Discussion on Governance

Sukeno:　At the very least, we need to establish a solid governance system and get it to work effectively for a global company to operate globally. Taking action to contribute to creating a decarbonized society is also one of the global market participation requirements. Considering these requirements, since I became Chairman of the Board (“Chairman”), we have worked to improve the Company’s governance system and have built the present governance system. In the course of building the present governance system, the Board of Directors has naturally played a key role. I believe that the roles of the Board of Directors are formulating basic management policies and strategies, making important decisions about business execution, and effectively supervising execution to make sure that the policies and strategies are implemented properly.

I do not believe that we can establish a governance system in the true sense of the term if the Chairman is involved in execution. We have now decided that we do not specify who shall be Chairman in the Articles of Incorporation. The Board of Directors selects the Chairman and has designated that I, as Chairman, shall not be Representative Director. In this way, we have made it clear that the Chairman is not involved in execution. The Board of Directors now consists of 10 members, of whom five members are inside directors who engage in execution at operating companies. Four members are outside directors. I believe that given that as Chairman I am not involved in execution, I can monitor the executive directors and outside directors from a neutral position. As a result, we can build a stronger governance system, and the transparency of the Board of Directors will increase.

Kitamura:　I realize that Chairman Sukeno has been pursuing initiatives to improve governance at the Company with a clear intention. The initiatives include a review of the skills matrix and a revision through discussions at Board meetings. In the process of reviewing the skills matrix, we did not simply choose skill items that are generally considered to be required in corporate management, such as legal affairs and accounting. We first chose business, function and region as three priority areas that will deepen discussions at Board meetings and then intensively discussed particularly important elements. Before discussions at Board of Directors meetings, the Chairman and outside officers discussed the skills matrix and deepened the understanding of each other’s views. This process enabled us to reconsider what we should primarily discuss at Board meetings and was very meaningful.

Sukeno:　What is important in reviewing the skills matrix is identifying areas where each director has expertise in light of the roles of the Board of Directors. Inside directors are required to have full knowledge of the assets, including technologies and human resources, that have supported the growth of the Company and to make the optimum business decisions. The main role of outside directors is, I would say, monitoring the direction of execution to determine whether it deviates from common values and common sense. Under these assumptions, the skills matrix should show how the members of the Board of Directors can contribute to deepening discussions at Board meetings.

Kitamura:　When we discussed the skills matrix, many Board members said that it is important for us to develop genes, or characteristics, that we have inherited, which made possible a significant change in the business structure as the photographic film market rapidly contracted. To achieve the sustainable growth of the Company, we need to maintain and develop our flexibility and resilience, which is part of our corporate culture. Corporate culture is a company’s values and code of conduct. It is created by employees’ awareness and actions. It is therefore closely related to human resources strategies. However good our management policies are, we cannot achieve our goals if we do not have a corporate culture in which employees, who implement the policies, have a good understanding of the Company’s values and have pride in what they do.

Sukeno:　In addition to the transformation of the business, I would like to give attention to predecessors’ efforts to overcome difficult challenges and start domestic production and commercialization of photographic film. We will be marking our 90th year in business. We need to remember our predecessors’ extraordinary efforts and the assets they left behind, including the desire to take on challenges, speed and teamwork, and pass these down to younger employees. It is these foundations laid by our predecessors that have enabled us to transform our business in the 2000s. As times change, values in society change. It is important for the Board of Directors to monitor what should not be changed and what should change.

The basic principle of corporate management is helping employees perform to the best of their ability. Investment in human resources, including investment in employee education and health and productivity management, is indispensable for ensuring the continuity of companies. Developing future management personnel is a particularly important issue. That is a theme that we should discuss more deeply at Board meetings. The addition of human resources strategies and corporate culture as a new skill item reflects this thought. The skill item is embodied in our management policy emphasizing human capital.

Kitamura:　The decline in the nation’s workforce is an important change. The turnover rate is increasing, and the lifetime employment system, which was an assumption for career plans, is ceasing to function. In this environment, recruitment and human resources development are becoming increasingly important in human resources strategies. We need to have a process for attracting excellent human resources, while paying attention to evaluation and assignments, cultivating and evaluating them, and developing human resources who will become responsible for management. The key to this process is corporate culture. The turnover rate is low among employees who align with the Company’s philosophy. They perform well even in adverse circumstances and continue to be motivated to come up with innovations.

When we discuss themes related to human resources strategies at Board meetings, I think about how executives, including top management, should communicate and explain the corporate culture to employees. Some voices of employees that we hear through the employee engagement survey and others incorporate the essence of the corporate culture, and outside directors pay attention to these voices. If there are any discrepancies between employees’ voices and management’s understanding, it is important to eliminate those discrepancies steadily.

