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>To avoid being delisted from the TOPIX components, a company must reduce its cross-holdings and raise its stock price. Strengthening engagement with investors is also an effective strategy.</li>
<li>While the TOPIX is clearly defined based on market capitalization of free-floating shares, the TSE Prime Market exhibits a certain ambiguity that seems to favor listed companies over investors.</li>
<li>Stocks that are removed from TOPIX will need to attract investor attention through outperforming earnings more than ever before. They will also lose opportunities for engagement with domestic institutional investors.</li>
</ul>


To avoid being delisted from the TOPIX components, a company must reduce its cross-holdings and raise its stock price. Strengthening engagement with investors is also an effective strategy.
While the TOPIX is clearly defined based on market capitalization of free-floating shares, the TSE Prime Market exhibits a certain ambiguity that seems to favor listed companies over investors.
Stocks that are removed from TOPIX will need to attract investor attention through outperforming earnings more than ever before. They will also lose opportunities for engagement with domestic institutional investors.


Compared to the TOPIX, Which Has Clear Criteria, the TSE Prime Market Appears Vague

<ul>
<li>While having more board members with “financial skills” is expected to contribute to increasing corporate value, many companies still struggle to improve their capital profitability.</li>
<li>Possible reasons for this include an inaccurate skills matrix, a lack of financial strategies aimed at increasing corporate value, and a board of directors—including outside directors—that is not functioning effectively.</li>
<li>To implement management practices aimed at increasing corporate value, all board members must understand corporate finance so that the board of directors can discuss strategies to achieve this goal.</li>
</ul>


While having more board members with “financial skills” is expected to contribute to increasing corporate value, many companies still struggle to improve their capital profitability.
Possible reasons for this include an inaccurate skills matrix, a lack of financial strategies aimed at increasing corporate value, and a board of directors—including outside directors—that is not functioning effectively.
To implement management practices aimed at increasing corporate value, all board members must understand corporate finance so that the board of directors can discuss strategies to achieve this goal.


Why Is Capital Profitability Slow to Improve, Even Though More Board Members Have “Finance Skills”?

<ul>
<li>Companies planning IPO on Growth Market now have no choice but to aim for market capitalization of 10 billion yen. Companies with lower market capitalization will list on Standard Market.</li>
<li>The issue of declining quality in Standard Market—as companies with low growth and small market capitalizations list, and companies with small market capitalizations migrate from Growth Market—will come into focus.</li>
<li>Can a company that IPOs 15 years after its founding be considered a growth company? This highlights the seriousness of the problem that there are few growth companies in Japan.</li>
</ul>


Companies planning IPO on Growth Market now have no choice but to aim for market capitalization of 10 billion yen. Companies with lower market capitalization will list on Standard Market.
The issue of declining quality in Standard Market—as companies with low growth and small market capitalizations list, and companies with small market capitalizations migrate from Growth Market—will come into focus.
Can a company that IPOs 15 years after its founding be considered a growth company? This highlights the seriousness of the problem that there are few growth companies in Japan.


Won’t the “Market Reform” of TSE Growth Market End up Merely Creating a “10-Billion-Yen Club”?

<ul>
<li>Cash flow is of the utmost importance for companies operated under the going-concern assumption. Therefore, companies and businesses are valued by discounting their cash flows at the cost of capital.</li>
<li>To determine whether there have been improvements in each item this year compared to the previous one, it seems that using an accounting measure such as ROIC is convenient approach.</li>
<li>The reason Japanese companies have low operating margins is that many have low gross profit margins. Management strategy—including allocation of resources to develop products with high gross profit margins—is necessary.</li>
</ul>


Cash flow is of the utmost importance for companies operated under the going-concern assumption. Therefore, companies and businesses are valued by discounting their cash flows at the cost of capital.
To determine whether there have been improvements in each item this year compared to the previous one, it seems that using an accounting measure such as ROIC is convenient approach.
The reason Japanese companies have low operating margins is that many have low gross profit margins. Management strategy—including allocation of resources to develop products with high gross profit margins—is necessary.


Creating Businesses that Generate High Gross Profit Margins Is the Key to Generating Cash Flow

<ul>
<li>For companies that view the measures to reduce administrative burden of AGM as part of compensation for filing annual securities reports before AGM, only a few days’ earlier submission is possible.</li>
<li>Meanwhile, with returns on capital still insufficient, there is growing discussion about increasing the number of individual investors as a way to prepare for attacks from foreign investors.</li>
<li>With many companies still failing to improve stock valuations and return on equity, it makes no sense to increase the number of individual shareholders simply to get corporate proposals approved.</li>
</ul>


For companies that view the measures to reduce administrative burden of AGM as part of compensation for filing annual securities reports before AGM, only a few days’ earlier submission is possible.
Meanwhile, with returns on capital still insufficient, there is growing discussion about increasing the number of individual investors as a way to prepare for attacks from foreign investors.
With many companies still failing to improve stock valuations and return on equity, it makes no sense to increase the number of individual shareholders simply to get corporate proposals approved.


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)

Compared to the TOPIX, Which Has Clear Criteria, the TSE Prime Market Appears Vague

I would like to discuss the August 28 Nikkei article titled “TOPIX Reform Moves Forward, with Index Composition Set to Fall Below 1,000; Excluded...

Metrical Inc

Why Is Capital Profitability Slow to Improve, Even Though More Board Members Have “Finance Skills”?

I would like to discuss the issues on the August 29 Nikkei article titled “Over 40% of Directors and Auditors at Major Companies Possess Financial...

Metrical Inc

Won’t the “Market Reform” of TSE Growth Market End up Merely Creating a “10-Billion-Yen Club”?

I would like to discuss the August 29 Nikkei article “Average Market Cap of TSE IPOs Hits Record High; Decline in ‘Small-Scale Listings’ Expected;...

Metrical Inc

Creating Businesses that Generate High Gross Profit Margins Is the Key to Generating Cash Flow

I would like to discuss the issues on the August 13 Nikkei article titled “Management with an Awareness of the True Cost of Capital.”

Metrical Inc

Out of Sight, Out of Mind

I would like to discuss the August 24 Nikkei article, “Abolition of Written Distribution of AGM Materials: Reducing the Burden on Companies, a...

Metrical Inc