KONICA MINOLTA

Integrated Report 2017

Giving Shape to Ideas

Discussion on Corporate Governance

Towards Sustainable Growth and Enhanced Corporate Value Fortifying Medium Term Business Plan Oversight

Masatoshi Matsuzaki
Chairman of the Board

Kazuaki Kama
Outside Director

Masatoshi Matsuzaki
Chairman of the Board

Profile

After serving as a Director at Konica Minolta Business Technologies, Inc., as President of Konica Minolta Technology Center, Inc., and in various other roles, became a director, and then the President and CEO of Konica Minolta, Inc. Assumed the position of Chairman of the Board in April 2014.

Kazuaki Kama
Outside Director

Profile

Served as President & CEO and then Chairman of the Board at IHI Corporation, among other positions. Became an Outside Director at Konica Minolta, Inc. in June 2014. Served as Chairman of the Compensation Committee from June 2015 to June 2017, and was thereafter appointed to the position of Chairman of the Audit Committee.

Improving the Effectiveness of the Board of Directors In recent years, an increasing number of companies have begun to place emphasis on improving the effectiveness of their boards of directors as a key corporate governance measure. What initiatives is Konica Minolta taking toward this end?

Matsuzaki
Konica Minolta first began assessing the effectiveness of its Board of Directors in fiscal 2004, the year following the Company's integration of its management structure through the implementation of a “company-with-committees” system. Tomiji Uematsu, Chairman at the time and instrumental in designing the governance system, oversaw its operation for one year. The following year, he initiated self-assessments by board members in questionnaire form to confirm that the governance system was functioning as intended; that is, that the "C" (check) aspect of the PDCA cycle was being carried out.
Kama
The Corporate Governance Code, which recommends, among other things, that the Board of Directors be evaluated, went into effect in June 2015. Konica Minolta, however, had been conducting evaluations of the Board of Directors for more than 10 years prior to the introduction of the Code, correct?
Matsuzaki
That's right. Ever since, we have made many improvements to the questionnaire that we use to evaluate the Board of Directors annually. Since my appointment to Chairman of the Board in 2014, I have attempted to implement two significant improvements. One was to add open-ended questions to the questionnaire out of a desire to not only gauge the degree of achievement, but to encourage respondents to explain the reasoning behind their evaluations. We have afforded Directors the option of submitting their questionnaires anonymously, but the majority of respondents have provided their names. There are instances where we speak directly with people after having collected the questionnaires to obtain additional information when deemed necessary. The other improvement was to announce a policy for operations for the new fiscal year that reflects these evaluation findings. To honor the time spent by our Directors in completing the questionnaires, I decided that as Chairman of the Board I had to commit myself to applying these opinions to the operations of the Board of Directors in the following year.
Kama
Each year, on the day of the general meeting of shareholders, we hold a Board of Directors meeting at which Mr. Matsuzaki explains the policy for operations for the Board for the new fiscal year. This is a true representation of the “A” (action) aspect of the PDCA model.

As an Outside Director,
how do you rate Konica Minolta's corporate governance?

Kama
Simply stated, I strongly believe that the Company is advanced in terms of its execution of corporate governance. The key goals of corporate governance are achieving sustainable growth and enhancing corporate value. Konica Minolta is always thinking about the kind of governance needed to realize these objectives while making improvements using the PDCA model. There is a good balance among Board members, including Outside Directors, and considerable thought is given to ensuring complementary backgrounds that help achieve good governance. The system is working quite well. One unique aspect is the monthly reports on business operations presented by the CEO at the end of each Board of Directors meeting. In addition to updates concerning business being undertaken, the reports incorporate a broad range of topics including CSR-related efforts, opinions collected at financial results briefings and other gatherings, and measures taken for the benefit of employees. Even from my perspective as an Outside Director with the responsibility of monitoring the status of the Company’s business operations, I can see that these reports are extremely well conceived. All Executive Officers are required by the Companies Act to report at least once every three months on the business operations they oversee, and the success of this method of governance owes to the Company’ rapid formation of a strong governance system and faithful adherence to the PDCA model.

The task of evaluating the effectiveness of the Board of Directors was entrusted to a third party in fiscal 2016.
What was the objective of this decision?

