Management Policies of the Toshiba Group Moving Forward (Issues to be Addressed)
Note: The following is the translation of “Issues to be Addressed” section of the Annual Securities Report filed by TOSHIBA CORPORATION (the “Company”) on June 24, 2021. This English translation was prepared for reference purpose only. If there is any discrepancy between the Japanese original and this English translation, the Japanese original shall prevail.
Enhancement of Shareholder Value
We currently believe that being a public traded company in TSE 1 and NSE 1 provides a stable equity structure suitable for enhancing long term value creation, and by taking advantage of the listed status will lead to corporate value enhancement. However, we will not disregard various proposals, including those to take the Company private, as alternative options to enhance Toshiba’s corporate value. While we recognize that there are various hurdles to take the Company private, we will seriously consider and evaluate any credible offers objectively viewed, a bona-fide and concrete offer of acquisition. We believe that the process and content of such a proposal must satisfy our many stakeholders, including shareholders.
We recognize that it is the utmost responsibility for the Board of Directors to act in the best interests of the Company and our shareholders.
The Board resolved to establish a “Strategic Review Committee.” The Committee will be composed solely of independent directors, with its mission to support the Board in its decision making independently, in order to enhance the Company's corporate value for its shareholders and other stakeholders.
Rebuilding the system for ensuring sound and stable management
The investigators appointed at the Company’s Extraordinary General Meeting of Shareholders held on March 18, 2021 conducted the investigation into whether the 181st Ordinary General Meeting of Shareholders held on July 31, 2020 was conducted in a fair manner (including whether or not resolutions were handled legally and fairly). In June 2021, the investigators published the investigation report indicating the results of the investigation. In the investigation report, the investigators indicated that the 181st Ordinary General Meeting of Shareholders held on July 31, 2020 had not been conducted fairly as required by the Corporate Governance Code. The Company takes such indication seriously and will take actions to identify the root cause without delay, in an objective and transparent manner, including the participation of third parties.
On this basis, the Company will rapidly rebuild the system for ensuring sound and stable management, in order to enhance the Company’s corporate value. During this process, the Company will begin a thorough search, incorporating shareholder perspectives, for additional independent Outside Directors with strong experience in managing a complex global business such as the Company’s businesses. As soon as such candidates are selected, the Company will seek the approval from its shareholders at an Extraordinary General Meeting of Shareholders.
Toshiba Next Plan
In November 2018, the Company formulated the Toshiba Next Plan, the overall business plan that aims to transform Toshiba for the upcoming five years, which has been implemented since FY2019. The details of the plan are as follows. (below reflects all changes that were made to parts of the Toshiba Next Plan as of today)
1. Overview and Vision
The Group aims for stable growth as Infrastructure Service Company and evolve into a cyber-physical system (“CPS”) (Note 1) technology company by combining the knowledge and capabilities accumulated over years of experience in a wide range business, ranging from infrastructure to electronic devices, with its strength in information processing, digital and AI technologies. The Group has developed the Toshiba Next Plan to establish the direction and measures that will transform its business to realize future growth.
The Group intends to continue contributing to the development of society by providing services and solutions that can help to solve issues facing the world today.
(Note 1) CPS means a system to collect data from the physical world to be analyzed and processed using digital technology. CPS creates value through a constant feedback loop between cyber and physical worlds.
2. Outline of the Toshiba Next Plan
The basic objective of the Toshiba Next Plan is to enhance shareholder value by maximizing corporate value and generating value for its customers, business partners, and employees. For this purpose, the Group will continue implementing measures to improve core earning power and will also secure investment for growth. We will maximize corporate value and expand TSR (Note 2) through profitable growth.
(Note 2) TSR stands for Total Shareholders Return and refers to the overall yield and return on an investment, including capital gains and dividends, received by shareholders.
(2) Business Portfolio and Action Plans
The Company will thoroughly manage its existing business portfolio by checking the competitiveness of each business and its markets. In businesses where expansion is anticipated, the Company will cultivate organic growth with appropriate investments. Action plans for restructuring its business portfolios are in place to improve margins in currently under-performing businesses. Progress will be monitored regularly and firmly.
(3) Policy on Shareholder Returns
The Company intends to maintain average consolidated dividend payout ratio of at least 30% (Note 3) as a base to realize stable and continuous increase. Shareholder’s equity in excess of the appropriate level of capital will be used to provide shareholder returns, including share buyback. Appropriate level of capital will be periodically reviewed by the Board of Directors.
While Toshiba will focus in the short term on ensuring its financial stability during the unpredictable COVID-19 situation, it is Toshiba’s intention in principle, to return the majority of the net proceeds from any KIOXIA Holdings Corporation divestiture to shareholders. Furthermore, if the external environment stabilizes, enabling capital markets and the global pandemic to be more predictable, Toshiba expects to be in a position to undertake more proactive portfolio streamlining and divestitures, including the assessment of highly accretive M&A opportunities to continuously improve capital allocation in order to further enhance shareholder returns and the long term value of Toshiba.
