SustainabilityDialogue between Outside Director and Outside Audit & Supervisory Board Member

Daicel from Each Standpoint

Komatsu: I have had experience with brokerage firms and institutional investors, and since that time I have had a favorable impression of Daicel. As I have gotten to know Daicel from the inside since assuming my position in June 2022, I have come to appreciate the Company’s approach to value co-creation involving not only itself but also its partners, its steady linkage between contribution to the creation of a circular society and its own growth, and its efforts to incorporate this into its Mid-Term Management Strategy.

Makuta: I became an Outside Audit & Supervisory Board Member in June 2020, and I feel that Daicel's business has become more transparent since the reorganization in April of the same year, which transformed the Company from a product-out to a market-oriented business structure. Before assuming this position, I imagined an upstream materials manufacturer and a group of engineers who were steadily and diligently engaged in manufacturing. In reality, however, we also handle products close to consumers, such as functional food materials and LCD protective films for smartphones. Now, my impression has changed to that of a group of engineers who are trying to break out of their shells by taking on new business ventures outside the boundaries of materials.

Komatsu: In terms of the attitude of the management team, as evidenced by the phrase “value co-creation” in its Basic Philosophy, the Company is unique by the fact that it is not self-reliant, as is often the case, but rather open to partnerships and does not insist on leading. The management of Daicel is rational and flexible in their decisions, saying things like, “It is faster if we work together,” or “Taking costs into account, an alliance promises more benefits than an acquisition,” and I feel that they are not averse to adopting new things and changes.

Evaluation of and Expectations for the Long-Term Vision, and Daicel’s “Human Resources” to Carry It Out

Komatsu: As mentioned above, the Company’s Long-Term Vision and Mid-Term Management Strategy are excellent in linking the concept of sustainability with its own growth strategy, but I was particularly impressed by the biomass value chain concept. Since 70% of Japan's land area is forested, if this concept is realized and circulation happens in a manner that guarantees profitability, Japan's topography itself will become an international competitive advantage. Furthermore, changes in forests can help solve some of Japan's major problems, such as revitalizing local economies. This competitive advantage will be sustained as the cycle repeats itself and the forests become more and more dynamic. I think this is a revolutionary concept in the sense that it is not a one-off town revitalization, but can continuously stimulate the local economy and can be an effective solution for regional development in Japan.

Makuta: Since the Long-Term Vision and Mid-Term Management Strategy are highly abstract, it is important to incorporate these into the business in a concrete manner, leveraging the strengths cultivated in the past. I believe that DAICEL Production Innovation is one of Daicel’s strengths. We have a proven track record and have recently established the AI-powered Autonomous Production System. The ability to develop our business based on a system that we have created through our ongoing pursuit of manufacturing efficiency and standardization is a major asset. That is why we are very excited about the challenge of microfluidic devices, which will directly lead to a completely new way of production.

Komatsu: How to incorporate a seemingly esoteric strategy into a business depends on the extent to which the vision is instilled in employees and made a personal matter. Last year, the presentations made by employees at DAICON (Daicel Group Business Contest) included a variety of proposals ranging from socially beneficial to those directly related to the Daicel Group's business. Of course, there were some points raised by the directors regarding feasibility and contribution to profitability, but I was impressed by the initiative and ability of many employees to make proposals.

Makuta: At the Board of Directors, product representatives also explained marine biodegradable plastics made from cellulose acetate. It was clear that the people in charge are taking pride in their efforts to solve the problem of environmental destruction caused by microplastics.

Komatsu: When I visited the nanodiamond production facility, I remember that the person in charge was very enthusiastic and cheerful, eager to take on new challenges and contribute to society. It remains to be seen whether the new products under development at Daicel will be launched within an appropriate time frame and grow into a major business, but from the glimpses we can see of these seeds, the vision has apparently spread among all employees.

Challenges in Realizing the Mid-Term Management Strategy

Komatsu: The updated Mid-Term Management Strategy covers the necessary elements of the strategy, such as improving profitability and revising the financial strategy. Even as a highlight, there are limits to raising the top line only by improving existing businesses, so the fact that new products are incorporated into the plan and the future is explained and easy to visualize is highly appreciated from an Investor Relations perspective.
Meanwhile, as we enter the middle of the Mid-Term Management Strategy period and the difficulty level of its execution menu increases, it is a critical issue whether we can get through the rough stage without delay and whether we can properly manage the risk of delay. If the Company implements what it has set forth even as the difficulty of successful measures increases markedly, and the achievement of management indicators and KPIs becomes apparent, the Company’s reputation in the stock market will also improve. To this end, we would like to see more back-and-forth exchanges at Board meetings on what needs to be completed by when, whether it can be accomplished more quickly, and what bottlenecks exist if there is a risk of delay. In addition, we would like to monitor and push progress forward.

