SustainabilityDialogue Between Outside Director and Outside Audit & Supervisory Board Member

Daicel seen from each perspective

Okajima : Throughout my career, which includes working for an airline and currently teaching at a university, I have had few opportunities to interact with chemical manufacturers, and I first learned about Daicel through a TV commercial. I thought it seemed like a company taking on the challenge of innovative and interesting things, but I didn’t fully understand its operations. Looking into it, I came to see it as a very aggressive company that, despite being a company with a history of more than 100 years, has developed initiatives like DAICEL Production Innovation. After becoming an Outside Director and visiting manufacturing sites, I have come to see Daicel as a group comprising honest engineers with an open mind, capable of implementing innovative initiatives such as the virtual company concept and partnerships with various external organizations. I now find Daicel a company that can combine rationality with flexible thinking and a long-term perspective on the future of society.

Kitayama : When I worked at an audit firm, I audited several companies in the chemical industry as a CPA, and at that time my image of Daicel was that of a rigid company. However, the more I learned about the Company through my role as an Outside Audit & Supervisory Board Member, the more surprised I was by many things. While many companies now tout sustainability and ESG, Daicel was early to embrace the ambition of growing itself through building a circular society, and has taken on that challenge boldly. In addition, the Daicel Group’s vision of contributing to a sustainable society while growing together with society resonated with me and I also thought such vision fits the times.
Moreover, as a pioneer in producing chemicals from plant-derived cellulose, Daicel is promoting such concepts as the Biomass Value Chain Concept, which aims to revitalize regional economies by recycling forests as an alternative to petroleum-based raw materials, and is developing groundbreaking technologies like a microfluidic device that minimizes the size of large-scale plants. Seeing all this, I feel that Daicel is an energetic company capable of driving innovation.

Results and challenges of the Mid-Term Management Strategy
“Accelerate 2025”

Kitayama : The biggest highlight of the past five years was the structural reform through business selection and concentration, which led to the complete acquisition of Polyplastics in FY2021/3. By doing so, we made engineering plastics a core business and expanded the business scale. Furthermore, we are expanding the Autonomous Production System, an evolution of the DAICEL Production Innovation, across the Group, and in R&D, are forming task forces on promising technologies to accelerate commercialization.
On the other hand, we have also decided to withdraw from certain businesses after carefully assessing the business environment. From the perspective of an Audit & Supervisory Board Member, I believe that in order to streamline and accelerate the mechanisms and processes for achieving medium-term targets, it is necessary to strengthen the function of regularly monitoring the progress and risk management of each business with a sense of urgency. FY2026/3 will be an important year for identifying various issues and linking them to the next Mid-Term Management Strategy, so I hope that active discussions will be held within the Company and at the Board of Directors.

Okajima : In the first half of the Mid-Term Management Strategy, we shifted to a market-driven approach from a product-driven one amid the COVID-19 pandemic, and carried out organizational reforms based on the shift. As Ms. Kitayama mentioned, we implemented drastic measures, such as turning the Engineering Plastics Business into our core business. I believe that FY2031/3 will be a turning point. Since we have been actively sowing the seeds for future growth, I think it is necessary to accelerate the creation of new businesses and the action to monetize them. Under the strong leadership of President and CEO Sakaki, who is responsible for monetization, I believe the Company will continue to take on various challenges. However, in implementing reforms, it is important to engage with employees carefully and work together as one team to achieve the goals for FY2031/3.
In addition to strategy, I am also concerned about measures to improve Daicel’s PER (price-to-earnings ratio) and PBR (price-to-book ratio), which are of high interest among officers. Despite generating reasonable profits, the Company is not recognized for its growth potential in the stock market, with its PER remaining only about half the industry average. While I believe that the Company should be evaluated more highly based on shareholder returns and ROE, I also think it is important to carefully and clearly communicate the future potential and growth prospects of the business.

