METRICAL:Post-COVID-19 Focuses on Family Companies

The environment surrounding our business is changing significantly in line with changes in social life due to the spread of the new corona virus infection. The biggest challenge for management is to adapt to these changes in the environment with a post-corona scenario in mind. We believe that one of the keys to adapting to these changes in a timely and flexible manner is management leadership. We expect to see a lot of interest in the relatively fast-moving family-owned companies. In the past, METRICAL research has shown that companies owned by founder’s families with 20% or more of their companies performing significantly better than average. We would like to focus again on the latest data. The following two charts show the distribution of ROE (actual for past 3-5 years) and Tobin’s Q between family-owned companies (those with 20% or more ownership) and the universe of 1,743 firms, with both ROE and Tobin’s Q being higher for family companies than for the universe of 1,743 companies’ distribution. It remains to be seen whether the family companies will be able to adapt to these changes at a rapid pace and achieve higher profitability, which will be reflected in their stock performance.

METRICAL: September CG Stock Performance

September stocks edged slightly higher after surged in the previous month. CG Top 20 stocks gained with solid outperformed against TOPIX and JPX400.

Stock prices kept positive return in September, followed by the rally in the previous few months.TOPIX and JPX400 closed slightly higher +0.52% and +0.11% respectively for the month. CG Top 20 stocks average climbed 2.28% for the month, increasing the outperformance against the both market indices.

METRICAL:Stock Prices of Family Companies and Investment Strategies

In the previous article, based on the study classified the 3 groups of the universe companies by the ownership of major shareholders: (a) Companies with major shareholders that hold >=50% of shares, (b) Companies with major shareholders that hold >=20% and <50% of shares and (c) Companies without major shareholders that hold >=20% of shares. A subsidiary and an affiliate company owned by a parent company or founder’s family company show superior performance in the key performance measures such as ROA and ROE and Tobin’s Q. In this point, it would be an effective way for a listed parent company to raise the return measures such as ROA and ROE of the parent company by consolidating the subsidiary or the affiliate company with relatively higher return. Such a case is increasingly occurred. We introduced investment strategies to buy listed subsidiaries (and affiliated companies) in anticipation of the acquisition of listed subsidiaries with high profit margins of the parent company.
At this time, on the contrary, we focused on family companies whose stock prices have remained lower. There are several purposes for going public, but if one of the purposes is the diversification of funding measures, the purpose wouldn’t’ be achieved in this situation where the stock price is low. There would be an option to reconsider listing on the stock market. From the management side, going private would be an alternative through MBO etc. The table below shows the family companies in our universe with Tobin’s Q less than 0.8, divided into 2 groups of family’s ownerships more than 50% or more than 20% and less than 50%. For a company that suffered low ROA and ROE, the low performance would be a reason for the low share price. However, some companies that have high ROA and ROE are traded at low. For a company in which there is no problem with return performance, but the share price remains low, it may be an option to consider “going private.” Aside from whether or not an investor actually acts such an effort in the engagement, this is an investment strategy to focus on such a viewpoint.

METRICAL:Corporate Government Rating of Japan’s 1,800 Companies (July 2020)

So far, we have been conducting analysis focusing on the relationship between improvement of corporate governance and stock price and key performance measures (ROE, ROA). This is the reason that we are keeping close eyes on the enhancement of corporate governance in the perspective of long-term investors. In addition, we decided to analyze the key performance measures based on the past 3 years average ROE and ROA from this month, as maximizing the shareholder value for the long-term or sustainability is a common goal of public companies and shareholders.

It goes without saying that the stock price is one of the important indicators of a public company. In the previous monthly letter as well, I mentioned that the disclosure information of IRs and shareholder meetings is highly correlated with stock prices (Tobin’s Q), key performance measures (ROE, ROA), and comprehensive corporate governance scores. Information disclosure is a very important starting point for management transparency. In fact, the stock price also shows the results of efforts to disclose the above information. Metrical reshuffles the composites of the top 20 companies based on the total corporate governance score as of July every year and provides the performance comparison between CG Top20 stock prices and the stock market indices (TOPIX, JPX400) monthly. It was this month in July that we reviewed the 20 composite companies (the corporate governance score itself changes each month). Lately, the members of the composite companies of CG Top 20 changed from the limited large companies for several years ago, as we expanded the universe from slightly more than 500 companies to 1,800 companies and other companies are willing to improve the corporate governance. This year, 6 companies have been replaced since last year. The 4 completely new companies are Shionogi Pharmaceuticals, Meitec, Kenedix, Net One Systems and NSD. and Omron returned to the top 20 club again, raising the scores.

METRICAL:June-Stock Market Changed Significantly Due to Concerns of Coronavirus. CG Top 20 Stock Price Outperform Against Topix and JPX400.

