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Outside Director and Corporate Auditor Roundtable Discussion (2015)

MASAYUKI MATSUSHIMA
Outside Director
Senior Advisor of Integral Corporation
HIROYUKI ITAMI
Outside Director
Professor of Tokyo University of Science,
Graduate School of Innovation Studies
(title at that time)

What are your thoughts on your respective roles as an outside director and an outside corporate auditor?

Matsushima: I’d like to first start off by saying that outside officers are not all powerful or all knowing. When it comes to business operations, officers from inside an organization can be more knowledgeable. So if you think about what kind of expectations outside officers can fulfill, the answer is clear: things that internal officers are unable to do, namely providing outside perspective. From the outside, it’s possible to view the Company’s management more objectively. Opinions rejected internally as nonsensical could be the very ideas that lead to new creation. I think being able to provide an original point of view is one of the things expected of outside directors.
Itami: While I wholly agree with what Mr. Matsushima just said, I’d like to add that outside officers can talk straight about things that are known within the Company but talked about in hushed tones. Since outside officers don’t have conflicts of interest with the Company or its management, they’re in a good position to speak truth to management. I believe outside officers can make the most of their position and contribute to effective management by taking the initiative to say the things people inside the Company are afraid to say.

What about the difference between a director and a corporate auditor?

M: In terms of actual function, there does seem to be a lot of overlap. When something comes up, if it’s something the corporate auditor’s responsible for, that doesn’t mean we as directors can avoid our responsibility.
I: Speaking from the position of an outside corporate auditor, there are functions set by law as specifically the responsibility of corporate auditors, like accounting audits and internal controls, and these must of course be fulfilled. However, on top of that, the auditor is in the position to attend Board of Directors’ meetings and speak about management decisions. How should the auditor take on this involvement? The reaction could be completely different depending on the corporate auditor’s own mindset or the corporate culture at the company. There are actually companies where corporate auditors attend board meetings but hardly ever say anything. Corporate auditors, myself included, don’t have voting rights, but given our participation in board meetings, I feel we should voice our opinions about business management frankly. Corporate auditors have an obligation to audit management. Midterm management plans and management strategies are subject to auditing. And that’s why while there is a difference in what is required of directors and corporate auditors by law, there is very little difference when it comes to participating in deliberations during board meetings.

What would you commend about MOL’s governance and what do you think should be improved?

I: I admire the system MOL has set up to reserve time for the Deliberation on Corporate Strategy and Vision(*), and encourage thorough discourse when outside directors and outside corporate auditors are in attendance. This is really good. As for what should be improved, there are times when the agenda is not implemented in a way that takes advantage of that system. Meaning: sometimes there are a large number of agenda items, explanations are too long, and insufficient time is left for discussion, albeit the company provides ample time for board meetings. Basically, I think the way the meetings are conducted needs to be improved.
M: I don’t believe there are problems with the Company’s governance overall. The board rarely simply approves the agenda items. The Board of Directors is highly open, debating the issues from various angles, setting aside issues for further debate, and offering support for items but with provisions attached. What I’m concerned about, though, is that while, in terms of corporate culture, everyone has superb communication skills and good character, nobody volunteers to play devil’s advocate or say something unconventional when something happens. Considering MOL has in the past posted wide losses and once violated Japan’s Antimonopoly Act, during trying times such as these, it would be much better if someone is brave enough to voice a contrary viewpoint.
I: That could also be because there’s not enough time for that during the meeting.
M: Yeah, that’s true. It would be even better if they could use technology or something during meetings to shorten speakers’ explanations and set aside time to explain how the item relates to the strategies of the Company as a whole and how it connects with the corporate vision.

* Deliberation on Corporate Strategy and Vision?
A major feature of MOL’s Board of Directors. At each meeting, the board focuses on a particular topic concerning management strategies, MOL’s long-term vision or other subjects involving management. These discussions provide an opportunity for lively debates that include the outside directors and corporate auditors.

Do you feel there are times when outside directors and corporate auditors should take on a leading role for the management team? What kind of situation do you think would merit such action at MOL?

I: I think taking on a leading role for the management team means speaking frankly with them. In general terms, the greatest responsibility of an outside officer is reining in management when they begin to get out of control. How you design a system or a control for that purpose is important. To be clear, I’m not implying or aware that any members of MOL’s management team are out of control at present. But, as someone who thinks a lot about governance, it’s important to have a system that can function during emergencies. Governance systems are like air: normally it’s better not to be aware of its presence. But, if you fall to the bottom of a hole and begin running out of oxygen, that’s when you first realize how much you need it. So I feel it’s a really sound idea to ensure it is ready before something urgent happens.
M: Moreover, in terms of organizational change, people outside the company may be more likely to provide insight since internal officers and employees are prone to following in the same old tracks. This includes reforming the organization and cutting losses. I think there are times when outside officers assess the situation from a long-term perspective and give management a bit of a push when they are hesitant to cut losses. In addition, speaking from my experience, I feel that outside directors can especially contribute to pointing out and preventing compliance issues.

