Accounting reform quadruples company value!? A "textbook for success" learned from ROIC management from an investor's perspective.

Introduction

Do you think that "profit is everything"? Are you aware that in many companies, the focus on the absolute amount of gross profit is actually encouraging impairment losses and inefficient investments?

Becoming proficient in accountingThis book covers the true story of how Ajinomoto overcame a crisis of approximately 40% decrease in net profit and a market capitalization below 1 trillion yen by introducing ROIC, and how it recovered to 4 trillion yen, as well as the specific story of how Fujikura escaped from massive losses.

By reading this article to the end, you will understand the essence of financial reform that managers should know, including "accounting indicators from an investor's perspective," "methods for implementing them in the field," and "common characteristics of successful companies." All technical terms are explained in an easy-to-understand way, so please start by checking the points that you can apply to your own work.

The Truth About How "ROIC Management Without Sacred Censors" Saved Companies

The key is how to efficiently generate profits from the money entrusted to you by investors. The accounting metric that captures this core is "Return on Invested Capital (ROIC)."

While many companies tend to pursue "Return on Equity (ROE)" and "Return on Assets (ROA)," this book argues that ROIC is the most suitable indicator for measuring "capital efficiency for each business."

Why ROIC?

ROIC is an indicator that shows "how much profit was made from the capital used in the business." It is calculated by dividing after-tax operating profit by invested capital (equity + debt).

Here's the key difference:

Ajinomoto's Executive Officer and Senior Managing Director, Eiichi Mizutani, stated, "In the past, we focused on the absolute amount of gross profit, which led to ever-increasing investment amounts. We regretted the organizational culture that resulted in impairment losses as a result." Using the balance sheet (BS), they chose ROIC to improve efficiency in generating profits.

If fixed assets and inventory increase due to overinvestment, ROIC will decrease. If ROIC does not exceed the cost of capital, the very existence of that business should be questioned.

Ajinomoto's three-stage reform: A textbook approach

Ajinomoto implemented its accounting reforms in three stages:

Phase 1: Shifting towards a focus on ROIC

• Net profit decreased by approximately 40% in the fiscal year ending March 2020, and market capitalization fell below 1 trillion yen.
• We want to share with the staff the understanding of "how to manage the money entrusted to us by investors and increase returns."

Second phase: Development of management accounting guidelines

• It functions as an "internal performance tracking tool" distinct from financial accounting (performance disclosure).
• Clearly define the "basic policy for profit management" and move away from simply accumulating short-term profits by department.

Third installment: Introduction of FP&A roles and a mini-CFO structure.

• A "mini-CFO" is assigned to each major business unit (30 people at Ajinomoto).
• Financial professionals with specialized knowledge will work alongside the team to enhance business value.

Fujikura's remarkable achievement: Company-wide ROIC goes from negative to 20%

Fujikura, a major electric wire manufacturer, reported a net loss of 38.5 billion yen for the fiscal year ending March 2020. Intensifying price competition for its main product, optical fiber, had raised concerns about massive asset impairment.

CFO Kazuto Iijima reflects, "Even as the business environment changed, we didn't pursue profits and didn't reduce working capital or inventory. That led to massive losses."

The solution was ROIC-focused management. We created a system where ROIC was reviewed weekly for each business unit and sub-segment, and the CFO himself attended meetings to keep a close eye on inventory dynamics.

result:

• Company-wide ROIC rose from negative territory to nearly 20%.
• Results surpassing those of the highly profitable company Keyence.
• Achieving medium-term goals ahead of schedule
• Market capitalization increased to approximately 6 trillion yen.

A New Management Style Shown by "Internal Activists"

As a way to further advance accounting reform from an investor's perspective, the concept of "internal activist" has emerged. This is not about the short-term profit-seeking sought by foreign activist firms, but rather about internal stimulation to flexibly respond to changes in the business environment.

Furukawa Electric's Practice: Optimizing Capital Allocation

Satoshi Miyamoto, CEO and head of the Strategy Division, embarked on a portfolio reform in 2022, posing as an "internal activist."

