Roundtable Discussion with External Directors
Building a governance system to achieve desired long-term management goals
What should Marubeni do now to realize the sustainable growth of corporate value? Three of the Company’s external directors discuss topics ranging from improving the effectiveness of the Board of Directors, to Marubeni’s sustainability, and the roles of the Nomination Committee and Governance and Remuneration Committee.
Towards a more effective Board of Directors
In addition to Marubeni’s compliance with all principles of Japan’s Corporate Governance Code, I really appreciate the Company’s commitment to a series of corporate governance reforms since the Japanese version of the Sarbanes-Oxley Act was implemented. An easy-to-understand example is the change in the composition of the Board of Directors. When I became a director at Marubeni seven years ago, there were only two external directors on the Board. Now, of the 11 board members, five are external directors. Female directors also continue to be appointed. In these ways, the Company is taking steps to reform the governance system to include more diverse viewpoints. Aside from the Chairperson, the ratio of internal to external directors is 5 to 5. In addition, although they don’t have voting rights, Audit & Supervisory Board members (three external and two internal) also attend Board meetings and participate in discussions. So, in terms of numbers, there is an even balance between internal and external members.
Still, I think there is room for improvement, in terms of both the content of Board meeting agenda items and the timing of their submission. For example, some proposals could be referred to other deliberative bodies such as the Corporate Management Committee. To this end, it is necessary to revitalize internal company meetings, as well as redefine the roles of the respective deliberative bodies, such as shifting the role of the Board of Directors towards monitoring. Also, I think that the timing of submitting agenda items should be more flexible. For example, I think it would be better to have proposals for large-scale M&A projects and other complex projects submitted earlier than usual. If we can resolve these issues, I believe the Board of Directors, in which the role of external directors is central, will be even more effective.
I’m involved in evaluating the effectiveness of the Board of Directors as Chair of the Governance and Remuneration Committee. Every year, we appoint outside experts to gather opinions from all directors and Audit & Supervisory Board members. I think the more the quality of the Board has improved, the more deeply it has been able to evaluate effectiveness. We have also revised and improved our methods of gathering opinions so that more specific points of view can be heard.
Among its efforts to improve effectiveness, where I think Marubeni has done particularly well is putting in place a system where the Secretariat briefs us in advance on agenda items, so that the Board is able to adequately discuss issues. Many of the projects Marubeni is involved in are quite complex and broad in scope, so it’s crucial that the external directors in particular are able to fully grasp a project’s outlines before the Board meets. I think the Company has done well in creating such an environment, including the support of the Secretariat, which is enabling a more effective corporate governance system.
On the other hand, there are three major issues. First of all, as Mr. Kitabata said, the Board of Directors is asked to deliberate on too many matters. I think the Board can be more effective if agenda items under consideration are reviewed and those that are submitted to the Board are chosen more selectively. This would allow us to more fully discuss each case. The second issue is how to incorporate diversity into the Board of Directors. Marubeni is a company that engages in fierce competition with Western companies in global markets. So, I believe there is room to deepen the quality of our discussions by increasing the diversity of Board members to a level on a par with that of Western companies. For instance, by increasing the ratio of female directors and incorporating the perspectives of non-Japanese directors it’s possible we would see opinions and ideas coming from a totally different angle. Finally, I think how we bring the perspectives of shareholders and investors into Board meetings and reflect them in management is also an issue. At the meetings of the Board and other meetings, the CFO, who is in charge of Investor Relations, faithfully reports to us the opinions of shareholders and investors. In the future, though, I think it would be good to create more opportunities for both external and internal directors to have direct discussions with shareholders and investors and hear their opinions.
One place where I think Marubeni’s corporate governance excels is the very active discussions we have around various agenda items, where the opinions of each person, whether they agree or disagree, are respected. Even if I have an objection, I am able to freely express my own opinion, and other people are free to respond fully, which is proof that the Board meetings are conducted in a highly transparent and open way. I think this is due in part to the fact that the Chairperson of the Board, as well as the other Board members, have conducted the proceedings in a manner that clearly respects the input of external directors.
In terms of issues, as Mr. Kitabata and Mr. Takahashi both mentioned, I believe we need to rethink the agenda and shift the focus of the Board of Directors to more supervisory and monitoring functions, rather than as a place to make business decisions. Our conversations should center on themes such as discussing various issues from a medium- to long-term perspective, the business portfolio Marubeni ought to be pursuing, and the future business of the general trading company. Also, the Board, and especially the external directors, should have more robust discussions about whether the Company is carrying out business activities with an eye to shareholder and investor concerns, and consider a range of specific measures needed to do so.
About Marubeni’s Sustainability
Marubeni is currently engaged in businesses that contribute to addressing environmental and social issues, such as solar power generation, bio-jet fuel, and water businesses. I think the spirit of Marubeni’s founders, “good for the seller, good for the buyer, good for society,” is very relevant to the SDGs and sustainability of our time. In that sense, helping to solve social issues is one of the reasons why Marubeni has existed since its founding.
I believe, for Marubeni, the foundation for achieving sustainability is, first of all, human capital. It is important for the Company to develop a culture that can attract motivated employees, and then hone their abilities so that they can go on to play an active role in expanding the business.
At Marubeni, the Sustainability Management Committee plays a central role in formulating a clear sustainability policy for the Company. As Mr. Kitabata mentioned earlier, human capital is the key to how this policy is applied to specific actions and made to bear fruit. In Marubeni’s case, the Company is engaged in a wide range of businesses that extend around the world. Naturally, its employees are also active all over the world, so it is crucial to create a mechanism for instilling a sustainability mindset in each employee. Moreover, by leveraging its global network and supply chain, I think the Company is able to take a comprehensive approach to the social issues it aims to help solve, while also possibly creating new business opportunities.