Matsuzaki
The questionnaires we had conducted by that point were the product of us having created our own questions and adjusting them. However, given our closeness to the situation, we realized there may have been things we were overlooking. This led us to entrust the creation of our questionnaires and the analysis of the results to an outside organization. We also knew that a third party would analyze the results objectively—this includes properly evaluating my performance as Chairman of the Board.
Kama
Questions on the most recent questionnaire were comprehensive, so we gained quite a bit of insight.
Matsuzaki
One of these concerned the selection of agenda items for Board of Directors meetings. Previously, as Chairman, I had been responsible for creating the agenda based on the issues faced by Konica Minolta management. However, my agendas rarely addressed aspects of our operations that were going well.
Kama
One example of this would be ESG (environment, society, and governance). Our ESG efforts have been widely praised, as evidenced by our repeated inclusion in the Dow Jones Sustainability World Index along with numerous other metrics. However, because we as Outside Directors also wanted to offer input on things that were going well, we asked that such issues be made incorporated in the agenda.
Matsuzaki
This was made clear to us through the results of the most recent questionnaire. Another realization concerned training for Directors. Recently, a growing number of corporations have taken action toward training their Outside Directors to ensure they are equipped to perform their duties. While Konica Minolta has recommended attendance at particularly useful seminars and other events, the Company’s Outside Directors have all served in top positions or have accumulated equivalent experience. As such, we believed it was more important to provide information that would give people a better understanding of Konica Minolta than to offer training opportunities. Questionnaire results have shown us, though, that more training opportunities are necessary for Inside Directors. As some of the Inside Directors are less experienced than the Outside Directors, the fact that this need exists makes perfect sense.

Mr. Kama, as Chairman of the Audit Committee beginning this fiscal year, what will you focus on when conducting audits?

Kama
We recently held the first meeting of the Audit Committee, at which I announced key audit priorities for the fiscal year that were unanimously approved. This meeting touched on three main points. The first is a more thorough validation of the effectiveness and suitability of business management processes. The second is conducting checks of routine business operations. And the third is the careful oversight of the management of Group companies, including those located abroad.
Matsuzaki
These three points you mentioned clearly represent the stance of the Audit Committee. Are there additional areas you personally intend to focus on?
Kama
Yes, although they are elements of the key priorities I have mentioned, my main concern is the proper management of major and potential risks. Stories of accounting fraud being committed by large enterprises have become common in recent years. The companies most at risk of such problems are newly acquired companies, affiliate companies overseas, and companies such as second-tier subsidiaries with tenuous capital ties to the parent company.
Matsuzaki
So your assertion is that more attention should be paid to risk at companies where governance may not be as effective.
Kama
That's right. We need to view problems occurring at other enterprises as object lessons and carefully investigate to ensure that these risks are not lurking within Konica Minolta. Naturally, the Audit Committee will exercise due vigilance in reducing impairment risk through activities such as large-scale M&A and capital investment. Outside Directors, however, are inherently prone to extreme caution given their sensitivity to risk. In situations where we feel that investment is needed to achieve medium- to long-term growth or enhance corporate value, even if significant risk does exist we will offer advice about mitigating that risk, and otherwise support the realization of growth strategies.
Matsuzaki
Risk cannot be avoided if an enterprise intends to achieve growth. However, the potential damage that may result must be carefully evaluated. This is why, even though I continue to remind the Board of Directors that the company should take all necessary risks, I encourage Outside Directors to draw on their experience and speak frankly at Board of Directors meetings concerning areas where we must exercise caution.

Toward the Achievement of the "SHINKA 2019" Medium Term Business Plan’s Objectives How does the Board of Directors view the results of the previous Medium Term Business Plan, TRANSFORM 2016?

