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.

On September 3, 2021, I attended the CFA Society Japan Seminar on "Tokyo Stock Exchange's New Market Classification." The 90-minute webinar from a representative of the Tokyo Stock Exchange consisted of a 60-minute presentation at the beginning and a 30-minute Q&amp;A session. The presentation was a detailed explanation along with a compiled material of the TSE's published materials, but the QA session was meaningful as it allowed us to ask questions individually about content not included in the materials. I also asked some questions that I had been wondering about and got answers to some of them, but not all of them, so it was meaningful that my understanding of this matter was a little more advanced than before. I have summarized the answers to my questions and my impressions and would like to report them here.

On September 3, 2021, I attended the CFA Society Japan Seminar on "Tokyo Stock Exchange's New Market Classification." The 90-minute webinar from a representative of the Tokyo Stock Exchange consisted of a 60-minute presentation at the beginning and a 30-minute Q&amp;A session. The presentation was a detailed explanation along with a compiled material of the TSE's published materials, but the QA session was meaningful as it allowed us to ask questions individually about content not included in the materials. I also asked some questions that I had been wondering about and got answers to some of them, but not all of them, so it was meaningful that my understanding of this matter was a little more advanced than before. I have summarized the answers to my questions and my impressions and would like to report them here.

Japan's Governance: Update On "Transitional Measures" For TSE Market Reorganization

Each month, Metrical updates its universe company data to analyze trends for universe companies as a whole and for individual companies. In this context, an unusual trend emerged in the data at the end of August. This is the Retired Top Management Score, which evaluates the unique practice of Japanese companies of having CEOs and other representative directors remain with the company as ex-CEO advisors even after they step down as directors. The fewer the number of ex-CEO Advisors, the higher the score. Until July, this score showed a significant positive correlation with ROE (actual) and ROA (actual), but this time it showed a significant negative correlation with ROE (actual), ROA (actual) and Tobin's Q. From the standpoint of promoting corporate governance and eliminating the unique practice of staying in the company as an ex-CEO advisor, I think we should carefully analyze this score. Until July, this score showed a significant positive correlation with ROE (actual) and ROA (actual), but this time it showed a significant negative correlation with ROE (actual), ROA (actual) and Tobin's Q.  From the standpoint of promoting corporate governance and eliminating the unique practice of staying in the company as an ex-CEO advisor, I think we should carefully analyze this score.

Each month, Metrical updates its universe company data to analyze trends for universe companies as a whole and for individual companies. In this context, an unusual trend emerged in the data at the end of August. This is the Retired Top Management Score, which evaluates the unique practice of Japanese companies of having CEOs and other representative directors remain with the company as ex-CEO advisors even after they step down as directors. The fewer the number of ex-CEO Advisors, the higher the score. Until July, this score showed a significant positive correlation with ROE (actual) and ROA (actual), but this time it showed a significant negative correlation with ROE (actual), ROA (actual) and Tobin's Q. From the standpoint of promoting corporate governance and eliminating the unique practice of staying in the company as an ex-CEO advisor, I think we should carefully analyze this score. Until July, this score showed a significant positive correlation with ROE (actual) and ROA (actual), but this time it showed a significant negative correlation with ROE (actual), ROA (actual) and Tobin's Q.  From the standpoint of promoting corporate governance and eliminating the unique practice of staying in the company as an ex-CEO advisor, I think we should carefully analyze this score.

Japan's Governance: Disclosure on Ex-CEO Advisors

In this article, I would like to focus on the Chair of the Board of Directors. For investors outside of Japan, this may come as a surprise. Who do you think chairs the board of directors in most Japanese companies? As the pie chart below shows, in the overwhelming majority of companies, the President or Chairman of the Board chairs the Board of Directors.

In this article, I would like to focus on the Chair of the Board of Directors. For investors outside of Japan, this may come as a surprise. Who do you think chairs the board of directors in most Japanese companies? As the pie chart below shows, in the overwhelming majority of companies, the President or Chairman of the Board chairs the Board of Directors.

Japan's Governance: Who Chairs the Board?

