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>While improving board practices may create value, we should assume that key actions can directly impact on value creation, improving value creation can, in turn, influence improvements in board practices.</li>
<li>Even if a Board of Directors Secretariat is established, many companies will simply set up such a department as a formality, out of a sense of obligation to follow suit.</li>
<li>Outside directors taking the initiative in board meetings is very important. To that end, in companies where outside directors constitute a majority, an outside director should serve as chair.</li>
</ul>


While improving board practices may create value, we should assume that key actions can directly impact on value creation, improving value creation can, in turn, influence improvements in board practices.
Even if a Board of Directors Secretariat is established, many companies will simply set up such a department as a formality, out of a sense of obligation to follow suit.
Outside directors taking the initiative in board meetings is very important. To that end, in companies where outside directors constitute a majority, an outside director should serve as chair.


For Outside Directors to Fulfill Duties as Independent Directors—rather than Simply Acting as Guests

<ul>
<li>The fact that many companies have yet to review their business portfolios is the reason why the effective utilization of capital and assets is progressing so slowly.</li>
<li>Even when complying with "interpretation guidelines," it's easy to imagine that companies will fall into two categories: those that set high standards and those that merely meet the minimum requirements.</li>
<li>In Japan, where secured loans have traditionally been dominant, the historical emphasis on assets that could be used as collateral may have influenced management’s preference for maintaining high cash reserves.</li>
</ul>


The fact that many companies have yet to review their business portfolios is the reason why the effective utilization of capital and assets is progressing so slowly.
Even when complying with "interpretation guidelines," it's easy to imagine that companies will fall into two categories: those that set high standards and those that merely meet the minimum requirements.
In Japan, where secured loans have traditionally been dominant, the historical emphasis on assets that could be used as collateral may have influenced management’s preference for maintaining high cash reserves.


Does the “curse” of Secured Loans Still Influence the Mindset of Managers Today?

<ul>
<li>This third revision of the Corporate Governance Code aims to enhance the effectiveness of the Code’s provisions while building on the momentum of previous revisions.</li>
<li>FSA and TSE aim to return to the original model, in which managers themselves take the initiative in decision-making. However, few companies improved corporate governance practices through managers’ own initiative.</li>
<li>In the area of corporate governance as well, listed companies should be held accountable for how they have improved their corporate governance practices to achieve their goals.</li>
</ul>


This third revision of the Corporate Governance Code aims to enhance the effectiveness of the Code’s provisions while building on the momentum of previous revisions.
FSA and TSE aim to return to the original model, in which managers themselves take the initiative in decision-making. However, few companies improved corporate governance practices through managers’ own initiative.
In the area of corporate governance as well, listed companies should be held accountable for how they have improved their corporate governance practices to achieve their goals.


Focus on How Practices Improve for Value Creation, Not Whether Improved Practices Helps Create Value

<ul>
<li>Under Companies Act, the amount available for profit distribution is based on parent company profits; however, with increased holding companies, parent companies alone often cannot accurately reflect actual business operations.</li>
<li>As an initiative by the company to address the discrepancy between these rules and actual business practices, the use of “reversal of capital reserves” is a commendable approach.</li>
<li>It's certainly true that many companies don't yet provide sufficient shareholder returns. Meantime, investors want to hear about companies’ investment plans and cash allocation strategies aimed at increasing corporate value.</li>
</ul>


Under Companies Act, the amount available for profit distribution is based on parent company profits; however, with increased holding companies, parent companies alone often cannot accurately reflect actual business operations.
As an initiative by the company to address the discrepancy between these rules and actual business practices, the use of “reversal of capital reserves” is a commendable approach.
It's certainly true that many companies don't yet provide sufficient shareholder returns. Meantime, investors want to hear about companies’ investment plans and cash allocation strategies aimed at increasing corporate value.


As for the Amount Eligible for Profit Distribution Under the Rules, That’s One Thing...

<ul>
<li>Most companies simply tack on criteria related to skills/background to rubber-stamp the composition of current board of directors, and a few disclose explanations of these criteria, scouting or nomination policies.</li>
<li>To prevent companies from falling into formalism, evaluations should focus first and foremost on whether they have created value, rather than on improvements in corporate governance practices.</li>
<li>We should not assume that value creation metrics improved simply because board practices improved; rather, companies that have shifted to value-creating management tend to also work on improving board practices.</li>
</ul>


Most companies simply tack on criteria related to skills/background to rubber-stamp the composition of current board of directors, and a few disclose explanations of these criteria, scouting or nomination policies.
To prevent companies from falling into formalism, evaluations should focus first and foremost on whether they have created value, rather than on improvements in corporate governance practices.
We should not assume that value creation metrics improved simply because board practices improved; rather, companies that have shifted to value-creating management tend to also work on improving board practices.


Avoid Letting Companies Fall into Formalism by Aligning Evaluation with Investors' Perspectives

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)

For Outside Directors to Fulfill Duties as Independent Directors—rather than Simply Acting as Guests

I would like to discuss the issues on the July 7 Nikkei article titled “Corporate Governance Guidelines Focus on ‘Improving the Quality’ of Outside...

Metrical Inc

Does the “curse” of Secured Loans Still Influence the Mindset of Managers Today?

I would like to discuss the issues on the July 3 Nikkei article titled “Corporate Governance Code: Are Assets Being Used Effectively? Cash and...

Metrical Inc

Focus on How Practices Improve for Value Creation, Not Whether Improved Practices Helps Create Value

I would like to discuss the July 7 Nikkei article titled “Corporate Governance Guidelines: Revision to Cut Number of Principles by 60...

Metrical Inc

As for the Amount Eligible for Profit Distribution Under the Rules, That’s One Thing...

I would like to discuss the issues on the June 24 Nikkei article titled “Capital Reserves in the Era of Large Shareholder Returns.”

Metrical Inc

Avoid Letting Companies Fall into Formalism by Aligning Evaluation with Investors' Perspectives

I would like to discuss the issues on the June 24 Nikkei article titled “A Flurry of ‘Omniscient and Omnipotent’ Directors: Challenges in...

Metrical Inc