Outside Director, Otsuka Holdings Co., Ltd.
Evolving corporate governance while maintaining the founding family’s spirit and Otsuka’s unique approach
From My Appointment to the Present Day
When I was appointed in 2016, the Otsuka group had just begun preparations for the formulation of the current Third Medium-Term Management Plan. Initially an unlisted company, the Otsuka group achieved growth through the charismatic management of its founding family. Since its listing, the company has shifted from being an owner-operated company to one in which leadership is chosen by shareholders. Although this transition was at an early stage when I joined the Board, I now feel it is close to completion. Such structural transitions sometimes lead to disruptions in areas including corporate governance, but in Otsuka’s case it has been relatively smooth. The group’s success in this respect is no doubt partly due to CEO Tatsuo Higuchi being a long-time veteran of the Otsuka group with an understanding of the founding family’s spirit and expertise in global management.
As the group expands the scale of its business for further growth as a truly global company, it must address how to evolve its management and corporate governance structures while maintaining the founding family’s spirit and Otsuka’s unique approach.
Progress and Challenges in Global Governance
One of the most important issues in global corporate governance is risk management. Global governance is extremely complex, as each country has its own challenges. But although there are of course many issues to deal with, I feel that the group is steadily building an organizational structure for addressing them.
Given the diversity of the Otsuka group’s shareholders, customers, clients and other stakeholders, it is essential that we carefully discuss what the best overall structure for global governance is. The group has enjoyed the benefits of a unique corporate culture since its founding, so it will be important to examine how to become truly global while continuing to reap those benefits.
While theories can guide us in envisioning an ideal society, the real world is much more complex and full of contradictions. Everything does not always go to plan. However, unlike academic pursuits, management requires constant decision-making. Our role as outside directors is to support such decision-making through our individual expertise.
The training and development of management personnel is an essential matter for the group. When assigning personnel to the group’s overseas businesses, there is a tendency to emphasize linguistic ability as a selection criteria, however, management capabilities are perhaps most important. It is also worth noting that linguistic ability and global skills do not always go hand in hand. Organizational development of management personnel with this in mind will be paramount.
Development through Diversity
Biological evolution is a continuous process in which individual species within a group successfully adapt to the surrounding environment and pass on their genes. As environments change, it is not always easy to predict which species will be able to adapt to any given change. In that sense, I believe the rich diversity of the Otsuka group’s businesses will enable it to continue evolving with the times.
On the other hand, with such rich diversity comes certain inefficiencies. The aim of global governance is to deal with these inefficiencies. However, the group must determine what is to be managed as a group, and what is to be left to local operating companies to deal with in their own ways. Markets differ by country, as does the stage of development of each group business. Even the purpose of doing business overseas can differ. Overmanaging these businesses can also lead to inefficiencies. Clarifying responsibility for the timing and criteria for investment or liquidation decisions, or for evaluating the success or failure of a particular business is important, but overmanagement can also be costly.
Moreover, while keeping the Otsuka spirit as its foundation, the group must make a choice about elements that have not kept up with the times. In biology, an organism’s metabolism is key to its survival. Although the human mind leads us to consider ourselves to be the same person we were ten years ago based on our memories of that time, the fact is we have changed dramatically in that time. Similarly, given the difficulty of determining what to keep and what to eliminate from an organizational perspective, it will be necessary to create a platform for decision-making based on evidence and data.
Role of the Corporate Governance Committee
The initial role of the Corporate Governance Committee was as a nomination and remuneration committee. While today the committee continues to thoroughly carry out this fundamental role as a nomination and remuneration committee, more time is now allocated to discussions on corporate governance as a whole, and these discussions have a greater degree of latitude than those at the Board of Directors meeting.
Rather than simply being a committee that fulfills its given mission, I sense that the committee’s activities have evolved to include discussions on the very foundations of corporate governance.
Outside Director, Otsuka Holdings Co., Ltd.
Maximizing value and generating sustainable growth as a group
Progress in Enhancing Group Governance
In addition to ensuring the smooth development of each operating company’s businesses, Otsuka Holdings must manage with a focus on how to maximize value and ensure sustainable growth as a group.
