About the Sustainability Strategy

There are a ton of social issues and a range of materials are needed to solve them. For the manufacture of any product, including those used for the establishment of infrastructure in emerging economies, lots of materials are necessary. Some of these materials, however, have negative impacts on the environment and society, and innovation is expected to deal with this issue. For the solution of present and future social issues, the importance of roles played by manufacturers of materials has grown to the highest level ever. I believe that there are many things that can and must be done through the power of chemistry.

In the long-term vision that we publicly announced in February 2022, we disclosed our sustainability-related material issues (materiality) for our business management toward achieving the vision for 2030. Moreover, thinking that we should in the past have been more imaginative about the future of society and the environment, we have created the following figure to show the future we seek to realize through the power of chemistry, which represents our commitment to contributing to the achievement of the SDGs through our business activities.
(Figure) The future we seek to realize through the power of chemistry (Extracted from the Integrated Report)

CEO Takahashi promised to “Position the concept of sustainability as an essential component of management” in the updated version of the long-term vision (Related link: Updated long-term vision in PDF format ）and in fact the Showa Denko Group is allocating its managerial resources by giving priority to sustainability, which I think is great and hard to disagree with. Taking this approach is truly important for the newly integrated company to achieve transformation as a chemical company and manufacturer of materials as the importance of such companies is further increasing.
I also think the idea expressed in the vision to “Become a company with like-minded partners throughout the world” is very good. Upholding this idea in the corporate vision, which represents a top-level concept of the Group, proves that the Group is quite advanced in terms of sustainability. The idea implies that the Group is quite strongly committed to sustainability and the co-creation of a sustainable society, for which it has firmly decided to select partners and to be selected as a partner.

Also, in order to achieve corporate growth by solving social issues, it is a good idea to include human resource-related issues in your issues of materiality. With regard to human resources, it is indeed necessary for you to develop talent, including researchers, sales personnel and manufacturing staff, by backcasting from the ideal, so that you can continue to develop and supply materials with pride. If you start human resource development based only on the methods, systems and capital that are presently available, you might head in the wrong direction.
There remain only about 8.5 years in the period for your long-term vision. You should position the 8.5 years as a period for preparing to reap the fruits of innovation in 2030 and beyond. In the 2030s, substantial changes will occur in relation to the use of energy and the circulation of resources due to progress with the conversion of materials, and you should be at the center of the changes as a chemical company and manufacturer of materials. Given that changes in the business environment will become even more dramatic during the 8.5-year period, I propose that you position the 8.5 years as a period for preparing to reap the fruits of innovation in 2030 and beyond, eliminating restrictions in relation to people, products, money, time, and other matters.
In other words, you need to prepare for the coming age of dramatic changes by steadily executing a PDCA cycle and ensure governance in your process to incorporate the perspective of sustainability in the nonfinancial KPIs that you are now formulating and in your future R&D and business promotion projects. Let me again emphasize the importance of not imposing restrictions in relation to people, products, money, time, and other matters when discussing related issues. It is also essential to develop the next generation of leaders who will be at the heart of the Group’s management in the coming age of transformation and to involve them in the discussions.

I think the thinking of many companies, including ours, about the future tends to be shaped by the current limits on managerial resources. It is not easy for such companies to discuss investments from a long-term viewpoint or share values across generations. Instead, they tend to discuss to choose one of the two out of “profit” or “responsibility & contribution,” and “present” or “future.” This is of course not a problem limited to Japanese companies and may also apply to the investor side. The need to overcome this problem seems to be one of the factors that caused the revision of the Corporate Governance Code. What do you think about this?

For example, the Kishida administration has upheld the policy of investing a total of 150 trillion yen in carbon neutrality over the next decade. However, the government will not give subsidies for all the money required for this investment. Both the public and private sectors will raise funds for the investment and the possibility of such investment will eventually depend on whether or not companies and investors can take a long-term view. At least in Europe, after long years of struggle, both the public and private sectors are beginning to move in that direction. For such financing, strict conditions need to be met for the use of capital, projects and systems for sustainability.

From the perspective of short-term profit and loss, you tend to focus on profit and then consider spending for social contribution as a “cost.” What is important is for the management team to decide to take a risk and make a large investment for the creation of a future business, on which they will gain returns only after a period that is much longer than what you would normally expect. By the revision of the Corporate Governance Code, directors and particularly outside directors who, like a third party, can take longer and more comprehensive views, are required to play the role of getting the management team to allocate managerial resources from a longer-term viewpoint while also maintaining discipline.

In order to turn the claim, “We will grow our business to contribute to society and create more value”—which sounds lip service—into reality, top managers need to have cash and courage, and the corporate governance system supports them in a strict but affectionate manner, I think.

