Main points

  • On November 21, 2024, TSE announced “cases where there is a gap between investors' perspectives.” The target is a total of 10 items divided into three stages: (1) analysis and evaluation, (2) consideration and disclosure of initiatives, and (3) dialogue and updates.
  • The problem is not just that the numbers are small. Companies are facing a series of weaknesses, including evaluating the current situation only from their own perspective, failing to decide on the balance sheet they are aiming for, simply listing measures but not showing cause-and-effect relationships, and failing to reflect dialogue with investors in their next decisions.
  • The following “7 Pitfalls” are the result of this course reorganizing the 10 items of the TSE according to the order of practical inspection. TSE itself does not indicate seven classifications.

Check for discrepancies before “copying good practices”

A collection of good practices can help you understand what a complete disclosure looks like. However, even if you simply transfer indicators and charts from other companies, they will not be persuasive unless they are linked to your company's issues. The first thing to do is to find out where your company's analysis and explanations deviate from investors' awareness of the issues.

TSE materials conduct this inspection in three stages.

  1. Analysis/Evaluation - How do you view the cost of capital, return on capital, market valuation, and balance sheet?
  2. Consideration and disclosure of initiatives - How are targets, capital allocation, business portfolio, and executive compensation designed and explained in response to issues?
  3. Dialogue/Updates - Does the company respond to dialogue with investors and reflect the content in disclosure and review of measures?

The points and case studies revised in December 2025 are based on the exchange of opinions with investors from over 400 companies both domestically and internationally. Therefore, it is best to think of the points raised here not as abstract model theory, but as a summary of the discomfort that investors feel when reading actual disclosures.

7 pitfalls

# Pitfall Signs that are likely to appear in disclosure Direction to review
1 Assess the current situation using only your own yardstick It is judged that being above the average in the same industry is sufficient. It does not consider the basis for the cost of shareholders' equity or the discrepancy with market evaluation. Assess the position from multiple perspectives, including investor dialogue, business risks, shareholder composition and the market’s required return.
2 Look only at the surface of PBR and ROE They merely point out that PBR is below 1x and ROE is low, but they do not analyze factors such as profitability, growth expectations, asset efficiency, and information asymmetry. Break down ROE, ROIC, margins, asset turnover and business-level profitability, and examine differences between management and market perceptions.
3 Undecided on target balance sheet and capital allocation By simply explaining cash and deposits, cross-shareholdings, interest-bearing debt, growth investments, and shareholder returns individually, it is difficult to see what the company is aiming for as a whole. Indicate the desired capital structure and priority order of capital allocation based on required funds, risk tolerance, investment opportunities, and debt capacity.
4 Putting the goal first and not showing the connection to the task There are numbers such as "ROE 10%" and "PBR over 1x", but I don't know why they are at those levels or what they need to change to achieve them. Connects logic from current situation analysis to goals, and breaks it down into specific measures such as profit margin, asset efficiency, business structure, and capital policy.
5 Do not delve into unprofitable businesses and motivation of managers The company assumes that all businesses will grow, and is not considering downsizing, withdrawing from, or selling unprofitable businesses. Executive compensation is also biased toward single-year performance. Examine each business’s returns on capital and decide whether to restructure, invest further, sell or exit. The compensation system will also be aligned with medium- to long-term corporate value.
6 Just listing measures, not showing cause and effect relationship It enumerates DX, human capital, M&A, share buybacks, etc., but it does not show which issues should be improved and how, and which indicators would be effective. Explain in the order of "Issue → Measures → KPI → Expected Effect → Verification Timing".
7 Management judgment is not updated even after dialogue Disclosing only the number of meetings, refusing dialogue without a reasonable reason, and failing to reflect the points gained through dialogue in next year's plans and disclosures. It will also disclose the main points raised during the dialogue, the considerations made by the board of directors, and the reasons for changes and postponements.

Pitfall 1: Assessing the current situation using only your company’s yardstick

The cost of capital is not an internal standard determined by the company at its convenience. The company estimates the rate of return required by the fund provider, taking into account business risks and the market environment. For this reason, simply showing the calculation formula is not always sufficient. If the level differs significantly from what investors perceive, it is necessary to explain why the difference occurs.

Also, being above the average in your industry alone is not enough. Investors choose investments not only within their own industry, but also in other industries and overseas companies. If the profitability of the industry as a whole is low, “at par with the same industry” is no basis for exceeding the cost of capital.

In addition to the cost of capital figure or range, the disclosure should include the main assumptions, the understanding gained through dialogue with investors, and the deviation from the company's perceived market valuation. TSE does not provide a uniform correct value. Importantly, a company's estimates are verifiable and align with investors' views.

Pitfall 2: Only looking at the surface of PBR and ROE

Merely confirming that the PBR is below 1x and writing that the market valuation is low cannot be considered analysis. The necessary response will differ depending on whether ROE is below the cost of capital, whether there are doubts about the sustainability of growth, whether excessive assets are pushing down on profitability, or whether business content is not being communicated.

The same goes for ROE targets. For example, by using the following decomposition, you can see which management issues need to be addressed.

ROE = Net profit margin × Total asset turnover × Financial leverage

It is effective to compare ROIC and WACC by business. Even if the company's overall ROE has improved, if there are still businesses that are below the cost of capital, the portfolio issues have not been resolved. When explaining market valuation, it is more important to show the structure that produces the numbers than the level of the numbers.

