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Dialogue Between an External Director and an External Corporate Auditor (2012)

Chairman of the Board and Representative Member of the Board of Toray Industries, Inc.
Corporate Auditor
Professor and Dean of Tokyo University of Science Graduate School of Innovation Studies
(title at that time)

Has your image of MOL changed, before and after being appointed?

SAKAKIBARA: Well, coming from another Mitsui Group company, I already had a certain level of knowledge about the com-pany, so I would not say that anything about MOL really came as a big surprise. However, I did receive an even stronger appreciation of how MOL's management utilizes past trends and its experience in the marine transport industry to analyze infor-mation, and to adjust its fleet and business portfolio accordingly.

ITAMI: I guess I had a slightly stronger change of impression, after being appointed. One year ago I was selected as an external auditor, but prior to that, I did not really know much about the marine transport industry. In fact, I was not even aware that MOL had the world's largest fleet of vessels.
My impressions are similar to those of Mr. Sakakibara. I was surprised at how much care and detailed consideration was given to risk, portfolio balance and various other factors in investment decisions. I also keenly noted the fact that I was experiencing one of the most momentous years for the industry, with both the boom in Chinese economic growth and the boom in global investment and speculation collapsing at about the same time. In fiscal 2011, as both of these "bub-bles" began to deflate, the company faced serious pressure, and large downward revi-sions were issued once every quarter. It was quite striking to see how big an impact the structural distortion of the global economy affected the marine transport industry, and earnings at MOL

SAKAKIBARA: Over the roughly 60 years since the end of World War II, the textile industry and the marine transport industry have both experienced the relentless force of cyclical trends. For a long time, textile companies have reinforced technological advantages as the main source of competi-tive vigor, allowing them to survive. For MOL, it is much the same. The company has been very cautious about managing its investment and financial strategies in order to ensure that it is able to continue generat-ing some profit even during the weakest phases of the business cycle. The company spent decades establishing a business with the power to withstand economic fluctua-tions, and it seems to me that the company has done a good job of finding ways to minimize the adverse impact during the down-cycles.

What is your main focus as an external director and an external corporate auditor?

SAKAKIBARA: This is my first experience serving as an external director, so when I first was appointed I thought deeply about what was expected of me. I think that my role as an external director is to draw upon past experience as a corporate executive while also providing an outside perspective.
In general, an external director has a responsibility to protect the interests of shareholders and to offer advice from a third-party perspective, for example, by indicating whether I think that management decisions are helping to enhance corporate value. I must also express my opinion on whether sufficient information is being pro-vided to external directors and external corporate auditors before making decisions, or whether there is sufficient disclosure to shareholders and other stakeholders about how decisions are made. I think these are key roles for an external director to play.
Another role that external directors can play is to bring different perspectives to the table. I can offer advice based on manage-ment experience in the manufacturing industry, which differs from the marine transport industry. For instance, the marine transport industry and the textile industry both need to steadily strengthen operations over the long term, adopt global manage-ment plans, and make large and strategic capital investments from a medium- to long-term perspective. However, the meth-ods and management approach adopted by executives in the two industries differ. An external director could note that "if we were a manufacturing company, this is how we would address the issue." That sort of advice might give MOL management a broader perspective on which to make their decisions, and thus can improve the quality of decision-making.

ITAMI: Many of MOL's external directors and external corporate auditors have experience in other industries, like finance and manufactur-ing, and therefore each individual's perspec-tive is a bit different. I think this diversity of perspectives is very effective.
As an external corporate auditor, there are two main points of focus. The first is how management creates its management plans. This is one of the things that we need to review in our role of overseeing manage-ment. My principal role is to check the man-agement process, and ensure that the directors, including Mr. Sakakibara, are conducting it appropriately. This was what I pledged to do when I was selected as an external corporate auditor, and I continue to focus on this role.
The second point is to monitor the risk related to MOL's overall fleet of ships. This cannot be done by just summing up the numbers for each business segment. Man-agement must always maintain a focus on the overall picture. It is like watching the flow of traffic from the top of a tall build-ing?you can see the overall flow of people and vehicles, whereas a vehicle or person on the ground would be unable to see the overall picture. Overseeing the status of the entire fleet is a lot like that.

