Outside Director Dialog

In June 2019, NTN obtained approval from an Annual Shareholders'Meeting and transitioned from a Company with Board of Corporate Auditors to a Company with a Nominating Committee, etc., but what has changed due to the transition?

Tsuda:

Traditional Japanese firms did not have a clear distinction between execution and supervision, and their function of supervising execution, or so-called governance, was inadequate. The same is true for NTN. Although NTN made a good decision to introduce Outside Directors, Board of Directors decided on even minor matters as before and the content of reports on such decisions was inadequate for Outside Directors. Thus, the important supervision function of Directors remained weak. We have changed our corporate structure to a Company with a Nominating Committee, etc. because we believe it would be better to drastically change our corporate governance structure to move away from the traditional corporate structure. The number of directors, who do not concurrently serve as Executive Officer, has increased to six, accounting for the majority of Board of Directors, and I think this and other factors indicate that the Company is going in the right direction.

Kawahara:

That's true. In order to speed up management, I think it is appropriate that the Company has adopted a system where Executive Officers focus on business execution and Directors are in charge of supervision. Now, President and Executive Officers execute business quickly, and Directors can fulfill their intrinsic role of "assessing personnel, compensation, and other matters, in response to the Company's major policies and status of execution." I had served as an Outside Audit & Supervisory Board Member for four years, but after I took office, a senior statutory auditor encouraged Outside Directors to attend every meeting of Board of Corporate Auditors as observers and as a result, such meetings served as a forum for sharing information and exchanging views among Outside Officers. This has been very helpful. On the other hand, I also felt that "measures are often taken to simply follow precedents." When I asked "Why do you do this?" in an interview during an audit, I often received answers like, "This is what we've been doing for a long time." Even if they thought they needed to change those points, the actual situation might not have allowed them to make a change easily.

Tsuda:

The transition to a Company with a Nominating Committee, etc. provided a good opportunity to change this corporate culture.

Kawahara:

That's right. However, though we took time to discuss the transition, the discussion remained as far apart as ever and did not proceed very much. I also participate in a Management Meeting and other events that are held before Board of Directors meeting is held, but there were some cases in which an issue was finally submitted to Board of Directors after many meetings were held for such issue. After the system change, Directors are able to concentrate on "supervision" tasks because executives give answers themselves. Also, the number of meetings has been reduced, and I feel the decision-making process has been accelerated and streamlined. With regard to Global Management Conference, Executive Officers have recently held active discussions themselves in their respective capacity and have not necessarily adopted resolutions unanimously.

Tsuda:

Some employees still have an impression that becoming a Director means becoming important, and I feel that some employees still have an old mindset. Governance reform can’t possibly be achieved overnight, but due to the change in the system, we are making steady progress toward the desired direction.

What issues did you consider as the head of the Nominating Committee and the Audit Committee in the previous fiscal year?

Kawahara:

Let me talk from the viewpoint of an Audit Committee member. Due to the frequent occurrence of improper accounting incidents involving our overseas subsidiaries that are listed companies, strengthening internal control globally was an important theme in the previous fiscal year. In Japan, the Audit Preparation and Support Office played a central role in holding regular meetings with statutory auditors of our subsidiaries, and we implemented initiatives such as sharing case studies. As a result, practices are gradually being improved, and I feel that the initiatives are producing good results. With regard to appointment of directors and statutory auditors at our Group companies in Japan, our senior management gives direct instructions to recruit human resources that are really helpful and advantageous to those companies. On the other hand, issues still remain in our overseas Group companies. Cultures and other factors vary depending on the regions and problems are difficult to identify. If we go to a local site for an audit and have a connection, we will be able to speak frankly. However, we have not yet established a relationship with all foreign subsidiaries and affiliated companies.

Tsuda:

As Mr. Kawahara has said, there are issues with internal control of our overseas Group companies. Although we have been moving forward with initiatives such as recruiting Hervé Brelaud from our French subsidiary and appointing him as Operating Officer in charge of Procurement, there has been a delay in the globalization of headquarters functions. Nonbusiness information such as the helpline is not quickly provided to Board of Directors from overseas sites. Regarding compliance at overseas sites, it is difficult to grasp problems because information as to where a problem exists and what the situation is like is not quickly provided to NTN’s Head Office.

Kawahara:

In order to solve the issue, we are currently creating a channel through which the sections in charge of internal control at overseas sites provide information to the Executive Officer in charge of overseas sites who works at NTN’s Head Office.

Tsuda:

This may be a harsh comment, but in other respects too, I feel that the speed at which a decision made by top management is disseminated to local sites and is put into practice is slow. For example, even though we decided to "curb capital investment," the decision was not quickly put into practice. I sometimes think it might be difficult to stop operations. In such a situation, on the contrary, it would be difficult to accelerate operations when it is necessary to do so. The same is true with the inventory. Even if inventory reduction is decided, it does not appear that the reduction proceeds quickly. Though the production process is long and divided into multiple sections, it takes time to "control" operations, because it takes time to communicate, importance is not conveyed, or each organization is unable to think and act on its own.

