Outside Director Dialog

The second year of the Medium-term Management Plan “DRIVE NTN100” Phase 2 for revitalization of NTN has ended. Please look back over the year in which we tackled our revitalization with firm resolve.

Komatsu：

Essentially, any Medium-term Management Plan should first draw a big picture of how to convert the business portfolio and then discuss which businesses to focus. However, under our current Medium-term Management Plan, we have proceeded with the reform from the beginning by positioning the three years as the period of “in-house arrangement” for the next leap forward, by getting out of the red, increasing the profit ratio, and improving our cash flow and financial structure.
In that regard, compared to the fiscal year ended March 31, 2021, our operating margin, cash flow, and financial structure have been improved. I think this can be highly evaluated as the results of efforts of all employees. On the other hand, I recognize that there are issues in the content and speed of improvements, including the operating margin and the cash conversion cycle. Rapid changes in the external environment such as soaring material and transportation costs may be one of the causes, but that also posed an opportunity for price increase negotiation, so I think the results may have been better if there had been a little clearer intention.
President Ukai has repeatedly delivered in-house messages saying that employees are allowed to negotiate, with a strong will, for any business not profitable enough, with possible discontinuation of the business in mind, and the entire company has been engaged in price increase and reduction of unprofitable businesses. As a result, the profit ratio has been improved smoothly in the industrial machinery business and the aftermarket business, while the automotive business was hit by an operating loss again in the previous year. By taking into account that the employees in the automotive business have made equivalent efforts to those in the other businesses, I assume that the management of the Automotive Business Headquarters failed to share the road map and KPIs for profitability improvement and communicate their clear intention. I am also concerned that employees unconsciously take orders that will lead to an operating loss to cover the fixed cost. First, it is necessary to stop bleeding by changing the criteria for judging businesses to a cash flow that will lead to the operating margin and better inventory level, not to sales and gross profit. At the same time, I expect that a plan for converting the business structure to enable a proper profit to be recorded in a sustainable manner will be finalized promptly and shared inside and outside the company.

Murakoshi：

I was just appointed as an Outside Director last year, so I’ll talk about what I have felt while watching NTN over the past year. As Director Komatsu said, any business has a certain lifecycle, and I think that we must consider how to change the business portfolio at each point of the cycle. With this viewpoint, I think our biggest challenge is how to do with the automotive business, our biggest business division. Most of our automotive business is for OEMs, but the business has not necessarily contributed to profits due to recent high raw material cost and unstable automotive production. Each business site has been dedicated to cost reduction and reflection of high raw material cost in product prices, but in reality, it is not always easy to reflect our added values such as products and technologies in product prices. Regarding whether this is a problem that can be solved in the short term or a structural problem, I feel it necessary to watch carefully as for how our management should be in the future.
President Ukai and other Executive Officers have a strong will to transform NTN. An agreement has also been reached on what our main axis should be. For example, when changing the direction of a large ship, even if you turn the steering wheel fully, the ship changes its direction only slightly. Before the direction is changed completely, it will take a while even if you keep full steering. Likewise, I think it requires determination and patience to transform a large company. Reform of a large organization also brings strain and pain to the organization. I think the President and other Executive Officers, who are in control of the steering, understand it, but I wonder if it has been known throughout the company. I feel that a challenge lies in whether people other than managers are able to commit themselves to the fact that we are in the middle of such a large reform.

Komatsu：

In this dialog last year, I said that ”we are motivated, the direction is not wrong, the only concern is speed.” As for this “speed,” I appreciate our success in raising sales prices faster than expected. Probably, that is partly due to the general trend for price increase and strong messages from President Ukai. On the other hand, progress has not been made as expected for what I have been saying for the three years after being appointed as an Outside Director, including inventory reduction and how to plan elimination and integration of plants. These are still issues, I think.

Murakoshi：

With regard to plants, I have visited plants in Iwata and Kuwana after being appointed as a Director. These plants are old and have been extended again and again. I think these plants have issues in terms of the efficiency. At present, our capital expenditures are restricted, so the reality is that there are limitations on investments for efficiency improvement, manpower saving, and no-man operation. Nonetheless, it is still indispensable for us, as a company in the manufacturing industry, to refine manufacturing facilities and technologies and maintain our competitiveness in terms of high productivity and product quality. From now on, the trend of decreasing birthrate and aging population will continue, as well as labor shortage, I think. Under these circumstances, it is time for us to consider seriously what to do with plants and where to invest toward our new Medium-term Management Plan.

