Enhancing discussions on sustainable growth and reliably fulfilling a supervisory function

Advice backed up by the objective viewpoints and the wealth of experience of outside directors is indispensable in order for the NGK Group to sustainably grow to achieve the NGK Group Vision. The Outside Directors spoke about the roles that the Board of Directors should fulfill and future challenges and expectations.

(Chairperson) Keigo Nojiri, General Manager of ESG Promotion Department

Reflecting on FY2022

Nojiri: Could you please tell us your impressions when reflecting back on this last year?

Kamano: FY2022 was a fiscal year marked with a rapidly changing environment for our society. This was not only impacted by the prolonged COVID-19 pandemic, but also by soaring material and energy costs due to the tense situation happening in Ukraine, the rapid depreciation of the yen, and currency volatility. As these can be called VUCA* times, it continues to be difficult to predict what will happen next. In the midst of this, I have the impression that the NGK Group has been steadily moving forward while balancing both reactive and proactive actions in line with the NGK Group Vision Policy.

V=Volatility, U=Uncertainty, C=Complexity, A=Ambiguity: A situation with an uncertain outlook making future projection difficult.

Hamada: I think this was a year that was hard for all organizations to navigate with the repeated waves of COVID-19 and rising costs. However, I believe that the NGK Group had a point of focus with the clear future direction of the NGK Group Vision and has pushed forward adhering to this focal point with a sense of unity.

Furukawa: I feel this was a year that we practiced patience and preparedness in this rapidly changing environment. We changed our organizational structure from one with four Business Group to one with three in an effort to streamline the organization and speed up decision making, and made a fresh start with New Value 1000 (NV1000) aiming to achieve 100 billion yen in sales for new commercialized products by 2030. Although creating new business will not be easy, I feel that by focusing on Corporate NV Creation we can rely on deepening our relationship with external organizations and taking on challenges without fear of failure.

Nojiri: How is the external environment changing in terms of governance?

Kamano: This spring, the Tokyo Stock Exchange requested that listed companies disclose their measures to practice management that factors in the cost of capital and stock prices, the implementation of dialogue with stockholders, and anything else of pertinence. The Board of Directors is working to improve capital efficiency through the application of ROIC at NGK. Going forward, it is necessary to conduct an in-depth analysis and assessment of the current situation of the company’s capital costs and profitability of capital and discuss remedial measures based on that assessment.

Furukawa: I think we provide more comprehensive disclosure information on the website and can adequately respond at this time. Moreover, while over the last few years there were fewer opportunities for direct dialogue with shareholders due to the impact of the COVID-19 pandemic, going forward these opportunities should gradually increase.

Hamada: Initiatives for human capital management have become critical since disclosure of human capital was made obligatory from the fiscal year ended March 31, 2023. We recently formulated the new NGK Group Human Capital Management Policy in response to this change. Currently, we are in the midst of further concrete discussions about human resource development and improving the corporate environment. My advice is to promote diversity, particularly for women’s participation and advancement in the workplace.

Board of Directors functioning as a place for free and constructive discussion

Nojiri: I’d like to ask about the Board of Directors which can be said to increase the effectiveness of governance. Could you tell us about the discussions had at the Board of Directors meeting and their general tone?

Kamano: There were 71 resolutions at the FY2022 Board of Directors meetings, and we deliberated on a significant number of topics, including management strategies, budget, and governance. Overall, it’s a friendly atmosphere, but when it comes to talks about management strategies and the business plan, sometimes everyone’s aspirations to help the company grow clash and the discussions can be tough.

Hamada: What I always appreciate is the opportunities for us Outside Directors to be briefed on the agenda items before the Board of Directors meeting. Since we always take enough time to carefully explain the items, we can attend the Board of Directors meeting already knowing the context and current situation. Also, I feel that a recent trend of the Board of Directors meetings, is to have fruitful discussions from the entire group’s point of view.

Furukawa: Along with reducing the size of the Board of Directors, the interactions between us Outside Directors and the Internal Directors have been intensifying in recent years, and the supervisory function has been also improving. I’m from the manufacturing sector and I strive to deepen my understanding of how projects are progressing and their development. I try to communicate my opinions and advice based on my own experience from a distant external point of view.

Nojiri: Out of the many deliberations throughout the year, what proposals or resolutions have left a lasting impression?

Hamada: One that we spent a lot of time on was the deliberation about the NAS battery, a megawatt-class energy storage system, and the discussions became heated each time. We went on a NAS battery factory tour and were given a detailed explanation about the technical underpinnings, cases and results of its practical application, and future outlook. I understand this is an important technology to support the future and a project that is socially significant. However, I expect that we need to tweak one or two things when it comes to profit.

Furukawa: I think that as decarbonization becomes more important, there are high expectations for energy storage system and seizing the current moment to work on the systematization of a capacity battery is significant. The are many issues regarding the possible business scenario to provide an energy solution to the world with the NAS battery, but I believe that NGK can accomplish this thanks to its 100-year history.

Kamano: The resolution to cease manufacturing insulators at the Chita location left a lasting impression on me. The reduction of our original business for insulators was a major decision, but I believe that looking ahead to the future it was a necessary step forward for the NGK Group toward business portfolio optimization, considering the current sluggish demand for insulators and the shift in consumption from products to services and experiences.

Overcoming challenges and achieving NV1000

Nojiri: In this rapidly changing business environment, the NGK Group is facing a host of challenges that must be overcome. Could you please tell us your thoughts about these issues?

