Outside Director Dialog

Could you talk about the fact that results have not kept pace while in the last few years internal consolidation thinking has grown?

Tsuda:

In the fiscal year ended March 2021, the main factor of the decrease in profit was a major reduction in production by automotive manufacturers, our main customers, due to the coronavirus pandemic. However, there were other factors: the investment in replacing the core IT system has increased from the initial assumption; there is still a long way to shift to aftermarket and industrial machinery businesses, which have a higher income; and impairment loss was recognized because returns from past capital investments did not reach initial assumptions. These do not easily produce positive results in numerical terms. Unfortunately, we must say that our management of capital investment has been inadequate. Nevertheless, looking back over the past year, cash flow turned positive. Inventory and fixed cost have also been reduced significantly. The break-even point is also declining. I think we can applaud the fact that the Company is producing results in terms of what it has planned. We have not yet completed structural reform that we should implement, including the reorganization of our domestic bases. Despite the impact of the shortage of semiconductors, automotive business is now recovering, and the Company will work to resolve the issues while restoring its financial strength. I feel this is where executive managers can show their skills.

Nishimura:

I praise the fact that in the past year, we have cut fixed cost in order to lower the break-even point, and I feel that things are breaking well in terms of management. On the other hand, there are two things that I felt were essential challenges, although I have less than one year of experience.
The first issue concerns the decision-making process. I feel that while a decision is made at an important meeting, management's consensus building and sense of satisfaction are inadequate. Despite the fact that a decision applies to the entire Company, actions are concentrated in some divisions and company-wide action is not taken. Therefore, even if we can make progress in what can be improved through the efforts of specific divisions, we have not yet generated any company-wide effects. I feel that it is necessary to dramatically change the direction of management to "team management" in the future. For this reason, I think it is necessary to flatten the organization as much as possible and change it so that the results of decision-making and consensus-building can be shared swiftly throughout the organization.
The other is about investment. Currently, most of the investment projects that are being discussed internally are concentrated on capital investment. Until now, the Company had been able to do business if it manufactured bearings and their application products. As a result, sufficient investment has not been made in further enhancing the added value of the products. Although technological research and development has been conducted, there has not been sufficient market research on the value of new products. This means that the Company is not fully aware of where its current position in providing value lies. It may be necessary to take a birds-eye view to ascertain how we are seen from the customer's standpoint. In this sense, we should invest a little more in marketing, technological development aimed at further enhancing added value, and product development. We have a variety of options, including alliances with external specialist companies, and technical cooperation or alliance with companies in other sectors. To this end, it is necessary to further improve profitability, to clearly incorporate it into investment items in the budget, and to select a person responsible for promoting it.

Komatsu:

From the investor's point of view, there may be a problem with the business portfolio. Investment is biased toward automotive OEMs, which are businesses whose future growth is difficult to ascertain, and they account for the majority of our portfolio. Even if we would otherwise want to focus on aftermarket business and other businesses with high gross profit, we would be forced to devote personnel, investment, and other resources to automotive OEMs, and we cannot take measures in a flexible manner. In addition, if we have a high level of internal reserves, we may be able to act quickly with a sense of urgency in transforming our business portfolio, but we will only proceed slowly because we currently have modest internal reserves. While this is understandable, it is essential to make a decision on at least the direction and share it with all employees in order to transform the Company. It may not be at the speed that investors ask for, but if the Company can transform itself at an adequate speed to achieve sustainable development, I think we will become a company with high profit margins.

Tsuda:

In terms of transformation, President Ukai, who assumed his position this year, has been involved in industrial machinery and aftermarket businesses for many years and has abundant experience in Southeast Asia. In order to strengthen the high-margin aftermarket business, he has a clear policy of discontinuing operations and transferring resources to the aftermarket business if income cannot be achieved even if the number of automotive OEM projects increases. Of course, there have already been such discussions, but things didn't go as we expected. For inventories, rather than uniformly reducing them, we must have a fixed number of products required for the aftermarket business, and must have a system in place to enable immediate delivery. The President has engaged in such activities. I hope that President Ukai will boldly take on the challenges we face.

Komatsu:

That's right. There is another thing I would like to consider after becoming Outside Director. It is the delay in updating management accounting in line with the current situation. Management accounting is still functioning at present, but I do not think that all executives and employees share the same numbers, can make business decisions quickly and accurately, and operating income under financial accounting is automatically increased. All employees want to proceed with business after allocating all costs based on criteria that employees are satisfied with, understanding the costs correctly, and recognizing immediately whether they are making money or not. I think it would be better to pay attention to setting KPIs for evaluation. There are many Japanese companies (other than us) that set income before allocation of headquarter costs as KPI. However, if operating income under financial accounting is not shared with employees as a KPI, even though a department is achieving its goals, if the company-wide earnings are tight and the remuneration is reduced, employees at the department will be strongly dissatisfied and their motivation will decrease. If we can quickly determine a series of processes, such as allocating all costs as fairly as possible, sharing them as KPIs, and reflecting those KPIs in evaluations, we will be able to understand costs in a timely manner and quickly determine whether orders should be received. I think that the mindset of employees will change and earnings will pick up faster. The accounting division knows the issues of management accounting. However, we do not see any noticeable progress at present because the start of operation of the core IT system has been delayed across the company. As these issues are shared by the Board of Directors, we believe that progress will be made going forward.
In terms of the personnel system, we are also moving forward with a plan for changing the evaluation system for executives. I 'm not sure if it can be implemented during the period ending March 2022, but discussions are proceeding.

