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>While good for small-cap stocks to disclose stock price improvement plans, which is the minimum to be eligible for TOPIX, few global investors can invest in company of this size.</li>
<li>Since many Japanese small-cap companies have diversified businesses and compete with numerous companies for a market that is not large, forcing low profit margins, a market shakeout is necessary.</li>
<li>The key is whether small cap companes that are beyond the reach of overseas investor engagement can execute a business portfolio review on its own initiative.</li>
</ul>


While good for small-cap stocks to disclose stock price improvement plans, which is the minimum to be eligible for TOPIX, few global investors can invest in company of this size.
Since many Japanese small-cap companies have diversified businesses and compete with numerous companies for a market that is not large, forcing low profit margins, a market shakeout is necessary.
The key is whether small cap companes that are beyond the reach of overseas investor engagement can execute a business portfolio review on its own initiative.


Market Shakeout Should Come with Business Portfolio Restructuring Especially for Small-Cap Companies

<ul>
<li>Listing criteria for TSE Growth Market will be raised to over 4 billion yen in market capitalization after 10 years of listing, but the details are left for further discussion.</li>
<li>It is necessary to provide opportunities for founders to exit and recover their capital without relying on an IPO, for example by creating a market for unlisted shares.</li>
<li>Switching to a policy of using cash for shareholder returns because of the inability to comply with TSE Growth Market listing maintenance standards is not a fundamental solution.</li>
</ul>


Listing criteria for TSE Growth Market will be raised to over 4 billion yen in market capitalization after 10 years of listing, but the details are left for further discussion.
It is necessary to provide opportunities for founders to exit and recover their capital without relying on an IPO, for example by creating a market for unlisted shares.
Switching to a policy of using cash for shareholder returns because of the inability to comply with TSE Growth Market listing maintenance standards is not a fundamental solution.


Management Mindset of Believing that Company Growth Is Not the Main Objective Is Hindering Growth

<ul>
<li>With external female board member resources under pressure, it will be extremely difficult to raise the percentage of female board members steadily at this rate.</li>
<li>The trump card for this is matching numbers. Increasingly, female board members with no management background or outside talent are being recruited to female managerial positions.</li>
<li>It is expected that fewer companies will move to Company with US type 3 Statutory Committees in order to avoid increasing the number of statutory executive officers.</li>
</ul>


With external female board member resources under pressure, it will be extremely difficult to raise the percentage of female board members steadily at this rate.
The trump card for this is matching numbers. Increasingly, female board members with no management background or outside talent are being recruited to female managerial positions.
It is expected that fewer companies will move to Company with US type 3 Statutory Committees in order to avoid increasing the number of statutory executive officers.


Side Effects of Matching Numbers to Raise the Percentage of Female Board Members

<ul>
<li>Listed subsidiaries decrease but increase if equity method listed companies are included. Many companies haven't fully exercised treatment of subsidiaries, selling only a little of their shares to below 50%.</li>
<li>Many parent companies that own listed subsidiaries and equity-method listed companies have placed cash in subsidiaries or equity-method companies without increasing their own stock prices.</li>
<li>Although companies have changed their mindset somewhat, they haven’t changed their management to effectively use cash to create value, which is the reason for the low valuations of Japanese stocks.</li>
</ul>


Listed subsidiaries decrease but increase if equity method listed companies are included. Many companies haven't fully exercised treatment of subsidiaries, selling only a little of their shares to below 50%.
Many parent companies that own listed subsidiaries and equity-method listed companies have placed cash in subsidiaries or equity-method companies without increasing their own stock prices.
Although companies have changed their mindset somewhat, they haven’t changed their management to effectively use cash to create value, which is the reason for the low valuations of Japanese stocks.


Parent-Subsidiary Listings Are a Microcosm of Japanese Stocks: Change to Value-Creation Is Long Away

<ul>
<li>While the move to strengthen shareholder returns is a step forward among companies, there is a concern about whether they are using their cash to invest fully in future growth.</li>
<li>Interestingly, while rising foreign shareholdings are driving companies that can't spend their cash reserves effectively to repurchase shares, overseas investors are overselling Japanese stocks in the first half of FY2024.</li>
<li>There has been focus on measures to reduce the denominator of ROE, but the current pace of reduction of policy shareholdings and cash reserves isn't sufficient to significantly boost ROE.</li>
</ul>


While the move to strengthen shareholder returns is a step forward among companies, there is a concern about whether they are using their cash to invest fully in future growth.
Interestingly, while rising foreign shareholdings are driving companies that can't spend their cash reserves effectively to repurchase shares, overseas investors are overselling Japanese stocks in the first half of FY2024.
There has been focus on measures to reduce the denominator of ROE, but the current pace of reduction of policy shareholdings and cash reserves isn't sufficient to significantly boost ROE.


Overseas Investors' Net Sale of Japanese Stocks Imply Priority of Profit Growth over Share Buybacks

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/