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.

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.

<ul>
<li>Dividend yield has remained flat as share prices have risen while shareholder returns have increased. JGB yields, being fixed rates, have seen bond prices fall, leading to rising bond yields.</li>
<li>Bond yields represent the required rate of return for bond investors, while for equity investors, it is the total return combining dividend yield and capital appreciation.</li>
<li>Stocks whose dividend yields became significantly lower than JGB yields likely appeared to investors as having future cash flows underlying their corporate value that would grow.</li>
</ul>


Dividend yield has remained flat as share prices have risen while shareholder returns have increased. JGB yields, being fixed rates, have seen bond prices fall, leading to rising bond yields.
Bond yields represent the required rate of return for bond investors, while for equity investors, it is the total return combining dividend yield and capital appreciation.
Stocks whose dividend yields became significantly lower than JGB yields likely appeared to investors as having future cash flows underlying their corporate value that would grow.


The Valuation Criteria for Stocks Remain Unchanged, but Polarization Continues to Advance

<ul>
<li>Given the current high stock prices relative to EPS compared to the past, attention should be paid to whether overseas investors shift to net selling if prices begin to decline.</li>
<li>In cases where treasury stock is sold again, it raises questions: Was it necessary to repurchase treasury stock amid cash flow concerns, or was this a forward-looking cash allocation decision?</li>
<li>As cash utilization, balance sheet restructuring, and capital profitability improvements gain attention, the number of outstanding shares will gradually decline as prompt share buybacks increase.</li>
</ul>


Given the current high stock prices relative to EPS compared to the past, attention should be paid to whether overseas investors shift to net selling if prices begin to decline.
In cases where treasury stock is sold again, it raises questions: Was it necessary to repurchase treasury stock amid cash flow concerns, or was this a forward-looking cash allocation decision?
As cash utilization, balance sheet restructuring, and capital profitability improvements gain attention, the number of outstanding shares will gradually decline as prompt share buybacks increase.


What Are Companies that Re-Sell Treasury Stock Thinking?

<ul>
<li>More large companies adopting ROIC as a KPI for executive compensation can be viewed as a positive change, indicating a growing awareness of capital costs and capital profitability among companies.</li>
<li>Shifting the growth strategy from sales and profits to capital profitability, and aligning the KPIs for that growth strategy with executive compensation KPIs, is also consistent with the investor perspective.</li>
<li>However, adopting ROIC as a KPI for growth strategies and its integration into management practices has only just begun at large companies, and issues surrounding executive compensation remain unresolved.</li>
</ul>


More large companies adopting ROIC as a KPI for executive compensation can be viewed as a positive change, indicating a growing awareness of capital costs and capital profitability among companies.
Shifting the growth strategy from sales and profits to capital profitability, and aligning the KPIs for that growth strategy with executive compensation KPIs, is also consistent with the investor perspective.
However, adopting ROIC as a KPI for growth strategies and its integration into management practices has only just begun at large companies, and issues surrounding executive compensation remain unresolved.


Adopting ROIC as a KPI Is Positive, but the Issue of Executive Compensation Remains Unresolved

<ul>
<li>Even when the TOPIX constituents are narrowed down to 1,200 stocks, the impact on market capitalization differs between those that remain and those that do not.</li>
<li>Measures to increase the free-float market capitalization (20 billion yen level) used in the TOPIX calculation criteria involve reducing fixed shares such as cross-shareholdings and raising stock prices.</li>
<li>Presenting a compelling performance outlook that demonstrates the expansion of corporate value is key to increasing market capitalization, and showing signs of this in recent performance is paramount.</li>
</ul>


Even when the TOPIX constituents are narrowed down to 1,200 stocks, the impact on market capitalization differs between those that remain and those that do not.
Measures to increase the free-float market capitalization (20 billion yen level) used in the TOPIX calculation criteria involve reducing fixed shares such as cross-shareholdings and raising stock prices.
Presenting a compelling performance outlook that demonstrates the expansion of corporate value is key to increasing market capitalization, and showing signs of this in recent performance is paramount.


For Companies Surviving on TOPIX, Resolving Cross-Shareholdings and Achieving Growth Are Essential

<ul>
<li>Among companies failing the listing criteria for Standard Market and Growth Market, many that cannot meet 1 billion yen tradable shares market capitalization criteria will migrate to Nagoya Stock Exchange.</li>
<li>These companies failed to grow market capitalization. For these companies, the purpose of going public may have been to increase their visibility and credibility than to achieve growth after listing.</li>
<li>Companies migrating from TSE to other markets face a significant hurdle in achieving growth and improving corporate governance to enhance management transparency, especially when institutional investor engagement is lacking.</li>
</ul>


Among companies failing the listing criteria for Standard Market and Growth Market, many that cannot meet 1 billion yen tradable shares market capitalization criteria will migrate to Nagoya Stock Exchange.
These companies failed to grow market capitalization. For these companies, the purpose of going public may have been to increase their visibility and credibility than to achieve growth after listing.
Companies migrating from TSE to other markets face a significant hurdle in achieving growth and improving corporate governance to enhance management transparency, especially when institutional investor engagement is lacking.


Raising the Quality of Listed Companies Is Quite Challenging for the Nagoya Stock Exchange

Executive Director, Co-head of CG Research, Metrical Inc.
METRICAL INC. is a corporate governance(CG)research, investment research and consulting firm in Japan, offering a full service CG research and solutions to investors, public companies and other wide range of organizations globally. http://www.metrical.co.jp/