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>TSE may be trying to dodge criticism that prime market, which includes many illiquid companies, has large gap with the concept of a "market that global investors can invest in."</li>
<li>JPX Prime 150 Index is expected to solve the problem of TOPIX buying up companies of low quality and not engaging with companies due to the large number of components.</li>
<li>Neither index is expected to differ much in performance since they are both market capitalization-weighted indices, but the difference in component stocks compared to TOPIX will provide investment opportunities.</li>
</ul>


TSE may be trying to dodge criticism that prime market, which includes many illiquid companies, has large gap with the concept of a "market that global investors can invest in."
JPX Prime 150 Index is expected to solve the problem of TOPIX buying up companies of low quality and not engaging with companies due to the large number of components.
Neither index is expected to differ much in performance since they are both market capitalization-weighted indices, but the difference in component stocks compared to TOPIX will provide investment opportunities.


New Index Distracts from Prime Market Issues While Providing Long/Short Opportunities for Investors

<ul>
<li>While the listing criteria aren't consistent with the initial concept of the prime market, "investment targets for global investors," "transitional" companies that don't meet those listing criteria are allowed listing.</li>
<li>Delisting through TOB or MBO will lead to the metabolism of listed companies and maintain the quality of the TSE as an "investment target for global investors" market.</li>
<li>It is not about bringing "transitional" companies into compliance with the listing criteria of the prime market, but about modifying the listing criteria to the original concept of the market.</li>
</ul>


While the listing criteria aren't consistent with the initial concept of the prime market, "investment targets for global investors," "transitional" companies that don't meet those listing criteria are allowed listing.
Delisting through TOB or MBO will lead to the metabolism of listed companies and maintain the quality of the TSE as an "investment target for global investors" market.
It is not about bringing "transitional" companies into compliance with the listing criteria of the prime market, but about modifying the listing criteria to the original concept of the market.


Rather, Listing Criteria for Prime Market Should Be Modified to the Original Concept of the Market

<ul>
<li>As for "liquidity," one of the problems of TSE market restructuring, if the selection criteria for TOPIX components are raised, fewer companies will be forced to cling to prime market.</li>
<li>Regarding "engagement" challenge, a solution is reducing the number of TOPIX components, since low fees and many portfolio companies of passive funds prevent investment managers from devoting resources to engagements.</li>
<li>Regarding "sustainable growth" challenge, inflation would be a catalyst for learning from history, where an environment that forced all companies to change caused a change in the mindset of managers.</li>
</ul>


As for "liquidity," one of the problems of TSE market restructuring, if the selection criteria for TOPIX components are raised, fewer companies will be forced to cling to prime market.
Regarding "engagement" challenge, a solution is reducing the number of TOPIX components, since low fees and many portfolio companies of passive funds prevent investment managers from devoting resources to engagements.
Regarding "sustainable growth" challenge, inflation would be a catalyst for learning from history, where an environment that forced all companies to change caused a change in the mindset of managers.


To Make the TSE Prime Market in Line with the Original Concept of the Market

<ul>
<li>Although many companies now disclose numerical targets in their mid-term management plans, only a few still use ROE or ROIC as numerical targets(15% 1,801 companies of Metrical Universe, March 2023).</li>
<li>The fact that many companies that don't include ROE or ROIC as KPIs indicates that the management wasn't aware of the return  from the shareholders' perspective or cost of capital.</li>
<li>The 3-year mid-term business plan is built on the foundation of the actual project in progress and should be outlined to reflect its cash allocations and cash flow returns.</li>
</ul>


Although many companies now disclose numerical targets in their mid-term management plans, only a few still use ROE or ROIC as numerical targets(15% 1,801 companies of Metrical Universe, March 2023).
The fact that many companies that don't include ROE or ROIC as KPIs indicates that the management wasn't aware of the return  from the shareholders' perspective or cost of capital.
The 3-year mid-term business plan is built on the foundation of the actual project in progress and should be outlined to reflect its cash allocations and cash flow returns.


Few Companies Include ROE and ROIC as KPIs in Their Mid-Term Management Plans

<ul>
<li>The rapid spread of companies, especially large companies, disclosing the skills matrix was triggered by Supplemental Principle 4-11-(i), which was added to the Corporate Governance Code.</li>
<li>While more companies focus disclosure on skills matrix of directors, it’s questionable whether these criteria have been validated to select those who can help expand the value of the company.</li>
<li>The process should ensure that the nomination process is based on the skills needed to run the company, not on who is close to the president of the company.</li>
</ul>


The rapid spread of companies, especially large companies, disclosing the skills matrix was triggered by Supplemental Principle 4-11-(i), which was added to the Corporate Governance Code.
While more companies focus disclosure on skills matrix of directors, it’s questionable whether these criteria have been validated to select those who can help expand the value of the company.
The process should ensure that the nomination process is based on the skills needed to run the company, not on who is close to the president of the company.


The Reasons for the Criteria Selected for the Directors' Skills Matrix Are Still Unclear

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)

New Index Distracts from Prime Market Issues While Providing Long/Short Opportunities for Investors

I would like to discuss the issues on the outline of the document "Outline of the JPX Prime 150 Index, a new index focusing on value creation"...

Metrical Inc

Rather, Listing Criteria for Prime Market Should Be Modified to the Original Concept of the Market

I would like to discuss the issues on the April 5 Nikkei Shimbun article, "Only 20% of Companies Have "Graduated" from the Transitional Measures...

Metrical Inc

To Make the TSE Prime Market in Line with the Original Concept of the Market

I would like to discuss the issues on the April 3 Nikkei Shimbun article, "TSE Reforms: Improvement Requested for P/Bs Below 1x to Put Soul into...

Metrical Inc

Few Companies Include ROE and ROIC as KPIs in Their Mid-Term Management Plans

I would like to discuss the issues on the March 31 Nikkei article, "Activist Shareholders Call for Higher Stock Prices: Company's Mid-Term...

Metrical Inc

The Reasons for the Criteria Selected for the Directors' Skills Matrix Are Still Unclear

I would like to discuss the issues on the April 2 Nikkei article, "Disclosure of Directors' Skills Spreads to Major Listed Companies, but There Are...

Metrical Inc