Kitayama : The corporate website features numerous initiatives aimed at driving innovation in the industry, such as cross-value chain initiatives to transform supply chains and plans for microfluidic device implementation. However, the focus is primarily on qualitative discussions, and it is unclear whether these initiatives can be realized in the near future or what impact they will have on performance. I’d like to see that such quantitative benefits be included and told as an innovative story toward the future, and believe that the way of communicating it is crucial.
Daicel is a company that started with biomass and the business, shaped over its long history, is closely associated with ESG and sustainability. A value-creation story in which advancing the Company’s growth strategy makes society and people better off is presumably easy to understand.

Okajima : As Ms. Kitayama just mentioned, the essence of corporate sustainability efforts is to advance them within its core business, not as a separate initiative. In that sense, it is only natural that the sustainability and corporate growth are integrated, and Daicel’s commitment to making this the core of its business activities is highly commendable. As a chemical manufacturer that has been a pioneer in environmental initiatives even before terms like SDGs were in use, we hope Daicel will become a leader in development of environmentally conscious technologies.

Accelerating the active participation of women
with a focus on providing opportunities

Okajima : Daicel announced its “Diversity, Equity & Inclusion (DE&I) Declaration” in FY2024/3. I believe that being a company where everyone can work comfortably is the essence of DE&I in the corporate world. I also believe that the most important factor in advancing this is strong commitment from top management. In fact, Daicel has been actively conducting employee training on these topics, and such efforts have started to produce results. For example, the percentage of female managers is gradually increasing, and the rate of male employees taking paternity leave is also rising. However, I find the current pace not sufficient and our challenge is now to accelerate the pace. Actually, given Daicel’s small gender pay gap, it can be inferred that the placement of human resources is relatively unbiased. However, even though there should be equal opportunities, the percentage of female managers has not risen to a sufficient level, and there are probably issues at the promotion and advancement stages. We have conducted unconscious bias surveys to identify unconscious prejudices and assumptions, and there are signs of progress in raising awareness. However, it is even more important that everyone understands how such initiatives contribute to improving corporate performance and corporate value and continues to implement them. In addition, it takes time to develop leaders, not just female leaders. It is also necessary to give women opportunities to grow by gaining experience in solving problems in responsible positions at an early stage.

Kitayama : I agree. Equity is fundamentally about opportunity; given that other companies in the same industry already have female directors and executive officers, Daicel too should intentionally promote women to higher positions. Promotion changes the world they see and expands what they can achieve. From my perspective, there are several women who I think are well-suited for the role, so I would like to see women become division heads, general managers, and even officer candidates at an early stage.

Okajima : Positions really shape people. The natural way to proceed may be to wait for them to gain experience and grow as people, but that takes too much time. I believe there is significant value in boldly promoting human resources and taking on challenging initiatives with a greater sense of urgency.
In the meantime, there is also the issue of women’s motivation. Recently, there seems to be an increasing number of young people, regardless of gender, who do not want to become managers. However, when considering diversity, there’s no need to insist on role models specific to women. What matters is presenting examples of managers that anyone would aspire to become, and there should be no distinction based on gender.

Kitayama : As the workplace environment improves and flexible working styles become more widespread, it is true that role models do not need to be women. If people, regardless of gender, accumulate successful experiences as managers, they will want to take on even greater challenges. I hope that more and more people will think this way and that the Company will become more vibrant.

Strengthening well-balanced governance between offense and defense

Okajima : I feel that the Board of Directors provides solid input and engages in transparent discussions. However, I think it can be difficult for only internal personnel to put the brakes on ongoing investment projects or proposals. When projects are proceeded only internally, people who have objections may get swallowed up by stronger players. At the Board of Directors, there have been comments that this is precisely why it’s necessary to seek objective opinions at an early stage from outside the Company. Furthermore, the causes and background of issues such as problems or delays in plans are frequently discussed. When an abnormality occurs and the same thing happens repeatedly in projects that were previously progressing smoothly, it is important to consider the possibility that there may be changes in corporate culture or work environment and that such changes may have caused the abnormality. Such matters are hard to notice from inside alone. This is where governance must function and what matters is how quickly we can recognize the signs and address them before they escalate. In addition, when problems arise, the frontline is usually doing its utmost. So it is important to analyze challenges from multiple perspectives, including whether there was undue burden on the frontline. These considerations should also be incorporated into the approach to governance.