Komatsu：

The current Medium-term Management Plan will end in one year. Discussion has started for the next Medium-term Management Plan, including organizational restructuring. Rather than setting numerical targets achievable in three years, I hope that the Medium-term Management Plan will present medium- to long-term numerical targets, for example, ROE and ROIC of 10% or higher, and serve to achieve those challenging targets. I also want each Executive Officer to show, regarding the action plans for each year, how much the ROE and ROIC will be improved if the plans are met, together with what backup plans have been prepared in case they are not met.

NTN transitioned to a Company with a Nominating Committee, etc., which is chaired by an independent Outside Director. Could you share your impression about this major reform in our governance?

Murakoshi：

As a result of becoming a Company with a Nominating Committee, etc., we are certainly on the forefront in terms of a “structure.” But I have an impression that our substantive reform is still halfway. Personally, the design of a Company with a Nominating Committee, etc. will work well in a system in which there is a market of professional corporate managers with mobility and optimal managers are selected from the market, like those in Western countries. On the other hand, in a social environment in which new graduates are employed en masse and move up the corporate ladder to become managers, as in Japan, I have an impression that we have a long way to go in terms of whether a Company with a Nominating Committee, etc. can really function.
I don’t know how NTN had been like before the reform, so I cannot make a comparison, but I think Outside Directors actively express their opinions. However, that is because Executive Officers reach an agreement at the management meeting before the Board of Directors, which naturally leads to many opinions from Outside Directors, so I feel there is an asymmetry of information here. Anyway, I am very interested in NTN’s initiatives, as a Japanese-style Company with a Nominating Committee, etc., and I feel it necessary for me, as a member of the company, to further search for the best solution.

Komatsu：

As Director Murakoshi mentioned, I also feel the difficulty of a Company with a Nominating Committee, etc. I was appointed as the chairperson of the Board of Directors last year, and regarding whether the chairperson has overwhelming power or not, I don’t feel being granted so much power.
But I think this is a “better” choice than before. The major reason why I think so is related, in the first place, to an increased number of Outside Directors. We, Outside Directors, are required to play a role of monitoring the company’s execution so that the company can grow and improve its corporate value in a sustainable manner. As a result of an increased number of people who monitor corporate management with such recognition, we receive many critical opinions, unlike at the Board of Directors consisting of internal members only. Also, as a chairperson, I am able to ask revision of the business administration structure based on Outside Directors’ opinions, and reporting to monitor the progress. In addition, there are many cases in which internal Directors and Executive Officers consider requests and opinions from Outside Directors, so I think this means the governance has improved.

Murakoshi：

I have also served as a Director at a Company with a Board of Company Auditors, and I think what matters, irrespective of the organizational design, is the recognition and the amount of information each Director has. For example, at the company I previously worked for, people at the corporate general manager or manager class explain the details of relevant projects about three days before the Board of Directors, and enough discussion is held there. So the difference in the amount of information on the executive side is reduced to a certain degree also at the Board of Directors. I have attended NTN’s Audit Committee as much as possible and was briefed about the contents of discussions at the Executive Officers Meeting and the Management Meeting from full-time Directors, but I feel an asymmetry of information, partly due to a time constraint. I think the key point for making the Board of Directors function is whether there is a system in place to enable external officers to obtain information sufficiently, rather than transitioning to a Company with a Nominating Committee, etc. as a “structure.”

Komatsu：

I have been talking about similar things for some time. I think this will be improved gradually in the future. Now, the recognition of Outside Directors is increasingly being enhanced. By keeping our current active encouragement, I expect NTN to function well as a Company with a Nominating Committee, etc.

How do you evaluate NTN’s initiatives for strengthening the management foundations, including establishment of the Carbon Neutrality Strategy Promotion Department and reform of the personnel system?

