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>Since a few companies include ROE and ROIC as KPIs in their mid-term management plans and present compelling measures, now is the time to promote shareholder returns in short-term measures.</li>
<li>Companies that expect stock price to rise should ensure that they make progress on the issues that overseas investors are focused on (improving profitability, corporate governance, capital allocation and disclosures).</li>
<li>Companies with foreign ownership in 30% range are expected to work on issues of interest to overseas investors, while companies with low foreign ownership take indifferent response to shareholder proposals.</li>
</ul>


Since a few companies include ROE and ROIC as KPIs in their mid-term management plans and present compelling measures, now is the time to promote shareholder returns in short-term measures.
Companies that expect stock price to rise should ensure that they make progress on the issues that overseas investors are focused on (improving profitability, corporate governance, capital allocation and disclosures).
Companies with foreign ownership in 30% range are expected to work on issues of interest to overseas investors, while companies with low foreign ownership take indifferent response to shareholder proposals.


Awareness of ROE Has Increased, but Now at the Stage of Implementing Short-Term Measures

<ul>
<li>There is concern about how well one female board director's opinion will be respected in management discussions among the large number of male board members.</li>
<li>Since the pool of female managers in companies hasn't grown, Corporate Governance Code will remain an "effort target" rather than a specific numerical standard for the ratio of female executives.</li>
<li>The government does not want to spark discussion of a "quota system" in the "political" field, so discussions of introducing a "quota system" for female board members are not realistic.</li>
</ul>


There is concern about how well one female board director's opinion will be respected in management discussions among the large number of male board members.
Since the pool of female managers in companies hasn't grown, Corporate Governance Code will remain an "effort target" rather than a specific numerical standard for the ratio of female executives.
The government does not want to spark discussion of a "quota system" in the "political" field, so discussions of introducing a "quota system" for female board members are not realistic.


Time-Buying and Political Agendas Prevent Effective Measures to Raise the % of Female Board Members

<ul>
<li>Many companies that cannot make significant investments in growth will reduce cash from their balance sheets through shareholder returns, and ROE+DOE will continue to reach high levels in FY2023.</li>
<li>A company with a P/B of less than 1x for a long time should consider the option of going private after weighing the costs and benefits of being listed.</li>
<li>Although most of the shareholder proposals will be rejected unless the foreign ownership is very high, whether the voting rights of domestic institutional investors will change remains to be seen.</li>
</ul>


Many companies that cannot make significant investments in growth will reduce cash from their balance sheets through shareholder returns, and ROE+DOE will continue to reach high levels in FY2023.
A company with a P/B of less than 1x for a long time should consider the option of going private after weighing the costs and benefits of being listed.
Although most of the shareholder proposals will be rejected unless the foreign ownership is very high, whether the voting rights of domestic institutional investors will change remains to be seen.


Watch for Changes in Proxy Voting by Domestic Institutional Investors on Shareholder Proposals

<ul>
<li>The essence of problem lies in the fact that even half of them believe that ROE doesn’t exceed cost of capital, yet managers haven't taken measures to address this problem.</li>
<li>In reality, management reform is still a long way off, as constructive proposals from shareholders are often not accepted until the % of foreign shareholders rises to the 30% level.</li>
<li>TSE has made it possible to compare the superiority of management skills with share price. Attention will be focused on how managers will answer questions about share prices at AGMs.</li>
</ul>


The essence of problem lies in the fact that even half of them believe that ROE doesn’t exceed cost of capital, yet managers haven't taken measures to address this problem.
In reality, management reform is still a long way off, as constructive proposals from shareholders are often not accepted until the % of foreign shareholders rises to the 30% level.
TSE has made it possible to compare the superiority of management skills with share price. Attention will be focused on how managers will answer questions about share prices at AGMs.


The Problem Is that Many Managers Know that ROE Is Below Cost of Capital but Are Not Taking Action

<ul>
<li>Overseas investors have called for increasing the ratio of variable compensation to executive compensation. Given that foreign ownership ratios have remained high, this upward trend is expected to continue.</li>
<li>Few companies use capital efficiency like ROE as KPIs for variable compensation, which is consistent with the fact that few companies set them as numerical targets in mid-term management plans.</li>
<li>The role of independent directors has become more important as more companies are involving compensation committees in the compensation determination process since the 2001 amendments to the Companies Law.</li>
</ul>


Overseas investors have called for increasing the ratio of variable compensation to executive compensation. Given that foreign ownership ratios have remained high, this upward trend is expected to continue.
Few companies use capital efficiency like ROE as KPIs for variable compensation, which is consistent with the fact that few companies set them as numerical targets in mid-term management plans.
The role of independent directors has become more important as more companies are involving compensation committees in the compensation determination process since the 2001 amendments to the Companies Law.


Fewer Companies Still Use Capital Efficiency Such as ROE as KPIs for Variable Compensation

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)

Awareness of ROE Has Increased, but Now at the Stage of Implementing Short-Term Measures

I would like to discuss the issues on the May 19 Nikkei article on "Overseas Shareholders Question Sustainability of Corporate Reforms at Post...

Metrical Inc

Time-Buying and Political Agendas Prevent Effective Measures to Raise the % of Female Board Members

I would like to discuss the issues on the Nikkei Shimbun's May 20 article, "Canon and Toray to Make First Appointments of Female Board Directors."

Metrical Inc

Watch for Changes in Proxy Voting by Domestic Institutional Investors on Shareholder Proposals

I would like to discuss the issues on the May 17 Nikkei article, Activist Investors Demand Dividend Increase, etc. to "Improve P/B below 1x"."

Metrical Inc

The Problem Is that Many Managers Know that ROE Is Below Cost of Capital but Are Not Taking Action

I would like to discuss the issues in the May 16 Nikkei article, "Activist Investors Searching for 'Buried Treasure,' Targeting Undervalued Small-...

Metrical Inc

Fewer Companies Still Use Capital Efficiency Such as ROE as KPIs for Variable Compensation

I would like to discuss the issues raised in the May 15 Nikkei article, "Japan's Executive Compensation to Rise to 59% of Performance-Linked Ratio...

Metrical Inc