Japan Association of Corporate Directors

One year has passed since I assumed the office of Chairman.

Looking back over the past year, the Japan Association of Corporate Directors ("JACD") has steadily and significantly increased its membership, the frequency of committee meetings and other events, and the number of participants. We believe this reflects the growing recognition of the importance of learning and thinking about corporate governance, both at the company and individual level.

Regarding the enhancement of the training program, which was a priority issue for the first year, the Special Committee has begun to discuss a new program with significant renewal.

In terms of broadening the scope of our activities, we have compiled recommendations for global standardization of governance structures, investment contracts and other structures, and incentive schemes such as stock options, which are important for globally oriented startups. We expect that these recommendations will have a significant impact in improving the environment of Japan's venture ecosystem, as it is difficult to produce unicorn companies from Japan that can take off on the global stage.

JACD's organizational structure has been further strengthened with the appointment of Mr. Michiaki Hirose, Chairman of Tokyo Gas, as the new Director and Mr. Fumio Tateishi, Chairman of Omron, as the new Nominating Committee Chairman.

Thanks to the efforts of all concerned, corporate governance is now a widely spoken and known concept, and although there is currently controversy over the methodology for its substantiation, there is no longer any debate as to whether it is unnecessary.

JACD believes that the key to substantiation as a theme for the second year is, above all, to improve the level of "bearers," i.e., outside directors and management, and the quality of engagement of institutional investors, and JACD will strengthen activities to encourage these efforts.

Regarding the capability enhancement of internal and external directors and board secretariats involved in governance, we intend to implement a newly launched three-stage training program that will serve as a standard role model. In the near future, we hope to make the same level of training available to directors of all listed companies.

Regarding engagement, in light of the issue of P/B ratios of less than 1 presented by the TSE Follow-up Committee and other issues, we will make it one of the key activity issues for this year to encourage precise management efforts for more long-term sustainable "earning power" and growth rather than just shortsighted and transient financial manipulation through increased dividends, share buybacks, sales of idle assets and the like, and how to make sure that engagement is enhanced in the essential sense of the word. This also applies to the disclosure of human capital investments. Rather than creating a superficial alibi, human capital enhancement must lead to increased profitability through intangible assets, which is critical in an era of knowledge-intensive industries.

With indexes and other passive investments have become a major trend in investment, there should be a great sense of urgency that the risk of a hollowing out of the engagement players who can commit to the real goal of governance, which is the long-term sustainable growth of corporate earnings, is rather increasing.

Another point is that most Japanese companies are unlisted small and medium-sized enterprises (SMEs), which now generate more than 70% of GDP and employment. Corporate governance issues are critical for these companies to sustainably increase productivity, profitability, and wages. The governance of unlisted companies, which have different characteristics and issues from those of listed companies, such as relationships with founding owner families, will also be the subject to research and study. Many of our members are unlisted companies that do not plan to go public and their stakeholders, and JACD hopes to meet their expectations as well.

(Chairman's Message from AGM2023, Kazuhiko Toyama, Chairman
Japan Association of Corporate Directors)