METRICAL:After TSE’s Request, the Key Is Whether the Company Can Deliver While Investors Are Still Hopeful

On August 30, 2024, the TSE published a document entitled “Future Measures Concerning ‘Measures to Achieve Management Conscious of Cost of Capital and Stock Price’.” I would like to provide an overview of this document below and discuss the issues that it addresses.

Ⅰ.Review of one year since the request and future plans
 While many listed companies have begun to disclose information and have begun to take other actions, the TSE recognizes that it will take a considerable amount of time to achieve medium- to long-term improvements in corporate value and that reforms are still “in progress”.
 TSE aims to create a market where it is “natural” for listed companies to work on improving corporate value through management that is conscious of cost of capital and stock price, and constructive dialogue with investors.
 In promoting future efforts, TSE, as a market operator, will focus on improving the environment for listed companies to enhance their corporate value through constructive dialogue with investors.
 As a result, it is expected that the cost of maintaining a listing will increase and that the number of management decisions to go private will also increase (TSE will not focus on the number of listed companies).
 Encouraging not only listed companies but also institutional investors to engage in dialogue with listed companies from the perspective of supporting the enhancement of corporate value in mid- to long-term, rather than focusing solely on short-term, superficial perspectives
 Reviewing overall progress by qualitatively understanding listed companies’ efforts and disclosures and evaluations by domestic and foreign investors, in addition to quantitative indicators such as PBR, ROE, and market capitalization (including international comparisons), as an evaluation axis for measuring future progress.

Ⅱ.Future Responses: Approaches based on the status of company initiatives
1. Approaches according to the status of the company’s initiatives
 Based on the status of companies’ responses and the results of interviews with investors and others, the status of companies’ efforts can be divided into three main groups

Image of corporate initiatives
Future Responses: Approaches according to the status of company initiatives
Group 1: Companies that are taking autonomous measures
Group 2: Companies expected to improve in the future
Group 3: Companies that have not yet made a display

(Distribution of company groups)
Group 1 + Group 2: 86% in the prime market, 44% in the standard market
Group 3: 14% in the prime market, 56% in the standard market

(Issues for company group 2 and company group 3)
 The issues in Group 2 include a discrepancy between the listed company’s goals and initiatives with investors, such as not meeting investors’ expectations, and inadequate communication with investors.
 The issue in group 3 is that some listed companies do not have the attitude and systems in place to deal with investors that they should have as listed companies, such as not engaging in dialogue with investors due to the lack of an IR system, and this is due to the fact that they are unlikely to feel pressure from the market due to the presence of their shareholders with financial support.

(TSE’s future policy)
 From the perspective of enhancing the value of the Japanese market as a whole, it is important to continue to support the efforts of Group 1 while focusing on Group 2 and taking measures to promote and support Group 2.
 For group 3, it is necessary to encourage them to build up their attitude and systems to face the market as listed companies and to promote initiatives from the viewpoint of protecting minority shareholders.

1. Response to Companies 2 (Companies Expected to Improve in the Future)
Provide material for consideration to resolve the “misalignment” of investor perspectives:
 Update of key points and case studies [to be released in early November].
➢In addition to examples that address the key points expected by investors, points and typologies that have gaps with investors’ perspectives will also be expanded (we will continue to collect opinions from a large number of investors in Japan and overseas).
✓ Disclosure of progress
✓ Review of business portfolio (x Lack of progress in selling or carving out businesses)
✓ Dialogue between outside directors and investors (x Outside directors not responding to requests for dialogue)
✓ Target setting (x Low level and not meeting investors’ expectations)
✓ Consideration of capital allocation policy with an eye on the balance sheet to be achieved (x Return to shareholders as a one-time response without such consideration)
✓ Other (x Only quoting past mid-term management plans, etc.)
 Introduction of changes in market valuation (stock price) due to disclosure status, etc.
 Continue to conduct awareness-raising (seminars and individual visits) for managers and other persons in charge of listed companies nationwide (a dedicated group was established at the beginning of the year)

Facilitate smooth communication with investors:
 Communicate the importance of first disclosing current efforts and considerations and brushing up through dialogue with investors to companies that have not made progress in disclosure
 Improvement of the list of companies disclosing information (a support tool for listed companies actively engaged in disclosure) [Details to be announced by the end of September, to be launched at the beginning of the year].
➢Set a deadline for companies [under consideration]: encourage companies [under consideration] to move to [already disclosed] by setting a certain period of time (details of operation to be discussed)
➢Identification of [Update] companies: In consideration of the fact that it will become more important to update their efforts in the future, a new column was added.
➢Identification of companies that “wish to have access to institutional investors”: To promote dialogue between companies that have been actively working on the consideration and disclosure of specific initiatives and targets and the establishment of IR systems, but currently do not have access to investors and wish to have more active dialogue, and institutional investors.
 Encourage investors to engage in dialogue with listed companies from a viewpoint that supports the enhancement of corporate value in mid- to long-term, and not just from a short-term, superficial perspective.

2. Response to Companies (3) (companies that have not yet disclosed)
Promotion of IR functions::
 In parallel with the request for management that is conscious of the cost of capital and stock price, we will encourage listed companies to secure IR functions in order to ensure the attitude and system toward investors that they should have as a listed company [Specific timing and methods will be discussed].
Follow-up on measures to protect minority shareholders:
(Measures up to last fiscal year)
In December 2023, the “Study Group on Minority Shareholder Protection in Dependent Listed Companies” summarized the discussions up to that point and issued two recommendations: “Enhancement of information disclosure regarding minority shareholder protection and group management” and “Expected roles of independent outside directors in listed companies with controlling or dominant shareholders. and “Roles Expected of Independent Outside Directors in Listed Companies with Controlling or Controlling Shareholders”.
 As a follow-up to the above, a review of the status of enhanced disclosure of information on minority shareholder protection and group management after the announcement [to be conducted in October or later].

