Dialogue between External Directors

This dialogue between external directors was held in May 2023.

Shiro Hiruta
External Director (Audit and Supervisory Committee Member)
Shiro Hiruta has served as President and Representative Director of Asahi Kasei Corporation and has held other important positions. He assumed the position of external director at the Company in June 2019.
Asako Yamagami
External Director (Audit and Supervisory Committee Member)
Asako Yamagami is an active attorney-at-law and a partner of ITN law office. She assumed the position of external director at the Company in June 2020.

Improvements to Corporate Governance Guided by Input from External Directors

Hiruta: I became an external director at Nikon in the fiscal year 2019. Since then, I have seen the Board of Directors become increasingly diverse through means such as the appointment of external directors from companies that are not major shareholders of the Company. I have also seen Board of Directors' meetings themselves improve in terms of effectiveness. When I took up the position of external director, I had the impression that discussions among the Board of Directors were not particularly active. At that time, I felt external directors needed additional opportunities to gain more information and knowledge on Nikon's business. After communicating this opinion to the executive team, they arranged the Study Sessions for the Directors, which granted us a better understanding of the state of the Company's business. This increased understanding proved to be invaluable to discussions and has thereby helped heighten the effectiveness of Board of Directors' meetings. The way Nikon actively responds to proposals from external directors is one of the strengths of the Company's corporate governance system.

Yamagami: Prior to the start of the Study Sessions for the Directors, I think that the executive team was hesitant to take the time of external directors. I thus told them that this concern was unnecessary, as I and other external directors also wanted to offer input based on a firm understanding of Nikon's business. By heightening our understanding through these study sessions, we have been able to devote a greater amount of time to discussions at Board of Directors' meetings.
In addition, the Independent External Directors' Meeting was established in FY2022, as a venue for discussions purely among external directors. At the inaugural meeting, participants engaged in discussions after confirming the purpose of the venue, which contributed to increased effectiveness. The meeting proves to be an informal forum for exchanging opinions among external directors to ensure that we are better prepared for discussions at Board of Directors' meetings.

Hiruta: In principle, only external directors participate in the Independent External Directors' Meeting. The amount of time between the disclosure of information on important projects and other matters to external directors and resolution at Board of Directors' meetings can be rather short. Accordingly, the Independent External Directors' Meeting is convened when necessary. At these meetings, external directors are given the opportunity to analyze the risks of a given proposal based on their differing backgrounds, which prepares them to voice opinions at Board of Directors' meetings as they deem necessary.

Yamagami: The effectiveness of Nikon's Board of Directors is evaluated on an annual basis, and steady improvements are being pursued based on the issues identified through these evaluations. For example, when it was pointed out that the Board should focus more on discussions regarding overarching directives, steps were taken to narrow the scope of agendas to dedicate more time to discussions on fundamental matters.

Hiruta: I have also seen steady improvements in the Company's voluntary committees, namely, the Nominating Committee and the Compensation Committee. As one specific example, when I was a member of the Nominating Committee, we primarily discussed the nomination of successors to the president. This situation prompted me to point out the importance of plans for cultivating successors who could be subject potential candidates for nomination. Thereafter, the Nominating Committee started discussing plans for cultivating candidates for important posts while also regularly monitoring said plans.


Process of Formulating the Medium-Term Management Plan

Hiruta: One of the factors that prompted Nikon's efforts to improve its corporate governance system was the fact that performance under the previous Medium-Term Management Plan-which concluded in FY2021-fell significantly short of the plan's targets. I decided to suggest the start of the Study Sessions for the Directors because I felt that one of the reasons behind this failure might lie in the process used for deciding these targets. During the process of formulating the current Medium-Term Management Plan, which kicked off in FY2022, external directors pointed out a number of issues related to operating environment changes and potential future risks at Board of Directors' meetings, and this input was incorporated into the plan.

Yamagami: Starting around six months prior to the announcement of the current Medium-Term Management Plan, the Board of Directors met at least once a month to discuss the plan. At first, I did not see a connection between the directives put forth by management and those proposed by the respective divisions, but we were able to craft a uniform approach through a process of ongoing discussion. As a result, I believe that we were able to formulate numerical targets and directives for the plan that could be accepted by both management and division leadership.

Hiruta: An important aspect of formulating the current Medium-Term Management Plan was that we discussed not only its numerical targets but also its long-term directives. The current plan thus came to outline Vision 2030 as well as the initiatives that will be advanced up to 2025 toward the realization of this vision. I also have to praise how we took part in a lively debate on which business areas should be strengthened to limit fluctuations in performance. We were able to take this approach because we adopted a long-term perspective in formulating Vision 2030.

Yamagami: Even now that the current Medium-Term Management Plan is in motion, the Board of Directors continues to evaluate performance from the perspectives of both performance and how effectively the Company is responding to operating environment changes.


Discussions Regarding the Enhancement of Shareholder Returns and M&A and Other Growth Investments


Hiruta: We recognize the danger represented by Nikon's price-to-book ratio being less than 1.0 times. Improving the price-to-book ratio will require the Company to make steady progress in advancing the current Medium-Term Management Plan in order to build a corporate constitution that will allow for ongoing profit growth and enhancements to shareholder returns. Nikon also must make sure that investors understand that it is taking these steps.