Matsuzaki
Over the three-year span of the previous Medium Term Business Plan, we conducted M&A activities abroad and undertook new business projects with the aim of transforming our business portfolio to enable us to better respond to increasing globalization, digitalization, and other rapidly changing aspects of the business environment. But because new businesses take time to achieve results, it is our Business Technologies Business and other core businesses that underpin our bottom line. Although efforts have naturally focused on improving profitability through measures such as the strengthening our solutions businesses within these core areas, we need to carefully reflect on having come up short in terms of achieving the management objectives set forth in the Medium Term Business Plan.
Kama
I think it’s commendable that we have established a foundation for new growth through proactive M&A and anticipatory investment. It is regrettable, however, that these efforts did not lead to better business results.
Matsuzaki
During the previous Medium Term Business Plan period, we heard at Board of Directors meetings about business performance forecasts and the market trends that served as the bases for those forecasts from our Executive Officers. But the business environment changed more quickly than expected and we were unable to rapidly gauge whether changes were temporary or systemic, rendering us unable to respond in a sufficiently prompt manner. In hindsight, it is clear that every business should have systematically conducted reviews at an earlier stage while preparing to ensure the necessary measures could be taken. This is a lesson we cannot afford not to apply to the new Medium Term Business Plan.
Kama
Even from our perspective as Outside Directors, we recognize that Konica Minolta is an exemplary company when it comes to governance. Our task for the foreseeable future is to raise its financial standing to a commensurate level. I look forward to the opportunity to contribute from the perspective of one of the people charged with oversight of the Company’s management.

With the launch of SHINKA 2019, the new Medium Term Business Plan, what role will the Board of Directors play?

Kama
Over the coming three years, it is important that we further accelerate our efforts to transform our business portfolio while we work to substantially strengthen our earning power. In formulating the new Medium Term Business Plan, we repeatedly listened to and discussing reports on business plans companywide. The new Medium Term Business Plan adopts a three-pronged portfolio management approach, focusing on core businesses, growth businesses, and new businesses. It encapsulates the Company's commitment to strengthening the profitability of core businesses while building new business and earnings structures through the redistribution of operational resources. As an Outside Director and Chairman of the Audit Committee, I will be thoroughly monitoring the progress of the plan’s execution.
Matsuzaki
For the new Medium Term Business Plan, I believe we need to steadily expand the growth businesses and cultivate the new businesses for which we planted the seeds during the previous Medium Term Business Plan, and achieve tangible results by the third year. The Board of Directors will be monitoring progress made by each business area toward this objective, and a particular area of focus will be PMI (post-merger integration) as a follow-up to M&A. We aim to closely oversee each major merger or acquisition that has been approved over the past three years.

Konica Minolta announced its large-scale acquisition of U.S.-based Ambry Genetics Corporation ("AG") in July of this year. Would you say this is a significant decision for Konica Minolta?

Matsuzaki
Our acquisition of AG is certainly the largest we have ever undertaken. But just as I did when I was president, current president Yamana is conducting M&A while prioritizing the acquisition of pieces necessary to bring our strategy to fruition as opposed to acquisitions that simply serve to increase the scale of the company.
Kama
Since the beginning, we have wanted to establish the Healthcare Business as a pillar for corporate growth and have discussed which direction this growth should take.
Matsuzaki
Yes. We have been particularly passionate about precision medicine, which helps pharmaceutical companies develop effective new drugs and offers optimal dosing and treatment solutions to patients, and Konica Minolta fully exhibiting its inherent strengths in this field. To this end, we have done extensive research on companies that can provide what we lack. Through this research, we determined that AG, with its world-class genetic diagnosis technologies, was the best fit in terms of size and synergy with Konica Minolta.

The launch of the new Medium Term Business Plan also brought revisions to the Executive Compensation System.
What was the intent of these revisions?

Matsuzaki
When Mr. Kama was the Chairman of the Compensation Committee, discussions over the Executive Officer compensation system favored providing more incentives in the interest of fostering a commitment to the Medium Term Business Plan. This is what prompted the revisions.
Kama
The Company's previous compensation system for Executive Officers and for Executive Officers also holding the position of Director consisted of a base salary together with performance-based compensation as well as stock-based compensation in the form of stock options. Performance-based compensation is, simply stated, compensation that is tied to short-term business performance. Stock options as stock-based compensation are also affected by medium- to long-term share price fluctuations, but were not directly tied to the achievement of targets outlined in the Medium Term Business Plan.
Matsuzaki
So the idea behind the compensation policy revisions was to increase motivation to reach the goals of the Medium Term Business Plan not by providing short-term incentives but by tying compensation to business performance and corporate value over multiple years?
Kama
Precisely. And with the start of the new Medium Term Business Plan periods in fiscal 2017, I wanted to create a compensation system that would incentivize the achievement of plan targets. Discussions took about two years, and finally led to the new system of “stock bonus linking with medium-term performance”. One particularly notable feature of the system is the granting of shares within the 0% to 150% range of the standard number of shares conferred according to corporate position based on the extent to which performance targets in the Medium Term Business Plan were achieved. Shares will be granted using a system known as a BIP (board incentive plan) trust, which establishes that, in principle, executive officers must hold granted shares until one year after retirement. This provides an incentive to achieve Medium Term Business Plan targets while at the same time encouraging executive officers to hold on to Company stock.
Matsuzaki
As the proportion of performance-based compensation for the short-term and medium-term has increased when compared to the previous system, the hope is that executive officers’ motivation to contribute to the achievement of targets and improvement in performance.
Kama
The base salary proportion of executive compensation at Japanese companies is generally significantly higher than at companies in the U.S. and Europe. We feel that the current system, whereby executive officers receive compensation commensurate with their contribution to improved performance is a more suitable method of compensation.