In the discussion on corporate governance in last year’s report, I alluded to how Otsuka Holdings should examine and implement an optimal operating structure to raise the collective strength of the Otsuka group. In March 2022, Managing Director Shuichi Takagi was appointed CSO to strengthen the corporate strategy functions of Otsuka Holdings. I believe this was a significant step toward enhancing group governance.
The next step is to deepen discussion for the future on whether the goal of each operating company is aligned with that of Otsuka Holdings, and whether each of those companies has a clear role to perform within the group, keeping in mind group-wide synergy and the group’s vision for 10 years from now.
Regarding finances, in its Third Medium-Term Management Plan the group stated its intention to conduct business management with a corporate-wide awareness of capital cost. Executive Director, CFO Yuko Makino is leading these efforts. In addition, the introduction and expansion of shared services is moving forward. I consider such services to be an extremely important factor in enhancing group governance. Group companies differ in scale, structure, industry and stage of development, so it will take considerable effort to incorporate these services. Nonetheless, I believe progress has been steady.
Importance of a Global Personnel Strategy
In addition to the introduction and operation of these shared services, global personnel functions will also fulfill a key role in group governance. Currently, each operating company is responsible for the formulation and implementation of its own personnel systems and strategies. From a global perspective, however, having numerous personnel systems and wage structures makes it difficult to implement shared services across all of these companies, and to ensure effective personnel utilization and education that will increase group-wide value. Once the roles and responsibilities of each group company have been clarified, it will be important from an organizational perspective to create a global personnel system and strategies that are linked to the level of contribution that those companies make to the group. In addition, giving consideration to an ideal remuneration system that could cover a variety of business types would further enhance group governance, including from the perspective of personnel development.
Generating innovation requires a system for consolidating information from various sources in one place. Collating information that at first glance might appear unconnected can lead to unexpected synergy and generate entirely new value. The same can be said for personnel data. Given that the Otsuka group is engaged in a diverse range of businesses worldwide, creating and reinforcing a global personnel structure will help generate even more opportunities for the group, leading to results that include greater synergy among group companies or helping employees advance their careers. In particular, the mindset and desire to develop global personnel who can raise the value of the entire Otsuka group will be essential. Assigning individuals to manage overseas group companies can be one effective measure, but of course not everyone will succeed. It is important that managers have a proactive approach, but thinking about defensive measures and sustainability is even more important. That is, rather than seeking short-term success, they must consider continued success over the long term. This can be difficult to understand for an inexperienced manager, so a development and training structure is vital. Led by CEO Tatsuo Higuchi, Otsuka Holdings is focusing on developing the next generation of group managers. Rolling out and establishing training programs like this at each operating company should prove effective.
Responsibility to Contribute to and Fulfill an Important Role in the Group
We live in an era in which continuously creating and developing novel, innovative pharmaceuticals is difficult. This is why it is important for each business and operating company to responsibly engage in initiatives with an awareness of how they contribute to the group and what role they should fulfill. In the Nutraceutical Business, the group stands in a unique, unrivaled position, and therefore has great potential for even more innovation. There are very few companies in the world who cover everything from prevention to recovery.
Given the diversity of the group’s businesses, I also believe there is a need to improve group-wide communication and strategic consideration of investment decisions and strategies. Entrusting investment to operating companies that have extensive experience, expertise and competitive advantages in specific fields could lead to even greater value. On the other hand, each operating company has its own viewpoint and targets, and so it could be that the decisions they make on strategies and investments are not in step with the group’s overall direction or interests. This is important to consider given the group’s aims to take capital cost into account in management.
Role of Outside Directors
The fundamental and most important role of outside directors is to supervise management, to which we give our full focus. Another vital task is to offer advice from an external perspective on business execution, including on group-wide synergy and determining a vision for the future. It is our duty to proactively offer opinions from an independent standpoint on what is working well and what needs to change. With the spread of the COVID-19 and an increase in geopolitical risk, the group’s business environment is changing at unprecedented speed. Conventionally, information based on past successes was seen as an asset, but that may no longer be the case. As such, it is important for companies to adapt their approach.
Outside Director, Otsuka Holdings Co., Ltd.
