Nippon Paint : Small Investor Meeting with Outside Director Q&A Summary 243KB

Small Investor Meeting with Outside Director Q&A Summary

(October 20, 2021)

• Questions by Investor A

Q1 I have a question about the relationship between corporate governance and Maximization of Shareholder Value (MSV). What is your idea of MSV? Supposing that MSV is translated as the growth of earnings per share (EPS), I believe one of the roles of corporate governance is to put a stop to actions aimed at increasing EPS at any cost. Is my understanding of the relationship between corporate governance and MSV correct? For example, the transfer of the European automotive coatings business and the India business to the Wuthelam Group probably makes sense from the perspective of improving EPS. However, it was a rather rare scheme. If the scheme causes people outside to be concerned about or raise doubts about a possible conflict of interest even if the transaction was executed via the right process, I think you can choose not to carry out the transaction from the perspective of corporate governance.

A1 As to your question about my idea of MSV, a higher EPS generally leads to a higher stock price and greatly benefits shareholders. You may think that MSV is similar to the concept of shareholder primacy. However, shareholder primacy differs greatly from MSV, which is the ultimate objective of the Nippon Paint Group.

The Board of Directors is constantly required to make decisions on subjects including investment projects. Therefore, the board members occasionally exchange opinions with the key leaders of the Nippon Paint Group called Global Key Persons (GKP) even when there is no agenda submitted to the board. As you could see, the word MSV includes "Maximization"; let me try to explain our duty as a private-sector company in relation to the satisfaction of employees and customers.

If the Nippon Paint Group maximized the satisfaction of all stakeholders other than shareholders, our shareholder value, which is the residual value, would probably be zero. Being an incorporated company, I believe that the Nippon Paint Group has various contracts with stakeholders. Looking at the relationship with employees, for instance, the Nippon Paint Group provides compensation to employees for their work and supports systems for their career plans. These are some of the types of contracts. In addition, the Nippon Paint Group has contracts with customers, such as contracts for selling products at

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appropriate prices and guaranteeing the quality of products. Employees and customers determine whether to work for the Nippon Paint Group or to purchase products supplied by the Nippon Paint Group based on this premise. Another point I would say is that the Nippon Paint Group has general social responsibilities, but cannot maximize the satisfaction of residents in areas where the Nippon Paint Group's factories and the head office are located. Nevertheless, the obligations of the Nippon Paint Group while operating businesses in those areas are based on certain forms of contracts (regardless of whether they are written or not). What remains after taking those obligations into account is EPS.

I believe it is very important for the board to keep an eye on whether the Nippon Paint Group uses an appropriate process for generating EPS and to provide the management team with various viewpoints. For instance, building a corporate culture is a very important element of a certain type of contract with employees. A slight misstep in the creation of corporate culture may cause an issue such as neglecting to perform compulsory testing by some of the leading Japanese companies, which made newspaper headlines recently. I believe it is inappropriate for the board to allow a corporate culture that accepts such misconduct to remain as is. As I explained earlier, MSV is equivalent to EPS when put in figures from a very broad perspective. In the meantime, we closely oversee the process for achieving the proper EPS.

At the same time, we must avoid waste in order to achieve the proper EPS after appropriately fulfilling our obligations to customers, employees, and society. Wee Siew Kim, the Co-President of Nippon Paint Holdings, used the term Lean For Growth (LFG) in the Integrated Report 2021. As expressed by this term, the Nippon Paint Group is aiming to accomplish a transformation into a very lean organization.

To give you the background to the transfer of the European automotive coatings business and the India businesses to the Wuthelam Group, the automotive coatings business of the Nippon Paint Group was not performing well after the acquisition of Bollig & Kemper (B&K). As a result, the board requested a restructuring plan and reviewed the plan three or four times. There were a few excellent plans. However, this business required several years for restructuring and the gap between us and competitors significantly widened while we were working on improving the performance of this business. As a result, we have continued to lag behind competitors in the European

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automotive coatings business for many years. With regard to the India businesses, the management team previously made decisions that disregarded the perspective of MSV. As a result, these businesses also needed restructuring.

Naturally, the board strongly requested an improvement in the performance of these businesses. The two newly appointed Co-Presidents fully understood that this was their responsibility and decided that the existing performance improvement plans would not work. I think all outside directors had reservations at first about the Nippon Paint Group's relationship with the Wuthelam Group becoming complicated again so soon after the simplification of the capital relationship following the completion of the acquisition of 100% ownership of the Asian JVs in January 2021.