What are you doing to foster a future Director who will be responsible for management in the future? What is needed to build confidence between Directors and personnel at the site?

Tsuda:

By the way, the Nominating Committee believes that "fostering successors" is a major issue. The issue is not how we will nurture the next generation, but our focus is on how to nurture the generation after the next and the generation after such generation. Education on business skills is sufficiently provided, but it is necessary to develop the ability to hold discussions on major themes and to enhance education for raising awareness of management issues. We are currently reviewing what kind of skills are needed in Japan and globally, and what kind of education should be provided to nurture such skills, targeting people around the age of 50. In addition, we created a skill matrix so that the skills of Directors can be understood by shareholders and third parties.

Kawahara:

The "Notice of Convocation" for the 121st Shareholders'Meeting (held in July 2020) also includes the skill matrix of candidate Directors.

Tsuda:

I would like to use this kind of matrix to check the skills of candidate successors and strengthen each person's skills, for example, by training them if there is any skill imbalance. However, it is not enough to have many "circles" in the checkbox, and we would like those who become a Director or Executive Officer to have a profound knowledge in at least one field. In order to gain the "trust" of people, which forms the basis of a leader, I think it is also important to acquire outstanding abilities that make others think "this person is a leading expert" or "I can't best this person."

Kawahara:

With regard to "trust," I would like to add something: when reporting the results of on-site audits to Board of Directors, we do not present any complaints, but are trying to communicate the facts frankly. Also, at the end of the audit, I try to ask, "What do you think of the current NTN? What does NTN need?" The subjects of audits are general managers of business sites and president of subsidiaries. They themselves have various thoughts, and I have heard them voicing questions like "What direction will NTN take?" Such voices are also reported and shared in Board of Directors and at other opportunities. This is because it is important to take follow-up measures to resolve problems in some way, as long as we have people at the site talk about their problems during the audit. Conversely, if we feel that the thoughts of Directors and Executive Officers are not communicated to people at the site, we may communicate them at the time of audit. Through these efforts, if we can communicate with each other and understand what trouble the work site has and what the NTN Head Office is thinking about, I believe we have fulfilled the role of auditing. We believe that realizing a smooth organization is also an important role of the auditing team.

The NTN Revitalization Scenario was announced in June 2020. Currently, a medium-term management plan is being formulated with the fiscal year ended March 2024 as the plan’s final year. How do you intend to revitalize NTN?

Tsuda:

The results for the fiscal year ended March 2020 were extremely unfortunate. The cash flow from capital expenditures was not in line with our expectations, causing a divergence between our initial expectations and actual results. In addition, we posted impairment losses due to the impact of the the new coronavirus (COVID-19).

Kawahara:

While sales did not grow in the previous fiscal year, a burden was imposed on us due to the establishment of a new plant in Wakayama Prefecture. However, this was for the purpose of anti-seismic measures and production restructuring, and must be seen to the end. As Mr. Tsuda said earlier, the "vertical axis" of the vertically-divided system of business divisions exhibited strong effects, and the divisions'idea of "investment must be made because the project has been decided" took precedence, with the initial estimates being too optimistic and the ex-post verification of returns being not properly carried out. In such a case, I think we were not able to discuss whether to continue the business, whether to stop it, and how to control it. I would like to confirm once again how to follow up on capital investment.

Tsuda:

That's right. We (Directors) are also responsible for deteriorating performance, and we have made strict evaluations and assessments in terms of personnel affairs and compensation, by taking measures such as reducing compensation. The issue is what direction to take in the future. How will you improve your business performance after you have overcome the impact of the new coronavirus? Currently, we are formulating the next medium-term management plan, and it does matter how Outside Directors will commit to it.

Kawahara:

Recently, investment is no longer permitted unless a reasonable explanation is given, including estimates of revenues and expenses and growth potential of the market. At last, we have shifted our focus from scale to cash flow and profit. I believe that this is the result of effects exhibited by the "horizontal axis" such as Finance Headquarters, Corporate Strategy Headquarters, Production Headquarters, and CSR Headquarters. I feel that the idea of overall optimization is taking root with priorities based on the "horizontal axis taken into account," and the idea of individual optimization at business divisions is being discarded. I myself believe that the highest priority should be given to cash flow. One of the major reasons why investment doesn't generate cash is that inventories are not quickly reduced, as mentioned earlier. I believe that the reason why inventories do not decrease is that the Company has its own pre-manufacturing processes. In principle, having pre-manufacturing processes should result in the retention of income, but the problem is that a burden of investment and inventory is greater than the income.

