Interview with Independent Directors
Chairman of the Board of Directors
Chairperson of the Compensation Committee
Interview with the Chairman of the Board of Directors
We spoke with Mr. Atsushi Abe, Chairman of Fujitsu’s Board of Directors and also Chairperson of its Executive Nomination Committee, about the current status of strengthening corporate governance and the activities of the Executive Nomination Committee, as well as key points for discussion at the Board of Directors meetings in the fiscal year ended March 31, 2022.
How has Fujitsu’s corporate governance changed since 2019, when you were appointed Chairman of the Board of Directors?
A board meeting is a place where the knowledge and experience of the members and the opinions based on them are brought to the table, even if there may be conflicting opinions, and constructive discussions are held to reach a conclusion. I believe that the members now share this understanding and are able to effectively put it into practice.
Specifically, we have created several new opportunities for external directors and auditors to deepen their understanding of the Group’s businesses and to create an environment in which they can fully participate in discussions based on this understanding. One of these is the “Business Overview Briefings.” We hold these briefings more than 20 times a year as a forum to learn about the current status of the different business units, which are changing at a rapid pace, and to communicate directly with the heads of the business units. In addition, “private sessions,” in which only external directors and auditors participate and freely exchange opinions, are held after every Board of Directors meeting. As a result of increasing such discussions, the nature of the independent directors’ meetings established in 2015 has changed from an opportunity to foster understanding about the business to an opportunity to organize issues and opinions for the Board of Directors based on the understanding gained at Business Overview Briefings and other meetings.
I myself also use these “forums” to gather the opinions of external directors and auditors and share them with President Tokita in one-on-one meetings to complement discussions at Board of Directors meetings, to ensure that external directors and auditors and the executive team see eye to eye with respect to the direction Fujitsu should take and important management policies.
What were the key points of discussion at the Board of Directors meetings in the fiscal year ended March 31, 2022?
Among the many themes discussed at this past fiscal year’s Board of Directors meetings, the most important were setting management targets for the fiscal year ending March 31, 2023, the final year of our medium-term plan, and the focus on growth areas that is essential for the continued expansion of our corporate value in the future.
In the medium-term plan formulated five years ago, we set management targets for the Technology Solutions business, which we have positioned as our core domain, of ¥3.5 trillion in sales revenue and an operating profit margin of 10% in the final year of the plan, the fiscal year ending March 31, 2023. Although these were lofty goals, we maintained the original targets without revising them downward in order to keep up with the challenge of always reaching for higher goals, and we have implemented multifaceted measures to achieve these goals, including the reallocation of resources and internal reforms. As a result, although it became unrealistic to maintain the original target for revenue, profitability has been steadily improving, and we believe it is possible to achieve the operating profit margin goal of 10% for the fiscal year ending March 31, 2023. We have decided to work hard this year to achieve sales revenue of ¥3.2 trillion and an operating margin of 10% in the Technology Solutions business.
Although our corporate value has been steadily increasing due to improved profitability and investors’ approval of our policy of shifting our main focus to higher value-added services and software as a DX company, it is clear that our market valuation is still low compared to industry peers when looking at market capitalization multiples. In order to correct this valuation, we must show growth potential. Now that we have a clear strategy for growth around Fujitsu Uvance, a portfolio of solutions that could become our new business model, with sustainability as a business objective, the Board of Directors will be making decisions to advance that strategy expeditiously. Regarding investment, we are discussing the need to increase the weight of investment for business growth while continuing internal reforms.
We also spent time on discussions related to the security incidents that occurred in 2021 in terms of managing risks that could damage our corporate value. A third party external committee has been established to examine the cause of the incident, take follow-up actions, and discuss measures to prevent a recurrence. The Board of Directors will continue to oversee this matter, including the state of organizational management and business processes, in order to resolve the underlying issues.
Please also tell us about the activities of the Executive Nomination Committee.
Based on the Group’s medium- to long-term growth strategy, we have been discussing what kind of knowledge and experience the Board of Directors as a whole needs to be equipped with. The skills matrix we published in March 2022 may be considered a progress report along the way. We plan to break down the major items we published in more detail and further refine our discussions to clarify the knowledge and experience that should be enhanced for the Board of Directors, and then make recommendations that will also go into the composition of the Board of Directors.
Regarding the selection of successors, we are brushing up the existing succession plans based on the same ideas governing the composition of Board of Directors. Specifically, we are visualizing the skills that the CEO and CFO should possess by dividing them into quantitative and qualitative aspects. In addition to making it possible to select candidates that have the requisite skills, this will also clarify training plans for candidates to fill in the gaps before they are assigned to the positions in question. At the same time, we discussed whether succession planning related to the selection of successors is truly reasonable, on the view that we should eliminate those rules and customs that are inappropriate.
In June 2022, Fujitsu welcomed Ms. Catherine O’Connell as a new independent external auditor. Ms. O’Connell is an entrepreneur who has worked in the corporate departments of Japanese companies, has knowledge of Japanese business processes, and is an entrepreneur who has established and heads a law firm in Japan. Above all, she has a sound critical mind and the ability to engage in constructive dialogue based on her knowledge and experience.
When we interviewed the current auditors regarding the appointment of a new auditor, we were told that an important quality for auditors is the “boldness” to point out problems sharply and frankly. We believe that Ms. O’Connell has the ability to do so and will contribute greatly to the future efforts of the Board of Directors and the Audit & Supervisory Board.
Finally, what are your future aspirations as Chairman of the Board?
