Dialogue (3) Strengthening Governance through a Global Framework of Four Geographic Hubs

Akio Yamada
Outside Director
Nippon Sanso Holdings Corporation
/Mitsuhiro Katsumaru
Outside Director
Nippon Sanso Holdings Corporation

Akio Yamada
Outside Director
Nippon Sanso Holdings Corporation

Mitsuhiro Katsumaru
Outside Director
Nippon Sanso Holdings Corporation

Outside directors Akio Yamada and Mitsuhiro Katsumaru have provided leadership in the Company’s governance reforms. Here, they have an open discussion on various issues, including a review of the five years since their appointments, the effectiveness of the Board of Directors, the significance of the transition to a holding company structure, challenges for the future, and response to the COVID-19 pandemic.

Looking Back on Five Years Since the Introduction of Japan’s Corporate Governance Code

Katsumaru: Mr. Yamada and I were appointed as outside directors in 2015, the year that Japan’s Corporate Governance Code (the “Code”) was formulated. The management of Taiyo Nippon Sanso Corporation at the time took the philosophy of the Code seriously and it was a time when they started specific initiatives. One of the major themes of the Code was enhancing and strengthening the Board of Directors, and in fact the Group’s Board of Directors has changed in several ways since that time.
First, discussions in the Board of Directors’ meetings have become more active. Perhaps this was set in motion by our free questioning and expression of opinions from an outside viewpoint. Outside directors in general have also become more active in the contributions than before.
Second, the responsibility of the Board of Directors has been clarified. The Board makes decisions on important management issues centrally, and governance has now become transparent.
Third, I must mention the establishment of the Advisory Committee on Appointments and Remuneration. This was an excellent decision by President Ichihara as the committee ensures accountability on important internal personnel matters with plenty of discussion to decide on matters. Mr. Yamada plays an especially important role in leading the committee as its chairperson.

Yamada: The Advisory Committee on Appointments and Remuneration is composed of three members, including President Ichihara and ourselves. The committee met 11 times during FYE2020, so it is rather active. The most important theme for the committee recently has been selection of a future successor candidate for the President CEO. Referring to best practices at other companies and so forth, we interviewed multiple candidates in the selection process and proceeded to select personnel based on evaluation and screening criteria. Our next task is how to approach the development of future management executive candidates.

Katsumaru: I think this is a good point to mention the issue that arises when both parent and subsidiary are listed companies. The Company is a consolidated subsidiary of Mitsubishi Chemical Holdings Corporation, which is the parent company of the Nippon Sanso Holdings Group as it is the controlling shareholder. In this case, the protection of minority shareholders’ interests is a focus, and there are two important points to be considered in this regard.
First, the Company’s governance is systemically guaranteed to a certain extent by the independence of the outside directors. We are both in an independent position with no relationship to the parent company, and we both strive to speak out with a constant awareness of the issue of protecting minority shareholders’ interests in the Board of Directors and other places.
Second, parent company Mitsubishi Chemical Holdings’ stance is to place an extremely strong emphasis on the autonomy of the Company’s governance. As such, we recognize that the risk of minority shareholders’ interests being harmed by the controlling shareholder will remain extremely low.

Yamada: Since 2018, the issue of protecting minority shareholders’ interests in listed subsidiaries has been much discussed. As Mr. Katsumaru has pointed out, we have an important role to play as independent outside directors in this regard.

Diversity of the Board of Directors

Yamada: Another important theme is ensuring diversity in the composition of the Board of Directors; for example, appointing female directors. President Ichihara and ourselves have taken this issue very seriously; however, we have not yet managed to appoint a female director at this stage. We will continue making a sincere effort on this issue.
Next, at the General Meeting of Shareholders in 2019, Chairman and CEO Thomas Kallman of Matheson Tri-Gas, Inc. was appointed as a director along with Chairman and President Eduardo Gil Elejoste of Nippon Gases Euro-Holding S.L.U., which joined the Group at the end of 2018. Their inclusion has greatly changed the composition of the Board of Directors.