Pitfall 3: Not deciding on the desired balance sheet

Even if you individually explain the reasons for holding large amounts of cash and deposits, the reasons for retaining cross-shareholdings, and the reasons for not increasing interest-bearing debt, it is unclear whether the combined balance sheet is appropriate for the company's strategy. What investors want to know is the level of required funds based on business risks and growth opportunities, and where to allocate surplus funds.

Stock buybacks and dividend increases may be appropriate based on analysis. However, if this is the only response to the TSE request, it will miss out on how to increase the competitiveness of the business and future profit growth. It is necessary to compare R&D, human capital, capital investment, M&A, debt repayment, and shareholder return in the same table and indicate priorities and decision criteria.

Pitfall 4--Putting the goal first and not showing the path to achieving it

Investors cannot judge the feasibility of a plan just by looking at numbers such as "ROE of 10% in FY2027" or "PBR of 1x or more." PBR is a valuation given by the market and is not an indicator determined directly by management. ROE also has different meanings depending on improving profit margins, reducing assets, and changing financial leverage.

Goals must be derived from an analysis of the current situation. For example, indicate whether to increase profit margins by restructuring low-profit businesses, increase asset turnover by reducing working capital, or return surplus capital. By setting a deadline and a responsible party for each measure, and even indicating a review policy for when performance deviates from the plan, goals turn from mere declarations to tools for business management.

Pitfall 5: Not delving into unprofitable businesses and executive compensation

The most difficult aspect of increasing capital efficiency is how to deal with businesses that are not producing profits. If there is room for improvement, rebuild it; if there is a more suitable owner, sell it; if there is no prospect of future returns exceeding the cost of capital, exit. Even if all businesses are maintained and only the overall goal is set, the allocation of management resources will not change.

At the same time, it is also necessary to check the management evaluation system. Remuneration that is linked only to sales or operating profit for a single year tends to motivate companies to accumulate assets and expand their scale. By showing how ROIC, ROE, TSR, business portfolio progress, etc. are reflected in medium- to long-term compensation, you can explain the mechanism for implementing the plan.

Pitfall 6 - Don't just list the measures

At first glance, sentences like the following seem to involve a lot of efforts. However, I don't know what to solve.

"We will increase corporate value through growth investment, DX, human capital investment, M&A, and shareholder returns."

What is needed is not the number of measures, but the causal relationship. For example, if you write, "Business A's low asset turnover rate is pushing down ROIC, we will shorten inventory days from X days to Y days and increase ROIC to Z% by FY2027," which will create a series of tasks, actions, indicators, and deadlines.

There is nothing wrong with using the medium-term management plan as a response to the TSE's request. However, in addition to showing the existing pages of the medium-term plan, it is necessary to make it possible to read the review based on the relationship with the cost of capital, the analysis of the board of directors, and dialogue with investors.

Pitfall 7: Dialogue does not lead to management decisions

Even if the number of interviews and number of participants are disclosed, the results of the dialogue cannot be determined. What matters are what issues investors raise, how management and the board consider them, and what changes they make.

Furthermore, not being able to communicate important undisclosed facts is one thing, but refusing to have dialogue with investors is another issue. Attitudes such as not responding to interviews without a reasonable reason or uniformly refusing requests for interviews with outside directors are inconsistent with the Code's emphasis on dialogue and the purpose of the TSE's request.

When updating disclosures, it is a good idea to specify what has changed from the previous year. If you change your goals, explain why. If you decide not to take any measures, consider the investor's proposal and explain the reason for the decision. The purpose is not to follow the dialogue, but to show that the dialogue was used as a basis for making decisions.

Self-check in 90 seconds

  1. Can you explain the basis for the cost of capital, including the difference in perception between you and investors?
  2. Are the levels of PBR, ROE, and ROIC broken down into business and financial factors?
  3. Are the balance sheet goals and priorities for fund allocation indicated?
  4. Is there a verifiable causal relationship between the goals and specific measures?
  5. Has the company made a decision to rebuild, make additional investment, sell, or withdraw from a business that is below the cost of capital?
  6. Rather than listing measures, do you explain them in the order of "Issue → Measures → KPI → Deadline"?
  7. Are there any instances in which disclosures or management decisions have been updated in response to dialogue with investors?

If there is even one item that you are unable to answer, that is the next point to revise. Rather than assigning scores, it is more important to ask specific questions at board meetings.

Implications for IR

  1. Make the 10 items of TSE a confirmation list before publication. Don't check IR materials, medium-term management plans, and corporate governance reports separately, but make sure they can be read with the same logic.
  2. Do not make the capital cost figure the only point of contention. As a group, explain the basis of the numbers, the difference in perception from the market, and how that difference was verified through dialogue.
  3. Link board discussions to disclosure. Make sure the analysis, goals, business portfolio, and capital allocation are approved by the board of directors, rather than just having the IR department do the writing.
  4. Do not publish the same sentences every year. Updates that show what has been maintained and what has changed based on results, dialogue, and changes in the environment.
  5. A good example is learning the structure and not borrowing numbers. Instead of transferring other companies' WACC and ROIC goals, refer to "how they connect issues to measures."

Source/reference materials

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