What are your impressions of the proceedings at MOL Board of Directors' meetings?

SAKAKIBARA: It is a lot different from any other company's board meetings. The meetings are transparent and open, with a lot of different opinions and viewpoints discussed very actively, ample information provided to make decisions, and the corpo-rate auditors taking an active part as well. Furthermore, it is interesting how top-level personnel from a variety of backgrounds each offer their own perspective?university professors, lawyers, financial industry pro-fessionals and so on?directors and corpo-rate auditors alike actively participate and everyone feels free to express their opin-ions....

ITAMI: I might have even expressed my opinions too often, eh?

SAKAKIBARA: Well, that wasn't quite what I meant. It was interesting to see how even the negative information was fully disclosed and the board took its time to discuss all the issues thoroughly. This really impressed me. The Chairman, Akimitsu Ashida, controls the discussions well but he doesn't try to rush the board towards deci-sions, and he shows an interest in getting the full input from everyone, including the external corporate directors. I think this is why Professor Itami was chosen as an external corporate auditor.

ITAMI: I must admit that I have a reputation for speaking my mind very directly, and sometimes even a bit harshly, and the fact that MOL would even choose a person like me as an external corporate auditor says a lot about the company's stance towards corporate governance. I think that it is very effective to hold the board's feet to the fire, but in a company with weak governance, that sort of approach is not welcome. An outspoken or critical person rarely gets selected as an external corporate auditor.
When a company actively seeks outside opinions and input, it does not necessarily mean that they are always going to accept decisions that diverge dramatically from the initial proposal. If the proposals that a com-pany's executives and operations managers make to the board are constantly being overturned and altered, that can create all sorts of confusion. What is important here is that the executives learn how the board debated their proposals and identified weaknesses in them. Then, the executives will be much more careful both in imple-menting the debated proposal and in devel-oping a proposal next time. In this way, I hope that my input has a positive impact, even if it isn't visible at the meetings.

What are your impressions of MOL's "Deliberations on Corporate Strategy and Long-term Vision" ?

SAKAKIBARA: I think that MOL is unique inthe fact that its corporate strategy and long-term vision is discussed by the Board of Directors. It is very valuable to have directors and corporate auditors thoroughly discuss and debate the company's strategies and vision for the medium and long term.
Each issue in the corporate strategy and long-term vision is presented along with detailed documents. The MOL management takes the time to explain each point to us and to obtain feedback and opinions from each external director and external corpo-rate auditor, according to their areas of expertise. This is a very effective way of ensuring that the ideas and assumptions of people within the industry did not conflict with perspectives from outside the industry.

ITAMI: I do not know of any other compa-nies whose Board of Directors spends this much time deliberating on issues that do not have an actual binding force or represent specific decisions. But actually, the deliber-ations bring benefits. The other day, the executives of MOL obtained input from external directors and external corporate auditors and prepared follow-up documen-tation. This helped them look at their plans from a new and broader perspective, deep-ening discussions. I think that these bene-fits will be reflected in the underlying structure of MOL's management plans.
After the formal discussions of the corporate strategy and long-term vision, we have a luncheon with the executive officers, and I think this is useful in allowing us to discuss issues further, in a less formal setting.

In your opinion, what are the main risks, and the main opportunities for MOL in the future, and what are your expectations for the company?

