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>The logic that "the stock prices of companies listed on the TSE 1st Section that chose the Standard Market have risen more" is not sufficiently explained. </li>
<li>I have doubts about the writer's logic that "the Corporate Governance Code is obsolete and companies will stop thinking according to it although there are many issues on CG Code.</li>
<li>I would like to add a few things because I sometimes feel that there are some misunderstandings when I talk to companies on capital allocation for shareholder return or investments.</li>
</ul>


The logic that "the stock prices of companies listed on the TSE 1st Section that chose the Standard Market have risen more" is not sufficiently explained. 
I have doubts about the writer's logic that "the Corporate Governance Code is obsolete and companies will stop thinking according to it although there are many issues on CG Code.
I would like to add a few things because I sometimes feel that there are some misunderstandings when I talk to companies on capital allocation for shareholder return or investments.


Japan's Governance: About the Article on Corporate Governance Code

<ul>
<li>The highest hurdle for companies that don’t meet the listing criteria is tradable market capitalization. The expiration for transitional measures that allow the company to maintain its listing is unknown.</li>
<li>The highest hurdle for companies that don’t meet the listing criteria is tradable market capitalization. The expiration for transitional measures that allow the company to maintain its listing is unknown.</li>
<li>On October 7, TSE will disclose which companies will have their TOPIX ratios reduced. For companies with insufficient market capitalization, this is an urgent issue that needs to be resolved.</li>
</ul>


The highest hurdle for companies that don’t meet the listing criteria is tradable market capitalization. The expiration for transitional measures that allow the company to maintain its listing is unknown.
The highest hurdle for companies that don’t meet the listing criteria is tradable market capitalization. The expiration for transitional measures that allow the company to maintain its listing is unknown.
On October 7, TSE will disclose which companies will have their TOPIX ratios reduced. For companies with insufficient market capitalization, this is an urgent issue that needs to be resolved.


Japan's Governance: TSE Market Reclassification: Results of Selection of New Market Segments

<ul>
<li>Companies that raised the % independent directors in 2021 improved both the nominating committee and compensation committee scores. This is in line with specific requirements of the revised CG Code.</li>
<li>Other than the percentage of independent directors, there were no changes in board practice measures that were positively correlated with significance affecting changes in other criteria.</li>
<li>I will examine whether passive events, such as revision of CG Code, will motivate companies to further improve their governance, or whether more companies will actively improve their governance.</li>
</ul>


Companies that raised the % independent directors in 2021 improved both the nominating committee and compensation committee scores. This is in line with specific requirements of the revised CG Code.
Other than the percentage of independent directors, there were no changes in board practice measures that were positively correlated with significance affecting changes in other criteria.
I will examine whether passive events, such as revision of CG Code, will motivate companies to further improve their governance, or whether more companies will actively improve their governance.


Japan's Governance: How Far Has Corporate Governance Improved in 2021 (5) - Change in ％ of INEDs

<ul>
<li>I suspect that there are other incentives for companies to improve their corporate governance practices (especially board practices) than improved performance (improved ROA and ROE).</li>
<li>Companies that improved ROA used cash raised on B/S from increased profits to return profits to shareholders through increased dividends, but still lacked conviction in using cash for future growth.</li>
<li>It is inferred that companies with higher ROE tend to use cash to buy back their own shares.</li>
</ul>


I suspect that there are other incentives for companies to improve their corporate governance practices (especially board practices) than improved performance (improved ROA and ROE).
Companies that improved ROA used cash raised on B/S from increased profits to return profits to shareholders through increased dividends, but still lacked conviction in using cash for future growth.
It is inferred that companies with higher ROE tend to use cash to buy back their own shares.


Japan's Governance: How Far Corporate Governance Has Progressed in 2021? (4) - Change in ROA and ROE

<ul>
<li>This article analyzes how changes in market capitalization correlate with changes in performance and corporate governance ratings.</li>
<li>Note that the % change in market cap as of December 2020 and December 2021 for 1,704 companies confirms a positive correlation that is more significant with ROA than ROE.</li>
<li>Companies that improved their Metrical score by 10 ppt or more increased their market capitalization the most, followed by companies that improved Metrical score by 5 ppt to 10 ppt.</li>
</ul>


This article analyzes how changes in market capitalization correlate with changes in performance and corporate governance ratings.
Note that the % change in market cap as of December 2020 and December 2021 for 1,704 companies confirms a positive correlation that is more significant with ROA than ROE.
Companies that improved their Metrical score by 10 ppt or more increased their market capitalization the most, followed by companies that improved Metrical score by 5 ppt to 10 ppt.


Japan's Governance: How Far Has Corporate Governance Progressed in 2021(3)

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: About the Article on Corporate Governance Code

On January 21, the Nikkei Shimbun published an article titled "Can companies think through the dangers of simply following governance guidelines? I...

Metrical Inc

Japan's Governance: TSE Market Reclassification: Results of Selection of New Market Segments

Lately, TSE released "Results of the Selection of New Market Segments by Listed Companies." This article will review the results based on its...

Metrical Inc

Japan's Governance: How Far Has Corporate Governance Improved in 2021 (5) - Change in ％ of INEDs

In 2021, the companies improved the % independent directors and nomination and compensation committees, which are specific requirements for...

Metrical Inc

Japan's Governance: How Far Corporate Governance Has Progressed in 2021? (4) - Change in ROA and ROE

The change in market cap is significantly correlated with the change in Metrical Score and ROA, so corporate governance and fundamentals analysis...

Metrical Inc

Japan's Governance: How Far Has Corporate Governance Progressed in 2021(3)

Companies that improved corporate governance practices in Metrical score by 10 ppt or more increased their market cap the most, followed by...

Metrical Inc