Message from Outside Directors and Outside Audits

Otsuka Holdings provides outside directors with explanations about the businesses of each major company, such as Otsuka Pharmaceutical, and holds regular briefings on the progress of research and development, to provide us outside directors with the information we need to thoroughly discuss them at board of directors. Even so, it is difficult to look at all businesses, so to make discussions more efficient and cross-functional, it is necessary to decide on themes, such as the supply chain, ESG, and human resource development, and focus on them.

Otsuka's Pharmaceutical Business focuses on disease, while the Nutraceutical Business looks at consumers as a whole. The organic linkage between these two businesses, which operate on the same theme of “health,” but in different fields, is the source of Otsuka's unique value, which cannot be found in a company specializing in prescription pharmaceuticals.
For example, in our Nutraceutical Business, we develop products based on the high level of ethics and scientific evidence we have developed in our Pharmaceutical Business, and this has led to a high level of trust from the market for our products. Also, in the Pharmaceutical Business, we not only focus on specific diseases through pharmaceuticals and medical devices, but also gain new insights from our awareness of consumers as a whole. I feel that these high levels of awareness and broadening of perspectives have interacted to cultivate the uniqueness of the Otsuka group over the years. I hope that the Otsuka group will continue to demonstrate its uniqueness by maintaining a high level of healthcare awareness, while keeping our uniqueness in mind.
Otsuka group was listed on the First Section of the Tokyo Stock Exchange (currently the Prime Market) in 2010, and built a business structure with a wide range of stakeholders in mind. After celebrating its 100th anniversary from 2021 to 2022, the Otsuka group has begun to take steps toward further expanding its business domain for the next 100 years.
I believe that for a company to endure for a long time, it must continue to contribute some value to society. A company that only pursues profit may make a profit in the short term, but it will not last long because it will not earn the trust of its stakeholders. The Otsuka group has a firm philosophy that has been in place since its founding. This philosophy has not become a mere skeleton, but has been steadily applied to its business to this day. Even as the scale of its business expands, I expect that it will not lose these advantages and will pass them on to the next generations.

For the entire group to achieve sustainable growth in the future, I believe that one of the challenges is the development of management personnel. Up to now, each operating company has been able to create unique products that contribute to solving social issues by demonstrating its own originality. However, to respond to drastic changes in the business environment, it may be necessary to consider aligning the entire group and concentrating resources to improve efficiency.
For example, in the area of human resource development, I believe that by unifying the direction of the group through standardization of mechanisms and other means, we can help reduce the burden on each company and contribute to maximizing corporate value. I feel that there is an urgent need to develop management personnel with a broad perspective that goes beyond their own areas of expertise and the boundaries of their organizations, and who have the leadership skills to drive the organization forward. Otsuka Holdings needs to continue to consider how to develop such personnel and provide them with experience.

Otsuka Holdings' Board of Directors’ meetings are lively, based on the philosophy of better decision-making through the free exchange of opinions among members with diverse experience and insight. Of all the discussions, opinions by outside directors probably make up about half. In one case, a proposal made by the company was improved based on the comments of an outside director, and the proposal was then put on the agenda again.

Regarding the composition of the Board of Directors, I believe that the outside directors are sufficiently diverse in terms of their respective expertise. Furthermore, with an eye on future global expansion, I believe that the addition of a foreign national who is familiar with business management in North America, where sales and earnings are growing rapidly, and a person who has led the management of global business within a Japanese company as a director would facilitate discussion from a more diverse perspective. As I myself have experience as the head of a Japanese subsidiary of a foreign company, I feel the need to bring more people with extensive overseas experience and a global perspective onto the board of directors, in the midst of the drastic changes in the global business environment.

The unique innovations of group companies have been realized through the freedom and originality of each operating company to develop its own business. While these management styles should be preserved and not overly centralized, I feel it is necessary to further deepen discussions at the Board of Directors regarding the balance between the best business operations of each operating company and the best direction of the group. If Otsuka Holdings can take the initiative in advancing strategies for such things as overseas business development while considering overall optimization, I believe that more synergies will be realized and the group as a whole will develop further.