Katsumaru: The management team has been working proactively on this theme and intends to continue strengthening its initiatives. Furthermore, with the participation of the heads of our U.S. and European operating companies, just mentioned, and the selection of Vice President Hamada, who has experience on assignment at Matheson Tri-Gas, discussions in the Board of Directors’ meetings have a more global perspective than ever before. In every theme that we discuss, including response to the COVID-19 pandemic, which will be mentioned later, we are now able to keep an eye on the status of the rest of the world, including Europe and the United States, at all time.
Furthermore, since October 2015, we have conducted evaluations of the effectiveness of the Board of Directors. This has been the most trying part of complying with the Code, but setting up a system for collecting the opinions of each director using the questionnaire, having a careful discussion based on the results, and implementing steps to solve issues has been an extremely important result.
Furthermore, a distinctive feature of the Company’s governance is the presence of a powerful Audit & Supervisory Board. The Board also provides tremendous support for us as outside directors when we are giving our opinions. Diversity has been secured for both the Board of Directors and the Audit & Supervisory Board, and the two meeting bodies are both functioning properly.

Yamada: Three of the four full-time Audit & Supervisory Board members are outside members and all have affluent corporate management experience and accounting knowledge. They make insightful observations and actively share opinions in the Board of Directors’ meetings. This is quite different from the scenario in other companies, I believe.
They say that all companies find it difficult to carry out an evaluation of the Board of Directors. The Company conducts a questionnaire survey and based on the results the execution site provides specific proposals, which are discussed again in turn by the Board of Directors. This approach has produced results such as narrowing down the matters for discussion, simplifying operating reports, and strengthening investment monitoring. In addition, the Audit & Supervisory Board is also active in presenting opinions and proposals.

Katsumaru: The organization is extremely good at self-transformation. There have been a large number of changes over these past five years compared with before the introduction of the Code. Many people are now interested in ESG and the SDGs as well.
Going forward, companies will be required to have diversity in management leadership and to have the power to transform themselves in step with the times. I believe that Nippon Sanso Holdings has the ability to meet these requirements.

Insights Achieved through Response to the COVID-19 Pandemic

Yamada: The Company rapidly implemented a series of responses to the COVID-19 pandemic. The Board of Directors has constantly had the latest situational reports since February, and in April a policy on preventing infection was formulated. Also, as Mr. Katsumaru just mentioned, Chairman and CEO Kallman and Chairman and President Elejoste have been appointed to the Board of Directors, providing direct access to wide-ranging information from outside of Japan as well, such as the overall status of infection in the United States and Europe, the economic impacts, and the impacts on the Group’s businesses and customer relationships. Without a clear outlook on when the pandemic may subside, we will make a united effort in Japan, the United States, Europe, and Asia and Oceania to recover earnings within the fiscal year, based on various information such as trends in demand industries.
Another important point is a company’s response to its social responsibilities. Amid concerns over the securing of adequate ventilators in medical institutions, the Company’s wholly owned subsidiary IMI Co., Ltd. was right at the front of the supply line as a medical equipment sales company. Many Group companies also supply medical oxygen. The employees of each company face the risk of infection in the same way as medical professionals, and continue to strive, putting their own health at risk.

Katsumaru: Everyone has performed admirably during the pandemic. I found two points particularly impressive.
The first was the supply of masks in and outside the Company. In May, the Company donated a total of 1.5 million medical masks to medical institutions and others. The Company took this action right when the world was in an uproar due to an acute shortage of masks, and its effort was recognized with a letter of thanks from the Governor of Tokyo. The Company also distributed 100 masks to every employee and made efforts to prevent infection. Both of these actions were extremely proactive and effective.
The other point was the Company’s supply of industrial gases amid the pandemic in Europe and other countries. The Board of Directors received an explanation from Chairman and President Elejoste of Nippon Gases Euro-Holding about its response to the pandemic in Italy. We were presented with the visual image of employees of Nippon Gases Euro-Holding risking infection to deliver oxygen to local hospitals, giving us a good understanding of the situation on the ground.
Through the recent series of situations, many companies have probably had to review the purpose of their existence and their role in society. The Nippon Sanso Holdings Group has performed its role tremendously, and I think it has reaffirmed its own purpose for existing.

Yamada: I feel that the Group philosophy of “Proactive. Innovative. Collaborative.” has truly been put into practice.

Objectively Clear ESG Disclosure

Yamada: Recently, there has been a surge of public interest around corporate ESG initiatives. The capital markets have also been emphasizing ESG investment and socially responsible investment (SRI). In light of the situation, I think the Group needs to apply more innovative thinking about the status of its ESG disclosure. The Group provides many gas applications that contribute to increasing operational and combustion efficiency and to reducing the environmental impact of metal cutting and welding, and smelting in blast furnaces. It is important to provide more intuitive and clear explanations focused on these initiatives in order to gain stakeholders’ understanding.