The outside directors asked the two Co-Presidents about the business plan underlying the transaction and how the European automotive coatings business and the India businesses can contribute to MSV. Although this transaction is a scheme to sell those businesses to the Wuthelam Group, before drawing a conclusion, we started discussions by reviewing the business plan to determine the objective of the transaction. After this process, we concluded that the transaction, in a way, is the launch of a venture business, which is a normal transaction for any publicly listed company. It was a case of starting a new venture business, which is an aggressive plan that cannot be carried out by the Nippon Paint Group alone. The discussion centered on if it is possible for us to ask shareholders who have invested in our group based on a sufficient understanding of our businesses to assume the financial risk of this plan as the Nippon Paint Group supplies the business resources for this joint venture.

The European automotive coatings business and the India businesses are strategically important, so we wanted to turn around their performance. On the other hand, there was a possibility of failure. If we were to start a business from the ground up, we could take on a new challenge with a new local partner. However, this was a restructuring of failing businesses as a result of wrong management decisions in the past. Considering these points, we discussed the following scheme: (1) NPHD will sell these businesses to the Wuthelam Group, which has a deep understanding of the Nippon Paint Group's businesses, (2) the Wuthelam Group will provide funds to restructure the businesses, and (3) NPHD will retain the right to buy back the businesses at some point.

The India businesses, which include the Nippon Paint Group's existing joint venture, were in a very complicated situation. Taking into account the overall

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growth potential of the Nippon Paint Group's business in India, we decided to temporarily transfer the India businesses along with the European automotive coatings business.

I believe this scheme has good prospects for success. We set up a special committee to examine this scheme and employed an independent advisor to evaluate the pricing, valuation and legality of the scheme. What I would like to emphasize here is that we did not use a process or make decisions as a mere formality simply to avoid a conflict of interest. This is a glimpse into the inner conflict of each director and discussions by the board involving this scheme. I hope you understand that we made this bold decision based on thorough discussions from a broad perspective.

I expect that we will be having a heated debate again when the Nippon Paint Group considers buying back these businesses in the future.

• Questions by Investor B

Q1 I think MSV is a very simple and rational concept, and I recognize the consistency of corporate governance decision making because MSV is the only criterion. However, I have some concerns about how the Nippon Paint Group views the fulfillment of duties to stakeholders. I think it is possible that the Nippon Paint Group's actions to achieve MSV will not actually lead to MSV if there is a gap in understanding between the Nippon Paint Group and its stakeholders, including society and shareholders. Isn't there a possibility of this type of gap occurring?

For instance, there have been various changes in the business climate, such as increases in requirements and the awareness of the need for actions concerning the environment and gender equality. Has the Nippon Paint Group been able to appropriately fulfill these obligations to stakeholders in response to the expectations of people outside the group? What is the board's policy and how does the board oversee the management team's decisions?

A1 The six outside directors may not necessarily have a thorough understanding of the expectations of all stakeholders, although we are making the best effort to do so. In addition, the views of stakeholders change day by day. Therefore, the important thing is to keep up with the latest trends.

There are several ways to do this. One is to listen to the opinions of the executive department or GKP in the paint and coatings business and paint

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related business of the Nippon Paint Group. They also manage operations by keeping in mind the perspective of various stakeholders. The Nippon Paint Group's partner companies include a company formerly listed on the Australian stock exchange. We can benefit from their expertise and knowledge regarding the ideal stance concerning corporate social responsibility and duties to stakeholders and internal control systems to determine what kind of duties the Nippon Paint Group should fulfill in every operating region and business. I believe the best information source unquestionably is the opinions of the local management.

The Board of Directors is consulted about various subjects such as investment projects, organizational changes, and personnel changes. The Independent Directors of the Board meeting enhances the capabilities of outside directors, who supervise and give advice to management from the perspective of fulfilling obligations to stakeholders. The Independent Directors of the Board meetings are held 14 or 15 times a year immediately after the Board of Directors meeting or when we have more time. The meeting is run without any agenda or keeping minutes. The focus of discussions is on increasing knowledge and updating information to raise the capabilities of every outside director, rather than on achieving a consensus of the six outside directors. Discussion topics include what roles the six outside directors should fulfill in the Nippon Paint Group and information about potential issues.

From time to time, external experts are asked to attend the Independent Directors of the Board meeting. For instance, we invited a legal professional to explain recent changes in the U.S. laws that impose more stringent requirements and discussed potential issues involving the Nippon Paint Group created by those changes. We also invited professors from U.S. universities with expertise concerning corporate governance and discussed corporate governance issues that are emerging in the U.S. and Europe. And also the Board of Directors evaluates the board's effectiveness once a year. Based on the result of this evaluation, we exchange opinions with the outside advisor who creates an independent third-party report on the board's effectiveness. In this way, we are working to enhance our ability to fulfill the Nippon Paint Group's obligations to stakeholders. As part of this process, we constantly exchange views about diversity, such as the potential candidates we should invite to become directors based on their practical knowledge and experience in certain areas.

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