Yamagami: At Nikon, investor relations meetings are held with investors and analysts, and detailed reports on the results of these meetings and analyses are submitted to the Board of Directors. These reports shape discussions on the current Medium-Term Management Plan, various projects, and other matters. In this manner, I believe that the Board of Directors is constantly mindful of how capital markets evaluate the Company.

Hiruta: Investors tend to see Nikon as a company with large cash surpluses. Such cash surpluses are held as they are crucial to a company like Nikon with a lot of businesses in which earnings levels can fluctuate. However, I think that, if Nikon was able to grow businesses with stable earnings structures, it could reduce the degree of fluctuation in overall performance and effectively lower its requirements for on-hand cash.

Yamagami: Nikon has put forth a policy of allocating capital to both shareholder returns and growth strategies. Regardless, amounts of R&D and other investments have been falling short of targets, meaning that this is an area that will require attention going forward.

Hiruta: I think it could be said that R&D, business acquisition, and other investments in the past were based on somewhat wishful thinking. The current Medium-Term Management Plan, meanwhile, incorporates accurate operating environment analyses to emphasize investments with a high degree of business feasibility. For example, SLM Solutions Group AG (currently Nikon SLM Solutions AG, hereinafter “SLM”) of Germany was converted into a consolidated subsidiary in January 2023. When discussing this investment, a number of opinions were voiced with regard to considerations such as SLM's capabilities in areas including promising metal 3D printing technologies and risks analyses based on the outlook for operating environment changes. It was judged that, as SLM was a listed company, the risks pertaining to the transparency of the available information were relatively low. Another important point of consideration was the future potential for this company's business domain.

Yamagami: Our examination of SLM was not limited to the company itself; we also scrutinized the risks and prospects for its business domain. During this process, Mr. Hiruta and other external directors with management backgrounds offered a broad range of advice based on their past experience. I, meanwhile, have been involved in a wide variety of business combinations as an attorney-at-law. I therefore endeavor to identify risks based on my experience in the legal field.
Looking ahead, I intend to pay close attention to the process of integrating and strengthening governance at SLM in my capacity as a member of the Audit and Supervisory Committee.

Importance of Diversity, Equity and Inclusion and Transformation of Company Culture


Yamagami: I am the only woman on the Board of Directors at Nikon. I therefore take care to avoid a situation in which my personal opinion is taken to be representative of women generally by talking with various women both inside and outside of the Company, before providing input in proactive manner at Board meetings. (Note: Since June 29, 2023, the number of female directors has increased to two.)
Also, when Nikon was looking to formulate a diversity, equity and inclusion policy, a sustainability representative asked me whether it might be more difficult to promote internal understanding of this policy if we added “equity” to the still relatively new concept of “diversity and inclusion.” In actuality, Nikon's prior understanding of diversity and inclusion concept already included the element of “equity.” For this reason, I responded to this question by stating that adding the word “equity” to the policy's name would make it more representative of the policy itself. I also used this opportunity to talk about the importance of gaining employee understanding through conversations based on thorough explanations of the significance of equity to fostering awareness regarding the policy. Based on my advice, the Company unveiled its Nikon Global Diversity, Equity & Inclusion Policy in April 2023. I have been informed that the Company is currently discussing the degree to which this policy is being observed while promoting awareness thereof, which is greatly reassuring.

Hiruta: The promotion of diversity, equity and inclusion is an issue of great importance. Manufacturers like Nikon have enjoyed a situation in which the equality of human resources means that individuals can be replaced with others in order to continue stable production. Today, however, things are changing, and now the earnings of companies are predicated on how well they are able to address customer needs and help respond to social issues.
Management should therefore recognize that diversity, equity and inclusion are indispensable to developing a business focused on improving customer value and addressing social issues. This fact should be constantly communicated to employees in order to transform the corporate culture.

Yamagami: Transforming a corporate culture requires that management be passionate and diligent toward ongoing communication. At the same time, it is important to gather and utilize input from the diverse individuals who will be shaping society a decade or two in the future.

Future Challenges for Nikon from the Perspective of External Directors

Hiruta: Nikon is devoting effort to accomplishing its numerical targets. However, I feel that ensuring daily business activities are based on a thorough understanding of the background behind these targets is a challenge that will be need to be tackled by frontline organizations and management alike.
Another challenge will be ensuring that a strong emphasis on cash and other financial matters is embraced by employees not involved in financial, accounting, and planning divisions. At the very least, this type of emphasis will be important for employees ranked section manager or higher. Earlier, Ms. Yamagami mentioned how the Company has not been able to fully use its R&D investment budget. This situation could be an example of managers' efforts to secure the largest budget possible. If more managers embrace a financial perspective, such issues may become rarer. I therefore hope to see Nikon fostering managers with a managerial perspective going forward.

Yamagami: I think that Nikon needs to address the issue of only having one non-Japanese officer, which is especially problematic given the Company's high ratio of overseas sales. Appointing overseas hires to management positions is becoming increasingly important for global companies from the perspectives of strengthening corporate governance and of recruiting and utilizing human resources. Such mobilization of non-Japanese employees is also a prerequisite of promoting diversity, equity and inclusion. I therefore aim to help Nikon promote these principles in the years ahead.