Makuta: In addition to explanations of individual products, if employees could report to the Board of Directors on the overall progress, including the time line to implementation, issues leading up to it, and countermeasures, we would be able to see the path to the realization of the Mid-Term Management Strategy. We value evidence because we are a group of serious engineers, and we strive to perfect our products and technologies, but we also need to proceed with speed so that we can showcase technological advances and promote the impact of our products and technologies. I hope that we can carry through with our Mid-Term Management Strategy through a cycle of implementing one or two new business seeds in the real world in order to involve as many employees as possible, creating an impact, and then allowing the employees themselves to feel the progress.

Komatsu: With regard to management’s commitment to the realization of the Mid-Term Management Strategy, I would first suggest that ROE should be included as an indicator for performancebased bonuses. Shareholders judge the management quality of a company based on two factors. One is performance, and the other is shareholder value, or in other words, it is whether the Company is committed to increasing corporate value. Since ROE is not only an indicator of asset efficiency, but also of long-term growth potential, the current system may be perceived to lack management’s commitment to increasing corporate value. Employee commitment is also important. While improving ROE is important for shareholders and investors, we consider ROIC to be a key indicator. I suggest incorporating evaluation criteria that contribute to the realization of the Mid-Term Management Strategy, such as including KPIs that lead to ROIC improvement in employee evaluations.

Reviewing Large Investment Projects from a Governance Perspective

Komatsu: Regarding the acquisition of Polyplastics as a wholly owned subsidiary, I heard at the time that the stock market was very critical of the investment amount, but as a manufacturing company, I think it is most important to make an M&A transaction a success from a long-term perspective.

Makuta: I also believe that this was integral to the Daicel Group’s growth strategy in the long run. We feel that the current business environment is becoming increasingly unstable geopolitically, with Russia’s invasion of Ukraine and the U.S.-China conflict. If the Company had not decided to make it a wholly owned subsidiary, it is highly likely that it would not have been able to make the decision to invest in its overseas locations in a flexible manner. As a result, we believe that this investment decision was the right one in terms of expanding businesses that we positioned as growth drivers in our portfolio management.

Komatsu: On the other hand, I feel that progress reporting at Board meetings is inadequate for large investment projects. For acquisitions and large investment projects, it is preferable to report regularly with a list. In general, business plans at the time of the investment or acquisition decision will deviate after three to six months, so individual measures should be considered. Also, if several projects differ from the plan, we would like to make a holistic decision on whether to continue after checking the overall situation and considering asset efficiency.

Management with Safety, Quality, and Compliance as the Priority Foundations

Makuta: The Daicel Group includes an extremely serious group of engineers, and they are very dedicated to avoiding anything that could cause accidents with their products or violate laws and regulations. At the same time, through the investigation of inappropriate actions related to third-party certification, I felt that there was a lack of sensitivity regarding matters outside the scope of the law. I also recommended at the Board of Directors that in order for the Company to continue its business, it should be more conscious of quality and compliance, keep its promises to consumers and customers in a broad sense, including contractual quality requirements, and be more sensitive to the expectations of society. To prevent recurrence in the future, it is important to create a system to remember the lessons learned from the past by conducting training programs so that not only executives but also employees share this awareness.

Komatsu: My concern was precisely this point: there seemed to be a gap between management's sense of crisis and preparedness and the employees' perception of the situation. Board members and employees reporting to the Board are aware of the crisis, but accidents and quality problems still occur repeatedly. We can eliminate compliance violations through the system, but there are limits, and ultimately it depends on the mindset of management and all employees. I believe that President and CEO, Ogawa, has taken this into consideration and has renewed the Daicel Group Code of Conduct and Ethical Standards of Daicel Group, as well as updated the Mid-Term Management Strategy.

Makuta: Daicel has held safety, quality, and compliance as the priority foundations of its business since the days when ESG was not even mentioned, so the Company has an affinity for ESG. I believe this has its roots in the desire to keep past accidents and scandals from fading away. I believe that this issue has reminded us that, in addition to our responsibility to society, it is essential for us to be aware of safety, quality, and compliance in order for our own company to survive.

To Support Growth by Leveraging Our Experience and Expertise

Komatsu: For a long time, I have been on the receiving end of Investor Relations briefings in the capital markets to evaluate companies. I would like to actively make recommendations on what constitutes accountability and management quality for shareholders. I am also involved in M&As, JVs, and restructuring, and would like to support growth with appropriate comments and suggestions.
Another thing I want to actively promote is diversity. I would like to see more female managers and, more importantly, more female executive officers and directors. There is diversity among women; some want to focus on work-life balance, while others want to work tirelessly. I think the challenge is to establish a system and evaluation method that gives women the autonomy to choose either one, but I would like to start with a dialogue with our employees, drawing on my past experience.

Makuta: My mission as an Audit & Supervisory Board Member is to use my legal expertise to watch for legal violations and to assist the Board of Directors in taking necessary risks. Without appropriate risk-taking, challenging goals cannot be achieved. I would like to support the achievement of our goals through overseeing whether there was sufficient discussion, including the credibility of documents, to ensure that the Board of Directors did not over- or under-discuss the issues in order to reach a decision.