Conversation between Chairperson Kazuhiro Tsuga and Outside Director Kazuhiko Toyama: Evolution of the Board of Directors

The Panasonic Group has transformed since adopting an operating company system in 2021. Guided by the belief that a corporation is a public institution, the Board of Directors plays a vital role in steering strategic direction with independence and objectivity. Kazuhiro Tsuga, Chairperson of the Board of Panasonic Holdings, and Kazuhiko Toyama, Outside Director, delve into the Board’s journey through past, present, and future.

Original article: This article is edited from “Integrated Report 2023.” Click here for the full article.

What changes have been made to the Board of Directors as a result of the transition to an operating company system in October 2021 and the establishment of the holding company in April 2022?

Tsuga: In the past, our Board of Directors had a mix of large and small projects on the agenda, making the meetings somewhat lacking in context. An inside director like me was able to understand the details of these projects, but I must say that it was considerably difficult for outside directors to equally understand them. With society and the business environment undergoing major changes, it was necessary for the Board of Directors to envision how the Panasonic Group should be and to enable thorough discussions among all members of the Board of Directors. We made the decision to move to an operating company system in light of the situation of the Board of Directors among other factors, at that time. As society’s expectations for us change, we too need to change our business fields, and our operating companies need to change accordingly. This is what the operating company system is designed for, so what is more important is how the operating companies have changed rather than how the Board of Directors has changed. This is my take on how the Board of Directors should evolve in the future as a result of these changes.

Toyama: I am currently in my eighth year as an outside director, and I had the impression that this would be a daunting challenge upon assuming the position. The Panasonic Group can be said to have some 40 businesses with net sales of around ¥200 billion, and the scale of sales for each of these businesses easily puts them on par with publicly traded companies. What’s more is that these are manufacturing companies, so their functions are multifaceted, requiring development, production, and sales units at the very least. Furthermore, since each business operates globally, when multiplied together, the number of management units reaches into the hundreds, and each business faces fierce competition. Only someone like Prince Shotoku, a well-known ancient multi-talented genius, would be able to manage a business like this. Also, as Mr. Tsuga pointed out, the previous Board of Directors had a mixture of many small projects. Board of Directors members had to shift their viewpoints back and forth from top to bottom, adjusting their focus for each project. When I was at the Industrial Revitalization Corporation of Japan, I was also looking at about 40 companies and reaching my limits even then. However, at that time, my workload would decrease once the revitalization support was completed, so the situation was different from the one in the Panasonic Group. To be frank, in the past, the Board of Directors had major shifts in focus from project to project, so the discussions lacked a tangible quality, and often resulted in half-hearted discussions. Even when the focus became clear from a higher-angle perspective on major themes, it was challenging as discussions shifted to a more detailed perspective when the theme changed. With the transition into a current operating company system and the establishment of a holding company, the situation for the Board of Directors has changed dramatically. Now, we are able to monitor each operating company, in terms of whether it is functioning well or not, from a higher-angle viewpoint, and we have a more tangible feel for the entire Group.

What’s your take on how the Board of Directors should be and what role it should play under the holding company system?

Tsuga: Operating companies put the customer first and are always thinking about what they can do for the customer. However, when society undergoes major changes, there are cases where we may not be able to keep up with the social changes if we are too close to our existing customers. Accordingly, it is important for the holding company to fulfill its role by calmly assessing changes in society. I believe the ideal role assignment is one in which the holding company captures future changes, while the operating companies stay close to their customers.

Toyama: The holding company needs to take a meta-perspective and expand its thinking over time and space. The holding company is responsible for back casting from 10 to 20 years down the road, and this perspective is increasingly being incorporated in the discussions at Board of Directors meetings. In addition, overseeing operating companies requires both an accounting perspective to monitor mainly for profitability and a meta-based medium- to long-term perspective, and an ideal Board of Directors should have both of these two perspectives.

Tsuga: I feel that the Board of Directors’ monitoring function is dependent on the past experience and skills of outside directors. For example, an outside director who is aware of long-term changes in the industry structure and an outside director with strong operational frontlines experience will have a different method of monitoring. Since we are a manufacturing company, I believe that in addition to having a meta-perspective, the Board of Directors also needs to have a operational frontlines perspective that connects the holding company with the operating companies.