Komatsu：

I highly evaluate the establishment of the Carbon Neutrality Strategy Promotion Department to succeed the Carbon Neutrality Promotion Project, which had been promoted across divisions until last year. For a project promoted across divisions, a problem may occur later because it is often less visible and overlooked which division is responsible for solution. This concern does not exist anymore. In this regard, however, again as with the Medium-term Management Plan, I want action plans to be prepared and the PDCA cycle to be implemented, rather than just responding to issues and tasks at hand. In doing so, it is necessary to make it known to business divisions, including deciding who will be in charge of each plan.

Murakoshi：

In my understanding, strengthening the management foundation means strengthening the corporate functions. I feel that NTN has necessary divisions in place, but some of them are still weak as functions. This may be a characteristic of manufacturers, but I think a certain independence exists at each manufacturing site, or each plant, which inevitably causes a tendency to increase the centrifugal force as an organization. Conversely, the corporate division at the head office is not used to having a centripetal force. To ensure the total optimization, it is necessary for the President and Executive Officers to strengthen and utilize the divisions at the head office with a company-wide viewpoint. A challenge in management is to prevent a situation where the head office organization exists, but nobody listens to it. It is important for us, Outside Directors, to monitor this carefully.

Komatsu：

In terms of strengthening the management foundation, reform of the personnel system is also required. Earlier, Director Murakoshi mentioned that employees may not understand that a large reform is being underway. Every company has a difference in a sense of crisis between top management and frontline staff. I think the shortcut is to make realistic KPIs, including personnel evaluation, known to frontline staff and change the company using a system, rather than to blindly share a sense of crisis. For example, we may even set the operating margin as a KPI for personnel evaluation and say that it will be reflected in evaluation of promotion and bonus. At first, everyone may first blame others, the head office or the production division for example, but eventually, they will start to think how to improve and take actions by themselves.

Murakoshi：

As for the personnel system, I have heard that review of the personnel system for managers is in progress. I think a structure is in place but the system design alone does not suffice to make the personnel system function smoothly. The Personnel Department itself is required to actually know each site and evaluate whether personnel at each position work properly. For achievement-based evaluation, a harder part comes after a structure is established.
By the way, I think that employee awareness survey can be used as one of indicators. I have heard that the survey was conducted also at NTN, but only in the corporate divisions. I think expanding the scope to all employees would help the management understand the actual conditions of the company. Based on the result, we may be able to extract and solve issues for respective departments, or extract company-wide issues in some cases. As for the latter, it is one way for improving employee engagement to organize a task force across all generations and divisions and discuss how to interpret the results and what to change. The true significance of employee awareness survey is to have each department think for themselves, instead of merely checking the result.

Komatsu：

Also in previous dialog, I expressed my opinion on the issue of diversity at NTN. After having opportunity to talk with female managers, I had an impression that not so many women are motivated so much for career advancement. Of course, it is natural that some women do not want to be promoted considering the balance between work and life. However, there should be women who want to get promoted, and I think a system should be in place that evaluates those women fairly. I think it is acceptable that there is a female manager working for reduced hours and all members in the department finish work early and go home. Including appointment of foreign employees, I want to speak up for these issues this year as the COVID-19 pandemic has calmed down.

Murakoshi：

I am concerned that the age group of executive candidates at NTN is pretty high. NTN is implementing an initiative to foster candidates for next-generation management called NNLP (NTN Next Leader Program), but the age group of participating employees is also high. Unless starting selection and fostering at around mid-40s, we will face a crisis of insufficient management at a critical moment.

Komatsu：

I completely agree with you. We have talked about variety of issues, and I strongly feel responsibility that we, Outside Directors, have to monitor management and continue encouragement for purposes such as revitalizing NTN.

Message from a new Director

Yasuo Kitani

As an Outside Director, I will do my best to contribute to the sustainable growth of NTN by making the most of the knowledge I have gained through my many years of business experience in Japan and overseas as a banker and my experience as an executive.
First of all, I will value communication with as many executives and employees as possible, and speedily learn about the Company as it is, along with its history. And then, I will appreciate what I see from a bystander’s vantage point, and while correctly understanding the changes in the environment surrounding the Company, I will make proposals in line with my responsibilities to help the Company grow in a healthy manner.
Although I am an Outside Director, I am appointed to work on a full-time basis, so I will work hard together with executives and employees to earn the support of many stakeholders and contribute to the development of NTN.