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>Forcing companies to submit ROE targets as measure to counter the fact that half of companies languish below 1x P/B is like a teacher asking students to submit an assignment.</li>
<li>If that motivates the management, good for them. However, in our experience, only a small percentage of students are motivated by the teacher's words and see their performance improve.</li>
<li>If companies are asked to submit ROE targets, they shouldn't simply meet them by changing capital structure through shareholder returns, but should achieve them through investments for future earnings growth.</li>
</ul>


Forcing companies to submit ROE targets as measure to counter the fact that half of companies languish below 1x P/B is like a teacher asking students to submit an assignment.
If that motivates the management, good for them. However, in our experience, only a small percentage of students are motivated by the teacher's words and see their performance improve.
If companies are asked to submit ROE targets, they shouldn't simply meet them by changing capital structure through shareholder returns, but should achieve them through investments for future earnings growth.


A Few Students Were Motivated by Assignments from Their Teachers, and They Performed Differently

<ul>
<li>TSE will probably settle on a compromise: "transitional measures will be completed as soon as possible," while "measures to minimize negative impacts will also be adopted.</li>
<li>Of 271 companies that failed to meet prime market listing criteria and are allowed to list under transitional measures, 227 (98%) don’t have tradable market capitalization of 10 billion yen.</li>
<li>The market capitalization of companies that disclosed plans to meet listing criteria within 3 years increased, while those that stated that they would meet criteria in over 3 years decreased.</li>
</ul>


TSE will probably settle on a compromise: "transitional measures will be completed as soon as possible," while "measures to minimize negative impacts will also be adopted.
Of 271 companies that failed to meet prime market listing criteria and are allowed to list under transitional measures, 227 (98%) don’t have tradable market capitalization of 10 billion yen.
The market capitalization of companies that disclosed plans to meet listing criteria within 3 years increased, while those that stated that they would meet criteria in over 3 years decreased.


Transitional Measures Will End in 2-3 Years, but Will Prime Market Listing Criteria Remain the Same?

<ul>
<li>People who can make business strategy decisions that are economic sense should be hired to serve on the board, not necessarily investors or financial experts.</li>
<li>If the motivation to increase corporate value is weak, linking the compensation of directors to the expansion of corporate value or granting them the company's stock is an alternative.</li>
<li>Investors aren’t necessarily the only ones with conflicts of interest with shareholders. Founders hold significant shares, and the same problem can be assumed for directors from financial institutions with cross-shareholdings.</li>
</ul>


People who can make business strategy decisions that are economic sense should be hired to serve on the board, not necessarily investors or financial experts.
If the motivation to increase corporate value is weak, linking the compensation of directors to the expansion of corporate value or granting them the company's stock is an alternative.
Investors aren’t necessarily the only ones with conflicts of interest with shareholders. Founders hold significant shares, and the same problem can be assumed for directors from financial institutions with cross-shareholdings.


It's Not Who The Directors Come From, but Their Skills and Ability to Fulfill Their Fiduciary Duties

<ul>
<li>Since the median P/B of companies listed on TSE is 1.0, Japanese companies will continue to attract the keen attention of activist investors around the world.</li>
<li>Many Japanese managers can rest on their laurels with share prices that don't command premium because of silent shareholders like cross-holding and BoJ that little care about share price performance.</li>
<li>There are many companies that publish management strategies that only give a sense of doing, and the stock price does not fall but keeps not significantly outperforming.</li>
</ul>


Since the median P/B of companies listed on TSE is 1.0, Japanese companies will continue to attract the keen attention of activist investors around the world.
Many Japanese managers can rest on their laurels with share prices that don't command premium because of silent shareholders like cross-holding and BoJ that little care about share price performance.
There are many companies that publish management strategies that only give a sense of doing, and the stock price does not fall but keeps not significantly outperforming.


A Company Invested by an Activist Should Understand that It’s Not Fully Exploiting Its Potential

<ul>
<li>This fiscal year, total dividends paid haven't increased compared to recovering total net profit. Consequently, the dividend payout ratio has fallen to the low 30% level, normal level for FY2020.</li>
<li>The correlations of market capitalization to net profit and to dividends paid both declined from those of the past 10 years, indicating lack of confidence in profits in year ahead.</li>
<li>Simply raising the dividend has limited effect on stock price increases. Given that the dividend payout ratio has declined, companies are required to explain how they are using their cash.</li>
</ul>


This fiscal year, total dividends paid haven't increased compared to recovering total net profit. Consequently, the dividend payout ratio has fallen to the low 30% level, normal level for FY2020.
The correlations of market capitalization to net profit and to dividends paid both declined from those of the past 10 years, indicating lack of confidence in profits in year ahead.
Simply raising the dividend has limited effect on stock price increases. Given that the dividend payout ratio has declined, companies are required to explain how they are using their cash.


More Effective for a Company to Show Background when It Raises Its Dividend Outlook

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)

A Few Students Were Motivated by Assignments from Their Teachers, and They Performed Differently

I have considered the Nikkei article on December 19, "TSE Opens 'Pandora's Box': Begins Discussing Issues of P/B Below 1x."

Metrical Inc

Transitional Measures Will End in 2-3 Years, but Will Prime Market Listing Criteria Remain the Same?

I would like to discuss a summary of the materials disclosed by the TSE on November 25 for "The 4th Follow-up Meeting on the Revision of Market...

Metrical Inc

It's Not Who The Directors Come From, but Their Skills and Ability to Fulfill Their Fiduciary Duties

I would like to discuss the issues on the Nikkei article, "METI proposes 'investors as outside directors' to promote mutual understanding with the...

Metrical Inc

A Company Invested by an Activist Should Understand that It’s Not Fully Exploiting Its Potential

I would like to discuss the issues on the Nikkei article, " EY Japan Provides Comprehensive Support for Shareholder Relations, Encourages...

Metrical Inc

More Effective for a Company to Show Background when It Raises Its Dividend Outlook

I would like to discuss the issues on the Nikkei article, "Listed companies, 250 companies revise dividend outlook upward for FY3/2023."

Metrical Inc