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>Companies are presumably allocating cash to shareholder returns rather than investing in growth. Lack of investment in growth may lead to slower profit growth, which leads to lower valuations.</li>
<li>There is concern that management may be hesitant to take risks. Since no shareholder hates shareholder returns, they may be easily diverted to share repurchases that don't require risk-taking decision.</li>
<li>Although the expected share repurchase will limit the risk of sharp decline in the stock prices, modest growth investments are likely to prevent the expansion of multiples.</li>
</ul>


Companies are presumably allocating cash to shareholder returns rather than investing in growth. Lack of investment in growth may lead to slower profit growth, which leads to lower valuations.
There is concern that management may be hesitant to take risks. Since no shareholder hates shareholder returns, they may be easily diverted to share repurchases that don't require risk-taking decision.
Although the expected share repurchase will limit the risk of sharp decline in the stock prices, modest growth investments are likely to prevent the expansion of multiples.


Companies that Buy Back Their Own Shares but Do Not Increase Their Share Price Should Consider Why

<ul>
<li>Large audit firms focus on more profitable business and improving the profitability of their audit services. Consequently, high-risk firms that have been withdrawn from large firms flow to small-and-medium-sized firms.</li>
<li>"Enhancement of governance, including third-party evaluation function" is crucial to ensure that the audit firm has system to oversee and objectively determine the appropriateness of audit process and audit opinion.</li>
<li>Smaller audit firms will comply with the guidelines just for show, but only when future problems with high-risk firms arise will effective reforms be made in accordance with the guidelines.</li>
</ul>


Large audit firms focus on more profitable business and improving the profitability of their audit services. Consequently, high-risk firms that have been withdrawn from large firms flow to small-and-medium-sized firms.
"Enhancement of governance, including third-party evaluation function" is crucial to ensure that the audit firm has system to oversee and objectively determine the appropriateness of audit process and audit opinion.
Smaller audit firms will comply with the guidelines just for show, but only when future problems with high-risk firms arise will effective reforms be made in accordance with the guidelines.


Is Effective Reform Only Possible After Future Problems with High-Risk Companies?

<ul>
<li>Looking back at the genesis of the scandals that are still recurring, the cause has always been lack of awareness of legal compliance. When cross-shareholdings were prevalent, shareholders were underestimated.</li>
<li>How widespread has the understanding of the concept of shareholder capitalism, including the cost of capital, become? The starting point is that management must comply with legal compliance.</li>
<li>The problem is that the statutory auditors had the authority to function even though independent directors didn’t exist. Diversity is important to create a board of directors that can dissent.</li>
</ul>


Looking back at the genesis of the scandals that are still recurring, the cause has always been lack of awareness of legal compliance. When cross-shareholdings were prevalent, shareholders were underestimated.
How widespread has the understanding of the concept of shareholder capitalism, including the cost of capital, become? The starting point is that management must comply with legal compliance.
The problem is that the statutory auditors had the authority to function even though independent directors didn’t exist. Diversity is important to create a board of directors that can dissent.


How Much Progress Has Been Made in Understanding the Concept of Shareholder Capitalism Since 1990s?

<ul>
<li>While it's natural for a rational investor to disagree with a company that cannot generate a return commensurate with the risk, the existence of cross-shareholdings in Japanese companies complicates matters.</li>
<li>The benefit of listing is raising capital on favorable terms by trading shares at a value greater than shareholders' equity, but there are not many Japanese companies trading at premium.</li>
<li>Going private is one option for companies that are unable to find growth investment opportunities and accumulate cash on their balance sheets. In this regard, Japanese equities are of interest.</li>
</ul>


While it's natural for a rational investor to disagree with a company that cannot generate a return commensurate with the risk, the existence of cross-shareholdings in Japanese companies complicates matters.
The benefit of listing is raising capital on favorable terms by trading shares at a value greater than shareholders' equity, but there are not many Japanese companies trading at premium.
Going private is one option for companies that are unable to find growth investment opportunities and accumulate cash on their balance sheets. In this regard, Japanese equities are of interest.


Going Private Is an Option for Both the Companies and Investors

Index Rebal Trades & Special Situations, Quiddity Advisors

Janaghan Jeyakumar, CFA

Index Rebal Trades & Special Situations

Quiddity Advisors

Pan-Asia Catalysts/Events

Event-Driven

<ul>
<li>Quiddity's "Who is Ready" series of insights aims to objectively identify names listed on the Tokyo Stock Exchange that are potential additions to the TOPIX Index in future.</li>
<li>This insight is a follow-up to <a href="https://www.smartkarma.com/insights/topix-inclusions-who-is-ready-oct-2022" target="_blank" data-smartkarma-citation="insights:81556" rel="noopener">TOPIX Inclusions: Who Is Ready (Oct 2022)</a> </li>
<li>At present, there are 60 names that satisfy all of these conditions and there are more names that are close to being in that group.</li>
</ul>


Quiddity's "Who is Ready" series of insights aims to objectively identify names listed on the Tokyo Stock Exchange that are potential additions to the TOPIX Index in future.
This insight is a follow-up to TOPIX Inclusions: Who Is Ready (Oct 2022) 
At present, there are 60 names that satisfy all of these conditions and there are more names that are close to being in that group.


TOPIX Inclusions: Who Is Ready (Dec 2022)

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)

Is Effective Reform Only Possible After Future Problems with High-Risk Companies?

I would like to discuss the issues on the Nikkei article of November 17, "Mandating Governance Guidelines for Small and Medium-Sized Auditing Firms...

Metrical Inc

How Much Progress Has Been Made in Understanding the Concept of Shareholder Capitalism Since 1990s?

I would like to discuss the issues on the November 15 Nikkei article, "Message from Yamaichi Securities' Failure: Unfinished Accounting and...

Metrical Inc

Going Private Is an Option for Both the Companies and Investors

I would like to discuss the issues on the Nikkei article of November 7, "Are Companies Fulfilling Their Listing Obligations?"

Metrical Inc

TOPIX Inclusions: Who Is Ready (Dec 2022)

There are currently four names identified with high likelihood of TOPIX Inclusion within the next few months: Medley, Appier, Chubu Steel, and...

Janaghan Jeyakumar, CFA

Companies that Buy Back Their Own Shares but Do Not Increase Their Share Price Should Consider Why

I would like to discuss the issues on the Nikkei article, "Share buyback quota for 2022 to top 9.2 trillion yen by mid-November.”

Metrical Inc

Is Effective Reform Only Possible After Future Problems with High-Risk Companies?

I would like to discuss the issues on the Nikkei article of November 17, "Mandating Governance Guidelines for Small and Medium-Sized Auditing Firms...

Metrical Inc

How Much Progress Has Been Made in Understanding the Concept of Shareholder Capitalism Since 1990s?

I would like to discuss the issues on the November 15 Nikkei article, "Message from Yamaichi Securities' Failure: Unfinished Accounting and...

Metrical Inc

Going Private Is an Option for Both the Companies and Investors

I would like to discuss the issues on the Nikkei article of November 7, "Are Companies Fulfilling Their Listing Obligations?"

Metrical Inc

TOPIX Inclusions: Who Is Ready (Dec 2022)

There are currently four names identified with high likelihood of TOPIX Inclusion within the next few months: Medley, Appier, Chubu Steel, and...

Janaghan Jeyakumar, CFA