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

Toyo Seikan Group Holdings L / Event-Driven

Nikkei has just announced the changes to the <a href="https://www.smartkarma.com/entities/nikkei-225" target="_blank" data-smartkarma-citation="entities:22909:1" rel="noopener">Nikkei 225 (NKY INDEX)</a> as part of its periodic review. The changes will be made prior to the open of the market on 1 October, so passive funds will trade at the closing auction on 30 September.There are 3 changes to the index with <a href="https://www.smartkarma.com/entities/keyence-corp" target="_blank" data-smartkarma-citation="entities:3077:1" rel="noopener">Keyence Corp (6861 JP)</a>, <a href="https://www.smartkarma.com/entities/murata-manufacturing-co-ltd" target="_blank" data-smartkarma-citation="entities:11649:1" rel="noopener">Murata Manufacturing (6981 JP)</a> and <a href="https://www.smartkarma.com/entities/nintendo-co-ltd" target="_blank" data-smartkarma-citation="entities:5415:1" rel="noopener">Nintendo Co Ltd (7974 JP)</a> replacing <a href="https://www.smartkarma.com/entities/nisshinbo-holdings-inc" target="_blank" data-smartkarma-citation="entities:10561:1" rel="noopener">Nisshinbo Holdings (3105 JP)</a>, <a href="https://www.smartkarma.com/entities/toyo-seikan-group-holdings-l" target="_blank" data-smartkarma-citation="entities:11858:1" rel="noopener">Toyo Seikan Group Holdings L (5901 JP)</a> and <a href="https://www.smartkarma.com/entities/sky-perfect-jsat-holdings" target="_blank" data-smartkarma-citation="entities:14097:1" rel="noopener">Sky Perfect Jsat (9412 JP)</a>.While the inclusion of <a href="https://www.smartkarma.com/entities/nintendo-co-ltd" target="_blank" data-smartkarma-citation="entities:5415:1" rel="noopener">Nintendo Co Ltd (7974 JP)</a> and the deletion of <a href="https://www.smartkarma.com/entities/sky-perfect-jsat-holdings" target="_blank" data-smartkarma-citation="entities:14097:1" rel="noopener">Sky Perfect Jsat (9412 JP)</a> was expected, the other names are relative surprises.The impact on the inclusions is not very high in terms of days of ADV to buy and in terms of the real float to buy, but the impact on the deletions is a lot higher. The selling on <a href="https://www.smartkarma.com/entities/nisshinbo-holdings-inc" target="_blank" data-smartkarma-citation="entities:10561:1" rel="noopener">Nisshinbo Holdings (3105 JP)</a> and <a href="https://www.smartkarma.com/entities/toyo-seikan-group-holdings-l" target="_blank" data-smartkarma-citation="entities:11858:1" rel="noopener">Toyo Seikan Group Holdings L (5901 JP)</a> will result in around 18% of the free float of the stock being sold and the stocks could drop a lot before investors start to get involved.This is the first review post the market consultation that was announced in May and the conclusions of which were published in July.As usual, Nikkei have ignored the sector balance that is spoken about so much in the index methodology. Apparently its easier to write the index methodology than to follow it!

Nikkei has just announced the changes to the Nikkei 225 (NKY INDEX) as part of its periodic review. The changes will be made prior to the open of the market on 1 October, so passive funds will trade at the closing auction on 30 September.There are 3 changes to the index with Keyence Corp (6861 JP), Murata Manufacturing (6981 JP) and Nintendo Co Ltd (7974 JP) replacing Nisshinbo Holdings (3105 JP), Toyo Seikan Group Holdings L (5901 JP) and Sky Perfect Jsat (9412 JP).While the inclusion of Nintendo Co Ltd (7974 JP) and the deletion of Sky Perfect Jsat (9412 JP) was expected, the other names are relative surprises.The impact on the inclusions is not very high in terms of days of ADV to buy and in terms of the real float to buy, but the impact on the deletions is a lot higher. The selling on Nisshinbo Holdings (3105 JP) and Toyo Seikan Group Holdings L (5901 JP) will result in around 18% of the free float of the stock being sold and the stocks could drop a lot before investors start to get involved.This is the first review post the market consultation that was announced in May and the conclusions of which were published in July.As usual, Nikkei have ignored the sector balance that is spoken about so much in the index methodology. Apparently its easier to write the index methodology than to follow it!

Nikkei 225 Index Rebalance: Nintendo, Keyence, Murata IN; Nisshinbo, Toyo Seikan, SKY Perfect OUT

In this article, I would like to focus on compensation incentives. As the table below shows, among the 1,722 companies in the Metrical Universe as of August 2021, 1,543 companies, or nearly 90%, have introduced some type of compensation incentive. Among the compensation incentives, performance-linked compensation is the most common, with more than 60% of the companies in our universe adopting performance-linked compensation. Only 23.5% of companies have adopted stock option plans. It is important to note that even if a company has adopted a stock option plan, it does not necessarily mean that it is currently granting stock options. The Corporate Governance Report submitted to the TSE does not include "restricted stock compensation" in the breakdown of compensation incentives, but recently this is becoming the mainstream instead of stock options (Metrical thinks this makes more sense).

In this article, I would like to focus on compensation incentives. As the table below shows, among the 1,722 companies in the Metrical Universe as of August 2021, 1,543 companies, or nearly 90%, have introduced some type of compensation incentive. Among the compensation incentives, performance-linked compensation is the most common, with more than 60% of the companies in our universe adopting performance-linked compensation. Only 23.5% of companies have adopted stock option plans. It is important to note that even if a company has adopted a stock option plan, it does not necessarily mean that it is currently granting stock options. The Corporate Governance Report submitted to the TSE does not include "restricted stock compensation" in the breakdown of compensation incentives, but recently this is becoming the mainstream instead of stock options (Metrical thinks this makes more sense).

Japan's Governance: Compensation Incentives

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)

Japan's Governance: Update On "Transitional Measures" For TSE Market Reorganization

Update: I had a chance to ask a TSE official about the TSE market reorganization. The change in TOPIX standards due to this market reclassification...

Metrical Inc

Japan's Governance: Disclosure on Ex-CEO Advisors

In the score for the unique practice of Japanese companies of retaining ex-CEO advisors, August data showed a different trend. This may have...

Metrical Inc

Japan's Governance: Who Chairs the Board?

Who do you think chairs the board of directors in most Japanese companies? As the pie chart below shows, in the overwhelming majority of companies,...

Metrical Inc

Nikkei 225 Index Rebalance: Nintendo, Keyence, Murata IN; Nisshinbo, Toyo Seikan, SKY Perfect OUT

Nintendo, Murata & Keyence are into the Nikkei225 while Nisshinbo, Toyo Seikan & Sky Perfect are out. This trade will be more about the deletes...

Brian Freitas

Japan's Governance: Compensation Incentives

Of the 1,722 companies in the Universe, nearly 90% of the companies have some kind of compensation incentive. Conversely, companies are reluctant...

Metrical Inc