First, we will further discuss how to realize our growth strategy centering on Fujitsu Uvance. At the same time, I think we must raise such issues as what is needed to continuously improve productivity, what is required to utilize intangible assets such as human resources, and increase competitiveness. For example, I would like to discuss the level of compensation for employees as a global IT services company.
With respect to strengthening the corporate governance system, based on an analysis of the current skill composition of the Board of Directors, we will also consider specific measures to bring the Group closer to its ideal state. We also intend to seek better ways to evaluate the effectiveness of the Board of Directors, including further expansion of mutual evaluations by directors.
Interview with the Chairperson of the Compensation Committee
The Fujitsu Group has changed its policy for determining executive compensation in 2022. We spoke with Dr. Chiaki Mukai, independent director and Chairperson of the Compensation Committee, about the thinking behind the new policy and the opinions that emerged during the discussion process.
The evaluation indicators for bonuses and performance-linked stock compensation have been changed for executive directors. What were the reasons for revising the compensation system? What did you emphasize in the review?
The decision to change the compensation system was based on the need to align it with the Management Direction and the human resources system.
In 2019, the Fujitsu Group set revenue and operating profit margin as financial indicators for management targets, later adding earnings per share (EPS). In 2020, Fujitsu established Customer NPS® and employee engagement as non-financial indicators, and added DX Promotion Indices the following year. However, a mechanism to reflect progress with these new indicators in the calculation of compensation had not been incorporated into the compensation system for executive directors. Specifically, changes in the evaluation system for senior executives above a certain level had preceded in incorporating non-financial indicators, so it was also necessary to align the compensation system with the evaluation system.
A compensation system that evaluates employees fairly, equitably, and transparently encourages the decision-making necessary to achieve business goals. By rewarding performance, it also serves to promote behavioral change. The current compensation system was created with an emphasis on making such ideas consistent throughout the Group.
At the roundtable discussion with independent directors a year ago, you mentioned that there were points that needed to be further deliberated regarding the reflection of non-financial indicators in the compensation system. What were some of the points of consideration?
The first point of contention was that sustainability and business timelines do not necessarily coincide. Environmental, social, and governance (ESG) initiatives are not something that will produce immediate results. In addition, ESG does not have an endpoint, and there is always room for progress in response to the changing times and the demands of society. For this reason, we have decided to evaluate whether the indicators have improved as a result of progress made in our efforts since the previous year, rather than evaluating whether or not a specific absolute value has been achieved.
While this policy change aligns the compensation system with the Management Direction, we do not believe it is complete. The Compensation Committee is still discussing whether there are more appropriate evaluation indicators.
Why did you add DJSI*1 and CDP Climate Change,*2 which are third-party assessments on ESG, to the list of items eligible for bonus payments?
The purpose of adding globally recognized thirdparty evaluations is to objectively view ourselves in the context of the standards required of a global company. Since both DJSI and CDP disclose evaluation items, we further considered that we could analyze what was not evaluated and take appropriate action. We would like to use them as benchmarks against which to examine what it takes to win in the world as a global company.
I would also like to explain a little bit about the DX Promotion Indices, which differ from non-financial indicators in terms of global recognition, in that they were established by Japan’s Ministry of Economy, Trade and Industry (METI). We are proud of our role as a leader in DX in Japan, as we aim for global growth.
If our Group proceeds with its efforts based on the DX Promotion Indices, it will become a benchmark for domestic customers in Japan. We also added the indices as a management indicator as they will help us understand the level of our DX from a global perspective while keeping an overview of Japan as a whole. As the DX Promotion Indices are an appropriate management goal, the indices should naturally also be reflected in the compensation system.
- *1Dow Jones Sustainability Index, a global ESG investment index
- *2CDP, an international non-profit organization, conducts surveys and evaluations of climate change initiatives at the request of investors and others, and publishes the results.
You mentioned that the discussions in the Compensation Committee will continue. What are your thoughts on the issues that need to be addressed in the future?
The members of the Compensation Committee agreed that it is necessary to start from the ideal image of the Fujitsu Group as a leading global company and consider a compensation system from the perspective of what is important to achieve this ideal. Policies and plans for achieving growth are updated in response to changes in the Group itself and in the business environment. As new management policies and plans are developed, we must naturally consider the compensation to reflect them. Looking beyond the current medium-term plan, which runs through to the end of March 2023, there is much work to be done.
Some members of the Board of Directors believe that a system to boost employee motivation should be introduced and the salaries of regular employees can be further raised to encourage further efforts toward growth. It is also necessary to exchange opinions with the human resources department to develop an executive compensation system that is consistent with the system for general employees. I believe that the most important task of the Executive Compensation Committee is not merely to look at the role of the executive directors, but to consider and adopt a better compensation system for the Group as a whole, and I myself feel that I deepen my understanding about the personnel system.
As competition for talent intensifies, what do you think is necessary for the Fujitsu Group to attract talent and continue to grow?
There are many ways to achieve this, such as globally competitive compensation and a system that allows for autonomous career development, but I believe that expanding revenue and achieving growth are also important for attracting talent. We believe that the growth of our Group’s corporate value will enhance our reputation, which in turn will provide us with opportunities to attract good global talent. To create such a good cycle, it is important to properly evaluate the work of those who contribute to growth. We believe that we need to create a system in which people who are motivated to lead the Group can develop their careers, attain promotions, and be rewarded accordingly, in order to be a company that is respected globally and that many people empathize with and want to work for.