Dialogue Between Outside Directors (Governance)

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Continuing to initiate structural reforms in
the years ahead will build on 10 years of progress

Ryoko Nagata
Outside Director Ms. Nagata gained extensive experience and a broad management perspective while serving as a senior vice president of Japan Tobacco Inc. and as an auditor at that company and one of its subsidiaries. She also has expertise in sales and marketing as well as sustainability issues.

Akio Sakumiya
Outside Director Mr. Sakumiya previously served as an executive vice president of Omron Corporation. During his career, while paying close attention to return on invested capital as a performance indicator for management, he mainly focused on management supervision as a non-executive director, and also served as a vice chairperson of a committee for nominating the president.

UACJ’s corporate governanceClarifying processes for reappointing officers, including outside directors

Sakumiya:
Five years have passed since I was appointed as an outside director at UACJ, and during that time, the Company’s corporate governance has greatly evolved. Compared with the time when I was appointed, decision-making and management execution has sped up significantly because the number of directors and executive officers has been substantially reduced. Moreover, we have made progress in separating the functions of management supervision and execution, and further clarified the roles of directors, auditors, and executive officers. The Nomination and Remuneration Advisory Committee is a testament to how the Company’s corporate governance has evolved. It conducts in-depth discussions in each of its meetings from its standpoint of supervising management, and the majority of its members, including the chairperson, are outside directors.
Nagata:
As you said, the deliberations of the Nomination and Remuneration Advisory Committee are very thorough. In meetings of the Board of Directors, too, President Ishihara encourages a diverse range of opinions while leading the discussions as chairperson, which makes it very easy for the outside directors to contribute.
Sakumiya:
The Company’s corporate governance has also evolved in another way: specific criteria for making decisions on whether or not to reappoint the president and directors have been established. The Company previously had criteria for dismissal, but this was mainly concerned with violations of laws, and provided no standards for evaluating performance. After closely examining these matters, the Nomination and Remuneration Advisory Committee established the new criteria. It decided that this criteria should not be limited to internal directors and officers, but also extend to the outside directors that supervise them. Therefore, it put a process in place for evaluating and making decisions on whether or not to reappoint the outside directors.
Nagata:
It seems rare in Japan for companies to set such clear criteria for evaluating and appointing outside directors.
Sakumiya:
This is required under Japan’s Corporate Governance Code, but many companies have made no progress. We discussed how to make the conditions and processes for nominating outside directors highly transparent and impartial, and integrated a skills matrix for this purpose. Actually, the first outside directors to be selected after this new process was adopted were you and Makiko Akabane.
Nagata:
I assume our backgrounds and experience were the main reasons for being selected. She is knowledgeable about international business matters while I have experience with corporate governance. Both of us have been involved in CSR and sustainability-related work for many years. I hope we can add substance to deliberations and contribute to the Company by drawing from our respective backgrounds. I think the skills matrix should be reviewed as necessary because requirements for outside directors could change depending on shifts in the operating environment.
Sakumiya:
You are absolutely right. When evaluating the president, however, we not only have quantitative criteria related to financial performance, but also qualitative criteria. Therefore, we outside directors must evaluate both quantitative and qualitative factors within the Company from an objective perspective. I think we need to create a process for alerting management of any potential problems before they lead to a serious issues for institutional investors and major corporate shareholders.

Challenges and expectations of UACJPursuing new growth potential focused on sustainability

Nagata:
The Company completed its structural reforms in fiscal 2022. How would you assess the outcomes of the reforms?
Sakumiya:
Although not everything proceeded according to plan, I think the reforms ultimately produced the outcomes that management originally aimed for, so they have been a success. Some results never materialized due to the impact of soaring prices of raw materials amid the pandemic and conflict in Ukraine, so the outcomes might not appear so impressive to those outside the UACJ Group. With that in mind, rather than being satisfied with what has been achieved so far, management should continue initiating structural reforms in the years ahead.
Nagata:
I completely agree.
Sakumiya:
To move forward, we must determine what was not accomplished through the structural reforms. For example, we need to examine how much progress was made in shifting to a solutions-driven business model, and how appropriate it was to dispatch a large number of Japanese personnel to manage operations in Thailand. In addition, the Company had aimed to improve its management structure through the reforms, but its price-to-book ratio was only 0.6 as of August 31, 2023. We need to analyze the reasons for this and take steps to raise the ratio.
Nagata:
I am also concerned about the low price-to-book ratio. I understand that the Company must execute strict budget controls and raise cost efficiency as much as possible to increase the ratio, but besides raising cost efficiency, which is a never-ending challenge for any manufacturer, it must stay focused on top-line growth. The Company is currently undergoing lengthy negotiations with customers about increasing product prices, but since this is not an easy task, discussions about how to boost sales will be critical going forward.
Sakumiya:
We will need to identify new business growth potential, including for the solutions-driven business model I previously mentioned.
Nagata:
And UACJ has great potential when it comes to sustainability-related businesses.
Sakumiya:
Yes, I agree. Since 2020, when the Japanese government declared its intention to make the country carbon neutral, I made the case for linking the Company’s environmental activities not only to risk management but also to its management philosophy. Because aluminum is lightweight and easily recyclable, the metal can significantly contribute to reducing environmental burdens. Therefore, on a group-wide level, we must consider its positive impact on financial performance in addition to non-financial results.
Nagata:
I also serve as an outside director of an automaker, so I am keenly aware of how applications for aluminum are expanding in the automotive industry, especially with the global shift to EVs. In other industries, too, aluminum has great potential. I hope we can identify opportunities for realizing this potential through research and technological development, and chart out various scenarios for growth, including the circular economy we want to build.
Sakumiya:
Since my appointment, I have been focusing on measures for improving the Company’s corporate governance, but they have not contributed to raising its market value, which is very disappointing. Therefore, I will continue looking for ways to raise its market value and make relevant proposals as an outside director.
Nagata:
I also want to contribute to improving the Company’s corporate governance and market value. At the same time, I intend to offer advice and raise questions, including hard questions about what is taken for granted at UACJ, so we can keep moving with the times.