Q & A with Independent Director

The Board of Directors of Nippon Paint is responsible for properly exercising authority based on the recognition of obligations to all stakeholders, with the ultimate goal of achieving Maximization of Shareholder Value (MSV) in the medium and long term. For this purpose, we have currently 11 members of Directors, which is suitable to deepen our mutual trust, and Independent Directors are the majority of the Board. In nominating Director candidates, we also take into consideration the balance of experience and skills of individual board members based on a skills matrix.

Contributions of Independent Directors are a premise for achieving MSV. Since we shifted to a Company with Three Committees (Nominating, Compensation and Audit) in 2020, we have constantly maintained a Board structure with Independent Directors forming a majority as the size of the Board varied slightly from time to time. This Board structure allows Independent Directors to perform the supervisory function by giving advice to the management based on their knowledge and expertise in order to encourage Nippon Paint Group to achieve sustainable growth and MSV in the medium and long term. We currently have 11 Directors (as of February 28, 2023), of which eight are Independent Directors. Besides these Independent Directors, the Board has Director Goh, who serves as the Non-Executive Chairman of the Board, as well as Directors Wakatsuki and Wee, who concurrently serve as Representative Executive Officers & Co-Presidents, with the aim of strengthening communication between execution and supervision.

The Directors have diverse backgrounds including extensive experience at business companies, financial institutions, and professional service providers. In addition, our Board is sufficiently diverse regarding nationality and gender.

We have a unique process for maintaining the diversity of the Board of Directors.

We do not simply create one-size-fits-all successor plans for Directors and Executive Officers first and then identify and narrow down the list of candidates who fit in the missing pieces. The Board of Directors of Nippon Paint Holdings is committed to deepening and broadening truly effective discussions. Rather than pursuing the appropriate size of the Board or ideal skill sets required of Board members, we are focused on determining whether our candidates are trustworthy. This comprehensive process takes into account their backgrounds and characters to determine what kind of performance can be expected. In other words, our approach, throughout the whole process, is based solely on the characteristics of each individual and personal connections.

Everyone we identified based on this approach as absolutely trustworthy board members to share the common mission of MSV has experience in three areas: corporate management, global business operations, and M&A. The experience gained in the course of their careers in these areas, which are designated in our skills matrix, is vital for the Directors of the Nippon Paint Group as we evolve based on Asset Assembler model. The people we determine to be trustworthy have specialized skills (finance, legal affairs, IT/digital, manufacturing/technology/R&D and other professional fields) backed by experience in those areas. The Directors’ performance of their professional capabilities to the fullest is what enables deep and thorough discussions at the Board of Directors meetings of Nippon Paint Holdings.

Future Director candidates may not be automatically selected or rejected based on these criteria. The selection of Director candidates should be strictly based on connections with people and mutual trust that is firmly established through sufficient communication.

For example, Director Kirby, who was newly elected in March 2022, was the CEO of a global paint manufacturer for many years. We knew very well about his business acumen and character before he was nominated as a Director candidate. Director Lim has experience at Temasek Holdings, which is owned by the Government of Singapore, and has also demonstrated her leadership in Singapore political circles, which we saw on a first-hand basis. They were selected as candidates by the Nominating Committee after direct communications. This process of selecting Director candidates by getting to know them well and assessing their qualification is very insightful. Therefore, the current Board structure and skills matrix are the outcome of our efforts to find individuals with the skills and characteristics required for more progress with our Asset Assembler model to achieve MSV.

Nippon Paint Groups adopts the same approach for selecting M&A targets. We never use the approach of narrowing down a long list of paint and coatings manufacturers worldwide by the so-called acquisition criteria. As we grow in our paint business and expand operations in the Paint++ business, we are adding new relationships based on direct contact. We thoroughly communicate with these new members of our group to identify people who are truly trustworthy and then work with these management teams as partners. We are convinced that this is the best approach for our Asset Assembler model based on autonomous and decentralized management.

As the Nippon Paint Group grows, the Board of Directors must use an even broader perspective in order to provide guidance needed to determine the future of the group. Naturally, the characteristics of the supervisory function that is demanded of the Directors is always changing. The Board of Directors will continue its evolution by constantly building and maintaining a team that can meet the ever-changing requirements for the sound management of the Nippon Paint Group.

In pursuit of our sole mission of Maximization of Shareholder Value (MSV), we should assess the “effectiveness of Board of Directors” by shareholder value from a medium- and long-term perspective.