Kamano: Regardless of the steadily accumulated achievements over the last few years, I can’t say the market evaluation for the NGK Group is always favorable, since there are concerns about the reduction of the main business due to the ongoing shift to electric vehicles. Under these circumstances, we drafted the NGK Group Vision indicating what type of business we want to be in 2050, and we began NV1000 as a checkpoint aiming to achieve 100 billion yen in sales in 2030 for new commercialized products. Achieving NV1000 is a top priority, and I believe the Board of Directors must thoroughly and repeatedly discuss the strategies and processes for creation and expansion of new businesses, and the further refinement of these ideas.

Furukawa: Speed is also important. If we can’t project that this will boost profits somewhere within 2 to 3 years, I’m concerned that it may be difficult to achieve. The impact of the shift to electric vehicles on the main business is unavoidable. At the same time, we should be at the new business stage in which we can actively participate in the shift to electric vehicles using NGK Group technology. I want the NGK Group to create something that is second to none with a new approach incorporating cutting edge technology and tools. For instance, materials informatics (MI), which are starting to be implemented, are expected to contribute to the highly efficient development of new materials.

Hamada: The point is how we can adjust NGK Group high-level proprietary technology to market demand and provide it as a solution. I’d like to create a flow where the Board of Directors send out a positive message about turning the changes in the external environment into opportunities and developing the next story with this sort of vision so that our employees can confidently proceed with their tasks.

Progress and issues of governance reform

Nojiri: How is governance reform going? the NGK Group is continuously working on governance reform, but I believe there are still shortcomings. Could you please tell us your candid opinions on this?

Kamano: I think governance is progressing in terms of effectiveness, transparency, fairness and all other aspects. The ratio of Outside Directors on the Board of Directors is 1/3, and the monitoring capabilities are becoming more robust through diverse discussions. Also, the chairperson of the Nomination and Compensation Advisory Committee has joined the Outside Directors, which guarantees objective and transparent decisions on compensation. Furthermore, they also show the medium- to long-term plan for the succession plan as well.

Hamada: I have served for six years, so I am keenly aware that initiatives to strengthen governance have been underway within that time period. On the other hand, the fact that the P/B ratio (price-to-book ratio) hasn’t reached 1 means the enterprise value of the NGK Group has not been properly conveyed to the world. It seems necessary to make the future management strategy focused on NV1000 enticing to those outside the company. Moreover, securing talent and human resource development are the keys to future growth. People in Japan and throughout the world have focused more on how companies should consider human resources and what measures should be taken. Presenting how the NGK Group currently shares its ideas on human capital at this timing could be evaluated through the NGK Group Human Capital Management Policy.

Furukawa: One of the indispensable elements to promote human capital management is diversity. The percentage of women in managerial roles at NGK was 3.8% in 2022, which is a rather low number. Our goal is to achieve 10% by 2030 and 20% or more by 2050, so we need to proactively recruit mid-career female managers.

Hamada: Women’s participation and advancement in the workplace is, of course, important for women, and in fact, there’s a point of interest for men as well. The extent of women’s participation and advancement will be a yardstick to determine whether a breath of fresh air is blowing throughout the company and whether change is proactively pursued.

Furukawa: Globalization including diversity could be said to be an issue. The NGK Group is a global company with overseas sales accounting for over 70% of the company sales. However, it seems the company still hasn’t quite achieved globalization in the true meaning of that word. There is English language training and study abroad programs, and we’re making an effort to develop personnel who can be active overseas. However, I think there should be a framework that welcomes talented foreign individuals to Japan rather than one where only Japanese staff go abroad. The R&D Department seems particularly promising for opening up opportunities for these personnel exchanges.

Identification of Materiality

Nojiri: This year, the NGK Group identified nine materiality issues to resolve social issues and sustainably enhance enterprise value. Could you please tell us your opinions on the process of identifying these issues?

Hamada: Since drafting the NGK Group Vision in 2019, we deepened the accumulated discussions, and after repeated workshops for the Materiality Identification Project over the year, we managed to identify these issues. This was certainly convincing and an extremely good method.

Kamano: This fiscal year, we will push forward the establishment of the action plan and KPIs (key performance indicators) focusing on priorities including the identified Materiality especially initiatives for climate change, the promotion of resource recycling, and the protection of human rights. Continued discussions are necessary including ones about how to modify monitoring indicators and how to manage progress.

Nojir: To conclude, would you mind sharing a message with all of the NGK stakeholders from your perspective as an Outside Director?

Hamada: Taking on challenges is in the DNA of the NGK Group, which has a 100-year history, with its unparalleled technology and wonderful staff. The foundation for growth has been laid, so I hope you look forward to seeing it grow in the future. I’d like to always be conscientious of my role to provide inspiration drawing on my external viewpoint and expertise as an Outside Director.

Kamano: I would like to fully support the NGK Group from the slightly detached perspective of an Outside Director in its aim to enhance enterprise value by contributing to the resolution of social issues based on the two objectives of carbon neutrality and digital society. In addition, I am committed to further strengthening and enhancing the governance structure to achieve more sound corporate management and higher employee motivation.

Furukawa: I recognize that the important tasks of an Outside Director with an independent standpoint is to frankly point out the problems that would be difficult for Internal Directors to point out and to express opinions paying attention to the direction in which the company overall is heading. We will continue to push for taking on challenges and making reforms, while bearing in mind the two goals of enhancing enterprise value focused on shareholders and providing an environment where all employees feel satisfied with their work in their positions.

Note: This interview was conducted in April 2023.