Creating robust mechanisms in anticipation of further globalization and development
Challenges in Global Governance
Until now, management of the Otsuka group was based on competition among its operating companies. This approach enabled it to grow into a unique total healthcare company. As the world becomes more complex and the number of Otsuka group companies reaches the 200 mark, however, I believe it is time to reexamine the group’s direction and review the mechanisms for keeping it on track.
As a listed company, Otsuka Holdings has a responsibility to contribute to its stakeholders by further boosting management efficiency and enhancing profitability. Consequently, the group is taking a positive step forward by establishing a new direction and rebuilding its mechanisms while maintaining its founding spirit. The appointment of Managing Director Shuichi Takagi as CSO in March 2022 reflects the group’s intention to do so.
Trust, but double check
In rebuilding mechanisms, Otsuka Holdings now needs to clarify the scope and scale of responsibility it will give to each group company. To ensure that the group’s direction and profitability are not affected, Otsuka Holdings needs to strengthen the management and capabilities of each operating company while respecting their independence. At the same time, it must carefully balance responsibilities under its control as a holding company with the responsibilities it entrusts to operating companies.
The Otsuka group already has various management mechanisms in place, but I believe even more robust mechanisms will be required if the group continues to develop through further globalization and if the number of group companies continues to increase.
Even before I was appointed as an outside director, I thought that the group had “unique and interesting management”. Whether it's POCARI SWEAT, Bon Curry, or Calorie Mate, Otsuka continues to believe in helping people and the world. Even after being appointed as an outside director, I still believe that the group has potential. This is because Otsuka has become a unique total healthcare company that lives on the beliefs and non-imitation ideas that have been passed down from our founding family.
It is not easy to manage a company while maintaining faith in its founding spirit. However, the Otsuka group’s founding spirit continues to be passed on through the group’s corporate philosophy. My hope is that the group can make use of this philosophy to provide even more solutions that benefit people and society
Further Growth in the Nutraceutical and Consumer Products Businesses
Compared to the management foundations of the Pharmaceutical Business, those of the Nutraceutical Business and the Consumer Products Business are still not at the same level. That said, the unique development of these two businesses has led to steady growth in their foundations. In the consumer products market, systems and values are undergoing major changes due to environmental issues, the need to address infectious diseases, and other factors. If the Otsuka group were to utilize bold investments in taking these changes as opportunities to employ its unique approach, I believe the scale of the business could increase significantly.
Reinforcing and Developing Management Personnel
Although there is already a significant focus on personnel development in the group, it is now at the stage where preparations must be made to prepare for further expansion by strengthening human resource development, rotation, and allocation functions within Otsuka Holdings to develop and increase the number of management personnel for group companies.
Effectiveness of the Corporate Governance Committee
In the future it may be necessary to set up separate remuneration and nomination committees, nevertheless, under the current structure committee members can engage in a lively exchange of opinions, and so I believe the committee is operating effectively. I look forward to even more active exchanges in the future.
Outside Director, Otsuka Holdings Co., Ltd.
Considering management policies and business strategies to further enhance the value of the Otsuka group
The Otsuka Group’s Value as an Organization
The Otsuka group has grown into a huge organization and has a diverse corporate history. With so many operating companies, the Board of Directors and the Corporate Governance Committee continue to deliberate over how to show the group’s true abilities and maximize its underlying value. If the group can make full use of its strong management foundation and maximize group synergy, its value will no doubt increase. To date, the creativity of each operating company has inspired mutual improvement, enabling the group to generate numerous innovations. However, the current speed and scale of change in digitalization, borderless information sharing, and other external trends is unprecedented. Amid this environment, the call is even greater for corporations to improve their corporate value through globalization, innovation, and synergy. At the Board of Directors, we constantly consider what management policies and business strategies will best improve the value of the Otsuka group.
One important matter for the group is personnel mobility. We are now in an era in which the values of people and organizations in Japan are changing significantly. Individuals now make their own choices on workstyles and working environments in ways suited to their ways of life and skill ambitions. In this regard, the wide range of companies and businesses of the Otsuka group offer the potential for individual employees to pursue what they most want to do within the group, and so I would like the group to further enhance the mobility and development of personnel.
I would also like both the group’s people and organizations to adopt a wider, more global perspective, and to accept risks and actively take on new challenges. It would be great if there were organizational mechanisms for encouraging such individual endeavors.
