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>Toyota Group and non-life insurances, which recently announced reductions in their policy shareholdings, are well-known for their large holdings, but a look at total asset ratios reveals a different aspect.</li>
<li>Companies with high policy shareholdings relative to total assets have lower ROE and ROA as well as foreign ownership, market capitalization, and valuations.</li>
<li>These companies with inconspicuously held policy shares are reluctant to take corporate governance initiatives and face many challenges in both board practices and key actions.</li>
</ul>


Toyota Group and non-life insurances, which recently announced reductions in their policy shareholdings, are well-known for their large holdings, but a look at total asset ratios reveals a different aspect.
Companies with high policy shareholdings relative to total assets have lower ROE and ROA as well as foreign ownership, market capitalization, and valuations.
These companies with inconspicuously held policy shares are reluctant to take corporate governance initiatives and face many challenges in both board practices and key actions.


Looking at Policy Shareholdings as a Percentage of Total Assets Reveals a Different Aspect

<ul>
<li>The "30% female board member goal" appears to be more about matching numbers with results rather than discussing the positive impact of diversity on the board.</li>
<li>Over the past year, corporate governance improved only modestly for all listed companies, but few that improved their corporate governance raised the percentages of female board members and independent directors.</li>
<li>Given the strong influence between improvements in governance and return on capital and foreign ownership, it's difficult for a company to transform itself without the reach of overseas investor engagement.</li>
</ul>


The "30% female board member goal" appears to be more about matching numbers with results rather than discussing the positive impact of diversity on the board.
Over the past year, corporate governance improved only modestly for all listed companies, but few that improved their corporate governance raised the percentages of female board members and independent directors.
Given the strong influence between improvements in governance and return on capital and foreign ownership, it's difficult for a company to transform itself without the reach of overseas investor engagement.


Challenge Is to Raise Governance and Return on Capital for More Companies Beyond Matching Numbers

<ul>
<li>Even with the 9% increase in share repurchases, the high level of cash on hand will likely be further built up, given the increase in cash flow.</li>
<li>Companies that have increased their valuations over the past year have further increased their valuations by growing their traditionally high valuations and ROE and ROA.</li>
<li>Cash allocation is a major challenge for all companies. Many companies have a payout ratio of 30%, and they have too much cash on hand relative to sales.</li>
</ul>


Even with the 9% increase in share repurchases, the high level of cash on hand will likely be further built up, given the increase in cash flow.
Companies that have increased their valuations over the past year have further increased their valuations by growing their traditionally high valuations and ROE and ROA.
Cash allocation is a major challenge for all companies. Many companies have a payout ratio of 30%, and they have too much cash on hand relative to sales.


Higher Valuations Require Increased Return on Capital to Attract the Attention of Overseas Investors

<ul>
<li>Companies in the 0% to 8% ROE group have low stock valuations and are in trouble because they are unable to step into value-creating management.</li>
<li>Companies in this group, which includes many prime market listed companies, have done what is required by Corporate Governance Code, but could not take action to increase their ROE.</li>
<li>The lack of significant differences in corporate governance practices for group with ROEs above 10% is due to foreign ownership not being significantly differentiated from other groups.</li>
</ul>


Companies in the 0% to 8% ROE group have low stock valuations and are in trouble because they are unable to step into value-creating management.
Companies in this group, which includes many prime market listed companies, have done what is required by Corporate Governance Code, but could not take action to increase their ROE.
The lack of significant differences in corporate governance practices for group with ROEs above 10% is due to foreign ownership not being significantly differentiated from other groups.


Companies with High Corporate Governance Practices Have High ROE, but Not Vice Versa

<ul>
<li>Since companies with higher foreign ownership have better profitability and corporate governance practices, it can be inferred that the overseas investor engagement has improved the company's profitability and corporate governance.</li>
<li>If the company's management has changed to value-creating management through the overseas investor's engagement, the company isn’t expected to change to value-creating management in just one year after "TSE's request".</li>
<li>Many companies that do not receive overseas investor engagement have more room for improvement in aspects of management strategy execution and will be evaluated over time for improvements in profitability.</li>
</ul>


Since companies with higher foreign ownership have better profitability and corporate governance practices, it can be inferred that the overseas investor engagement has improved the company's profitability and corporate governance.
If the company's management has changed to value-creating management through the overseas investor's engagement, the company isn’t expected to change to value-creating management in just one year after "TSE's request".
Many companies that do not receive overseas investor engagement have more room for improvement in aspects of management strategy execution and will be evaluated over time for improvements in profitability.


Only Seriousness of Shareholder Return Can Judge Change in Management in 1 Year After TSE's Request

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)

Looking at Policy Shareholdings as a Percentage of Total Assets Reveals a Different Aspect

I would like to discuss the issues on the April 26 Nikkei article, "ACGA Recommends Zero Policy Shareholdings in Principle."

Metrical Inc

Challenge Is to Raise Governance and Return on Capital for More Companies Beyond Matching Numbers

I would like to discuss the issues on the May 1 Nikkei Newspaper article, "Female Board Members: 30% or More, Only 10% of Companies Listed on Prime...

Metrical Inc

Higher Valuations Require Increased Return on Capital to Attract the Attention of Overseas Investors

I would like to discuss the April 23 Nikkei article, In summary, I have considered the April 23 Nikkei article, "Listed Companies Buy Back 10...

Metrical Inc

Companies with High Corporate Governance Practices Have High ROE, but Not Vice Versa

More companies are using ROE as a KPI in response to "TSE's request," but the average ROE of companies remains flat. I would like to discuss what...

Metrical Inc

Only Seriousness of Shareholder Return Can Judge Change in Management in 1 Year After TSE's Request

I would like to discuss the issues on the April 17 Nikkei Shimbun article, The Market's Strict Eyes on 'Cost of Capital Management' in Name Only."

Metrical Inc