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.

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.

<ul>
<li>More large companies adopting ROIC as a KPI for executive compensation can be viewed as a positive change, indicating a growing awareness of capital costs and capital profitability among companies.</li>
<li>Shifting the growth strategy from sales and profits to capital profitability, and aligning the KPIs for that growth strategy with executive compensation KPIs, is also consistent with the investor perspective.</li>
<li>However, adopting ROIC as a KPI for growth strategies and its integration into management practices has only just begun at large companies, and issues surrounding executive compensation remain unresolved.</li>
</ul>


More large companies adopting ROIC as a KPI for executive compensation can be viewed as a positive change, indicating a growing awareness of capital costs and capital profitability among companies.
Shifting the growth strategy from sales and profits to capital profitability, and aligning the KPIs for that growth strategy with executive compensation KPIs, is also consistent with the investor perspective.
However, adopting ROIC as a KPI for growth strategies and its integration into management practices has only just begun at large companies, and issues surrounding executive compensation remain unresolved.


Adopting ROIC as a KPI Is Positive, but the Issue of Executive Compensation Remains Unresolved

<ul>
<li>Even when the TOPIX constituents are narrowed down to 1,200 stocks, the impact on market capitalization differs between those that remain and those that do not.</li>
<li>Measures to increase the free-float market capitalization (20 billion yen level) used in the TOPIX calculation criteria involve reducing fixed shares such as cross-shareholdings and raising stock prices.</li>
<li>Presenting a compelling performance outlook that demonstrates the expansion of corporate value is key to increasing market capitalization, and showing signs of this in recent performance is paramount.</li>
</ul>


Even when the TOPIX constituents are narrowed down to 1,200 stocks, the impact on market capitalization differs between those that remain and those that do not.
Measures to increase the free-float market capitalization (20 billion yen level) used in the TOPIX calculation criteria involve reducing fixed shares such as cross-shareholdings and raising stock prices.
Presenting a compelling performance outlook that demonstrates the expansion of corporate value is key to increasing market capitalization, and showing signs of this in recent performance is paramount.


For Companies Surviving on TOPIX, Resolving Cross-Shareholdings and Achieving Growth Are Essential

<ul>
<li>Among companies failing the listing criteria for Standard Market and Growth Market, many that cannot meet 1 billion yen tradable shares market capitalization criteria will migrate to Nagoya Stock Exchange.</li>
<li>These companies failed to grow market capitalization. For these companies, the purpose of going public may have been to increase their visibility and credibility than to achieve growth after listing.</li>
<li>Companies migrating from TSE to other markets face a significant hurdle in achieving growth and improving corporate governance to enhance management transparency, especially when institutional investor engagement is lacking.</li>
</ul>


Among companies failing the listing criteria for Standard Market and Growth Market, many that cannot meet 1 billion yen tradable shares market capitalization criteria will migrate to Nagoya Stock Exchange.
These companies failed to grow market capitalization. For these companies, the purpose of going public may have been to increase their visibility and credibility than to achieve growth after listing.
Companies migrating from TSE to other markets face a significant hurdle in achieving growth and improving corporate governance to enhance management transparency, especially when institutional investor engagement is lacking.


Raising the Quality of Listed Companies Is Quite Challenging for the Nagoya Stock Exchange

<ul>
<li>Transitioning to company with audit and supervisory committee is neutral for governance improvement, but the reason governance improvement hasn't decisively improved is that few companies adopt the US-type 3-committee structure.</li>
<li>Currently, discussions are underway on company with US type 3 Committees, specifically the proposal that “only when outside directors constitute majority, shall the authority to determine nominations reside with theBOD.”</li>
<li>This resembles the situation when companies established audit committees prioritized demonstrating improvements in corporate governance over substantive enhancements to corporate governance itself.</li>
</ul>


Transitioning to company with audit and supervisory committee is neutral for governance improvement, but the reason governance improvement hasn't decisively improved is that few companies adopt the US-type 3-committee structure.
Currently, discussions are underway on company with US type 3 Committees, specifically the proposal that “only when outside directors constitute majority, shall the authority to determine nominations reside with theBOD.”
This resembles the situation when companies established audit committees prioritized demonstrating improvements in corporate governance over substantive enhancements to corporate governance itself.


Will Substantive Reforms to Governance Be Postponed Again This Time for Building a Track Record?

<ul>
<li>“Case studies of overcoming challenges” are effective in Japan, where peer pressure is strong. As a starting point for discussion, they will lead to management practices that enhance future value.</li>
<li>Regarding challenges in initiatives outlined in “Survey Results for Companies,” responses indicating challenges in formulating medium-to-long-term capital policies, reviewing business portfolios, and identifying growth opportunities ranged from 20% to 49%.</li>
<li>More variable compensation for executives to increase alignment with shareholders' perspectives, and stricter voting by institutional investors on director election proposals are also necessary.</li>
</ul>


“Case studies of overcoming challenges” are effective in Japan, where peer pressure is strong. As a starting point for discussion, they will lead to management practices that enhance future value.
Regarding challenges in initiatives outlined in “Survey Results for Companies,” responses indicating challenges in formulating medium-to-long-term capital policies, reviewing business portfolios, and identifying growth opportunities ranged from 20% to 49%.
More variable compensation for executives to increase alignment with shareholders' perspectives, and stricter voting by institutional investors on director election proposals are also necessary.


Publishing “Case Studies of Overcoming Challenges” Is Effective, But It Alone Is Not Sufficient

Executive Director, Co-head of CG Research, Metrical Inc.
METRICAL INC. is a corporate governance(CG)research, investment research and consulting firm in Japan, offering a full service CG research and solutions to investors, public companies and other wide range of organizations globally. http://www.metrical.co.jp/

Aki Matsumoto
Executive Director
• Metrical Inc

Adopting ROIC as a KPI Is Positive, but the Issue of Executive Compensation Remains Unresolved

I would like to discuss the issues on the November 27 Nikkei article titled “More Companies Link Executive Compensation to ROIC; TDK and NTN Focus...

Metrical Inc

For Companies Surviving on TOPIX, Resolving Cross-Shareholdings and Achieving Growth Are Essential

I would like to discuss the issues on the November 1 Nikkei article titled “Companies Fighting to Stay in the TOPIX: The Crucial Challenge of TOPIX...

Metrical Inc

Raising the Quality of Listed Companies Is Quite Challenging for the Nagoya Stock Exchange

I would like to discuss the Nikkei article on November 20, “Nagoya Stock Exchange Sees Highest Number of New Listings in 63 Years; Becomes...

Metrical Inc

Will Substantive Reforms to Governance Be Postponed Again This Time for Building a Track Record?

I would like to discuss the issues on the the Nikkei article dated November 19, titled “Companies with Audit Committees Increase 80% in 8 Years;...

Metrical Inc

Publishing “Case Studies of Overcoming Challenges” Is Effective, But It Alone Is Not Sufficient

I would like to discuss the issues on the Tokyo Stock Exchange's disclosure materials dated November 13, titled “Updates to the Case Studies on...

Metrical Inc