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>Although more companies have recently started to use their cash for shareholder returns, this is still not enough in terms of the dividend payout ratio.</li>
<li>Both sales and profits of companies haven't increased by that amount for past 10 years. The question for the future is whether the cash on hand can be used effectively.</li>
<li>It is hoped that the quality of listed companies on prime market will improve as a result of M&amp;As involving industry restructuring, the dissolution of parent-subsidiary listings and going private.</li>
</ul>


Although more companies have recently started to use their cash for shareholder returns, this is still not enough in terms of the dividend payout ratio.
Both sales and profits of companies haven't increased by that amount for past 10 years. The question for the future is whether the cash on hand can be used effectively.
It is hoped that the quality of listed companies on prime market will improve as a result of M&amp;As involving industry restructuring, the dissolution of parent-subsidiary listings and going private.


The Key Is to Be Able to Use Cash on Hand Effectively in the Future

<ul>
<li>Given the history of changes in the external environment that have changed managers' mindsets all at once, inflation and rising foreign shareholdings are likely to be the catalysts for change.</li>
<li>Given that some companies still do not show capital efficiency as a KPI, it is dangerous to expect much from individual companies' efforts to improve capital efficiency.</li>
<li>Whether or not to engage in management improvement is a matter for managers, but the catalyst is often an increase in foreign shareholdings. Changes are taking place in some companies.</li>
</ul>


Given the history of changes in the external environment that have changed managers' mindsets all at once, inflation and rising foreign shareholdings are likely to be the catalysts for change.
Given that some companies still do not show capital efficiency as a KPI, it is dangerous to expect much from individual companies' efforts to improve capital efficiency.
Whether or not to engage in management improvement is a matter for managers, but the catalyst is often an increase in foreign shareholdings. Changes are taking place in some companies.


What Changes in the External Environment Are Changing the Mindset of Managers?

<ul>
<li>8 years after the introduction of Corporate Governance Code and "Ito Report," which showed the relationship between P/B and ROE as the cornerstone of management, few companies improved their management.</li>
<li>Companies with sustained share price growth were executing excellent growth policies and IR disclosures that were likely learned from their engagement with overseas investors.</li>
<li>It takes a certain period of time for a company to learn through engagement, for the results to show up in improved management, and for other investors to notice it.</li>
</ul>


8 years after the introduction of Corporate Governance Code and "Ito Report," which showed the relationship between P/B and ROE as the cornerstone of management, few companies improved their management.
Companies with sustained share price growth were executing excellent growth policies and IR disclosures that were likely learned from their engagement with overseas investors.
It takes a certain period of time for a company to learn through engagement, for the results to show up in improved management, and for other investors to notice it.


Learning Through Engagement Takes a Certain Period of Time to Show Results

<ul>
<li>The TSE is in a long-term battle to improve the quality of the prime market while maintaining lax listing standards that do not fit the prime market concept.</li>
<li>If passive funds move to JPX Prime 150 Index, which would increase the divergence between stock prices of high quality and low quality companies, it might motivate the companies more.</li>
<li>If there is little difference between performance of TOPIX and JPX Prime 150, the passive funds will be satisfied with this index, and the TOPIX engagement problem will be eliminated.</li>
</ul>


The TSE is in a long-term battle to improve the quality of the prime market while maintaining lax listing standards that do not fit the prime market concept.
If passive funds move to JPX Prime 150 Index, which would increase the divergence between stock prices of high quality and low quality companies, it might motivate the companies more.
If there is little difference between performance of TOPIX and JPX Prime 150, the passive funds will be satisfied with this index, and the TOPIX engagement problem will be eliminated.


Having Ended Its Traditional Role, TOPIX Faces Several Challenges

<ul>
<li>While many listed companies have already established formal standards, TSE plans to establish rules with higher hurdles to ensure the independence of listed subsidiaries and other dependent companies.</li>
<li>It would make more sense for TSE to question why the parent company maintains the subsidiary's listing, and minority shareholders of both parent and subsidiary would be more interested.</li>
<li>Certainly TSE's "independence criteria" for independent directors is loose, which has negatively impacted the operation of the Board of Directors, so it would be effective to re-establish the criteria.</li>
</ul>


While many listed companies have already established formal standards, TSE plans to establish rules with higher hurdles to ensure the independence of listed subsidiaries and other dependent companies.
It would make more sense for TSE to question why the parent company maintains the subsidiary's listing, and minority shareholders of both parent and subsidiary would be more interested.
Certainly TSE's "independence criteria" for independent directors is loose, which has negatively impacted the operation of the Board of Directors, so it would be effective to re-establish the criteria.


Independence of BOD Is Necessary, but Can Independence of Subordinate Companies Really Be Ensured?

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)

The Key Is to Be Able to Use Cash on Hand Effectively in the Future

I would like to discuss the issues on the 31 May Nikkei article, "Japan's stock market rises, gap with the US in ability to generate cash: the...

Metrical Inc

What Changes in the External Environment Are Changing the Mindset of Managers?

I would like to discuss the issues on the May 30 Nikkei article on "Mini-Buffet in the World: Expectations of Change Over Undervalued Japanese...

Metrical Inc

Learning Through Engagement Takes a Certain Period of Time to Show Results

I would like to discuss the issues on the May 29 Nikkei article on "Will the Activist Market Last Only One Year? Corporate Reforms Must Start with...

Metrical Inc

Having Ended Its Traditional Role, TOPIX Faces Several Challenges

I would like to discuss the outline of the material disclosed by the TSE on May 26, "Publication of Component Issues and Calculation Procedure for...

Metrical Inc

Independence of BOD Is Necessary, but Can Independence of Subordinate Companies Really Be Ensured?

I would like to discuss the issues on the materials of the TSE's third "Study Group on Minority Shareholder Protection in Dependent Listed...

Metrical Inc