The President was changed for the first time since we migrated to a Company with a Nominating Committee, etc. Please tell us about the process for the President change.

Tsuda:

The Nominating Committee consists of 3 outside members, including myself (the chairman of the committee), and 2 inside members. One of the 2 inside members was the President, and the other was the director in charge of human resources. The resignation of the President and appointment of their successor were difficult to discuss at a meeting of all members, and we held discussions among the 3 Outside Directors and convened the Nominating Committee after holding a dialog with the former President Ohkubo and exchanging views with other Outside Directors. After evaluating his execution, planning, and previous experience, we decided unanimously that Mr. Ukai was suitable for the position, and recommended him to the Board of Directors.

Nishimura:

I also exchanged views with former President Ohkubo on the successor. As mentioned earlier, I recognize that the transition to "team management" is a major issue, and recommend President Ukai because he is qualified as a person capable of guiding the transformation with enthusiasm. I have great expectations for his management skills. Not only the President but also all other executives have things they are not good at. By complementing each other and functioning as a "team," management can make firm management decisions that realize a company-wide, long-term transformation. I think it will be important in the future how he positions this as a management decision-making process, and how he leads not only executives but also capable human resources to work as a team.

This year, NTN has identified materiality and are working to promote sustainability management in earnest. How do you see these developments?

Komatsu:

It is certainly true that we are seriously committed to sustainability management. Since Mr. Ukai assumed the position of the President in particular, the Company has been working with a strong sense of urgency on the world issue of decarbonization. I think the entire Company is making serious efforts not only to reduce emissions, but also to ensure our products contribute to environmental conservation. On the other hand, with regard to diversity and other issues, it seems that the environment-related challenges are so great that those issues are placed on the back burner. Given that it is difficult to cover all ESG issues and that environmental conservation is an urgent issue, it is not a mistake to place emphasis on the environment. However, what surprised me was that there are few female managers. All of our male executives are not biased against women, but when evaluating them, there is a possibility that criteria for choosing managers are unknowingly slanted in favor of male employees. There may also be an idea that it would be a pity if we let women do this kind of work, and that it would be a tough job because women need to take care of their family. Some women are happy with such treatment, while others are not. If working styles change, there are cases where more women want to become managers. I feel that it is necessary to talk to female employees and managers about these matters.
It is also important that not only women but also non-Japanese people play an active role. As with the case of women, there is no desire to exclude foreigners. The Company will be forced to change in the future. No matter what the business model will be, I believe that innovation will progress as human resources from various countries and women come in.

Nishimura:

This time, we expressed our support of TCFD recommendations as part of our sustainability management, which is a major business opportunity. We are a global company with approximately 70% of its sales coming from overseas. We have many production, sales, and research bases in Asia, Europe, and the Americas globally, and if those bases cooperate with each other, we can continuously provide services without interruption 24 hours a day. In other words, this expression of support means that we declare that we will engage in the global standard business in which services are continuously provided to our customers through complementary collaboration between our bases, even if there are risks arising from climate change. To this end, we must promote global standardization of procurement, manufacturing, sales, and logistics, as well as information-sharing and strengthening of governance. In this way, we must work together as the "One NTN." We should be conscious of the concept of the "global standard" from an early stage and from a company-wide perspective, at least with regard to new products and service businesses that we will work on in the future.
In addition, it is expected that many countries and companies will change their direction significantly toward the realization of a carbon-free society in the future. We have continued to realize a NAMERAKA society since our foundation. Taking advantage of this strength, we need to take a step further to lead society in areas such as renewable energy, new energy, and development of new materials. On this occasion, we should take one step closer to customers, aiming to sell higher-value-added products to them. Achievement of carbon neutrality will be very difficult in all countries and companies in the future, and it is imminent that supply will not keep pace with the demand for new energy. This may be an opportunity to pursue an unprecedented alliance. As we play a key role in the wind turbine business, I think it is important to aim to become a global company with a culture of openness.