The revisions to executive compensation were also undertaken with consideration given to ESG.
What was the rationale behind this decision?

Kama
This came from the notion that, in order to improve corporate value over the medium- to long-term, we needed to evaluate not just measures concretely linked to business performance but also assess initiatives such as ESG that are difficult to gauge quantitatively, and to do so consistently. As ESG is a management priority that must be considered from a medium- to long-term perspective, it must be incorporated into policies and initiatives every year. After much consideration, we opted for an annual performance-based cash bonus rather than a long-term incentive bonus. More specifically, we decided to include initiatives related to non-financial indicators such as ESG in the category of qualitative evaluation, namely "progress concerning strategic matters" within the realm of responsibility of each Executive Officer, and to incorporate more non-financial indicators.
Matsuzaki
ESG initiatives are top management priorities that require engagement by the entire Group—from top managers to employees in the workplaces in each area of business. I hope the consideration given to ESG in evaluating the performance of Executive Officers makes clear to them, as well as all Konica Minolta employees, that ESG initiatives are not some kind of special undertaking—rather, they are a means to "contribute to society through our business activities."
Kama
For that reason, ESG covers a wide field of business activity and encompasses a broad spectrum of indicators. In addition to management indicators, evaluating performance related to non-financial indicators including ESG will be a part of the oversight provided by the entire Compensation Committee.
Matsuzaki
There are two areas that the Board of Directors, intends to focus on in its monitoring of ESG initiatives. The first concerns Sustainable Development Goals (SDGs) adopted by the United Nations in September 2015. The new Medium Term Business Plan outlines specific objectives aimed at resolving a wide variety of societal issues in the 17 areas covered by the SDGs, and the Board of Directors will be monitoring progress made towards these objectives. Our second area of focus is the promotion of ESG through day-to-day business activities. To further accelerate these efforts, the new Medium Term Business Plan describes the ideal to which we aspire: becoming a "digital company with insight into implicit challenges."

Lastly, please talk about how the Board of Directors' intends to achieve the objectives outlined in the new Medium Term Business Plan.

Kama
The new Medium Term Business Plan aims to accelerate the transformation promoted under the previous Medium Term Business Plan and formulate a new business structure to support medium- to long-term growth. It will of course be no easy task to establish a stable revenue base by the final year of the plan while balancing the allocation of resources to growth businesses and new businesses. Nevertheless, even as conditions surrounding our core businesses become increasingly challenging, our Executive Officers are no doubt confronting these problems with an unwavering determination with the mindset that Konica Minolta's future is dependent on achieving the Plan's objectives. Recognizing this high degree of dedication, the Board of Directors will closely monitor the progress being made in each business in support of the achievement of plan objectives.
Matsuzaki
A key role to be played by non-executive Inside and Outside Directors will be to observe the decision-making process and the performance of Executive Officers from an independent, objective perspective. But monitoring is a means, not an end. As Mr. Kama said, the goal of corporate governance is strictly to achieve sustainable business growth and enhance corporate value for the medium- to long-term. The newly enacted Medium Term Business Plan lays out specific business strategies and management goals for the next three years while looking five years into the future. It is essential that the Board of Directors not only review each initiative carefully and manage risk effectively, but avoid the distraction of less crucial short-term concerns and provide advice from a medium- to long-term perspective in support of the realization of our objectives.