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>Listed companies have accumulated a great deal of cash over the years, so they are more than capable of balancing growth investments with shareholder returns.</li>
<li>Since Net Profit Margin remains slower than Operating Profit Margin, this may be a sign that companies will book extraordinary losses and embark on business restructuring leading to future profits.</li>
<li>Asset turnover has not improved. Not only have shareholder returns increased only in proportion to the rise in cash flow, but the cross-shareholding program is still in its early stages.</li>
</ul>


Listed companies have accumulated a great deal of cash over the years, so they are more than capable of balancing growth investments with shareholder returns.
Since Net Profit Margin remains slower than Operating Profit Margin, this may be a sign that companies will book extraordinary losses and embark on business restructuring leading to future profits.
Asset turnover has not improved. Not only have shareholder returns increased only in proportion to the rise in cash flow, but the cross-shareholding program is still in its early stages.


Both the Reduction in Cash on Hand and the Reduction in Policy-Held Shares Are Still Underway

<ul>
<li>If the revised Corporate Governance Code requires Prime market-listed companies to have majority independent outside directors, issues regarding outside directors’ concurrent positions and long tenures may become more prominent.</li>
<li>The real reason hiring at companies with statutory nomination committee etc. isn't progressing is that internal leadership cannot accept the decisions made by nomination committee, which carry legal enforceability.</li>
<li>As more companies establishing statutory nomination committees increases and corporate governance practices become more formalized at many companies, investor engagement will play an even more critical role than ever before.</li>
</ul>


If the revised Corporate Governance Code requires Prime market-listed companies to have majority independent outside directors, issues regarding outside directors’ concurrent positions and long tenures may become more prominent.
The real reason hiring at companies with statutory nomination committee etc. isn't progressing is that internal leadership cannot accept the decisions made by nomination committee, which carry legal enforceability.
As more companies establishing statutory nomination committees increases and corporate governance practices become more formalized at many companies, investor engagement will play an even more critical role than ever before.


Are Investors Prepared for the Upcoming Formalization of Corporate Governance Practices?

<ul>
<li>Changes to laws and regulations may lead to more companies having majority independent directors, which could result in more companies transitioning to Company with US-style three-committee structures.</li>
<li>There're concerns about whether outside directors could effectively fulfill roles if more companies have majority of outside directors. In reality, this likely depends on the case-by-case circumstances of each company.</li>
<li>Rather than compromising the quality of outside directors just to meet formal requirements, companies would be better off abandoning those requirements and moving from Prime Market to Standard Market.</li>
</ul>


Changes to laws and regulations may lead to more companies having majority independent directors, which could result in more companies transitioning to Company with US-style three-committee structures.
There're concerns about whether outside directors could effectively fulfill roles if more companies have majority of outside directors. In reality, this likely depends on the case-by-case circumstances of each company.
Rather than compromising the quality of outside directors just to meet formal requirements, companies would be better off abandoning those requirements and moving from Prime Market to Standard Market.


A Crossroads: Should a Company Strive to Meet Formal Criteria, or Move to Standard Market Instead?

<ul>
<li>Corporate Governance Code stipulates that board members should limit concurrent positions to reasonable number and requires disclosure; however, over 400 peoples at listed companies hold concurrent positions at over 3.</li>
<li>While there are expectations to appoint outside directors with management experience, increasing the proportion of female board members is currently being prioritized over that.</li>
<li>While an outside director who has served for many years may have developed good rapport with the executive officers, from shareholders’ perspective, this does not necessarily serve their best interests.</li>
</ul>


Corporate Governance Code stipulates that board members should limit concurrent positions to reasonable number and requires disclosure; however, over 400 peoples at listed companies hold concurrent positions at over 3.
While there are expectations to appoint outside directors with management experience, increasing the proportion of female board members is currently being prioritized over that.
While an outside director who has served for many years may have developed good rapport with the executive officers, from shareholders’ perspective, this does not necessarily serve their best interests.


There Is Concern that Meeting Formal Criteria Is Being Prioritized Here as Well

<ul>
<li>An increase in % of variable compensation in executive compensation, linked to medium-to-long-term performance targets, is expected to foster shareholder-oriented management and lead to growth of shareholder value over time.</li>
<li>Some caution is needed when executive compensation is linked to TSR. The key is to ensure that executive incentive compensation is determined based on combination of medium-to-long-term performance and TSR.</li>
<li>Although the proportion of performance-based and incentive compensation has been gradually increasing, it seems that many executives are still hesitant to take risks to create value.</li>
</ul>


An increase in % of variable compensation in executive compensation, linked to medium-to-long-term performance targets, is expected to foster shareholder-oriented management and lead to growth of shareholder value over time.
Some caution is needed when executive compensation is linked to TSR. The key is to ensure that executive incentive compensation is determined based on combination of medium-to-long-term performance and TSR.
Although the proportion of performance-based and incentive compensation has been gradually increasing, it seems that many executives are still hesitant to take risks to create value.


Although Executive Compensation Has Improved, Many Managers Still Seem Hesitant to Take Risks

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)

Both the Reduction in Cash on Hand and the Reduction in Policy-Held Shares Are Still Underway

I would like to discuss the issues on the Nikkei article dated June 23 titled “Share Buybacks Surge to 16.2 Trillion Yen; January–May Figures...

Metrical Inc

Are Investors Prepared for the Upcoming Formalization of Corporate Governance Practices?

I would like to discuss the issues on on the June 18 Nikkei article titled “Companies with Statutory Nomination Committee Finally Surpass 100;...

Metrical Inc

A Crossroads: Should a Company Strive to Meet Formal Criteria, or Move to Standard Market Instead?

I would like to discuss the issues on the June 19 Nikkei article titled “Over Half of Directors Are ‘Outside Directors’ at 40% of Major Companies:...

Metrical Inc

There Is Concern that Meeting Formal Criteria Is Being Prioritized Here as Well

I would like to discuss the issues on the June 20 Nikkei article titled “400 Outside Directors Serve on Three or More Boards: Driven by a Shortage...

Metrical Inc

Although Executive Compensation Has Improved, Many Managers Still Seem Hesitant to Take Risks

I would like to discuss the issues on the June 17 Nikkei article titled “Executive Compensation: Portion Linked to Mid- to Long-Term Metrics Rises...

Metrical Inc