I am a member of the Sustainability Management Committee, which was formed two years ago. Since the beginning, committee members from across the organization have been engaged in very animated discussions. It’s been encouraging to see the members’ willingness to rethink their business activities and make bold proposals based on what they experience in the field. As an example of their achievements, the Company has made a decision, based on a long-term perspective, to halve its coal-fired power net generation capacity and also announced early on its support for the TCFD*1 recommendations.
Marubeni has identified several categories of Fundamental Materiality and Environmental & Social Materiality. Among them, it is the shared understanding of members of the Sustainability Management Committee that human capital is Marubeni’s most important asset. As an investment in human capital, it is essential to put in place a system that provides employees with a variety of opportunities and experiences. I think this idea is also leading to a review of the Company’s HR system. It is my belief that “sustainability” has steadily become one of management’s principles.
As Ms. Okina said, the policy Marubeni established on the coal-fired power generation business was a major management decision in terms of profitability. At the same time, I think it was very significant in terms of signaling to the world Marubeni’s commitment to responding to the expectations of society. Moreover, in terms of initiatives to grow the business, it is necessary to continue to take on even small-scale projects. Marubeni’s track record in the solar power generation business has grown steadily, so much so that the size of a single solar power project in the Middle East, for example, is as large as that of one nuclear power plant in terms of the generation capacity. I am looking forward to seeing the Company push forward in business areas that successfully help to address new social issues, such as water, food, and marine plastic waste. Moreover, along with the COVID-19 pandemic, companies are being called on not only to develop vaccines, but to respond to social needs in other areas as well. In Japan and overseas, we will see growing demand for environmental activities as well as improved hygiene. I believe Marubeni is a company that can take advantage of major business opportunities while actively responding to such new social demands.
Speaking of the current pandemic, one outcome has been the introduction of new working styles, such as working remotely from home or elsewhere. Before, this was a convenient option but it was not much utilized. Going forward, I think the working styles of Japanese firms will be transformed. Beyond the current crisis, we will see a paradigm shift not only in workstyles but in lifestyles. The Company will need to be ready to respond to the needs that emerge from this.
I would like the Company to take the lead in workstyle reform. Marubeni is improving its IT environment and actively introducing telecommuting, but as I said at the Board meeting the other day, there is still some work that can’t be done without coming into the office, and further revision is needed. It is my hope that Marubeni can bring about a virtuous cycle: By enabling flexible working styles that are conducive to a healthier work-life balance, Marubeni will be recognized as a more sustainable company, and will therefore attract the kind of employees it is looking for.
On the other hand, I think a major risk from the current pandemic is that it will be extremely difficult for management of global companies to navigate all the increasing uncertainties they face. In Japan, we are exposed to major changes in the business environment due to the impact of COVID-19, such as an expected surge in the number of companies with insufficient capital. Marubeni will need to deal with a variety of risks as it moves forward in a post-COVID environment.
Roles of the Nomination Committee and Governance and Remuneration Committee
The role of the Nomination Committee is to examine director and Audit & Supervisory Board member candidates proposed to be presented at the General Meeting of Shareholders, and report its findings to the Board of Directors. It also deliberates on proposals for executive appointments drafted by the President. Thoroughly discussing all proposals in the Nomination Committee, a majority of whose members are external directors, is one mechanism for ensuring the transparency of the appointment process.
I currently chair the Nomination Committee. I believe a key role for the Committee going forward will be to formulate a succession plan. Marubeni needs to raise up senior executive candidates who, in their actions and management decisions, are able to lead the Company appropriately regardless of how the times change, and to establish training programs to that end.
To date, the Governance and Remuneration Committee, which I chair, has revised a part of Marubeni’s compensation structure. Specifically, in addition to consolidated net profits, which were already used as a performance-based compensation indicator, we revised the compensation structure to include core operating cash flow*2 as a further indicator. As Marubeni is involved in a number of large-scale investment projects, we consider cash flows generated from such projects to be a highly relevant indicator of the Medium-Term Management Strategy GC2021, and thus reflected this in the compensation structure.
In the fiscal year ended March 31, 2017, we also introduced stock options, to create a greater incentive to contribute to share price appreciation and growth of shareholder value, as well as to share the rewards and risks of share price fluctuations with shareholders.
Furthermore, in the fiscal year ended March 31, 2020, to create a further incentive to grow future market capitalization, we introduced stock options with terms that can only be exercised if the Company’s market capitalization has increased after three years, and if the growth rate of market capitalization has exceeded the TOPIX (Tokyo Stock Price Index) growth rate.
Amid increased demand for supervision and monitoring of the Board of Directors, the dual system of oversight of the Nomination Committee and the Governance and Remuneration Committee is effective, and will lead to more robust corporate governance. In terms of the Nomination Committee, as Mr. Kitabata mentioned, I also think the creation of a succession plan is a key issue. A solid framework, in which the Nomination Committee plays a central role in the selection and development of senior executive candidates, is needed. I also think the Governance and Remuneration Committee plays a critical role in maintaining a fair, impartial, highly transparent compensation framework, and in remaining accountable to shareholders and investors. I’ve only just joined the Nomination Committee, and I would like to make a strong contribution to growth in Marubeni’s corporate value.
1 TCFD (Task Force on Climate-related Financial Disclosures): Established by the Financial Stability Board (FSB).
2 Core operating cash flow: Operating cash flow excluding net increase/decrease in working capital and others.