Specific approach:

1. Check the difference between ROIC and cost of capital for each business.
   • Market capitalization increases due to improved ROIC.
2. Investor-focused management meeting structure
   - Follow up on management indicators such as ROIC on a monthly basis.
   - The Strategy Headquarters is involved in investment decisions through market research.
3. Reallocation of internal resources, including human capital
   - Focused investment in key areas

Miyamoto explained, "Like many activists, I tried to identify business challenges by utilizing the difference between ROIC and the cost of capital, and then attempted to reallocate capital."

Eltez's Structural Reforms: A Strategy for First-Minute Victory

Information security companyEltezWe have established an internal activist team and launched the following initiatives:

• Focus on profitability that has deteriorated due to past M&A
• We have begun considering options including withdrawing from the business.
• "We need to change our approach of solely chasing sales figures."

Executive Vice President Toyo Ito says, "We want to take preemptive action before activists target us."

The widespread adoption of FP&A roles in the workplace: The role of a mini-CFO

The increasing adoption of FP&A (Financial Planning & Analysis) in Japan has aspects of internal activistism.

At Ajinomoto, Koichi Hattori, who was assigned to the food business, developed a tool that "visualized the cost structure of the business over 1,000 hours." While sales teams generally resist price increases, Hattori logically explained cost increases to the sales team, enabling flexible pricing even during inflation.

Points to consider when prioritizing ROIC and common characteristics of successful companies

I realize that ROIC alone is not enough.

With the Tokyo Stock Exchange now urging companies to be mindful of the cost of capital, cost of capital management centered on ROIC is spreading among Japanese companies. However, there are some points to be aware of.

Daisuke Tsuchiya, a partner at Azusa Audit Corporation, points out that "looking only at ROIC can lead to mistakes."

fact:

• Omron, which has championed its unique ROIC management strategy, has seen its market capitalization plummet to about one-third of its peak.
• President Junta Tsujinaga stated, "We regret that we have been slow to invest in strengthening our competitiveness."

Common characteristics of successful companies

What is the secret to Ajinomoto and Fujikura's success?

"The reforms were achieved by persistently and effectively bridging the gap between the accounting and financial perspectives and the desire for growth at the operational level."

By implementing accounting reforms from an investor's perspective, we are paying close attention to efficiency while maintaining a balance with investments aimed at business growth.

Key performance indicators emphasized by other companies: A multifaceted perspective

The survey publishes the responses of the top 50 companies selected using Gross Shareholders' Return (TSR) as a "value creation indicator."

Top priority trends:

• 12 companies that cited ROIC
• Nine companies that cited ROE
• A total of 21 companies prioritize capital efficiency.

Examples from other companies:

Expert advice: Balance is everything.

Ichiro Nyora, Managing Director of Boston Consulting Group, said:ROIC is well-suited for gripping the business operations. ROE is a metric that focuses on results for shareholders."The differences are explained.

Summary

Accounting is not simply about tracking numbers. It's about understanding the essence of a company from an investor's perspective and balancing the growth aspirations of those on the ground with financial efficiency—that's what it takes.

If you aim to quadruple your corporate value through accounting reform, like Ajinomoto and Fujikura, then introducing ROIC is a powerful tool, but it's not enough. A multifaceted approach is necessary, including measures to ensure its adoption in business operations, the development of management accounting guidelines, and the placement of FP&A professionals.

The important thing is:

1. We pursue a balance between capital efficiency and growth investment.
2. Select indicators that are easy to understand on the ground.
3. Sometimes, bold decisions, including withdrawing from a business, are necessary.

Companies listed on the Tokyo Stock Exchange's Growth Market, as well as domestic startups learning from overseas, are adopting the concept of "internal activists." Their aim is not to pursue short-term shareholder profits, but to strengthen long-term competitiveness.

Business leaders should not view accounting indicators simply as numbers, but rather as a language that bridges the gap between investors and the front lines, striving to enhance corporate value. This attitude is crucial for making the most important management decisions in these uncertain times.