(Note 3) For the time being, equity in earnings or losses of KIOXIA Holdings Corporation is excluded from the Company’s policy on shareholder returns.
(4) Development of New Growth Fields
The Company sees opportunities in changes in the environment brought about by destructive innovation amid such mega-trends as growing urban infrastructure needs, expanding mobility of people and goods, automation through advanced technological development, expanding advanced medical technologies, and the shift to renewable energy. We aim to grow new businesses by bringing together the Group’s unique technologies and resources and investing the management resources for growth.
(5) The Company’s Digital Transformation
As the digital revolution is increasingly felt throughout the society, the Group will transform itself by promoting cultural change throughout the organization in order to adopt digitization. The Company will build a standardized IoT architecture and by bringing together Toshiba’s demonstrated knowledge across diverse business fields, we will develop IoT services for electric power generation, railways, buildings, logistics and manufacturing companies.
(6) Establishing Structure for Execution
The Company will introduce an initiative to incubate entrepreneurship. Furthermore, to accelerate its digital transformation, the Company will take measures to develop internal talent while proactively seeking to hire new talents from outside.
The organizational structure will be changed to strengthen business operations and secure faster decision making process through simplification by consolidating business units and removing layers within the organization. Internal control functions will be further reinforced by expanding the scope and strengthening internal audit. In order to share values with shareholders, and to effectively incentivize to maximize mid- to long-term corporate value, the performance based compensation system that reflect TSR had been implemented, and had set the majority of executive officer compensation to be paid in restricted stock.
Implementation of the Toshiba Next Plan
1. Phase 1: Strengthen Core Earning Power
Four reforms to strengthen core earning power had resulted in a cumulative benefit of 130 billion yen from FY2018, the time Toshiba Next Plan was formulated, to FY20. In structural reforms, withdrawal from non-focused businesses has been completed, and the target to reduce number of subsidiaries for 25% is expected to be fulfilled up to 80% against the target. With regard to the number of subsidiaries, we plan to further advance the integration for half out of 388 companies.
Steady progress had been made in our digitalization initiatives, and we have already completed to standardize 97% of our operational specifications. We will work to reduce IT-related expenses by replacing our current IT system, while also streamlining back-office divisions by improving operational efficiency. From FY2021 onward, we believe that engineering reform that leads to design standardization and modularization, and IT replacement will greatly contribute to reduce fixed costs significantly.
In the monitoring business, we withdrew from the new development of Advanced system LSI (SoC) in the system LSI business and established an efficient business operation structure to significantly lower the break-even point. In the HDD business, by shifting the core of its business strategy to near-line HDDs to accommodate the increasing need for data centers, the profitability improved with acceleration in development and expansion of its production facilities. In the Thermal Power business, basic profitability improved by increasing service business portion, reviewing labor allocation, and reducing fixed costs by optimizing manufacturing base locations. In the Printing business, measures to improve its profitability are essential as it was largely impacted by the spread of COVID-19. We will continue to monitor the structural reform outcome of the Toshiba Tec Corporation, and will discuss necessary measures from the business portfolio strategy perspective as the Toshiba Group.
2. Phase 2: Stable Growth as an Infrastructure Services Company
Our Group consists of nearly 20 business units by industry basis. By classifying the contents of the business by functions, it can broadly be summarized into 4 segments: Device Products, Infrastructure Systems (construction), Infrastructure Services, and Data Services. In Phase 2 of the Toshiba Next Plan, Infrastructure Services are the core businesses of our Group. We intend to steadily grow sales and earnings by supporting the maintenance services of the equipment that we installed over years, and by our long-term relationships with customers.
First, we will optimize operations and consolidate indirect operations through the means of IT and AI, and enhance competitiveness of service operations by optimizing subsidiaries. Second, we will expand existing businesses and securing service contracts, and increase service areas by taking in services for equipment made by other manufacturers. Finally, we will evolve into a company that provides value-added services by transitioning to profit-share models and developing new services such as matching. These three points will be factors behind the growth for Infrastructure Services.
Our Group holds the top share of businesses in a wide range of fields from renewable energy to energy management. We believe that business opportunities through decarbonization can be a major opportunity for expanding Infrastructure Services, and we are confident to contribute to realize a decarbonized society.
For green and digital technology with its major example as energy matching, we established a new company in last November together with Next Kraftwerke, a major European renewable energy supply and demand adjustment company. In addition, we will not miss the chance to accelerate our growth with our cutting edge technologies; Quantum Key Distribution, which will be the new standard network system in the quantum computer era, and a data matching platform that conveniently activate local communities by distributing purchase data and human flow data.
