Outside Director Message

My involvement with the Nisshinbo Group began during my approximately 20 years working for a semiconductor-related company, when I frequently visited an important customer, New Japan Radio Co. Ltd, (now Nisshinbo Micro Devices Inc.). That being said, I did not have a deep understanding of the various businesses under the Nisshinbo Holdings and the work they were engaged in. Accordingly, prior to assuming the position of outside director in March 2023, I carefully read Nisshinbo’s Sixty-Year History (published in 1969), a history of Nisshinbo that I purchased at a used bookstore. I found this book extremely interesting, because it covers in detail the first 60 years of the 120 year history of the Nisshinbo Group, especially the early years after our founding in 1907. I was greatly impressed by the role Nisshinbo played in the history of Japan's economic development, as well as the management skills of the late Seijiro Miyajima, who developed Nisshinbo into one of the best companies in the spinning industry during the tumultuous period before and after World War II.

At the same time, I want to affirm that Nisshinbo corporate governance has changed in accord with the development of the Japanese economy. When the company was founded, most of our shareholders were individual shareholders—in other words, capitalists. The aforementioned Mr. Miyajima promoted management such that retained earnings were allocated to growth, such as the establishment of plants in Kawagoe, Hamamatsu, and Qingdao, China. In the postwar controlled economy, borrowings were the main means of corporate financing, so Nisshinbo, like other Japanese companies, accepted directors on the executive side from financial institutions, and corporate shareholders, mainly banks, were also listed among the major shareholders. At that time, banks were focused on a company's ability to repay loans, and compared to today, corporate management was not as strongly focused on the stock market in terms of cost of equity and return on capital.

Corporate governance has changed dramatically in the past two decades since 2000. Given the declining population, an increasing number of Japanese companies have globalized their operations and expanded to overseas markets offering greater growth potential compared to the domestic market, and the ratio of foreign shareholders has increased accordingly. The roles and responsibilities of directors are changing with the need for management to become more aware of the stock market and with the substantial changes in the composition of our shareholders.

The role of an outside director, to whom minority shareholders have entrusted management, includes increasing the transparency of financial reports presented by the company to shareholders, and to closely monitor and supervise executive side operations. Upon my appointment to the Board of Directors, I first acquired company shares through the shareholding association.

There are also significant differences between Japan and U.S. companies in terms of the operation of the Board of Directors. Most Japanese companies hold monthly Board meetings that run for several hours, while in the U.S., companies generally hold quarterly Board meetings which run over a two- to three-day period to coincide with the timing of quarterly earnings reports. Audit Committees, under the chairmanship of a certified public accountant, also spend at least a full day conducting detailed financial statement audits, and submit audit reports in the presence of attorneys and external auditing firms. Regardless of how a company operates, whether in Japan or the U.S., the key is to minimize the critical information gap between insiders and outsiders, so that the company can maintain an arms-length, equal balance relationship with its shareholders. I believe this is one of the responsibilities of the Board of Directors.

With regard to Board of Directors composition, I feel Nisshinbo is well-balanced in terms of the respective skills and gender diversity of outside directors. In contrast, Nisshinbo executive directors and officers are currently exclusively male. In Nisshinbo's plants during the Meiji and Taisho era, management positions were held by men, but it was the power of women that supported production floors. It is important to accelerate the pace of transformation into a company where women can fully demonstrate their abilities, and to further promote the appointment of women to executive and managerial positions.

One other issue is improving the P/B ratio. Nisshinbo, and about half the other companies listed on the TSE Prime market have P/B ratios below 1x. Only about 5% of U.S. companies in the S&P 500 have P/B ratios below 1x. In Japan, which was affected by the collapse of the bubble economy, the experience may have led to an emphasis on contingency preparedness and a consideration of financial security rather than asset efficiency. Although the reasons for this may vary from company to company, Nisshinbo has relatively low profit margins, and the share price after the announcement of our medium-term management plan did not increase, indicating that our shares are not highly valued. Thus improving our low P/B ratio will continue to be an issue for the foreseeable future. The “B” in P/B ratio refers to fixed assets such as inventory, manufacturing facilities, and working capital. By improving the productivity of these “Bs,” I believe Nisshinbo can further enhance its valuation in the stock market.

We will increase the knowledge and management skills of our human resources and expand diversity throughout the organization, while strengthening our response to private and public sector demand and enhancing our strengths based on global standards. As the Nisshinbo Group has always responded flexibly to the changing times, I believe there is great potential for the company to transform itself and compete on a global scale through these initiatives.

Since the pandemic, Nisshinbo Board of Directors meetings are, in principle, held online, but outside directors have regular opportunities for face-to-face discussions. Although I have only been in office for one year, the outside directors have already established good teamwork and are discussing various ways of improving P/B ratio among other topics.

In the same way that the shareholder composition of Japanese companies has become closer to that of U.S. companies, the separation of management execution and supervision has advanced, and governance structures, such as nomination and compensation committees, have been incorporated into the institutional design of Japanese companies. Going forward, the issue we face involves the nature of the Nomination Committee. In the U.S., CEO reappointments or new CEO nominations are the duty of outside directors. Nisshinbo considers the selection of candidates for the future management positions and the preparation of succession plans as an important part of the duty of outside directors, and I would like to discuss this issue further.

In fiscal 2023, KOKUSAI DENKI Electric became part of the Nisshinbo Group. In the areas of 5G and radar, along with Japan Radio,KOKUSAI DENKI Electric possesses highly competitive seed technologies. I believe that firmly linking these seeds to economic value is also important from the perspective of enhancing corporate value. In the semiconductor industry, which is a growth market, Nisshinbo’s Micro Devices business faces an uphill battle, as its profit level is lower than that of foreign companies of similar size. To compete on a global level in terms of marketing and competitiveness, Nisshinbo must make investments. We must also analyze the factors behind low gross profit margins, such as whether productivity is a problem or whether sales prices are too low, and take measures to improve profit margins.

Improving profitability and productivity are always at the center of Board meeting discussions. I have been involved in the medium-term management plan from the formulation stage, and I think there are many steps that can be taken by utilizing DX for operations such as inventory management and productivity improvements. While I have focused on the challenges Nisshinbo faces with regard to enhancing corporate value, we also face challenges in terms of opportunities for further growth.

Nisshinbo’s senior management, along with the IR team, will proactively communicate with capital markets to firmly convey our growth story and enhance corporate value.