The Otsuka group's overseas revenue and number of employees now account for a higher percentage of its total revenue and employees than Japan. Under these circumstances, governance of overseas operations has become one of the most important topics. For example, Otsuka’s business in China has traditionally been conducted with an emphasis on the actual situation of each local subsidiary, rather than being led by an overall management organization. Now, not only in China, but our business operations in other countries and regions around the world are subject to geopolitical risks, which require the Company to make quick decisions and to manage its operations with sensitivity. In Otsuka Holdings’ management of the group, it is necessary to reaffirm awareness of these risks and consider strategies accordingly.

The composition of the Board of Directors has an appropriate ratio of internal and external directors, and the Board operates with the fine balance of the non-overlapping expertise of each outside director. In addition, the directors involved in each of the major operating companies and the medical device business, which is expected to grow in the future, participate in the Board and I believe they share the direction of the group as a whole. I believe that further improvement of governance can be expected in the future by increasing the number of foreign and female directors in light of global expansion and business expansion in the women's health field, and by deepening cooperation with corporate auditors who have different perspectives. At the same time, in light of the current business scale and future expansion of business domains, I have advised the Otsuka group to work with a sense of urgency on a review of the Group-wide risk management system at this time, after the 100th anniversary, in order to respond flexibly to drastic changes in the business environment. The Otsuka group is a group with the awareness to flexibly adapt to the environment, and I look forward to its further evolution.

I believe that the structure of a holding company which promotes group management is an appropriate corporate structure for responding to the current drastic changes in the business environment. However, with respect to risk management, with 196 group companies and a wide range of business formats, it is necessary to rethink how to divide the Otsuka group's businesses and what system to use to achieve that, and at the same time, I think it is necessary to be more strategic in human resource development. While there are excellent human resources, it is difficult to find superhuman individuals who can do everything on their own. In the future, it is important to consciously develop human resources who can assume responsibility in each business field and to increase the number of such human resources as much as possible.

To date, as a total healthcare company, the Otsuka group has provided an integrated perspective on what is necessary for people to live.
The Otsuka group is characterized by the desire to always pursue creativity, which was nurtured over three generations of the founding family, and is still alive and well and is reflected in the group's operations to the present day. The Otsuka group takes on challenges that other companies cannot meet, pursues what only Otsuka can do and what can only be done by Otsuka, and creates new value by constantly changing. That is Otsuka’s raison d’etre. It may be difficult to predict exactly how the Otsuka group should be 100 years from now. Still, I believe that one of the challenges facing the current management team is to think about where the Otsuka group will be in 20 to 30 years' time, and create a common understanding throughout the group to realize the Otsuka philosophy, and to point the group in a specific direction.

The year 2023 is my fourth year as an outside director, and in my first year, I had to perform my duties with many restrictions, such as not being able to visit work sites because that was when the COVID-19 pandemic began. However, despite this, the information provided has improved over the years. In addition to briefings from major operating companies, there are regular meetings with the Board of Auditors and the Vice Presidents involved in internal audit and internal control. In addition, there have been opportunities to participate in various symposiums held at Otsuka Holdings, such as the AI Forum. The frequency of meetings has increased, especially in the past year or two, and there is talk among outside directors that they are now able to deepen their deliberations from a more multifaceted perspective.

In order to further advance corporate governance, I believe that we need to think about the magnitude of issues and the allocation of time for deliberations based on timing in order to better use time discussing how to maximize the corporate value of the Otsuka group. In order to achieve sustainable growth, we need to create synergies throughout the Otsuka group, which I believe can be further deepened through forward-looking initiatives.
In terms of dialogue with investors, I also feel that there is room for improvement in the dissemination of information to give them a deeper understanding of Otsuka's diverse business operations, which are the hallmark of the company. If we can come up with a management strategy that improves the asset and capital efficiency of the entire group, investors will be able to see the company's growth more clearly. I hope that the Fourth Medium-Term Management Plan, starting in the next fiscal year, will incorporate this perspective.

The Otsuka group is unique in that, in addition to its main areas of the Pharmaceutical Business and the Nutraceutical Business, it also has many other businesses, such as medical devices, chemicals, and food products. One of Otsuka group's strengths lies in this diverse business development, but some investors tend to focus on the Pharmaceutical Business because of its prominent profit margin and growth potential among these businesses, and tend to dig deeper into this area.
Based on the shareholder meetings, it appears that many individual shareholders in general are supportive of the Otsuka group from a long-term perspective. However, investors, especially institutional investors, are researching a very large number of companies and businesses, focusing on their respective areas of expertise, which may make it difficult for them to see the overall picture of the Otsuka group. As a result, I suspect that business segments other than the Pharmaceutical Business may not be properly evaluated.
There is probably no one who would disagree with the Otsuka group's corporate philosophy. To realize this philosophy, how will the group as a whole develop its business and strengthen its strategies going forward? It is important to share this perspective not only with investors, but also with each operating company within the group, and to clearly explain the growth plan. If we can do this, I believe that the Otsuka group as a whole will be able to further enhance its driving force and achieve sustainable growth.

