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>Few companies have disclosed their cost of capital, so TSE provided specific indicators for this purpose. On the other hand, allergies to cost of capital disclosure are persistent in companies.</li>
<li>It is a concern that many companies still have more fixed remuneration than variable remuneration for compensation incentives, which are a mechanism for achieving capital profitability goals like ROE.</li>
<li>Engagement with overseas investors can be effective, but there are challenges, such as the existence of passive funds and companies with small market capitalizations that are not eligible for investment.</li>
</ul>


Few companies have disclosed their cost of capital, so TSE provided specific indicators for this purpose. On the other hand, allergies to cost of capital disclosure are persistent in companies.
It is a concern that many companies still have more fixed remuneration than variable remuneration for compensation incentives, which are a mechanism for achieving capital profitability goals like ROE.
Engagement with overseas investors can be effective, but there are challenges, such as the existence of passive funds and companies with small market capitalizations that are not eligible for investment.


Guidebook for Raising P/B Published, but Still Much Work to Be Done to Achieve Goals

<ul>
<li>Code of Corporate Conduct lacks explanation of the role to be played by a listed company and the background. Consequently, there're cases where the same companies have repeatedly committed misconduct.</li>
<li>For companies that are good at pretending that they are trying, without any substance to their corporate governance, making the provisions of Corporate Governance Code mandatory effort won't be effective.</li>
<li>TSE's request seems to be an effort obligation. It is good that the substance of the company's improvement plan, which only made an effort to improve, will be improved.</li>
</ul>


Code of Corporate Conduct lacks explanation of the role to be played by a listed company and the background. Consequently, there're cases where the same companies have repeatedly committed misconduct.
For companies that are good at pretending that they are trying, without any substance to their corporate governance, making the provisions of Corporate Governance Code mandatory effort won't be effective.
TSE's request seems to be an effort obligation. It is good that the substance of the company's improvement plan, which only made an effort to improve, will be improved.


What Happens to the Effectiveness of TSE Requests when They Become Effort Obligations?

<ul>
<li>Although many institutional investors' voting criteria apply the rule of "support the proposed appointment of top management director if one female director is nominated," more in-depth examination should be conducted.</li>
<li>Agenda based on TSE's request isn't easy to understand for all investors, and the current voting guidelines for domestic institutional investors make it unlikely that they will vote for it.</li>
<li>The ISS ROE criteria will be raised next year, and companies may not raise ROE with bold shareholder returns until the voting guidelines for domestic institutional investors are also raised.</li>
</ul>


Although many institutional investors' voting criteria apply the rule of "support the proposed appointment of top management director if one female director is nominated," more in-depth examination should be conducted.
Agenda based on TSE's request isn't easy to understand for all investors, and the current voting guidelines for domestic institutional investors make it unlikely that they will vote for it.
The ISS ROE criteria will be raised next year, and companies may not raise ROE with bold shareholder returns until the voting guidelines for domestic institutional investors are also raised.


Raising ROE May Require Raising Proxy Voting Guidelines

<ul>
<li>Most large companies initially estimate sales and profits conservatively, and CapEx, which is often planned more than a year in advance, isn’t often above plan.</li>
<li>Companies have a cautious earnings outlook, but the market consensus still expects profit growth in FY2024. CapEx growth in the BOJ Tankan is expected to be slightly higher than profits.</li>
<li>Assuming an 8.5% increase in CapEx for large manufacturing companies and a low single-digit growth in the recurring profit outlook, the level of cash on hand is unlikely to decrease.</li>
</ul>


Most large companies initially estimate sales and profits conservatively, and CapEx, which is often planned more than a year in advance, isn’t often above plan.
Companies have a cautious earnings outlook, but the market consensus still expects profit growth in FY2024. CapEx growth in the BOJ Tankan is expected to be slightly higher than profits.
Assuming an 8.5% increase in CapEx for large manufacturing companies and a low single-digit growth in the recurring profit outlook, the level of cash on hand is unlikely to decrease.


Since Cash on Hand Will Not Decrease in FY2024, Shareholder Returns Remain a Hot Topic

<ul>
<li>Profit margins boosted by cuts in personnel, R&amp;D, CapEx, and corporate tax rates. Much of the improved free cash flow went onto the balance sheet instead of being invested.</li>
<li>OP Margin's sluggish growth indicates that the cost-cutting model is no longer working. Investments are needed to create products with higher gross margins.</li>
<li>While the limitations of the cost-cutting model can be seen, ROE, which indicates the achievement of the management goal of increasing medium-to-long-term shareholder returns, is sluggish in many companies.</li>
</ul>


Profit margins boosted by cuts in personnel, R&amp;D, CapEx, and corporate tax rates. Much of the improved free cash flow went onto the balance sheet instead of being invested.
OP Margin's sluggish growth indicates that the cost-cutting model is no longer working. Investments are needed to create products with higher gross margins.
While the limitations of the cost-cutting model can be seen, ROE, which indicates the achievement of the management goal of increasing medium-to-long-term shareholder returns, is sluggish in many companies.


Any Manager Can Simply Implement Shareholder Returns

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/