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>Since listed companies have abundant cash reserves even if interest rates rise, they will use their cash to pay down debt but they are unlikely to use it for investments.</li>
<li>Cash is piling up on balance-sheet resulting from the inability to invest in growth and get out of the game of sharing the pie of the existing stable domestic market.</li>
<li>In order to raise profit margins significantly, a manager may find growth and invest in non-existing businesses or introduce game-changing products that disrupt the stability of the market.</li>
</ul>


Since listed companies have abundant cash reserves even if interest rates rise, they will use their cash to pay down debt but they are unlikely to use it for investments.
Cash is piling up on balance-sheet resulting from the inability to invest in growth and get out of the game of sharing the pie of the existing stable domestic market.
In order to raise profit margins significantly, a manager may find growth and invest in non-existing businesses or introduce game-changing products that disrupt the stability of the market.


Risk Taking by Managers Is Key, Weather Changing the Game or Creating a New Business

<ul>
<li>Since the TSE's disclosure request includes specific keywords, companies will not be able to refuse to disclose these keywords to investors if they request it in the future.</li>
<li>If companies expect revaluation of their stock price that goes beyond temporary rise in share price, it's necessary to present growth story that goes beyond measures to strengthen shareholder returns.</li>
<li>Since companies will no longer have a reason to refuse to disclose keywords, activist investors can expect to have more positive discussions with management in the future.</li>
</ul>


Since the TSE's disclosure request includes specific keywords, companies will not be able to refuse to disclose these keywords to investors if they request it in the future.
If companies expect revaluation of their stock price that goes beyond temporary rise in share price, it's necessary to present growth story that goes beyond measures to strengthen shareholder returns.
Since companies will no longer have a reason to refuse to disclose keywords, activist investors can expect to have more positive discussions with management in the future.


Expecting Fewer Refusals to Disclose Management Issues and More Positive Discussions with Management

<ul>
<li>Fujitec's board composition was above average of Japanese companies in form. This was an opportunity to see an example of a board that is formally structured but not actually functioning.</li>
<li>Bringing manager's buddy on as an "independent director" is not likely to contribute to sustainable growth in corporate value.</li>
<li>If domestic institutional investors, including passive funds, vote according to the will of the company, it will lead to stagnation of the substance of corporate governance in Japanese companies.</li>
</ul>


Fujitec's board composition was above average of Japanese companies in form. This was an opportunity to see an example of a board that is formally structured but not actually functioning.
Bringing manager's buddy on as an "independent director" is not likely to contribute to sustainable growth in corporate value.
If domestic institutional investors, including passive funds, vote according to the will of the company, it will lead to stagnation of the substance of corporate governance in Japanese companies.


Let Fujitec's Case Be a Lesson to Companies and Investors in Japan

<ul>
<li>While policy holdings have declined, passive funds have appeared among the top shareholders of many companies. The Bank of Japan's ETF purchases have accelerated this growth. </li>
<li>The question is whether the passive funds that have appeared as major shareholders in each company are exercising their voting rights on reasonably reasonable basis that fulfills their fiduciary duties.</li>
<li>In reality, engagement is limited to a few companies due to the large number of portfolio companies and low management fees.This implies that the same is true for proxy voting.</li>
</ul>


While policy holdings have declined, passive funds have appeared among the top shareholders of many companies. The Bank of Japan's ETF purchases have accelerated this growth. 
The question is whether the passive funds that have appeared as major shareholders in each company are exercising their voting rights on reasonably reasonable basis that fulfills their fiduciary duties.
In reality, engagement is limited to a few companies due to the large number of portfolio companies and low management fees.This implies that the same is true for proxy voting.


Passive Funds, Silent Shareholders, Are a Barrier to Corporate Governance

<ul>
<li>Looking at all listed companies over past 10 years, despite the gradual dissolution of cross-holdings, the Total Asset Turnover has not increased and the Equity Ratio level has not changed.</li>
<li>Reducing equity capital through shareholder returns is effective in raising ROE, but ROE is unlikely to rise continuously if the company's cash flow does not continue to increase.</li>
<li>ROA is the product of the ROE components of net sales and asset turnover, excluding financial leverage. ROA is a key factor for increasing valuations.</li>
</ul>


Looking at all listed companies over past 10 years, despite the gradual dissolution of cross-holdings, the Total Asset Turnover has not increased and the Equity Ratio level has not changed.
Reducing equity capital through shareholder returns is effective in raising ROE, but ROE is unlikely to rise continuously if the company's cash flow does not continue to increase.
ROA is the product of the ROE components of net sales and asset turnover, excluding financial leverage. ROA is a key factor for increasing valuations.


Do Companies Tend to Focus on Shareholder Returns Because They Can't Find Investment Opportunities?

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)

Risk Taking by Managers Is Key, Weather Changing the Game or Creating a New Business

I would like to discuss the issues on the March 2 Nikkei article, "Economy without Shakeout, 60% of Listed Companies with Profit Margins of Below...

Metrical Inc

Expecting Fewer Refusals to Disclose Management Issues and More Positive Discussions with Management

I would like to discuss the issues on the February 27 Nikkei article, "Activist investors bandwagon on TSE's 'P/B over 1x' request.”

Metrical Inc

Let Fujitec's Case Be a Lesson to Companies and Investors in Japan

I would like to discuss the issues on the March 2 Nikkei article, "Companies should improve their governance, not run away from activist investors."

Metrical Inc

Passive Funds, Silent Shareholders, Are a Barrier to Corporate Governance

I would like to discuss the issues on the February 28 Nikkei article, "Growing Passive Investment is a Hotbed of Low Corporate Profitability;...

Metrical Inc

Do Companies Tend to Focus on Shareholder Returns Because They Can't Find Investment Opportunities?

I would like to discuss the February 24 Nikkei article, "The Barrenness of the Low P/B Stock Bubble: TSE Distances Itself from 'Denominator...

Metrical Inc