Kitayama : At Daicel, even if internal discussions on investment projects or new businesses have proceeded according to a set plan, there are cases where the Board of Directors actively discusses them and decides to review them again. In that sense, I think I can recognize Daicel as a company that is able to stop and think. However, when it comes to new businesses, although we receive explanations about production technology and cost reduction when starting, I sometimes question whether the project team and the SBU (strategic business unit) are working together on the project by incorporating investment recovery plans with due consideration given to future changes in the market environment. Therefore, in addition to regular monitoring, if things are not going well, the Board of Directors should promptly consider countermeasures and make decisions based on strict withdrawal criteria before losses expand. Putting such a framework in place constitutes defensive governance. However, defense alone won’t bring growth, so the Board of Directors must assess the extent to which risks are hedged for innovative technological developments and investment projects before pushing them forward. I believe that strengthening a well-balanced governance between offense and defense is essential.

Linkage between compensation for Directors and ROIC

Okajima : Regarding compensation for Directors, Daicel has traditionally used net sales and operating income as performance-linked indicators, but starting in FY2026/3, we have replaced operating income with EBITDA, an internationally recognized evaluation indicator, and added ROIC. With similar momentum seen in the stock market and Outside Directors also calling for the consideration of appropriate indicators, the Nomination and Compensation Committee made the decision. ROIC is believed to directly reflect corporate value and the soundness of management, and is also an indicator that Daicel emphasizes. Therefore, I think linking it to compensation for Directors is appropriate for us to achieve our Mid-Term Management Strategy. However, while EBITDA indicates profitability from a short- to medium-term perspective, ROIC focuses on capital efficiency over the medium to long term. Therefore, there are aspects that are difficult to improve in the short term, and the calculation method is somewhat complex. It is important to first deepen understanding within the Company and to explain it clearly and carefully to stakeholders.

Kitayama : ROIC should ideally be compared with WACC (weighted average cost of capital) for each business to assess the spread (range, difference) between the two, and as the next step, we need to deepen the management of ROIC by business segment from the company-wide ROIC, and shift toward portfolio review and performance evaluation. Eventually, I’d like to see a system that also links to individual target-setting and incorporates indicators from an ESG perspective, such as environmental assessments and employee satisfaction surveys.

Working together from our respective positions
to support sound management

Okajima : As an Outside Officer, I believe it is important to take an overview of management while also looking at things from a field perspective, that is, with a magnifying glass, and I think I can make use of my corporate working experience in this regard. In terms of diversity initiatives, I will actively promote the advancement of women, who are considered the largest minority group. Daicel, which promotes people-centered management, is a company that exists because of its people and its operations, and no matter how much DX and AI advance, that remains our starting point and foundation. I would like to continue exchanges and dialogue with employees to help create an environment where everyone can maximize their abilities.

Kitayama : As a certified public accountant, I will focus on whether management is conscious of capital costs, capital profitability (ROIC, etc.), and stock prices in order to achieve sustainable growth and enhance corporate value. I will also monitor whether the business portfolio and the allocation of management resources are appropriate. In terms of M&A, for example, I will oversee not only accounting treatment but also how the business will be shaped by the deal, the business plan, goodwill assessment, and the post-acquisition management structure. Fortunately, I am invited by Standing Audit & Supervisory Board Members to participate in interviews in the field, so I will actively visit the workplace, communicate with employees, and share the information I gathered with Outside Directors. Through meetings of the Board of Directors and meetings among Outside Officers I will continue to work closely with the Board of Directors and Audit & Supervisory Board Members to provide oversight and advice aimed at ensuring sound management.