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>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

<ul>
<li>Companies with larger market capitalizations tend to have higher profitability and valuations, and those companies have higher foreign ownership.</li>
<li>Given that board practices improved and that valuations, highly correlated with foreign ownership, are higher for companies with larger market capitalizations, this can be due to engagement of overseas investors.</li>
<li>If this hypothesis is correct, the gap between the top and bottom market capitalization companies will widen further as it takes a certain time for engagement to pay off.</li>
</ul>


Companies with larger market capitalizations tend to have higher profitability and valuations, and those companies have higher foreign ownership.
Given that board practices improved and that valuations, highly correlated with foreign ownership, are higher for companies with larger market capitalizations, this can be due to engagement of overseas investors.
If this hypothesis is correct, the gap between the top and bottom market capitalization companies will widen further as it takes a certain time for engagement to pay off.


Engagement Keeps Widening the Profitability Gap Between the Top and Bottom Companies in Market Cap

<ul>
<li>Companies with higher ratings for Corporate Governance Practices (Board Practices and Key Actions) tend to have significantly higher profitability, market capitalization and valuations.</li>
<li>Foreign ownership has the highest correlation with the Metrical CG score, suggesting that years of overseas investor engagement have improved the companies' corporate governance practices and profitability.</li>
<li>The pace of efforts varies with criteria of Corporate Governance Practices.  Companies with Metrical CG scores of over 70% are ahead in % independent directors and % female board members.</li>
</ul>


Companies with higher ratings for Corporate Governance Practices (Board Practices and Key Actions) tend to have significantly higher profitability, market capitalization and valuations.
Foreign ownership has the highest correlation with the Metrical CG score, suggesting that years of overseas investor engagement have improved the companies' corporate governance practices and profitability.
The pace of efforts varies with criteria of Corporate Governance Practices.  Companies with Metrical CG scores of over 70% are ahead in % independent directors and % female board members.


Why Are Companies with High Corporate Governance Practices Ratings More Profitable?

<ul>
<li>Even after the TSE's request for a P/B increase, it is not possible to raise valuations simply on the expectation of a P/B increase without improving profitability.</li>
<li>Most companies have cash allocation challenges. Companies with higher profitability will accumulate even more cash on hand, so higher level of shareholder return will further positively impact ROE and ROA.</li>
<li>Some of the companies that have reduced valuations include those with relatively high ROE and ROA, so there are small-cap stocks with reduced valuations and increased investment opportunities.</li>
</ul>


Even after the TSE's request for a P/B increase, it is not possible to raise valuations simply on the expectation of a P/B increase without improving profitability.
Most companies have cash allocation challenges. Companies with higher profitability will accumulate even more cash on hand, so higher level of shareholder return will further positively impact ROE and ROA.
Some of the companies that have reduced valuations include those with relatively high ROE and ROA, so there are small-cap stocks with reduced valuations and increased investment opportunities.


Increasing Profitability to Gain Support from Overseas Investors Is a Condition for Higher Valuation

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)

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

Engagement Keeps Widening the Profitability Gap Between the Top and Bottom Companies in Market Cap

I would like to discuss what characteristics and trends are most likely to be observed by dividing the companies into six groups by market...

Metrical Inc

Why Are Companies with High Corporate Governance Practices Ratings More Profitable?

I would like to discuss what relationship there is between corporate governance practices, company profitability, and valuations.

Metrical Inc

Increasing Profitability to Gain Support from Overseas Investors Is a Condition for Higher Valuation

In this article, I would like to try to summarize the recent analysis of "Percentage of Foreign Share Ownership" and "Valuation trends over the...

Metrical Inc