Innovation and Efficiency through Creativity
The Otsuka group’s structure enables it to create and facilitate relationships within the group that are unlike external collaborations. Moreover, these are not one-time relationships but ongoing partnerships, and close connections between the upper management of each company are a strength. Some pioneering examples include the collaboration between Taiho Pharmaceutical and Otsuka Pharmaceutical for the sale of anticancer agents in the U.S., and the partnership between Otsuka Medical Devices and Otsuka Pharmaceutical. I believe making these successes more visible could inspire even more successful collaborations among operating companies and projects.
On the topic of investments, whether it be in R&D, IT, or the expansion of sales channels, the Otsuka group can make much larger-scale investments than single entities. For businesses in industries with low profit margins, for example, there is a limit to the investments they can make from retained earnings alone. In contrast, the Otsuka group can adopt a larger risk appetite for investments in promising domains. Meanwhile, in external collaborations too, the recognition that can be gained for the group’s comprehensive strengths is much more significant than that possible for a lone operating company.
On the other hand, the group must also make the correct choices. The Otsuka group has an admirable culture of developing products over the long term; nevertheless, strategically investing in areas where there is room for growth but also withdrawing from areas where there is none will be critical to capturing new growth opportunities. Social demands change with the times, so rigid cost and personnel allocations risk compromising the comprehensive strengths of the group. It is therefore important to create new mechanisms that allow the group to take on new challenges that can in turn lead to virtuous cycles.
Business Management with an Awareness of Capital Cost
With so many different businesses, it is only natural that their KPIs differ—what is important is that through the setting of KPIs, management is then undertaken with a sense of ownership and responsibility. Embedding the concepts of cost of capital and ROIC throughout every operating company in the group is a difficult task, however. For unlisted group companies, the tendency is to think that there will be no issues as long as they diligently execute their businesses. Converting the above indicators into numerical targets is an effective way to increase decision-making transparency for both the business execution side and the governance side regarding business details and investment priorities.
In becoming a listed company, Otsuka Holdings welcomed shareholders as a new category of stakeholder. When shareholders purchase shares in the Otsuka group, they do so more than merely as an investment, but also because they look forward to the sustainable growth of the group. Communicating the group’s commitment to growth to each category of stakeholder will no doubt lead to improved relationships of trust.
Diversity on the Board of Directors
As outside directors, we have the opportunity to talk and interact with persons in charge of business execution at each operating company. With capital markets increasingly turning their attention to long-term succession plans, it is good that we are able to confirm first hand what kind of leaders are in charge of the group’s various businesses, as well as their approaches to managing the operating companies and business execution.
As revenue from the group’s overseas businesses increases, one step to achieving the diversity and group synergy that I mentioned earlier would be to appoint managers in charge of overseas businesses to the Board of Directors. This would broaden the perspectives represented on the Board of Directors and make it easier for us to identify issues. Currently, the Board of Directors at Otsuka Holdings comprises mainly top-level management from domestic companies. There are issues and approaches outside Japan that are difficult to gauge simply by looking at the numbers. Hearing from those directly in charge of the group’s overseas businesses would no doubt make it easier to ascertain the condition of the group as a whole.
Outside Director, Otsuka Holdings Co., Ltd.
Governance under which Otsuka is always moving in the right direction and aspiring to greater heights
Governance as Expressed in the Corporate Philosophy
For me, the Otsuka group’s corporate philosophy―"Otsuka-people creating new products for better health worldwide"―is the prime expression of what the group’s approach to governance should be. The words “for better health worldwide” show the group’s desire to ensure better health in governance too, in that it emphasizes a constructive approach to governance, in other words looking at what to eliminate and what to revise. “Creating new products,” meanwhile, is an expression of the group’s willingness to take on new challenges to reach greater heights. My role as an outside director is to ensure governance under which the Otsuka group is always moving in the right direction and aspiring to greater heights.
Strive to Do What Only Otsuka Can Do
The Otsuka group’s communications often reference “what only Otsuka can do” and “uniqueness.” To me, rather than connotations of “specialness” or “exclusivity,” these words express how the group is willing to use strong leadership to take on challenges that others cannot.