We firmly believe that the best approach to achieve MSV is group management based on mutual trust, which we call Asset Assembler model. Naturally, it is essential for the Board of Directors to make an effort to deepen trust among Directors and between Directors and the executives. This trust is the crucial key to improve the effectiveness of Board of Directors. We recognize that mutual trust can be a measure of the Board’s effectiveness at this time.

To build mutual trust, each Director maintains close communications with other Directors even outside the Board of Directors meetings and the Committee meetings. In addition, we hold a meeting of Independent Directors after every Board of Directors meeting to exchange opinions on the operations and discussions of Board of Directors. We also receive the input of the executives, including the group’s leading management personnel called Global Key Persons (GKPs). For example, at the Audit Committee, we constantly engage in dialogues with the management team of each partner company. In 2022, there were 16 of these sessions. Our feedback on the outcome of growth strategies and recognition of challenges involving local operations obtained through such communication are shared in the Board of Directors. As we pursue autonomous and decentralized management, these communications with the management of partner companies have allowed us to discuss effective growth strategies based on the actual status of our businesses without falling into armchair planning. We believe the cornerstone of our contribution as Independent Directors is to share opinions collected in this way with the Co-Presidents and Chairman Goh, to ensure an alignment of opinions with them. We believe that discussions in the Board of Directors based on this opinion-sharing will enhance the quality of the Board’s decision-making.

We conduct an objective assessment of the progress of our actions to improve the effectiveness of Board of Directors every year, including comparisons with other companies, through Board Advisors Japan, Inc., a third-party organization. Overall, the results of the Board’s evaluation in 2022 showed that “the Board’s effectiveness is generally ensured” and all Directors are “engaging in active discussions from the viewpoint of supporting the management” by applying insights linked to their professional knowledge. Based on these results, we think we have made progress to a certain degree. In addition, we recognize that there is a greater need for “contributions of Independent Directors” than ever to further improve the effectiveness of Board of Directors. We accept the results sincerely and constantly review and take actions to address the Board’s challenges with a commitment to take the board’s discussions to a higher level and achieve MSV.

We aim to drive the growth of our businesses based on two major strategies. One is the organic growth of our existing businesses; the other is inorganic growth driven by assembling new assets through acquisitions.

To achieve these two types of growth, I believe the timely and appropriate financing as well as the perspective of building a proper business portfolio are essential. For instance, the Board of Directors is expected to provide assistance to enable the executives to make the best judgements for growth, such as existing business investments and divestitures and acquisitions of new businesses, based on a bird’s eye grasp of different situations involving our business fields.

In the global paint and coatings market, the 10 leading companies including Nippon Paint have a share of less than 50%. Small and mid-sized companies are competing intensely for the remaining share. Furthermore, the adjacencies market, which we coined “Paint++”, is estimated to be around three times larger than the paint and coatings market. I believe that Directors can further upgrade discussions about growth strategies by viewing all of these businesses as growing in the global markets and optimizing investment decisions based on a rigorous and objective assessment of our business portfolio with our eyes on business opportunities for growth.

At the off-site meeting held in August 2022, we examined the uniqueness and superiority of our strategy compared to the strategies of our global competitors. We thoroughly discussed our growth strategy such as by reexamining the positioning of Asset Assembler model in relation to the business models of other companies in broad range of sectors. We also deepened our discussions on our group’s growth potential based on the “Paint ++” strategy that is overseen by the Co-presidents and other executives, and on the adequate forms of financing for implementing this strategy. These discussions have allowed us to establish in greater detail our road map to MSV. Achieving a common understanding and deepening a mutual understanding of issues facing our group in order to drive the group’s growth have contributed to improving the quality of deliberations about each agenda item at the Board of Directors meetings. The assessment of the Board of Directors’ effectiveness in 2022 highly rated the Board’s activities for “creating an opportunity to discuss the company’s key strategy over time.” Also, there were comments that “the Board of Directors mostly discussed important subjects, such as medium- to long-term management strategy” with “the commitment to pursue Maximization of Shareholder Value (MSV) shared among the board members.”

The biggest challenge concerning our group’s corporate governance is whether the executives can continue to boldly take risks in a timely and appropriate manner in the pursuit of MSV. Based on mutual trust as I mentioned earlier, the Board of Directors is constantly receiving necessary updates from the executives, in response to which the Board members are strengthening our support for their risk taking in the pursuit of MSV.