Katsumaru: It is somewhat difficult to achieve both objectivity and intuitiveness in ESG disclosures.
However, the focus here should be on the extremely sustainable nature of the Group’s business model itself. The industrial gases business takes in oxygen and nitrogen from the atmosphere and converts them into energy before releasing them back into the atmosphere. It is a wonderful circular process. This oxygen and nitrogen cycle supports various aspects of industry throughout the world. I think it is necessary to pursue a clearer explanation of how gas plays this social role and creates unique value.

Yamada: For example, just as the technology for the maglev train is supported by superconduction provided by liquid helium, the progress of humankind and the development of the economy rely on industrial gases.
The impact of having the heads of our U.S. and European operating companies on the Board of Directors is apparent in the change of focus on ESG. For example, in 2019 the Group announced its support for the TCFD recommendations. In discussions about this in the Board of Directors’ meetings, they drew out examples of other major companies that compete with the Group and stated their views that the Group should also promote its initiatives with greater urgency.

Acquisition of European Business and Creation of Synergies

Katsumaru: The acquisition of the European business (now Nippon Gases Euro-Holding) at the end of 2018 involved a major decision to invest acquisition funds comparable to the Company’s annual sales. We actively expressed our encouragement for the acquisition up to the decision. The reason was that while the Japanese economy had continued to stagnate since the 1990s, the U.S. and European economies had grown steadily. Operating only in Japan limited the Group’s aspirations for growth and transformation. Given the backdrop to this deal, as an outside director unfettered by any need to continue the previous trajectory or preserve continuity, my thinking was that we might not see such an opportunity again. There is still a lot of work to do, but thus far things have progressed nicely.

Yamada: Another important role that we have is to support appropriate decision-making by top management and to build a foundation for setting the Company on its course. President Ichihara made a huge decision, and I believe he has created a way forward for the Group’s continuous growth.
Furthermore, Nippon Gases Euro-Holding’s management executive team have been actively working to assist in the process of its integration. Moreover, the executive teams of Nippon Gases Euro-Holding and Matheson Tri-Gas have been involved in discussions about generating synergies after the integration. Chairman and President Elejoste made specific proposals such as deepening relationships with global customers in the electronic materials gases business, creating business opportunities through cooperation between engineering divisions, and mutual use of gas application technologies. These formed the basis for deeper discussion in the Global Operations Division (at the time) and subsequently in the Global committees.
In this way, the PMI is proceeding smoothly, and we have transitioned to a holding company structure to fully maximize management efficiency for the global framework of our four geographic hubs and the Thermos business. With this, the Nippon Sanso Holdings Group made a fresh start under a new structure on October 1, 2020.

Katsumaru: The Group management philosophy and policies are created by the Company. However, each operating company has a considerable level of discretion and responsibility, and will promote its business autonomously. Generally, a holding company structure can be seen in various ways, but I believe it is one of the ultimate structures for promoting efficient, rational group management while utilizing the characteristics and strengths of each region of the world. Moreover, in our discussion on this issue, my contribution was regarding the change of company name. I thought it would be an appropriate time for a name that clearly reflected the new holding company structure. Moreover, Taiyo Nippon Sanso Corporation is a fine company name that carries the Company’s history, so it has remained in use for the domestic operating company. In addition, in terms of having an executive function that specializes in business management, the appointment of Director Nagata as president of the Taiyo Nippon Sanso Corporation as the domestic operating company is appropriate for the holding company structure since he has a wealth of experience in the industrial gases business in Japan.

Yamada: Even in an ordinary operating company, if it has a lot of subsidiaries then strengthening governance as a group is a major challenge. In this regard, as a holding company, Nippon Sanso Holdings is truly an organization for Group governance, and will efficiently perform the functions of business strategy, management functions, risk management, and synergy creation for the entire Group.
Generally speaking, information sharing using IT and financial management are essential for creating Group synergies. In regard to this, CFO Draper, who is in charge of finance, accounting, and IT at Nippon Gases Euro-Holding, has been made executive officer of the Group Finance and Accounting Office and CFO of Nippon Sanso Holdings. I expect this will not only contribute to diversity and globalization within the execution structure but also generate wide-ranging ripple effects in all directions within the Company.

Katsumaru: I think this kind of diversity will create even more big changes in the newly launched Nippon Sanso Holdings Group. Nippon Gases Euro-Holding, which operates businesses in every country in Europe, has a great deal of knowledge regarding Group management. It is also well developed in terms of its relationships with employees and its stance on ESG. Having gained Nippon Gases Euro-Holding as a member on the heels of Matheson Tri-Gas, the Nippon Sanso Holdings Group can be expected to continue changing and growing going forward.

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