During my time examining systems for supporting research on space exploration, I came to understand how research and development requires a long-term commitment, process management, and supportive colleagues and partners. Meanwhile, large investments do not always guarantee success in R&D; sometimes, small investments can lead to major or fascinating results. Even if the outcome of a project is difficult to foresee, it is important for R&D leaders to commit to supporting their team. It is also necessary to create networks and exchange information, and to move forward while gradually revising the direction of projects as necessary. I believe the Otsuka group can apply all of these capabilities to great effect.
Meanwhile, to maintain better health throughout society, it is important to directly address the needs of patients, consumers, and communities. A representative example among pharmaceuticals is ABILIFY MAINTENA, a drug developed for schizophrenia patients that offers them a more convenient prescription format and solutions to the issues they face in society and life. POCARI SWEAT is another example. Although sales began one bottle at a time, direct contact with consumers raised awareness of the product’s advantages, and built it into a popular brand. Almost 40 years later, Otsuka developed POCARI SWEAT ICE SLURRY, which supports construction workers and others working under extremely hot conditions, and is now promoting it at various sites. Products such as these could not have been created through product development and marketing activities that only had efficiency in mind.
Doing the Right Thing
The idea of doing something because it is the right thing to do, rather than simply because those are the rules, is deep-rooted in the Otsuka group’s culture. A representative example is the group’s sustainability initiatives. The U.N. SDGs were adopted in 2015, but the Otsuka group was engaged in sustainability initiatives long before then.
In the Dasgupta Review, which analyzes the economics of biodiversity, Professor Partha Dasgupta warns that because conventional economic models have undervalued the idea of nature as an asset, the adherence to indicators that aim solely for GDP growth can have a damaging effect on biodiversity. For example, the SDGs consist of goals and targets set around the pledge to “leave no one behind.” Achieving the SDGs in a way that does not put the burden on generations to come over the next two centuries or cause negative impacts is a major issue requiring consideration. If we look at global warming, the emphasis tends to be entirely on reducing greenhouse gases, but waste heat is also a serious concern. Even before global warming became a much talked-about topic, Otsuka was engaged in thorough efforts to reuse energy and protect biodiversity. It is important that Otsuka maintains its approach of doing the right thing, not just what is mandated in rules and regulations.
Strengths Stemming from the Nutraceutical Business
One of the Otsuka group’s biggest strengths is its Nutraceutical Business. The Pharmaceuticals Business targets diseases that necessitate treatment through drug or medical intervention, whereas the Nutraceutical Business supports people’s independent efforts to maintain their health. The business continues to earn users’ trust by aligning itself with the common desire to maintain and improve health.
The business environment will continue to change at great speed. As global warming and population aging progress, structural transformations in society will call into question how people relate to each other and manage their own lives. It is therefore important to anticipate changes among consumers, homes, and communities, and to communicate the significance of the Nutraceutical Business. During the pandemic, for example, POCARI SWEAT has not just been a brand or a beverage, but also functioned as a key part of social infrastructure.
A Key Mission: Enhancing Financial Efficiency
With increasing concerns about inflation, resource constraints, and supply–demand mismatches in the labor market, macroeconomic conditions have changed significantly since the outbreak of the pandemic. These conditions will naturally have serious implications for both the Japanese economy and corporate activities.
Today, the Otsuka group comprises 200 companies (including affiliated companies), each of which is managed as an independent company. Moreover, some of these operating companies are engaged in multiple businesses. Although this approach is suited to long-term business management, including personnel development, it is important to further reinforce the methods and tools required to manage financial accounting and managerial accounting from different perspectives. In the current environment, in which there is significant movement at the macroeconomic level, it is essential to find the most beneficial means of implementing financial management and capital efficiency across all group companies. The Otsuka group must therefore incorporate approaches for enhancing financial efficiency, such as centralized capital management and foreign exchange risk management. When reading the group’s earnings statement from the top, first come figures on revenue and expenditure that meet the expectations of all our stakeholders—be it customers, suppliers, contractors, business partners, employees, financial institutions, or national and local governments—and only then comes net profit, which is the basis for paying shareholder dividends. Improving financial efficiency is key if the group is to meet its expectations for growth and the expectations of its shareholders and investors. While this will present a significant challenge, it is one that the group must tackle.