SAKAKIBARA: Looking at global economic conditions, I think that Asia is still going to play an increasingly vital role in supporting global economic growth. As a Japanese marine transport company, MOL already has bases in Asia and therefore it is in a strong position to benefit from Asian eco-nomic growth. To me, that represents the biggest opportunity.
The biggest risk may also come from Asia. While China represents a great oppor-tunity, it also represents a threat. If Chinese marine transport companies increase their profile rapidly and become rivals, the key question will be how we can maintain our competitiveness. Naturally, safe operation and reliability are important sources of competitiveness in the marine transport industry, but MOL needs to seek out other ways in which to enhance its competitive edge.
In the textile industry as well, China has become a fierce competitor with Japan, but in the manufacturing sector you have to be the global number one in order to secure viable profits. The second-ranked competitor may be able to generate meaningful profits but the third and fourth-ranked competitors are likely to struggle. Therefore, it is essential for companies to constantly seek ways to sharpen their competitive edge. Toray Industries, Inc., for example, uses its edge in technology as its overwhelming competitive advantage, so it focuses heavily on research and development, to maintain that edge.
To enhance its medium- and long-term competitiveness, MOL needs to refine its strategic research function in order to develop competitive advantages that are unique to MOL. This includes developing fuel-efficient navigation methods or systems, or providing services that competitors cannot match. By providing services that only MOL can offer, I think that the company will be able to maintain a competitive edge.

ITAMI: I agree with Mr. Sakakibara that Japan's geographical position in Asia represents the biggest opportunity for MOL. The fact that MOL has the world's largest fleet also represents an advantage. Marine transport starts at the coast. As Japan and most of the nearby countries in Asia have plenty of coastlines, there is good potential for business expansion. Certainly competition from Chinese marine transport firms is a concern, but from a personnel cost per-spective, MOL has good potential to compete. A large percentage of its crews are non-Japanese, and the labor market for this industry is truly global. This is a positive point for MOL, because the company's personnel cost structure can be adjusted to reflect changing global conditions. I think this makes the shipping industry a very attractive business field.
The key issue for the company is how to maintain a competitive advantage. What does it need to do to strengthen its overall position? Based on a year of experience as an external corporate auditor, I think that the answer is to use scientific methods in vessel operation and fleet portfolio management to pursue an edge. The shipping business sometimes requires risk-taking by its nature, but to increase MOL's winning percentage, the Company should adopt a scientific approach to risk-taking.
For example, if the entire company subjects data on market trends to scientific analysis, methods of forecasting future trends are likely to emerge. The company transports a wide variety of cargo, and in the past it depended mainly on past experiences and hunches in order to make decisions. If these are scientifically quantified, it should improve the accuracy of investment decisions. If MOL pursues these research and development activities, it may be able to quantify patterns in the marine transport market, and in this way, give itself a competitive advantage that few other companies in the industry could match.

SAKAKIBARA: At the end of the day, however, issues may arise that even computer simulation cannot resolve. In such a case, management is the one that makes the final decision.

What is your impression of MOL's relationship with its investors?

SAKAKIBARA: I have a sense that MOL's top management has a very strong dedication to its investors. In this annual report, for example, management tries to present information from every angle, explaining business strategy and management strategy to investors and trying to let the investors see how its executives make their decisions. This is extremely important, because investors are always interested in hearing the views of management and trying to understand where they are coming from. It is also interesting to see how much importance MOL places on winning the trust of its investors. Even when there is unpleasant news to announce, such as marine accidents, the company goes to great lengths to disclose detailed information. I view this corporate culture of openness as one of MOL's great strengths, and I hope that they continue to foster and seek ways to enhance it.

ITAMI: I also have the impression that they do their best to engage completely with investors. You can sense this just by attending a Board of Directors' meeting?nobody ever tries to evade issues or obscure information.

Finally, is there anything you want to say to MOL management?

ITAMI: In so many ways, fiscal 2012 is going to be an important year for the company. Though business conditions are very harsh, if management charts a clear and principled course for the company, MOL can pass through the "storm" and make a steady recovery going forward.

SAKAKIBARA: Everyone at MOL, including top management, has been very sincere, and I see this culture as one of the company's most valuable assets. This allows the company to earn trust, and I want to see MOL preserve this aspect of their culture. Backed by MOL's sincerity, the themes of the midterm management plan, "GEAR UP! MOL," should lead the company to success in confronting a difficult business environ-ment. I really look forward to seeing MOL ride out the storm, with courage and confidence.

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