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>Both Kappa Kreate and ATOM are almost completely controlled by their parent company, ColoWide, and we cannot expect corporate governance practices that would actually be a relief to minority shareholders.</li>
<li>With the parent company in full control, the subsidiary's minority shareholders are likely to be aware that the interests of the parent take precedence over those of the minority shareholders.</li>
<li>Parent company shareholders shouldn't tolerate continuing to own subsidiaries that damage their interests. The problem isn't a problem of the interests of the subsidiary's shareholders, but of the parent's shareholders.</li>
</ul>


Both Kappa Kreate and ATOM are almost completely controlled by their parent company, ColoWide, and we cannot expect corporate governance practices that would actually be a relief to minority shareholders.
With the parent company in full control, the subsidiary's minority shareholders are likely to be aware that the interests of the parent take precedence over those of the minority shareholders.
Parent company shareholders shouldn't tolerate continuing to own subsidiaries that damage their interests. The problem isn't a problem of the interests of the subsidiary's shareholders, but of the parent's shareholders.


The Problem Isn’t for the Subsidiary Shareholders but for the Parent Company Shareholders

<ul>
<li>The benefit of issuing ESG bonds for retail investors is that they provide an investment opportunity for retail investors to become familiar with the ESG initiatives of individual issuers.</li>
<li>For the issuers, they can reduce issuance costs compared to institutional bonds. For the underwriting investment banks, the bonds are more profitable than institutional bonds because of higher sales fees.</li>
<li>Since ESG bonds for individuals have a maturity of 3-10 years, ESG factors such as the environment may have a short time to affect credit risk.</li>
</ul>


The benefit of issuing ESG bonds for retail investors is that they provide an investment opportunity for retail investors to become familiar with the ESG initiatives of individual issuers.
For the issuers, they can reduce issuance costs compared to institutional bonds. For the underwriting investment banks, the bonds are more profitable than institutional bonds because of higher sales fees.
Since ESG bonds for individuals have a maturity of 3-10 years, ESG factors such as the environment may have a short time to affect credit risk.


ESG Bonds for Individuals Matching Increased Issuance Intentions

<ul>
<li>The important thing is not whether the ROIC tool is used or not, but rather the risk-taking for investment and whether it resulted in sufficient returns.</li>
<li>A change in the outlook for improving profitability is necessary for the stock price to rise, and furthermore, a compelling growth policy and capital allocation can also be effective.</li>
<li>The fact that valuations have not risen sufficiently in the current situation infers that investors lack confidence in the path to improving profitability for each business.</li>
</ul>


The important thing is not whether the ROIC tool is used or not, but rather the risk-taking for investment and whether it resulted in sufficient returns.
A change in the outlook for improving profitability is necessary for the stock price to rise, and furthermore, a compelling growth policy and capital allocation can also be effective.
The fact that valuations have not risen sufficiently in the current situation infers that investors lack confidence in the path to improving profitability for each business.


ROIC Helps to Raise Transparency in Business, but Management Skills Are the Key to Improve Return

<ul>
<li>Companies are presumably allocating cash to shareholder returns rather than investing in growth. Lack of investment in growth may lead to slower profit growth, which leads to lower valuations.</li>
<li>There is concern that management may be hesitant to take risks. Since no shareholder hates shareholder returns, they may be easily diverted to share repurchases that don't require risk-taking decision.</li>
<li>Although the expected share repurchase will limit the risk of sharp decline in the stock prices, modest growth investments are likely to prevent the expansion of multiples.</li>
</ul>


Companies are presumably allocating cash to shareholder returns rather than investing in growth. Lack of investment in growth may lead to slower profit growth, which leads to lower valuations.
There is concern that management may be hesitant to take risks. Since no shareholder hates shareholder returns, they may be easily diverted to share repurchases that don't require risk-taking decision.
Although the expected share repurchase will limit the risk of sharp decline in the stock prices, modest growth investments are likely to prevent the expansion of multiples.


Companies that Buy Back Their Own Shares but Do Not Increase Their Share Price Should Consider Why

<ul>
<li>Large audit firms focus on more profitable business and improving the profitability of their audit services. Consequently, high-risk firms that have been withdrawn from large firms flow to small-and-medium-sized firms.</li>
<li>"Enhancement of governance, including third-party evaluation function" is crucial to ensure that the audit firm has system to oversee and objectively determine the appropriateness of audit process and audit opinion.</li>
<li>Smaller audit firms will comply with the guidelines just for show, but only when future problems with high-risk firms arise will effective reforms be made in accordance with the guidelines.</li>
</ul>


Large audit firms focus on more profitable business and improving the profitability of their audit services. Consequently, high-risk firms that have been withdrawn from large firms flow to small-and-medium-sized firms.
"Enhancement of governance, including third-party evaluation function" is crucial to ensure that the audit firm has system to oversee and objectively determine the appropriateness of audit process and audit opinion.
Smaller audit firms will comply with the guidelines just for show, but only when future problems with high-risk firms arise will effective reforms be made in accordance with the guidelines.


Is Effective Reform Only Possible After Future Problems with High-Risk Companies?

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)

The Problem Isn’t for the Subsidiary Shareholders but for the Parent Company Shareholders

I would like to discuss the issues on the Nikkei article about "Mr. Go Yamakado, president of Atom, another revolving sushi chain, has been...

Metrical Inc

ESG Bonds for Individuals Matching Increased Issuance Intentions

I would like to discuss the issues on the Nikkei article, "Issuance of ESG bonds for individual investors to reach a record high in 2022".

Metrical Inc

ROIC Helps to Raise Transparency in Business, but Management Skills Are the Key to Improve Return

I would like to discuss the issues on the Nikkei article, "ROIC cannot be faked. Efficient management's report card is the key to higher stock...

Metrical Inc

Is Effective Reform Only Possible After Future Problems with High-Risk Companies?

I would like to discuss the issues on the Nikkei article of November 17, "Mandating Governance Guidelines for Small and Medium-Sized Auditing Firms...

Metrical Inc

The Problem Isn’t for the Subsidiary Shareholders but for the Parent Company Shareholders

I would like to discuss the issues on the Nikkei article about "Mr. Go Yamakado, president of Atom, another revolving sushi chain, has been...

Metrical Inc

ESG Bonds for Individuals Matching Increased Issuance Intentions

I would like to discuss the issues on the Nikkei article, "Issuance of ESG bonds for individual investors to reach a record high in 2022".

Metrical Inc

ROIC Helps to Raise Transparency in Business, but Management Skills Are the Key to Improve Return

I would like to discuss the issues on the Nikkei article, "ROIC cannot be faked. Efficient management's report card is the key to higher stock...

Metrical Inc

Companies that Buy Back Their Own Shares but Do Not Increase Their Share Price Should Consider Why

I would like to discuss the issues on the Nikkei article, "Share buyback quota for 2022 to top 9.2 trillion yen by mid-November.”

Metrical Inc

Is Effective Reform Only Possible After Future Problems with High-Risk Companies?

I would like to discuss the issues on the Nikkei article of November 17, "Mandating Governance Guidelines for Small and Medium-Sized Auditing Firms...

Metrical Inc