The Otsuka group supports society from both inside the healthcare system, which includes medical and social insurance, and from the healthcare field, which cannot be handled completely by just the healthcare system. It has a high awareness of compliance that has been cultivated over 100 years, and an exceptional commitment to the local community that is unique to Japan’s corporate governance code, and a passionate commitment to diversity. On the other hand, this boundary between inside and outside changes depending on historical background, and with the system for dealing with stakeholders in each country. But, our involvement with contributing to investors who are open to the outside world to deal with these changes is still short, and our efforts to harmonize Otsuka's character with what is required by society have only just begun. For example, I feel the need to further raise awareness of the cost of capital. As a group that always contributes to healthcare in one way or another, it is important to have a dialogue with medium- to long-term investors. Recently, the Board of Directors has been actively discussing not only business growth, but also how to express and communicate corporate value, the cost of capital, and the evaluation of investments, and I recognize the importance of being more aware of this.

At the Otsuka group, everyone conducts business with high aspirations. For example, in the field of oncology, which is Taiho Pharmaceutical's main business area, it is not unusual for the survival rate to be 20% or 30%, depending on the type of cancer, but patients are receiving treatment while holding out hope for more effective treatments and new drugs, hoping that they are among the 20%. Taiho Pharmaceutical is working hard to develop new drugs for patients who continue to undergo treatment with hope and without giving up.
Otsuka Holdings should take a more leading role in how to protect the budding efforts and achievements of these companies and provide appropriate investment and support.
The role of the Otsuka group may change in the future in light of the direction of medical care and trends in the healthcare field. In order to be able to respond to such changes in the environment and business structure, Otsuka Holdings and its operating companies will need to more seriously consider how to balance a corporate philosophy based on high aspirations with the profits required by capital markets.
In particular, Otsuka is now at the stage where it needs to consider more comprehensively how to be conscious of investors' interests. I consider the development of business with an awareness of the cost of capital and future investment strategy to be an issue for the entire group, and have raised the issue at board meetings.
The Otsuka group needs to move forward in the same direction regarding how to realize profit and investment allocation while pursuing a Purpose as Otsuka. First, Otsuka Holdings needs to clearly state a direction, and then consider raising awareness and providing education for each operating company.

Regarding risk management, the risk the Otsuka group needs to be most concerned about is that many of its operating companies are involved in businesses that are inside the healthcare system (the Pharmaceutical Business), from which there is a possibility of information leakage or some other threat from outside. The Pharmaceutical Business requires strict application of regulations due to the nature of its business, which involves human lives, so these risks must be carefully addressed.
The Otsuka group operates not in the "pyramid" style of a regional control company or intermediate holding company, but more like a "bunchin" (a Japanese-style paperweight that is a long bar, covering the entire width of the paper) style, in which businesses are basically conducted based on the discretion of each individual company. For this reason, I believe that each operating company has a higher degree of management freedom than other companies, and that future responses regarding risks can be made flexibly and quickly at the discretion of each company. On the other hand, one of the future issues for the entire group is how to develop personnel capable of responding to risks and how to structure the organization.
Generally speaking, Japanese companies are said to be defenseless against such risks. However, in the case of the Otsuka group, we have many group companies that operate overseas, and I believe that Otsuka can gain the latest knowledge about risks from our overseas subsidiaries. Since Otsuka has many operating companies in North America, where regulations are particularly strict, I believe that the group as a whole can improve its risk management capabilities by applying its North American risk management expertise to other countries and regions as well.

