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>The problem with cross-shareholdings is not simply that they weigh heavily on ROE and ROA improvement, but also that they do not create tension in management.</li>
<li>The degree of seriousness of the company's efforts to reduce policy shareholdings is a measure of the improvement in return on capital. The level of seriousness must be monitored.</li>
<li>The fact that there are inappropriate entries in the items required of prime market listed companies indicates that many companies are not suitable for prime market listed companies.</li>
</ul>


The problem with cross-shareholdings is not simply that they weigh heavily on ROE and ROA improvement, but also that they do not create tension in management.
The degree of seriousness of the company's efforts to reduce policy shareholdings is a measure of the improvement in return on capital. The level of seriousness must be monitored.
The fact that there are inappropriate entries in the items required of prime market listed companies indicates that many companies are not suitable for prime market listed companies.


Key to Look Carefully to See if What Is Disclosed Is Consistent with Profitability and Other Results

<ul>
<li>While it's commendable that more companies are publishing their skills matrices, it's not enough to verify that the skill items are useful in expanding the value of the company.</li>
<li>Since management strategies vary from company to company, the skills required to formulate and execute a company's strategy are not likely to be the same as those of other companies.</li>
<li>Director candidates should be selected based on the skills needed to expand the value of the company in future and skills that complement the skills lacking in the current directors.</li>
</ul>


While it's commendable that more companies are publishing their skills matrices, it's not enough to verify that the skill items are useful in expanding the value of the company.
Since management strategies vary from company to company, the skills required to formulate and execute a company's strategy are not likely to be the same as those of other companies.
Director candidates should be selected based on the skills needed to expand the value of the company in future and skills that complement the skills lacking in the current directors.


Is the Gap Between the Skills Matrix and the Board Personnel Needed Widening?

<ul>
<li>The reversal of foreign and cross-held shares in shareholding ratio is the main catalyst for today's change. Companies with high foreign ownership gradually accepted the proposals of overseas investors.</li>
<li>The issues of low profit margins, high policy shareholdings, excess cash on hand, and consequently low ROE are still unresolved in many companies, while some companies did successful through engagement.</li>
<li>More companies will seek compromise with shareholders by enhancing shareholder returns in the face of the fact that the gap between cost of capital and return on capital wasn't filled.</li>
</ul>


The reversal of foreign and cross-held shares in shareholding ratio is the main catalyst for today's change. Companies with high foreign ownership gradually accepted the proposals of overseas investors.
The issues of low profit margins, high policy shareholdings, excess cash on hand, and consequently low ROE are still unresolved in many companies, while some companies did successful through engagement.
More companies will seek compromise with shareholders by enhancing shareholder returns in the face of the fact that the gap between cost of capital and return on capital wasn't filled.


In TSE as a Whole, There Are Far More Companies Whose Traditional Issues Have Not Been Resolved

<ul>
<li>For companies facing challenges in maximizing sustainable shareholder returns, it is not a bad idea to rethink management strategies for corporate value growth in the quiet environment of going private.</li>
<li>MBOs began to attract attention as managers became more aware of the listing costs. TSE's request last March was the product of making companies even more aware of the costs.</li>
<li>It is not easy for a company that has not been recognized in the marketplace for many years to increase its stock valuation in a short period of time.</li>
</ul>


For companies facing challenges in maximizing sustainable shareholder returns, it is not a bad idea to rethink management strategies for corporate value growth in the quiet environment of going private.
MBOs began to attract attention as managers became more aware of the listing costs. TSE's request last March was the product of making companies even more aware of the costs.
It is not easy for a company that has not been recognized in the marketplace for many years to increase its stock valuation in a short period of time.


In Particular, Companies with Small Market Capitalization Should Consider Going Private

<ul>
<li>Many Japanese managers have little idea that what belongs to shareholders is net profit and not free cash flow. This has created two problems.</li>
<li>If Japanese companies, mostly manufacturers, use dividend payout ratios as a criterion for shareholder returns, cash on hand will not decline even if shareholder returns are increased to some extent.</li>
<li>The inability to move beyond the concept of allocating investment and shareholder returns based on increases or decreases in cash may be the reason for the unclear cash allocation policy.</li>
</ul>


Many Japanese managers have little idea that what belongs to shareholders is net profit and not free cash flow. This has created two problems.
If Japanese companies, mostly manufacturers, use dividend payout ratios as a criterion for shareholder returns, cash on hand will not decline even if shareholder returns are increased to some extent.
The inability to move beyond the concept of allocating investment and shareholder returns based on increases or decreases in cash may be the reason for the unclear cash allocation policy.


What Lies Behind the Inability to Come up with Flexible Cash Usage Is

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

Key to Look Carefully to See if What Is Disclosed Is Consistent with Profitability and Other Results

As for the May 27 Nikkei article, "FSA to Investigate Appropriate Disclosure of Policy Shareholdings, Targeting All Listed Companies",

Metrical Inc

Is the Gap Between the Skills Matrix and the Board Personnel Needed Widening?

I would like to discuss the issues on the May 26 Nikkei article, “Skill Matrix Disclosure Insufficient? Criticism of Side-by-Side Content."

Metrical Inc

In TSE as a Whole, There Are Far More Companies Whose Traditional Issues Have Not Been Resolved

I would like to discuss the issues on the May 26 Nikkei article, "Japanese Stocks, 'External Pressure' is a Catalyst, and the Argument is from...

Metrical Inc

In Particular, Companies with Small Market Capitalization Should Consider Going Private

I would like to discuss the issues on the May 24 Nikkei Shimbun article, "Record MBOs: 1.4 Trillion Yen, Market Discipline Prompts Metabolism."

Metrical Inc

What Lies Behind the Inability to Come up with Flexible Cash Usage Is

I would like to discuss the May 18 Nikkei Newspaper article, "No Sanctuary" in Capital Efficiency Reform, Management's Decision in Financial...

Metrical Inc