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>Since there was no difference in IR Disclosures between companies that increased valuations over past year and those that didn't, it's clear that improvement IR Disclosures alone won't raise valuations.</li>
<li>Since many companies with large market capitalizations have high foreign ownership, overseas investor engagement has had a positive impact on their high return on capital.</li>
<li>TSE's support for companies with small market capitalizations is a type of engagement that encourages companies whose engagement doesn't reach them to think about their management strategies.</li>
</ul>


Since there was no difference in IR Disclosures between companies that increased valuations over past year and those that didn't, it's clear that improvement IR Disclosures alone won't raise valuations.
Since many companies with large market capitalizations have high foreign ownership, overseas investor engagement has had a positive impact on their high return on capital.
TSE's support for companies with small market capitalizations is a type of engagement that encourages companies whose engagement doesn't reach them to think about their management strategies.


After the TSE "Engagement," It Is the Company Itself to Devise and Execute a Management Strategy

<ul>
<li>Overseas investors tend to invest in companies with larger market capitalization and higher profitability, and companies with higher foreign shareholdings have significantly better values in corporate governance.</li>
<li>Hitachi has been one of the most successful companies in this area, probably due to its intermittent reforms in profitability and corporate governance through engagement with overseas investors.</li>
<li>Few companies, like Hitachi, achieved sustainable growth by continuous business portfolio review. This has led to high stock price volatility for many companies that cannot enter the sustainable growth phase.</li>
</ul>


Overseas investors tend to invest in companies with larger market capitalization and higher profitability, and companies with higher foreign shareholdings have significantly better values in corporate governance.
Hitachi has been one of the most successful companies in this area, probably due to its intermittent reforms in profitability and corporate governance through engagement with overseas investors.
Few companies, like Hitachi, achieved sustainable growth by continuous business portfolio review. This has led to high stock price volatility for many companies that cannot enter the sustainable growth phase.


The Key Is to Achieve Sustainable Growth Through Continuous Business Portfolio Review

<ul>
<li>A few companies have stock compensation plans for outside directors, but their common features are a majority of outside directors on the board and a high percentage of foreign ownership.</li>
<li>8 million compensation for an outside director would be too low to devote much of his/her time to that company. Consequently, 17.5% of all outside board members serve multiple companies.</li>
<li>The need to raise the ratio of female board members amid the low percentage of women in managerial positions has increased the concurrent positions of female board members.</li>
</ul>


A few companies have stock compensation plans for outside directors, but their common features are a majority of outside directors on the board and a high percentage of foreign ownership.
8 million compensation for an outside director would be too low to devote much of his/her time to that company. Consequently, 17.5% of all outside board members serve multiple companies.
The need to raise the ratio of female board members amid the low percentage of women in managerial positions has increased the concurrent positions of female board members.


Issues Related to Outside Director Compensation Are Plentiful

<ul>
<li>The speed of management reform in Japanese companies is usually slower than investors and shareholders expect. In case of small- to mid-cap stocks, the speed is much slower.</li>
<li>In small-to-mid-cap stocks, foreign ownerships are often lower than the average for listed companies, and older companies are often protected by cross-shareholdings. Therefore, engagement should be prepared for sluggish response.</li>
<li>The way to resolve this situation is for the company to break the silent shareholder structure or increase shareholders who can exercise their voting rights based on rational decisions.</li>
</ul>


The speed of management reform in Japanese companies is usually slower than investors and shareholders expect. In case of small- to mid-cap stocks, the speed is much slower.
In small-to-mid-cap stocks, foreign ownerships are often lower than the average for listed companies, and older companies are often protected by cross-shareholdings. Therefore, engagement should be prepared for sluggish response.
The way to resolve this situation is for the company to break the silent shareholder structure or increase shareholders who can exercise their voting rights based on rational decisions.


Patience Is Often Needed for Small- And Mid-Cap Company Engagements

<ul>
<li>The increase in net profit from the previous year outpaced the growth in dividends, which increased cash on hand for listed companies to a record high level. </li>
<li>Since the equity ratio of manufacturing sector is over 40% and there's little room for debt repayment, there's room for a considerable increase in dividends in conjunction with share repurchases.</li>
<li>If free cash flow isn't used to invest in growth and return profits to shareholders, rather than to pay small dividends to shareholders, cash on hand will continue to increase.</li>
</ul>


The increase in net profit from the previous year outpaced the growth in dividends, which increased cash on hand for listed companies to a record high level. 
Since the equity ratio of manufacturing sector is over 40% and there's little room for debt repayment, there's room for a considerable increase in dividends in conjunction with share repurchases.
If free cash flow isn't used to invest in growth and return profits to shareholders, rather than to pay small dividends to shareholders, cash on hand will continue to increase.


Cash on Hand Has Built up to a Level Where Small Shareholder Returns Are No Longer Sufficient

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)

After the TSE "Engagement," It Is the Company Itself to Devise and Execute a Management Strategy

I would like to discuss the issues on the July 11 Nikkei Shimbun article, "TSE Bridges Mid-to-Small Cap Companies and Investors to Support P/B...

Metrical Inc

The Key Is to Achieve Sustainable Growth Through Continuous Business Portfolio Review

I would like to discuss the issues on the July 9 Nikkei article, "Foreign ownership in Hitachi exceeds 50% for the first time; investors evaluate...

Metrical Inc

Patience Is Often Needed for Small- And Mid-Cap Company Engagements

I would like to discuss the issues on the June 25 Nikkei article, "Shareholder Proposals by Activist Investors, Pressure on Management Even if...

Metrical Inc

Cash on Hand Has Built up to a Level Where Small Shareholder Returns Are No Longer Sufficient

I would like to discuss the issues on the June 26 Nikkei Shimbun article, "Corporate Cash on Hand at 114 Trillion Yen, Record High; Increase...

Metrical Inc

After the TSE "Engagement," It Is the Company Itself to Devise and Execute a Management Strategy

I would like to discuss the issues on the July 11 Nikkei Shimbun article, "TSE Bridges Mid-to-Small Cap Companies and Investors to Support P/B...

Metrical Inc

The Key Is to Achieve Sustainable Growth Through Continuous Business Portfolio Review

I would like to discuss the issues on the July 9 Nikkei article, "Foreign ownership in Hitachi exceeds 50% for the first time; investors evaluate...

Metrical Inc

Issues Related to Outside Director Compensation Are Plentiful

I would like to discuss the issues on the July 9 Nikkei article, "Hitachi to Pay Outside Directors in Stock to Supervise Management from...

Metrical Inc

Patience Is Often Needed for Small- And Mid-Cap Company Engagements

I would like to discuss the issues on the June 25 Nikkei article, "Shareholder Proposals by Activist Investors, Pressure on Management Even if...

Metrical Inc

Cash on Hand Has Built up to a Level Where Small Shareholder Returns Are No Longer Sufficient

I would like to discuss the issues on the June 26 Nikkei Shimbun article, "Corporate Cash on Hand at 114 Trillion Yen, Record High; Increase...

Metrical Inc