I became an Outside Audit & Supervisory Board Member in 2022 and, as a certified public accountant and a certified fraud examiner, I bring expertise in areas related to internal control and compliance to my audits. What has been particularly impressive over the past year has been the number of informational opportunities. Business briefings by major operating companies, regular business reporting meetings, and monitoring meetings for each business segment often provide a lot of information that leads to lively discussions among outside directors and auditors, and this undoubtedly contributes to the corporate governance of the entire group.
Another significant feature of Otsuka's corporate philosophy is that its top management, starting with CEO Higuchi, very clearly and proactively communicates it. At various occasions, such as events commemorating the 100th anniversary of the company's founding, the top management spends a great deal of time communicating to employees in their own words, quoting "Otsuka-people creating new products for better health worldwide." I feel that having a clear vision of what the company is aiming for has a significant positive impact on the Otsuka group, which has a diverse range of operating companies, and on the company's ability to carry out its business with a sense of unity.
If we think of actively conducting business as the gas pedal, then compliance and internal controls serve as the brakes, so to speak. In order to be able to step on the accelerator with confidence in management, good brakes are necessary. It is very easy to say "compliance is important" or "internal control is important" in normal times. It is precisely when a problem arises that you can tell how a company is dealing with compliance by the kind of discussions that take place at meetings of the board of directors and board of auditors. As one example, when something occurred at a subsidiary in 2022 that could become a future risk, the board of directors repeatedly discussed the issue with an awareness of the structural problems behind it. This sincere response demonstrated the high level of awareness of compliance and internal controls within the Otsuka group.
From a governance perspective, I believe that one of the roles of auditors is to check whether efforts are being made to improve the quality of important brakes. It is important for the entire Otsuka group, with Otsuka Holdings taking the lead, to be aware of and think about how to apply both the gas pedal and quality brakes on a daily basis.

The Otsuka group mainly handles products and services related to pharmaceuticals, functional beverages, and functional foods, which are areas of business that often have a direct impact on the human body. For this reason, the Otsuka group has a strong sense of compliance, particularly with regard to safety, and a deeply rooted corporate culture of adhering steadfastly to regulations and rules. As long as the current compliance awareness is maintained, it is unlikely that any serious compliance violations that directly affect the company's survival will occur immediately. However, if left untended, compliance awareness can quickly recede and, in turn, cause major problems.
Compliance is not only related to product safety. There are situations where compliance is required in various areas, for example the working environment and accounting procedures. In particular, the concept of harassment is constantly changing, and the concept also changes depending on the society, country, or region. It is necessary to constantly update organizational awareness and efforts, while learning from past failures to avoid falling into a situation where you thought you were taking appropriate measures, but without knowing it became outdated.
For the entire group’s risk management, it is very important that each individual site not keep risk information to themselves. In other words, when a risk becomes apparent, it is very important that the organization be able to quickly assess the situation and respond to it on a group-wide basis. In this respect, the operations of the Otsuka group appear to be somewhat complicated. The operations themselves are handled in good faith, but because the group is composed of many group companies, it inevitably takes time to understand the situation, and in some cases, a lot of explanations are required to understand the background. I believe that these issues can be further streamlined with future innovations. In order for compliance and internal control to function without delay and become a living system, instead of operating with the current complexity as a given, it is necessary to continue asking the fundamental questions, "Is that really okay?” and “Is that really necessary?”

The Audit & Supervisory Board has identified the initiatives to sustainable management as one of the main audit themes for 2023. Since it is an important management theme, it is naturally a key theme in our audits as well. The Otsuka group has a strong awareness of sustainability, given its corporate philosophy of "contributing to better health" and the fact that it does business in many countries. Going forward, we will need to upgrade our efforts and explain them to our many stakeholders.
And it is important to continue to emphasize compliance in order to strengthen corporate sustainability. A compliance-oriented stance itself does not directly lead to business performance. On the other hand, failure to take action could result in a loss of trust with stakeholders. To avoid such a situation, it is important for Otsuka Holdings as well as the top management of each operating company to continue to demonstrate a serious commitment to compliance. I would like to continue to audit such efforts in cooperation with the auditors of the group companies.
I believe that a good company is one in which the people who work there are proud of their company, and by extension, the stakeholders feel that the company is indispensable. For the Otsuka group to achieve sustainable growth as a good company over the next 100 years, I would like to contribute to improving the quality of management by discussing and cooperating with other auditors and improving the quality of the brakes of compliance and internal control.

