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>With ISS's plan to resume ROE criteria and TSE's mention of P/B, more shareholder proposals calling for stronger shareholder returns due to stagnant stock prices and ROEs can be expected.</li>
<li>Since over 30% of listed companies have major shareholders holding 20% or more of their interests, the voting behavior of domestic institutions is key to the passage of shareholder proposals.</li>
<li>With TSE's disclosure request regarding the significance of parent-subsidiary listings, this matter will become another focus of the AGM in business portfolio reform and securing the interests of minority shareholders.</li>
</ul>


With ISS's plan to resume ROE criteria and TSE's mention of P/B, more shareholder proposals calling for stronger shareholder returns due to stagnant stock prices and ROEs can be expected.
Since over 30% of listed companies have major shareholders holding 20% or more of their interests, the voting behavior of domestic institutions is key to the passage of shareholder proposals.
With TSE's disclosure request regarding the significance of parent-subsidiary listings, this matter will become another focus of the AGM in business portfolio reform and securing the interests of minority shareholders.


Shareholder Proposals Likely a Focus at 2024 AGM Are ROE, P/B, and Parent-Subsidiary Listings

<ul>
<li>EPS and BPS had run in parallel since June 2022, but BPS has accelerated at a more rapid pace since May 2023, and TOPIX has risen sharply since April 2023.</li>
<li>Since TOPIX is more correlated with BPS than EPS, the hypothesis that "stock prices are more reliant on BPS increases, including cash increases, than on EPS" would be considered.</li>
<li>Investors may believe that Japanese management still needs more time to use cash effectively, and evaluate companies based on their BPS, which indicates a movement toward improved cash flow.</li>
</ul>


EPS and BPS had run in parallel since June 2022, but BPS has accelerated at a more rapid pace since May 2023, and TOPIX has risen sharply since April 2023.
Since TOPIX is more correlated with BPS than EPS, the hypothesis that "stock prices are more reliant on BPS increases, including cash increases, than on EPS" would be considered.
Investors may believe that Japanese management still needs more time to use cash effectively, and evaluate companies based on their BPS, which indicates a movement toward improved cash flow.


Investors Are Valuing Equities Thinking that Managers Are Still Slow to Put Cash to Good Use?

<ul>
<li>There are 167 companies of 1,784 companies in Metrical Universe (12/2023) with major shareholders holding over 50% stake, and 605 companies with major shareholders holding between 20% and 50% stake.</li>
<li>TSE has requests listed parent companies, listed subsidiaries, and affiliates to disclose the significance of parent-subsidiary (affiliates) listings. This will further increase pressure for the dissolution of parent-subsidiary (affiliates) listings.</li>
<li>Hitachi's transformation into value-creating company, which once spawned numerous listed subsidiaries, has been a success story since it began full-fledged "selection and concentration" process through the dissolution of parent-subsidiary listings.</li>
</ul>


There are 167 companies of 1,784 companies in Metrical Universe (12/2023) with major shareholders holding over 50% stake, and 605 companies with major shareholders holding between 20% and 50% stake.
TSE has requests listed parent companies, listed subsidiaries, and affiliates to disclose the significance of parent-subsidiary (affiliates) listings. This will further increase pressure for the dissolution of parent-subsidiary (affiliates) listings.
Hitachi's transformation into value-creating company, which once spawned numerous listed subsidiaries, has been a success story since it began full-fledged "selection and concentration" process through the dissolution of parent-subsidiary listings.


Increasing Pressure from Investors for Dissolution of Parent-Subsidiary (Inc. Affiliates) Listings

<ul>
<li>While many companies have disclosed enhanced shareholder returns, dividend payout ratio in 30% range and no increase, and 4% increase in total dividends from the previous year, is not enough.</li>
<li>Since DOE remains at just under 3% same as the previous year, few companies allocate enough cash to dividend to reduce Shareholder's Equity, and consequently ROE is expected to lower.</li>
<li>Cash on hand in September is at all-time high. Behind the ROE, which shows no sign of rising, is the psychology of managers who want to keep cash on hand.</li>
</ul>


While many companies have disclosed enhanced shareholder returns, dividend payout ratio in 30% range and no increase, and 4% increase in total dividends from the previous year, is not enough.
Since DOE remains at just under 3% same as the previous year, few companies allocate enough cash to dividend to reduce Shareholder's Equity, and consequently ROE is expected to lower.
Cash on hand in September is at all-time high. Behind the ROE, which shows no sign of rising, is the psychology of managers who want to keep cash on hand.


Is Japan's Culture the Psychology of Managers Who Prefer to Keep Cash on Hand over Higher ROE?

<ul>
<li>In addition to the large number of micro-caps among companies listed on the Growth Market, another problem is the lack of growth in market capitalization after IPOs. </li>
<li>Many managers consider IPO to be the goal, and this is evidenced by the fact that not many companies raise capital at IPO and after listing.</li>
<li>The government proposed raising the market capitalization criteria for IPOs and revitalizing the secondary market for pre-listed companies. TSE is likely to review its listing criteria as early as 2025.</li>
</ul>


In addition to the large number of micro-caps among companies listed on the Growth Market, another problem is the lack of growth in market capitalization after IPOs. 
Many managers consider IPO to be the goal, and this is evidenced by the fact that not many companies raise capital at IPO and after listing.
The government proposed raising the market capitalization criteria for IPOs and revitalizing the secondary market for pre-listed companies. TSE is likely to review its listing criteria as early as 2025.


What Is A "Growth Market" Where Many Companies Do Not Grow in Market Cap or Raise Capital?

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)

Shareholder Proposals Likely a Focus at 2024 AGM Are ROE, P/B, and Parent-Subsidiary Listings

I would like to discuss the issues on the December 27 Nikkei article, "Shareholder Proposals, 344 in the Highest Number in 2023, Activist Investors...

Metrical Inc

Investors Are Valuing Equities Thinking that Managers Are Still Slow to Put Cash to Good Use?

I would like to discuss the issues on the December 26 Nikkei article, "Prime Listed Companies' Earnings Per Share at Record High."

Metrical Inc

Increasing Pressure from Investors for Dissolution of Parent-Subsidiary (Inc. Affiliates) Listings

I would like to discuss the issues on the December 25 Nikkei article, "European money in 'dissolution of parent-subsidiary listings': Hitachi's...

Metrical Inc

Is Japan's Culture the Psychology of Managers Who Prefer to Keep Cash on Hand over Higher ROE?

I would like to discuss the issues on the December 24 Nikkei Shimbun article, "Listed Companies' Dividends to Reach 16 Trillion Yen in FY2024, 3...

Metrical Inc

What Is A "Growth Market" Where Many Companies Do Not Grow in Market Cap or Raise Capital?

I would like to discuss the issues on the December 17 Nikkei article, "TSE Considers Raising Criteria for Growth Market Listings, Criticisms Strong...

Metrical Inc