Tsuda:

In the future, proposals will come from the Sustainability Committee, and it is important to hold discussion with the question "what do we do and by when?" in mind. How will we set goals, tackle them, and lead them to evaluation? It is the role of the Board of Directors to discuss this point. At present, we are focusing on climate change, but I believe that we need to pay attention to and visualize employees ' sense of satisfaction from work.

Komatsu:

Materiality is also identified in the Social and Governance segments other than Environment. It is crucial that directors make sense of this well-balanced identification of materiality, and penetrate it to the frontline staff of the organization. It would be a pity if it is not implemented.

What do you think about the trend toward linking the achievements of sustainability management with remuneration?

Komatsu:

Discussion is currently underway on KPIs related to ESGs. The Compensation Committee holds discussion so that at least KPIs that have been set should be linked to the assessment of executives.

Tsuda:

Currently, equity-linked remuneration is included in the medium- to long-term incentives of executives. However, only economic indicators, such as consolidated operating income rate and total assets turnover rate during the period of the medium-term management plan, have been used to assess the performance of executives. We discuss in what direction we should go in relation to how to incorporate social indicators in the assessment process and their direction. Furthermore, some pointed out that there is a need to set social indicator targets not only for executives but also at business sites, so that bonuses will be raised if they are achieved. Since NTN is now prioritizing the rebirth of NTN, it is difficult to work on the publication of social indicator targets. However, we recognize that it is necessary to present planned and actual figures.

How is the progress of globalization and integration of Japan and overseas, which have been emerging as challenges for some time?

Tsuda:

I have spoken about the challenges of our globalization and the integration of Japan and overseas in previous dialogs as well. CSR activities are becoming a global initiative. Manufacturing and quality also involve exchanges of opinions and technology with overseas sites, but I don 't think that each department at the head office regards itself as a part of the "global headquarters" to a satisfactory extent. For example, committees and the Board of Directors should include overseas topics in their reports, but the main topics are still domestic ones in some cases. I think we will have to keep pointing this out for some time.

Finally, what contributions will you, as Outside Directors, make to NTN?

Nishimura:

During the past year, as an Audit Committee member, I visited the business divisions of the head office and manufacturing plants and affiliated companies nationwide wherever possible in order to conduct operational audits. I have learned not only issues at the front lines, but also a number of other aspects, such as attractive human resources and the progress made in significantly promising production reforms. Overall, however, I have an impression that communication and information sharing between headquarters and plants, as well as between plants, is inadequate or scarce. We have no time to spare in achieving "team management," which aims for total optimization rather than individual optimization. In my previous job, I learned many things as a member of the management team of a company that shifted from "charisma management" to "team management." I believe that this experience will also be very helpful to the Company's transformation. In addition to proposing an ideal form of "team-based management" that is appropriate for the Company, I am committed to pursuing it together with employees.
Another issue I would like to mention is promoting collaboration with companies in other sectors. In my previous job, I worked actively in collaboration with governments, local governments, related organizations, and companies to build social infrastructure for customers such as government agencies and companies in the finance, healthcare, and broadcasting sectors. While there is still a major hurdle for the Company to aggressively enter the social infrastructure business, I hope to play a key role in collaborating with companies in other sectors with regard to promising new business fields, further expanding the social value of the Company, and becoming a company that will lead the next generation's "global standard."

Komatsu:

I think I can make a balanced proposal on governance because I have experience in working for an institutional investor in the global capitalism world and working in the domestic entertainment publishing industry. I would like to help the Company solve issues related to diversity, ESGs and management accounting as soon as possible by holding an interview and making proposals, even if I may be considered intrusive. In doing so, I would like to contribute to the enhancement of corporate value. From past experiences, I also know all too well the importance of monitoring. If we properly perform monitoring, we can revise our trajectory and respond in a timely manner. Verification of investment results not only increases the probability of future investment success, but also makes it easier to take on challenges. I would like to constantly ask "what happened after that?" in order to avoid a situation where no results are produced after an investment or declaration is made.

Tsuda:

We are not making much progress in terms of marketing in areas other than the automobiles and industrial machinery sectors and collaboration such as joint development with companies in other sectors. Even if we try to enter new businesses, it is often impossible for us to do so by ourselves, so we need to take slightly more aggressive measures. Since the Company has conducted business with specific customers so far, I think that the Company may have difficulty creating a connection. I know that "saying is one thing and doing is another," but I must continue to say that. I feel unhappy about what I, as an Outside Director, have done over the past 5 years. I have long felt that we have not been able to sufficiently evaluate and analyze what we have planned and implemented. It is important to analyze what results are produced and what is bad if you cannot produce results. Ms. Komatsu also mentioned that, and I would like to ask such questions persistently. Regarding items to be reported to the Board of Directors, information to be reported that is needed by directors must be sorted out a little more, so that more productive reports will be submitted to directors. There are still many areas for improvement, and this time again I feel I have become outspoken, but I would like to continue working to realize a newly reborn NTN and increase its corporate value.