Global supply chains are rapidly changing due to the spread of COVID-19 and the Russia-Ukraine conflict. The shift is from global supply chains that collect inexpensive goods from around the world to reduce costs to regional supply chains that ensure a stable supply of products by securing supply chains in each region. In addition, increasing awareness of human rights and other factors have raised the issue of compliance in the supply chain, and new laws and regulations are being created one after another in response to these changes.
Japanese companies are also rushing to respond, and although they have organized sustainability committees and other bodies, it is still difficult to get results for the resources allocated, due to operational issues such as a lack of a clear sense of purpose. In this situation, Otsuka Holdings' internal audits and Sustainability Promotion Committee reports are of a high quality and are written responsibly by experienced staffs, indicating that the company is devoting sufficient resources to governance and risk management. The report is also a good indication that the company is devoting adequate resources to governance and risk management.
I have been attending board meetings as an Outside Audit & Supervisory Board Member since 2022. At the Board of Directors meetings, outside directors with diverse backgrounds always express their opinions actively based on their respective knowledge, and I feel that the executive side has the capacity to accept diverse opinions, giving me the impression that viewpoints from the outside are quite important. In order for the company to further evolve, I think it is worth considering the participation of a person with a U.S. background on the board of directors in the future, since approximately 40% of revenue comes from North America. I believe that this would bring in a more global perspective and further enhance the effectiveness of the Board of Directors.

The Otsuka group's corporate philosophy and vision are to contribute to the better health of people worldwide, and there is an affinity with creating shared value in the business itself. Furthermore, not only does top management regularly communicate a clear direction regarding the company's raison d'etre and corporate philosophy, but employees are also highly committed, which I feel is linked to the dissemination of substantial information on sustainability-related initiatives, audits, and other activities. However, while the philosophy and direction are clear, there appear to be certain issues with the complexity of the group's organization. With many operating companies in Japan and overseas, and some businesses are overlapping among operating companies, the group's overall business and organizational hierarchy is create a complex structure. From the perspective of an Outside Audit & Supervisory Board Member, I feel that there is room for further pursuit of a corporate organization that is rational and efficient enough to embody the corporate culture and make the most of its employees.
For example, as mentioned at the beginning of this message, regulations on corporate activities are becoming stricter in foreign countries, and compliance with soft law is also required. However, due to the scale of business and the issue of securing staff, it does not seem realistic to require all group companies to respond individually. In the future, I think it will be necessary to establish a system that allows some degree of centralized management, such as by organizing a specialized back office under the leadership of Otsuka Holdings to handle intermediate tasks such as laws, regulations, etc. By taking a flexible approach that is tailored to business and regional realities, each group company will be able to focus on its own business activities and grow into a more innovative organization.
I believe that what I, as an Audit & Supervisory Board Member, can contribute to Otsuka group's growth as a total healthcare company is to continue to ask questions from a purely outside perspective, from the standpoint of a lawyer, such as, "Is this okay? Or, why is this the way it is?” I will continue to raise questions with an awareness of the problems so that I can continue to contribute to the clarification of issues, and improve governance.

In reports by securities firm analysts, companies tend to be evaluated on a short-term basis. However, sustainability initiatives, such as human resource development and environmental issues, do not produce results overnight. Furthermore, with the growing global awareness of sustainability, companies can no longer simply pursue financial gains alone.
Although the Otsuka group has many stakeholders and its group companies operate in a wide variety of business formats, overall, the group is recognized as having a strong commitment to sustainability issues. For example, Otsuka Chemical’s management team fully understands the characteristics of its business and the high environmental impact of its operations, and is aware of the hurdles it faces before taking action.

When I talk with Otsuka Holdings employees, I get the impression that they are all cheerful and frank. And yet, they also have the tenacity to work until the end without giving up. In order to be a good company, each employee needs to be responsive and able to say what is obvious, and it seems that Otsuka Holdings has fostered such a culture. Conversely, a company where employees are overly concerned about whether their superior is pleased or not, or precedent, and are hesitant to speak up, is likely to have governance concerns.
What makes the Otsuka group stand out among Japanese companies is the strong communication of its corporate philosophy by top management, which is shared and applied to actual business operations. Employees know better than anyone else that their products are developed based on firm principles and evidence. Therefore, they have confidence in the products they handle and are able to persevere in their efforts to develop the market with the belief that their superior products will definitely be accepted by the market, even if they may not be profitable in the short term. In this sense, their brightness and tenacity are connected with the fact that they are able to positively tackle their own business based on their corporate philosophy. I hope that the company will continue to produce organizational solutions to issues and promote collaboration among the group so that its excellent human resources can play an even more active role, and grow even stronger as an energetic company.