Reinstatement to the first sections of the Tokyo Stock and the Nagoya Stock Exchanges
Toshiba stock was demoted from the first to the second sections of the Tokyo and Nagoya Stock exchanges on August 1, 2017; however, applications for reinstatement to the first sections of the Tokyo and Nagoya stock exchanges have been approved by Tokyo Stock Exchange, Inc. and Nagoya Stock Exchange, Inc. in January 2021, and the stock was reinstated to the first sections of both markets on January 29, 2021.
In February 2020, the Company established the COVID-19 Response Task Force to prevent the spread of the novel coronavirus pandemic. This task force is addressing the pandemic with employee safety and putting an end to the situation as top priorities. In light of rising new COVID-19 case numbers, particularly in certain regions, and because of concerns over the strain being placed on healthcare systems, we have sought to limit person-to-person contact as much as possible by having all employees work from home as a general rule. At the same time, the Group operates many businesses and services essential to maintaining social activities, including our social infrastructure business that forms a foundation of people’s lives. In order to fulfill our supply responsibilities and social responsibilities for such, the Company has continued its activities to provide delivery, maintenance and services to customers and business partners and conduct businesses essential to maintaining operations and social activities within the scope necessary and after implementing further measures to mitigate the risk of spreading the virus.
Improvement of Internal Controls Process
In line with our basic policy of prioritizing compliance over all business activities, we are working to further enhance our internal control.
We have established a three-line defense, with frontline business departments as the first line, management departments as the second, and auditing departments as the third, and have defined clear roles and duties for these organizations. Through their efforts to check and balance and carry out their responsibilities properly, we have carried out a number of measures aimed at achieving effective risk management.
As part of efforts to further enhance our internal control system last year, we newly established the Compliance Advisory Meeting with external experts as members. Based on the results of their discussions, within the Legal Affairs Division we newly established the Risk Management Compliance Office, which will re-enforce compliance awareness and enrich cross-organizational compliance systems and measures. We will bolster our three-line defense based on the following trajectory with regard to matters that the Compliance Advisory Meeting indicated as requiring amelioration or further discussion.
- With respect to promoting a strong awareness about compliance, we will carry out the proper messaging at the appropriate time and develop education programs to ensure employees have a firm grasp of our fundamental principle of prioritizing compliance over even organizational goals.
- As part of fraud risk management, we devised a new “zero tolerance (steadfast refusal to accept such behavior)” policy that will guide our efforts to develop and enforce all necessary rules, which includes creating a uniform system of standards for antifraud measures, establishing rules for control operations, preparing manuals, and communicating more effectively about disciplinary action.
- Concerning our whistleblowing system, we will continue to make further improvements to the system to promote its use by taking thorough measures to ensure greater awareness of the system, launching the capacity to receive English-language reports in Japan, and improving the overseas reporting network.
- For internal audits concerning our fraud risk management system, as we have already publicly announced, we will provide better response by bolstering our internal auditing capabilities through such measures as adding more personnel.
The Group sees impacts from climate change as material risks and, following the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), we are analyzing impacts on our business. We predict physical risks from natural disasters and transition risks from the rising cost of responding to regulations, loss of sales opportunities due to delays in responding technologically, and impaired reputation from delays in initiatives. As such, we are striving to strengthen our frameworks and activities for addressing these risks. At the same time, we see opportunities from increased demand, including decarbonized energy technologies and energy-saving products and services, so we are proceeding to transition toward decarbonization business, starting with renewable energies. We have established a framework for the Board of Directors to execute appropriate supervision of the material issues related to the impact of climate change on our business.
As a response to climate change and as stated in our Environmental Future Vision 2050 announced in November 2020, the Group aims to reduce greenhouse gas emissions throughout the Group’s value chain by 50% compared to the FY2019 level by FY2030, as we contribute to realizing a net zero emissions society by 2050. We have set separate FY2030 reduction targets for the Scope 1 & 2 categories together, and for the Scope 3 category, and have acquired the approval of the Science Based Targets (SBT) initiative, which is consistent with the Paris Agreement.
At present, we are pursuing the detailed Seventh Environmental Action Plan, which takes us to FY2023, and are proceeding to reduce GHG emissions in our business activities, as well as in our products and services. We aim to hold total GHG emissions in our business activities in FY2023 to 1.04 million t-CO2 and to achieve a 1% year-on-year improvement in our total energy-derived CO2 emissions intensity. Furthermore, in our products and services, we aim to continue developing and delivering renewable energies as well as products and services that have robust energy-saving features. We aim to reduce GHG emissions during energy supply by 13.6% versus FY2019, while aiming for an 84 million t-CO2 contribution to GHG reduction during product use.
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