Tsuda:

Recently, the idea of production reform has been accepted, and the idea of reducing and downsizing the pre-manufacturing processes through outsourcing and fabless models is being adopted.

Kawahara:

That's right. We certainly suffered a great deal of losses, but these are due partially to reforms involving "bleeding," which we couldn't carry out in the past, and I feel confident about our efforts in that respect. Rather than pursuing making the "scale" larger, future investments should be made after judging "whether or not you can reliably gain profit," and investments that have already been made need to be verified after the fact. As a full-time Outside Director, I will strongly recommend such measures in the future.

Tsuda:

With regard to the difficulty of "stopping operations" I mentioned earlier, we already have a long manufacturing process, and the Company clung to the idea of having all processes on its own and plunged into a situation where it had a lot of inventory as intermediate goods. Even when operations were stopped, because the entire production process is long, inventories are accumulated in respective sub-processes. In order to resolve this issue, we have begun efforts to reform production so that we do not have intermediate goods.

Kawahara:

Governance reforms have enabled Executive Officer in charge of the Production Headquarters to focus on his own duties, and due partially to this, the production reforms have been facilitated.

Tsuda:

In response to Executive Officer's advice, young employees at our core plants have led the way in rationalizing production, and have begun to expand this initiative to other plants. As a Director, I would like to make sure that this kind of effort is not hindered and that they are fully supported. It is very important to make investment decisions for production facilities.

Kawahara:

It seems that, when requested by customers, our employees think "even if profit from this project is low, our future business will be expanded by working on the project" and as a result, they make unprofitable investments.

Tsuda:

Weak cost competitiveness tends to lead to such ideas. If a manufacturer's requirements are not consistent with our strategy, we can reject them, can’t we? I believe it is most important to overcome the weaknesses of our company and to build up strength that surpasses that of our competitors. To this end, I believe that the ultimate issue is to what extent we can make rationalization efforts, including production reform and sales reform.

What issues remain to be addressed in response to the new coronavirus infections? What initiatives will you take in anticipation of the next era?

Tsuda:

The risk management system has been in place, but if you ask whether we have assumed the outbreak of infectious diseases such as the new coronavirus, we made no detailed assumption about such situation. Nevertheless, we believe that NTN has been able to respond smoothly, including ensuring the safety of its employees and promoting telework, by immediately establishing the Central Headquarters. I would like to assign a passing score to our first-stage response to manage this crisis.

Kawahara:

My evaluation is similar to Mr. Tsuda’s. In the event of a global pandemic, the Central Headquarters, headed by President, has been able to collect information and manage various measures in a unified manner, with the highest priority promptly placed on the health and safety of employees. Our measures to promote work style reform and introduce telecommuting under the leadership of the Personnel Department have also helped us respond to the pandemic successfully. In the future, I think it is important to summarize the issues that have surfaced, such as overtime management and evaluation systems, and incorporate solutions to such issues into our systems. In addition, while the Procurement Headquarters is following up on the maintenance of the supply chain, it is necessary to carefully determine the extent of impacts of the new coronavirus. In addition, because our financial position significantly worsened, we must be aware of the increasingly unfavorable evaluation of our company by society, and fulfill our accountability to explain our current situation and goals to all stakeholders, as we strive to produce results in a reliable manner.

Tsuda:

I think what position NTN will take in terms of the supply chain is a very important issue in light of the turbulent social situation. We need to consider the issue, considering the confrontation between the U.S. and China, which has surfaced in recent years.

Kawahara:

Returning to the topic of capital investment, we should allocate budgets to "investment for renewal of aging facilities" and "investment for rationalization leading to reduced fixed cost," which have not been sufficiently carried out until now. Even if the scale of the budget for capital investments shrinks, partly due to the impact of the new coronavirus, these investments may contribute to lowering the break-even point. If you use old equipment, it seems that the cost is kept down at a first glance. However, problems arise, such as quality issues or low productivity. I believe that we need to implement control measures so that such problems do not occur

Tsuda:

If Executive Officer provides in-depth explanations to workers at the site, I believe that we will be able to respond more quickly to the issues that Mr. Kawahara mentioned. We can say that now is the time for improvement.

Kawahara:

From a long-term perspective, NTN is proceeding with the identification of materiality. This is an important task for NTN to continue to be a company needed by society.

Tsuda:

With regard to materiality, it may be a good idea to start with work with a rough design and update it according to the situation, instead of trying to create well-designed work from the beginning. Also, I believe that it is most important for top management to understand the significance of the issue. Materiality will also be factored into the medium-term management plan.

Tsuda and Kawahara:

Despite challenging results in the fiscal year ended March 2020, we intend to increase corporate value by selecting and concentrating our businesses. As discussed in this talk, NTN's revitalization is progressing steadily through the promotion of governance reforms and other measures. We will continue to check management as Outside Directors and fully support the progress of NTN.