In June 2020, the stock market price continued to rise in the first half of the month, following the favorable sentiment that economic activity resumed from the previous month. Since the number of new coronavirus-infected persons has increased worldwide, it has become a nervous development from the middle of the month and has a large up and down amplitude.

Both Topix and JPX400 stock indexes have fallen slightly to -0.12% and -0.01%, respectively, over the past month. CG rating score Top 20 stock price is +0.47%, outperforming both stock indexes significantly.

METRICAL: Corporate Governance Report in English

The AGM season for the March fiscal year end companies is approaching as most of Japanese companies hold it in June, while some companies cannot have finalized the financial reporting yet due to the spread of novel coronavirus infectious diseases (COVID-19). In recent years, an increasing number of companies have moved the date of the AGM up from the end of June (historically majority of companies have held it on Thursday of the last week in June), and many companies are providing and disclosing notices of convocation of general meetings of shareholders in English. Also, although the articles of incorporation must be changed, an increasing number of companies are allowing electronic voting. These are very good initiatives for shareholders and investors. Metrical evaluates how the companies enhance the IR information disclosure as well as such above items as the AGM/IR criteria. For reference, the correlation between AGM/IR factor and key performance measures such as ROE (actual), ROA (actual) and Tobin’s Q is shown below. Especially in Tobin’s Q, the significant positive correlation of this factor is remarkable. Obviously, a company with a higher AGM/IR scores, such as higher IR information disclosure and accessibility to annual general meeting of shareholders would be traded at a higher share price in the market. This result could encourage those who are in charge of IR at a public company above all.

METRICAL: May – Stock Prices Rose Sharply and CG Top20 Stock Price Rises

The market price in May 2020 was favorable to the resumption of economic activity and continued to rise sharply from the previous month. The stock market rose sharply for the second straight month following the rise in US stock prices, which was greatly appreciated by the news of the progress of the new corona vaccine clinical trial. Both Topix and JPX400 stock indexes have risen 6.75% and 7.17%, respectively, over the past month. CG rating score Top 20 stock price is 3.54%, underperforming both stock indexes.

METRICAL: Study on Committees

Over the past year, an increasing number of companies have set up nomination and compensation committees. In order to improve transparency and objectivity and considering the continuity of management, establishing these committees is a key issue in enhancing corporate governance. Due to the request of the Tokyo Stock Exchange, many companies have moved to set up advisory committees lately. On the other hand, only a limited number of companies have moved to the organization structure of a company with 3 statutory committees for the same period.

Based on the data of approximately 1,800 companies, we will show how far companies have progressed in setting up the committees for the past 2 years since March 2018. As shown the chart below, compared to March 2018 and April 2020, the number of companies with statutory nominating committee and compensation committee increased modestly from 65 companies/all 1,796 companies to 68 companies/all 1,753 companies in total. It obviously shows how difficult the companies consider moving to the structure with 3 statutory committees. On the other hand, as for the optional (advisory) committees, an increasing number of companies have set up the nomination committee and compensation committee. The number of companies with optional (advisory) nomination committee increased from 550 companies /1,731 companies (31.8% of all companies excluding the companies with structure having 3 statutory committees) as of March 2018 to 949 companies/1,685 (56.3% of all companies excluding the companies with structure having 3 statutory committees as of April 2020. Similarly, the number of companies with optional (advisory) compensation committee increased from 609 companies/1,731 companies (35.2% of all companies excluding the companies with structure having 3 statutory committees) as of March 2018 to 992 companies/1,685 companies (58.9% of all companies excluding the companies with structure having 3 statutory committees) as of April 2020.

METRICAL: April – Prices Rose But CG Top 20 Slightly Underperforming

The market price in April 2020 has recovered significantly from the previous month when it continued to decline significantly due to concerns over the spread of new corona infections. The world market price turned to an increase as the US stock prices rose from expectations for good clinical trials of corona drugs. Both Topix and JPX400 stock indexes have risen for the first time in four months since January, recovering 4.54% and 4.60% respectively in the last month. CG rating score Top20 stock price was slightly underperforming with 4.15%. The volatility (standard deviation) for the current month is 7.65%, 7.74%, 4.11% for Topix, JPX400, and CG Top20 stocks, respectively.

METRICAL: Willingness to Change

We have observed the number of female directors as a key factor on board practices to measure how a company is willing to change. The table below shows the correlation analysis between the number of female directors and performance key measures such as ROE (actual), ROA (actual) and Tobin’s Q on the 1,755 companies as of March 31, 2020. We have seen the statistically significant positive correlation between ROE (actual or results) and the factor since we started the correlation analysis with correlation analysis with BDTI in 2017. Now, the factor shows the sign of significance to ROA (actual or results) in this month, updating the data of December fiscal year end companies after AGMs.