market."

Metrical Inc

Even if Proper Nomination Process Is Skipped, It May Be Considered Better than Zero Women Directors

I would like to discuss the issues on the July 20 Nikkei article, Harmonic Drive Systems' First Female Director in 53 Years: Competition Intensifies."

Metrical Inc