Discussion Point 1: “Now that approximately one year has passed since the request was made, TSE has compiled future measures based on exchanges of opinions with institutional investors and other market participants and discussions at the Follow-up Meeting on the Revision of Market Classification.”
As introduced in my previous article “Will TSE’s Mock Engagement Measures Work?”, the “Future Measures (Draft)” presented in the “Current Status and Future Measures (Draft) of TSE Concerning ‘Measures to Achieve Management Conscious of Cost of Capital and Stock Price’” at the “17th Follow-up Meeting on the Revision of Market Classification” held by TSE on August 19, 2024, became the future measures as it is now. The specific measures will be announced in September or later. Specific measures will be disclosed sequentially from September onward. These specific measures may cause some listed companies to expect what in the world kind of support measures they will receive. Or, conversely, there may be companies that find it troublesome to have to make disclosures that conform to the wishes of the TSE. For investors, on the other hand, they have a certain appreciation for the fact that many company managers have now started to realize that they need to incorporate the cost of capital into their management. However, investors who are looking for results in terms of investment performance are still waiting for the company’s results. As for the companies, many of them are still just at the starting line. There may be a gap in the perception of time for results between investors and listed companies. Investors expect faster results, and if they are slower than expected, there is a risk that expectations will be stripped away. On the other hand, it is expected that some companies that are judged to take a considerable amount of time to achieve results may choose to go private.

Discussion Point 2: “Based on the status of companies‘ responses and the results of interviews with investors and others, the status of companies’ efforts can be divided into three main groups.”
TSE classifies listed companies into three categories: Group 1 (companies that are taking autonomous action), Group 2 (companies that are expected to improve in the future), and Group 3 (companies that have not yet disclosed). Companies that have disclosed in response to “TSE’s request” are categorized as groups 1) and 2), and companies that have not disclosed are categorized as group 3). The distinction between groups 1) and 2) and group 3) is clear, as it refers to the presence or absence of disclosure. On the other hand, the TSE does not make a distinction between companies group (1) and companies group (2). If that distinction were to be made between companies that are generating returns on capital in excess of their cost of capital, or companies that are generating value, such as through rising P/B, it would go without saying that there are very few companies in company group 1). For company group ②, which accounts for the majority of companies listed on the prime market, TSE plans to release in November a “Key Points and Case Studies” to resolve the discrepancy between the company and investors’ viewpoints. In addition, in order to facilitate smooth communication with investors, TSE has been releasing a list of companies that have disclosed information, and plans to clearly indicate which of these companies have updated their disclosures and which wish to engage in dialogue with institutional investors.

TSE can only provide guidance to listed companies and cannot actually produce results on behalf of the company. With many companies having very small market capitalizations, it is necessary to produce results as quickly as possible that the company can steadily create value in order to attract the attention of institutional investors. It is a fact that many companies struggle with dialogue with institutional investors. Through dialogue with institutional investors, companies are required to spread the perception that they are capable of creating value in a sustainable manner in order to expand their market capitalization. It is not a chicken and egg situation; results come first.

In summary, I have considered the outline of the TSE’s August 30 disclosure “Future Measures Concerning ‘Measures to Achieve Management Conscious of Cost of Capital and Stock Price’” and its discussion points.

The TSE’s “Current Status and Proposed Future TSE Measures Regarding ‘Measures to Achieve Management Conscious of Cost of Capital and Stock Prices’” introduced in my previous article, “Will TSE’s Mock Engagement Measures Work?” is now directly the future measures.

For investors, there is a certain appreciation for the fact that many company managers have stood on the starting line of “the point of cost of capital, which must be incorporated into management. On the other hand, as TSE acknowledges that “the reform has just begun,” it is expected that many companies will take time to achieve results. Investors, who demand results in terms of investment performance, also demand results from companies, and if a gap surfaces between the two timelines, there is a risk that this will lead to a stripping away of investor expectations. It is also to be expected that companies that have determined that it will take a considerable amount of time to achieve results will move to consider going private.

The companies can be divided into two groups: those that have disclosed their initiatives in response to “TSE’s request” and those that have not yet done so. TSE plans to provide elementary guidance to those companies that have not yet disclosed their IR activities. TSE has indicated that companies that have disclosed are divided into two groups: (1) “companies that are taking autonomous action” and (2) “companies that are expected to improve in the future,” but has not indicated the percentage of each group or the key points of classification.

If we assume that the classification is companies that are generating return on capital in excess of cost of capital, or companies that are generating value, such as through rising P/B, then the TSE would be imposing guidance on the majority of companies in group (2), since there are so few companies in group (1).

TSE plans to release a “Key Points and Case Studies” to the group of companies (2) in November to resolve the discrepancy between their perspective and that of corporate investors. However, investors are looking for results as soon as possible.

Many companies lament the lack of opportunities for dialogue with institutional investors even after conducting IR activities, but the first priority is to produce results in order to seek access to institutional investors. It is a race to produce good results within a limited time frame and faster than other listed companies.

http://www.metrical.co.jp/cg-ranking-top100/

Aki Matsumoto, CFA

Please see detail research the following links.
http://www.metrical.co.jp/
Please feel free to contact the below email address if any interest or query.

Aki Matsumoto, CFA
Executive Director
Metrical Inc.
akimatsumoto@metrical.co.jp
http://www.metrical.co.jp/jp-home/

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