Sukeno:　I believe that the CEO’s most important role is to make sure to explain the corporate culture to employees who join the Group through M&A. If the CEO shows the direction to the head of each business, and the head of each business educates the management of companies that join the Group, the Company’s corporate culture and genes will be made known throughout the entire Group.

Sukeno:　The key points of what we should do to raise the effectiveness of the Board of Directors are to share necessary and adequate information among the directors and have lively discussions. This is what the members of the Board of Directors should do. I think that arguments about governance put a little too much emphasis on the social attributes of the directors, such as nationality and gender, and the level of independence. The genders and nationalities of directors and whether they are inside or outside directors do not matter. If the appointment of outside directors who have expertise in certain areas raises the effectiveness of the Company’s Board of Directors, we should appoint them, even if outside directors account for a majority of the members as a result. It is important to think about appropriate members according to the Company’s management policy instead of having superficial discussions.

Kitamura:　I too have put emphasis on qualities rather than social attributes when I choose directors. I believe that we should further explain about our policy of choosing directors based on the qualities of the candidates, irrespective of whether the members of the Board of Directors meet the standards of the Corporate Governance Code. We have, of course, made steady progress in the development of non-Japanese employees. I have heard that some non-Japanese employees have come close to being promoted to management. I think Chairman Sukeno is considering the participation of non-Japanese employees in discussions at Board meetings this fiscal year. I hope that we will deepen discussions.

Kitamura:　In addition to discussions at Board meetings, we are able to have casual discussions with CEO Goto. These discussions are very meaningful because we get to know what the CEO is paying particular attention to. Exchanging opinions freely on informal occasions will result in more lively discussions at Board meetings. We often notice something in casual conversations. I hope we will have more opportunities to speak with executives other than the CEO.

Sukeno:　We have two points to keep in mind when we develop the next medium-term management plan. First, we need to determine what we have been able to do and what we have not been able to do in the current medium-term management plan. We also need to accurately identify risk factors that block us from achieving our targets. We might not be able to achieve results as planned in some businesses. In those cases, we need to thoroughly analyze the factors for changes in the assumptions that we made when we developed the plan and check whether solutions to the problems are included in the next medium-term management plan. I have requested the corporate executives to do these things.

The second point is return on investment. In the period of the current medium-term management plan, we have made decisions on active capital investment and M&A, particularly in growth areas, including the Healthcare and Advanced Materials segments. We will deepen discussions at Board meetings on whether the return on investment is in line with the initial plan, what the risks are and whether we will hedge the risks.

Kitamura:　We have had meaningful discussions at Board of Directors meetings on evaluations in the capital markets, including our stock price. We will concentrate our management resources in growth areas while generating management resources by establishing a revenue base in other businesses. In this way, the Company will achieve growth in the medium to long term. Our story is clear. To communicate the story to the market in a way that is easy to understand, we should devise better ways of disclosing information. For example, we could present supporting data.

We have announced our policy of selling cross-shareholdings if there is no rationality in holding them. We have already made a noticeable reduction in our cross-shareholdings, and I expect us to earn high marks for that from investors.

Kitamura:　Since the Nomination and Remuneration Advisory Committee was established in 2018, we have been holding discussions every year about whether the CEO should stay in the position and about a list of successor candidates created in consideration of whether they have the qualities required of the CEO, listening to the opinions of the inside directors who are members of the committee. CEO Goto was appointed in 2021 based on ongoing discussions according to our succession plan. The list of successor candidates is updated each year. CEO Goto had been included in the list. We make sure to implement this procedure to facilitate succession. In this way, we ensure a process that those outside of the Company consider to be objective and transparent.

Sukeno:　We revised the CEO succession plan after I became a member of the committee. Now we have two succession plans: a plan in case of a sudden replacement of the CEO due to a contingency and a plan for succession after the CEO has been in the position for a certain period. Under the latter plan, we discuss what kinds of experience we should give the candidates opportunities to gain and how we should broaden their expertise for their personal development. We have been updating the list of successor candidates. What are the important qualities that the CEO should possess? The CEO should have an overall picture of the Company, which has multiple businesses. As I said at the beginning, the CEO should also be able to pass down the corporate culture. The most important quality is that the CEO should have a deep understanding of the Company’s corporate culture, enabling corporate executives to pass it down to the next generation.

Through these efforts, the Company will help employees perform to the best of their potential and continue to strive to create innovations and enhance corporate value over the medium to long term. As Chairman, I pledge to take the lead in discussions at Board meetings and pursue a higher level of governance.

* This interview held on July 13, 2023