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>Many Japanese managers have little idea that what belongs to shareholders is net profit and not free cash flow. This has created two problems.</li>
<li>If Japanese companies, mostly manufacturers, use dividend payout ratios as a criterion for shareholder returns, cash on hand will not decline even if shareholder returns are increased to some extent.</li>
<li>The inability to move beyond the concept of allocating investment and shareholder returns based on increases or decreases in cash may be the reason for the unclear cash allocation policy.</li>
</ul>


Many Japanese managers have little idea that what belongs to shareholders is net profit and not free cash flow. This has created two problems.
If Japanese companies, mostly manufacturers, use dividend payout ratios as a criterion for shareholder returns, cash on hand will not decline even if shareholder returns are increased to some extent.
The inability to move beyond the concept of allocating investment and shareholder returns based on increases or decreases in cash may be the reason for the unclear cash allocation policy.


What Lies Behind the Inability to Come up with Flexible Cash Usage Is

<ul>
<li>Companies with higher foreign shareholdings have superior board practices, suggesting that overseas investor engagement played an important role in improving management that resulted in return on capital.</li>
<li>Clues to changes in management reform can be found in the percentage of independent board members, the percentage of female board members, and policy shareholdings/total assets.</li>
<li>While the substance of the goals is important, the focus has shifted to management's strong will to achieve the goals to raise valuations and return on capital.</li>
</ul>


Companies with higher foreign shareholdings have superior board practices, suggesting that overseas investor engagement played an important role in improving management that resulted in return on capital.
Clues to changes in management reform can be found in the percentage of independent board members, the percentage of female board members, and policy shareholdings/total assets.
While the substance of the goals is important, the focus has shifted to management's strong will to achieve the goals to raise valuations and return on capital.


Content of Disclosures Is Important, but the Focus Has Shifted to Whether the Goals Can Be Achieved

<ul>
<li>Even companies with high valuations and return on capital have room to further raise their return on capital and valuations because of cash allocation challenges.</li>
<li>Companies whose valuations have not changed over the past year have low ROE and ROA, yet have high policy shareholdings. They have not taken steps to improve return on capital.</li>
<li>As for whether many companies without high foreign ownership can raise their return on capital and valuations, strong will of management to achieve their goals is necessary.</li>
</ul>


Even companies with high valuations and return on capital have room to further raise their return on capital and valuations because of cash allocation challenges.
Companies whose valuations have not changed over the past year have low ROE and ROA, yet have high policy shareholdings. They have not taken steps to improve return on capital.
As for whether many companies without high foreign ownership can raise their return on capital and valuations, strong will of management to achieve their goals is necessary.


The Key to Higher Valuations for Mid-To-Small Caps Is Management's Strong Will to Achieve Its Goals

<ul>
<li>Companies with low valuations have lower ROE, ROA, and foreign ownership as well as inferior board practices and key actions. Conversely, companies with high valuations show the opposite relationship.</li>
<li>Over the past year, companies that increased their valuations were those with already  high valuations, return on capital and foreign ownership that further improved their earnings and increased their valuations.</li>
<li>This suggests that companies that have begun to make progress in management reform by improving board operations and clarifying management policies through engagement by overseas investors have achieved positive results.</li>
</ul>


Companies with low valuations have lower ROE, ROA, and foreign ownership as well as inferior board practices and key actions. Conversely, companies with high valuations show the opposite relationship.
Over the past year, companies that increased their valuations were those with already  high valuations, return on capital and foreign ownership that further improved their earnings and increased their valuations.
This suggests that companies that have begun to make progress in management reform by improving board operations and clarifying management policies through engagement by overseas investors have achieved positive results.


Clues to Management Change Are % Independent Directors and .....

<ul>
<li>Although few shareholder proposals will be passed, companies that receive shareholder proposals and don't like the attention are likely to seek compromise and come to terms with shareholders before AGM.</li>
<li>Companies with low valuations have significantly lower ROE, ROA, market capitalization, and foreign ownership. In order to raise valuations, the first step should be to increase return on capital.</li>
<li>Companies with higher valuations can be expected to have begun to steer their board operations in an improved direction. Policy shareholding reductions can be considered as seriousness toward management improvement.</li>
</ul>


Although few shareholder proposals will be passed, companies that receive shareholder proposals and don't like the attention are likely to seek compromise and come to terms with shareholders before AGM.
Companies with low valuations have significantly lower ROE, ROA, market capitalization, and foreign ownership. In order to raise valuations, the first step should be to increase return on capital.
Companies with higher valuations can be expected to have begun to steer their board operations in an improved direction. Policy shareholding reductions can be considered as seriousness toward management improvement.


Reducing Policy Shareholdings May Be a Sign of Seriousness to Improve Management

Japan

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TSE Tokyo Price Index TOPIX (TPX INDEX)

What Lies Behind the Inability to Come up with Flexible Cash Usage Is

I would like to discuss the May 18 Nikkei Newspaper article, "No Sanctuary" in Capital Efficiency Reform, Management's Decision in Financial...

Metrical Inc

Content of Disclosures Is Important, but the Focus Has Shifted to Whether the Goals Can Be Achieved

I would like to discuss the issues on the May 17 Nikkei article, "70% of TSE Prime Market Listed Companies (1,100 companies) to Reduce Cross...

Metrical Inc

The Key to Higher Valuations for Mid-To-Small Caps Is Management's Strong Will to Achieve Its Goals

I would like to discuss the issues on the April 26 Nikkei article, TSE Strengthens Requests for Improvement of Low P/Bs; May Spread to Small- and...

Metrical Inc

Clues to Management Change Are % Independent Directors and .....

I would like to discuss the issues on the May 7 Nikkei article, "Board of Directors Dialogues with Funds to Enhance Value."

Metrical Inc

Reducing Policy Shareholdings May Be a Sign of Seriousness to Improve Management

I would like to discuss the issues on the May 1 Nikkei Newspaper article, "Shareholder Proposals Have Sustained Strength in Share Prices Longer...

Metrical Inc