Yes, but what comes with the support is larger responsibility. Chemical companies and manufacturers of materials need to improve their product performance, reduce their costs by measures including the pursuit of economies of scale, minimize their environmental impact and address various other things that might be mutually conflicting. To innovate, these companies must do more than develop innovative technologies and seek their practical application. They need to find a way to boldly invest talent, resources and money in what may seem to impose a huge “cost” on them, and then be able gain returns on their investments, which I believe is the true meaning of innovation as it relates to the chemical industry.
Not only Western chemical companies but also their counterparts in South Korea and China are changing their direction to foster this kind of innovation, and that with amazing speed. If you do not follow this trend, you are saying, “We will not participate in this competition.” Competing on the world stage means to innovate in this way or reform your business model.

Since specifying our issues of materiality, we have been setting nonfinancial KPIs as part of our effort to formulate and implement concrete measures for the issues. We have entered the stage of setting specific KPIs for the two issues of materiality, which are “Gain credibility through responsible business management” and “Promote a corporate culture that nurtures autonomy and creativity” in time for the publication of the Integrated Report. Going forward, we will think more deeply about the KPIs and also start making examinations for “Strengthen competitiveness and create social value through innovation.”

We have been committed to clearly setting our priorities based on the challenges and aspirations felt on-site at our respective workplaces. We have been holding a series of discussions with the management team on the challenges that all of us view as those to be met for us to be trusted and selected by our stakeholders including customers and to make selections ourselves to hold onto the uniqueness of the Showa Denko Group. As a result, the KPIs are not limited to numerical indicators and include a number of indicators on the establishment of qualitative processes. We also need to meet the challenge of monitoring the results of our activities in an objective manner, but we will start by checking whether or not we are working on truly important issues. (Related link: Explanations made by those in charge of safety, compliance and risk management at the Group)

You do not need to make perfect KPIs from the beginning. What is crucial is to move forward a step or two from the status quo and inspire a desire on the part of the relevant divisions to also move forward. By starting to work on KPIs, you can identify specific problems and what it takes for you to make progress with your measures. Setting KPIs is not a goal in itself, and it is necessary to continue to review the related measures. In fact, you formulate KPIs by discussing the issues repeatedly and thoroughly to make sure they are indicators that can be truly shared by all members of the team, and this is a process that I highly appreciate. It is, however, also important for the Group to set its future targets via a backcasting method rather than trying to make improvements on the present situation as required.

When the Showa Denko Group achieves its goal of becoming a company that can compete on the world stage, it will conduct operations, including those for production, R&D and sales around the globe. And, as a global company, if you start operating a plant in an emerging market will you be able to achieve zero safety problems and zero waste at the level that you aim for in Japan? When you compete globally in 2030, to what extent will you be able to achieve what you aim to do based on your present KPIs? What I mean is, you need to set your KPIs by backcasting from your ideal state in 2030 and then pursue their achievement toward 2030. To this end, you should take a broader view beyond the national border and should not let your thinking be limited by your current managerial resources. You need to be committed to achieving the goal, including meeting these preconditions.

It would be difficult to do so. “We do not know where we will establish our new production bases and what kinds of companies in which industries we will acquire in the future. We therefore have no evaluation criteria or future targets and cannot make investments.” This kind of thinking will make us hesitant to move forward and as a result we will fail to take actions in a timely manner. What you have said reaffirms for me the importance of moving forward without making short-sighted decisions and of starting to make the decisions that we need to make now and continuously reviewing them to become a truly global company in the future, while at the same time demonstrating this attitude to our stakeholders to receive and incorporate their feedback.

Yes. Global companies are not allowed to say, “We can do this in Japan but we do not know about the situation outside the country.” For example, for diversity, the challenges faced by the United States must be different from those faced in Japan because of racial and ethnic differences between the two countries. Accordingly, the approach to be taken for the solution of diversity-related issues will also differ. Also, for career management, is it appropriate to apply the Japanese way of thinking to employees working in India? To instill the Purpose and Values, you will need to meet more difficult challenges.

Yes. Global companies are not allowed to say, “We can do this in Japan but we do not know about the situation outside the country.” For example, for diversity, the challenges faced by the United States must be different from those faced in Japan because of racial and ethnic differences between the two countries. Accordingly, the approach to be taken for the solution of diversity-related issues will also differ. Also, for career management, is it appropriate to apply the Japanese way of thinking to employees working in India? To instill the Purpose and Values, you will need to meet more difficult challenges.

So, we can make more proactive contributions to the development of younger generations. It fosters co-creation for a better society for the Showa Denko Group to conduct activities that benefit both present and future generations. As for STEM, what we deem necessary is science, technology, engineering, art and mathematics (STEAM) education, or STEM plus art (A). Indeed, we need to have personnel versed in STEAM in order to demonstrate our imaginative capacity through creative thinking toward developing our business and R&D for the future that we seek to realize, while considering both our positive and negative impacts on the future environment and society as a chemical company and manufacturer of materials.

Yes, you have many things to do, but I believe you are making a good start. Please let me repeat that you should not set your vision based on restrictive limits. You should instead use the backcasting method, think about what it will take for you to achieve your vision and embrace challenges to this end. I look forward to seeing you do it.