As an outside director and outside corporate auditor, looking back on major proposals and agendas for past board meetings and the Deliberation on Corporate Strategy and Vision, was there anything that left a particularly strong impression?

I: As for the matters in which people outside the Company played an important role, what most sticks in my memory are those times when a wide range of opinions arose, such as the time when we discussed moving part of the dry bulkers division to Singapore. This move would lead to an extraordinary loss over \100.0 billion but improve the Company’s standing. Another debate that stands out is when we discussed what to do about a struggling affiliate requesting financial support. I feel those were times I could really fulfill my function.
M: I recall one quite heated debate. Many opinions conflicted, causing the decision to be postponed to the next meeting. Ultimately an agreement was reached, but with provisions attached. I felt I was really able to contribute to the discussion as an outside director. And what impressed me when holding the Deliberations on Corporate Strategy and Vision at the Board of Directors meetings was the frequent discussion of the containership business. The debates become quite lively and things begin to pick up steam. I have a positive impression of that.

“STEER FOR 2020” was, in a sense, crafted in response to the result of a previous investment that led to excessive market exposure. Could you tell me what kind of opinions you gave as an outside director and outside corporate auditor?

M: I stressed three points. The first was that, for management to really do its job, it would have to consider better insulating the Company from market forces, since shipping market conditions, exchange rates, bunker prices and other such factors are directly connected to corporate profits. I said that structural reform seemed necessary. Since it is the marine transport industry, I do think that it’s impossible to be completely free from market forces and it’s necessary to learn to live with them, but I added that I believe the Company should get out of the situation where it’s easily shaken by the markets. The second point was truly global management. Until now, Japan has been the Company’s major location. But with the changing demographics and geopolitics, Japan’s proportion of global production and consumption are declining over the long term. To respond to these changes, I said the Company needs to pivot from its current business model to become a truly global corporation and establish a model for sustainable growth. This could be done by employing new technology or reorganizing trade routes from a global perspective while making use of alliances and local subsidiaries. Actually, I think management is aware of this as localization progresses at bases in Singapore and Hong Kong. The third was controlling risks for the Company as a whole. This also includes responses to environmental changes, not just market conditions. I told them that they should have a better sense of how much risk they are operating under.
I: “STEER FOR 2020” was supposed to be formulated based on reflections of the past, and that’s just what happened. At that time, I asked if they’d done proper scientific calculations on how much risk the fleet portfolio was harboring.
M: You said that at a board meeting, right? That left a lasting impression.
I: If you measure the total risk exposure of the fleet portfolio, you could say, “this is too much risk to bear” or “in that case, let’s try decreasing this or increasing that,” and at least have somewhere to start a discussion about reorganizing the portfolio. But if you have no idea about the amount of risk, even if you’re told that there are risks, you won’t know if they’re big risks or small risks, right? Actually, when we began trying to quantify the risks, albeit imperfectly, the ratio of free vessels became a subject of debate. So I think it was meaningful that someone outside the Company said something should be done because it should be possible to express the risks quantitatively. In the meantime, while I do think it’s wonderful that the Company has recently been focusing on securing stable profits under “STEER FOR 2020,” there is the danger that the Company may go too far to minimize risks in divisions naturally exposed to market conditions, such as containerships and tankers. They really have to train people who can confront risks, but if the employees get immersed into “risk-free” tasks, the number of people who can grapple with risks will decrease. I asked them to consider that as well.

Please tell us what your expectations are for MOL going forward, or share any last thoughts on your role.

M: As I said before, I’d like the Company to establish a sustainable growth model as a truly global corporation. And, to help accomplish that, I’d like to fulfill my role as an outside officer and trusted advisor.
I: I’d like MOL, as a world-leading shipping company with the world’s largest fleet, to continue to grow going forward. To do that, the Company needs to pour money and human resources into the expanding areas of their portfolio. Training personnel is especially important. I’d like to see the Company soundly carry out its plans for securing and training the seafarers and captains it will need as the focus begins shifting to LNG carriers. Because companies are people. What I can do to help achieve this is, I think, to just speak frankly with management.

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