P.14 Dialogue with Outside Directors

14 Introduction

Roundtable Discussion among Outside Directors

systematically embedded into the Groupʼs investment discipline. One of the requests from Outside Directors was to reorganize the Companyʼs internally shared case studies of past investment failures to make them more accessible to Outside Directors. At the same time, there are still issues that require improvements. For example, a certain number of our businesses have ROIC below WACC, and determining how closely the Board should monitor them is an ongoing challenge. We need to strike a balance between effective monitoring and appropriate delegation of authority to the executive side. I also believe we need to further strengthen our framework for reviewing not only investments that were made, but also those that were forgone. We need to determine whether those decisions were appropriate and to reflect on them from the perspective of lost profits.

Asakura: The fundamental objective of monitoring is to verify whether an investment is progressing in line with the assumptions made at the time the investment decision was taken. To dynamically transform our business portfolio, however, we must conduct multifaceted hypothesis testing that anticipates changes in underlying markets and business environments themselves. Although it is a challenging undertaking, I believe we need to further strengthen this perspective going forward. Furthermore, it is also important to determine in advance the limits of our balance-sheet resilience under “worst-case” scenarios that take into account geopolitical risks and other factors.

Otsuki: I agree. In addition to uncertainties like geopolitical and economic security risks, we need to evaluate from multiple perspectives how rising interest rates could affect funding costs, WACC, and demand for the Companyʼs products and services. I believe risk management will increasingly require us to envision wide-ranging potential crisis scenarios and further enhance our stress testing accordingly.

Our next stage of growth

Asakura: For listed companies, asset mobilizing is a fundamental principle. It is only natural for the Group to expand and strengthen its asset-turnover businesses̶such as leasing and real estate̶which generate earnings by mobilizing assets, while continuing to reshape its portfolio through long-term asset replacement. I find it reassuring that our management team is committed to this approach. Investing with an exit strategy in mind ultimately gives management more options. The key is to have a broad range of options̶whether to divest, continue holding, or make additional investments. To achieve this, we need to earn the trust of a wide range of stakeholders. Accordingly, we must continue to enhance our market valuation by presenting concrete, quantifiable results.

Otsuki: In my view, the integrated trading company business model has shifted from a focus on trading to one centered on investments. Moreover, such investments are now in a transitional period, moving from an income-centered model to one that aims for total returns, including exit strategies. Since investment time frames vary depending on the business, itʼs quite difficult to maximize total returns at any given point in time. Furthermore, each M&A involves another party, so it is essential to enhance management and risk management functions during the PMI process. When it comes to divesting, moreover, the decision-making process is more complex than with investing, because we have the discretion to determine the timing and terms ourselves. A key challenge moving forward is how to establish an effective monitoring system for these business acquisitions and divestitures.

Asakura: Discussions on our next medium-term management plan are about to start in earnest, and I would like to make sure we thoroughly explore the issue of capital allocation. What is the direction of our business portfolio transformation, and how will we determine the appropriate levels of leverage and shareholder returns based on that? I hope this medium-term management plan will demonstrate the Groupʼs self-directed resolve, rather than simply being viewed in the context of general trading companies.

Otsuki: I believe our medium-term management plan is key to facilitating concrete dialogue with investors. At the same time, I would like to see it formulated only after we have deepened our discussion about our long-term aspirations and the direction we should take.

Asakura: The Board engages in constructive and candid discussions, actively incorporating the views of Outside Directors. Supported by such an effective governance framework, we remain focused on enhancing corporate value over the long term̶five or even 10 years ahead̶without being unduly influenced by short-term market fluctuations. As an Outside Director, I intend to fulfill my role by supervising management from a medium- to long-term perspective, ensuring that we remain a company that shareholders regard as one “worth holding for the long term.”

Otsuki: Over the past two years, the Group has steadily implemented transformations in various areas, including its business portfolio, governance, and investment discipline. It is precisely because of our past failures that we have achieved something different from other companies. Building on those lessons, we have steadily made the changes that truly matter. Going forward, our priority will be to deliver tangible results. As Outside Directors, we will continue to support the executive sideʼs pursuit of new challenges while rigorously monitoring the outcomes on behalf of the shareholders and other investors who have entrusted us. Going forward, we hope you, our shareholders and investors, will take a forward-looking perspective in observing the results of the Groupʼs transformation and future growth.