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>It is premature to start discussions on stopping raising the hurdles of the Corporate Governance Code when Japan's boards are not dominated by a majority of independent directors.</li>
<li>If listed companies are left to voluntarily improve their corporate governance practices, differences in corporate governance practice efforts among listed companies are expected to widen.</li>
<li>Companies with high percentage of foreign shareholders, primarily those with large market capitalization, are expected to continue to improve their corporate governance practices through engagement by overseas investors. vice versa</li>
</ul>


It is premature to start discussions on stopping raising the hurdles of the Corporate Governance Code when Japan's boards are not dominated by a majority of independent directors.
If listed companies are left to voluntarily improve their corporate governance practices, differences in corporate governance practice efforts among listed companies are expected to widen.
Companies with high percentage of foreign shareholders, primarily those with large market capitalization, are expected to continue to improve their corporate governance practices through engagement by overseas investors. vice versa


Size of Market Capitalization Will Make a Difference in Corporate Governance and Value Creation

<ul>
<li>Government ministries, agencies and the TSE want to raise the value of the Tokyo market, even if it means using the opinions of overseas investors, including activist investors.</li>
<li>Companies with high foreign ownership and large market capitalization are proactive in corporate governance efforts, while many other companies are passive, indicating that differences in efforts among companies are significant.</li>
<li>Thanks to the revision of the Corporate Governance Code, corporate governance practices have improved mainly in terms of formal criteria, and now substantive improvements are required.</li>
</ul>


Government ministries, agencies and the TSE want to raise the value of the Tokyo market, even if it means using the opinions of overseas investors, including activist investors.
Companies with high foreign ownership and large market capitalization are proactive in corporate governance efforts, while many other companies are passive, indicating that differences in efforts among companies are significant.
Thanks to the revision of the Corporate Governance Code, corporate governance practices have improved mainly in terms of formal criteria, and now substantive improvements are required.


CG Watch, Which Made Great Strides Will Be Tested Next Time for Substantial Governance Improvements

<ul>
<li>It’s no surprise that some companies consider the dissolution of parent-subsidiary listings as a swift and effective measure to raise ROE. However, not every listed subsidiary will be TOB.</li>
<li>TOB of a high-profitability subsidiary can have significant impact on both the denominator and numerator of the parent company's ROE because it uses more cash and will improve profit margins.</li>
<li>Even if the "significance of parent-subsidiary listings" is disclosed, few investors believe that the listed subsidiary's independence is fully ensured, and the dissolution of parent-subsidiary listings will eventually follow.</li>
</ul>


It’s no surprise that some companies consider the dissolution of parent-subsidiary listings as a swift and effective measure to raise ROE. However, not every listed subsidiary will be TOB.
TOB of a high-profitability subsidiary can have significant impact on both the denominator and numerator of the parent company's ROE because it uses more cash and will improve profit margins.
Even if the "significance of parent-subsidiary listings" is disclosed, few investors believe that the listed subsidiary's independence is fully ensured, and the dissolution of parent-subsidiary listings will eventually follow.


ROE and Valuations of Japanese Stocks Will Improve Through Dissolution of Parent-Subsidiary Listings

<ul>
<li>While disclosure of committee activities in annual securities report provides clues to the independence of committee, this might create higher hurdle for moving to Company with US type 3 Committees.</li>
<li>Based on the premise that disclosure of committee activities can change management's mindset and enable committees to function, more specific details should need to be disclosed to all listed companies.</li>
<li>Many companies have nominating committees that meet 1-2 times a year before the AGM. Few companies have a Succession Plan, which is of great interest to investors.</li>
</ul>


While disclosure of committee activities in annual securities report provides clues to the independence of committee, this might create higher hurdle for moving to Company with US type 3 Committees.
Based on the premise that disclosure of committee activities can change management's mindset and enable committees to function, more specific details should need to be disclosed to all listed companies.
Many companies have nominating committees that meet 1-2 times a year before the AGM. Few companies have a Succession Plan, which is of great interest to investors.


What Can Be Done to Make the Independence of the Committee Function that Investors Have Questioned?

<ul>
<li>Although there's range in the cost of capital, a sense of level is shared among investors, so even if a company estimates lower, it will be found to be incorrect.</li>
<li>The essential problem isn't scrutiny of the cost of capital, but rather that many companies produce low returns. Investors are skeptical that companies produce returns above their cost of capital.</li>
<li>If stock prices do not rise, investors will continue to demand that companies improve their management, attributing this to the negative gap between the cost of capital and return.</li>
</ul>


Although there's range in the cost of capital, a sense of level is shared among investors, so even if a company estimates lower, it will be found to be incorrect.
The essential problem isn't scrutiny of the cost of capital, but rather that many companies produce low returns. Investors are skeptical that companies produce returns above their cost of capital.
If stock prices do not rise, investors will continue to demand that companies improve their management, attributing this to the negative gap between the cost of capital and return.


Investors Expect a Feasible Management Strategy Rather than an Accurate Cost of 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)

Size of Market Capitalization Will Make a Difference in Corporate Governance and Value Creation

I would like to discuss the issues on the December 12 Nikkei article, "Corporate Governance Reform Focusing on Substance.”

Metrical Inc

CG Watch, Which Made Great Strides Will Be Tested Next Time for Substantial Governance Improvements

I would like to discuss the issues on the December 15 Nikkei article, "Japan's Corporate Governance Ranks Second in Asia in Challenges, Rated 'High...

Metrical Inc

ROE and Valuations of Japanese Stocks Will Improve Through Dissolution of Parent-Subsidiary Listings

I would like to discuss the issues on the December 13 Nikkei Shimbun article, "Parent-Subsidiary Dissolutions Call for Japanese Stock Hopes:...

Metrical Inc

What Can Be Done to Make the Independence of the Committee Function that Investors Have Questioned?

I would like to discuss the issues on the December 13 Nikkei Newspaper article, "Number of Nominating Committee Meetings: 1 to 17 in FY2022, with...

Metrical Inc

Investors Expect a Feasible Management Strategy Rather than an Accurate Cost of Capital

I would like to discuss the issues on the December 11 Nikkei article, "'Its Cost of Capital is Too Low': Market Uncovers Lax Estimates."

Metrical Inc