Toyama: In this regard, I find the current composition of the Board of Directors to be good, as we have outside directors from a wide variety of backgrounds.

What makes our Board of Directors superior or unique compared to other companies?

Toyama: I have the impression that the members of the Board of Directors are serious and transparent. However, the flip side of this is that everyone is harmonious, and the direction of the discussion is somewhat coordinated before it is brought to the Board of Directors. As such, things are not so often decided dialectically through heated exchanges at Board of Directors meetings. Previously, when I first became outside director in the Company, the Board of Directors seemed to be more harmonized, but now we have much more in-depth discussions.

Tsuga: In particular, we had intense discussions both at internal meetings and at the Board of Directors meetings regarding the acquisition of Blue Yonder.

Toyama: I like discussions like that, and it gives me an adrenaline rush. Recently, the Panasonic Group has been able to largely and promptly steer toward a better direction in terms of management. In this regard, our Board of Directors is interesting. I now truly feel a sense of fulfillment as an outside director.

Tsuga: In fact, the discussions at the Board of Directors were generally not active enough in the past, and more or less accepted the decisions made by the execution side of the business. I am grateful that the Board of Directors has been able to evolve with the help of outside directors.

What is the Board of Directors’ understanding of the issues concerning the Panasonic Group?

Tsuga: Growth requires sales, but we have long struggled with higher sales leading to lower profitability. As a former president, I have strong concerns about how we can achieve both growth potential and profitability and enhance corporate value. Today, the Panasonic Group feels as if it has a hole somewhere, as sales of AV equipment such as TVs have fallen dramatically compared to where they were in their heyday, and we have lost a major chunk of business, such as with the sale of the semiconductor business to an outside party. So how do we fill this hole? I believe that the Panasonic Group needs new pillars, and it is important to add as many of them as possible. Of course, given the size of the Company, a multi-billion-yen business does not constitute a pillar. We have made various investments and some of those have not worked out in the past. And finally, under Mr. Kusumi’s leadership, the automotive battery business is beginning to appear as a pillar. This is not so much the aspiration of the Board of Directors, but I personally have a strong desire to make sure that the Panasonic Group has several pillars.

Toyama: If we look at what you just said from a different angle, it is fair to say that this is not an issue unique to the Panasonic Group, but one that the Japanese electronics industry has faced for some time. With the progress of digitization, the sources of added value have shifted. For example, manufacturing TVs is no longer lucrative, rather, it is the video streaming companies and semiconductor companies that are booming in profitability. The current situation, where we are unable to build business pillars as before, is a highly challenging management situation. The Panasonic Group is a symbolic Japanese business entity and has confronted many of the same challenges that Japanese companies have faced in the past. A better Panasonic Group can be an inspiration for Japan, and I am not exaggerating to say I became an outside director because I expected the Panasonic Group to create new solutions. In addition, we need to be transformative as a company as transformations take place in various fields, including digital, environmental, and other areas. In terms of corporate management theory, one can say that the business pillars will naturally emerge if the Group has transformational capabilities. The transition to an operating company system changed the external form of the Company, but now we need to change the managerial aspects of our Company. I am sure that all of the members of the Board recognize and agree to this point. Also, from a financial perspective, making capital investments in production facilities paired with technological innovations will be required going forward. Automotive batteries are a perfect example of this. We need to rapidly and continuously make capital investments in production facilities while realizing new innovations, and this way of investing entails substantial risks. For example, this is clearly riskier than building a TV factory during Japan’s high-growth period. Accordingly, mature businesses must have the ability to generate cash flow to fund investments, which is one of the reasons why we place an emphasis on operating cash flow. To build a business pillar in a high-risk environment, we must generate cash from businesses where we have a competitive advantage, and then channel that cash throughout the Group. We need to discuss this point at the Board of Directors meetings going forward.

Tsuga: The transition to an operating company system led to the uptake of the large investment projects such as one in automotive batteries. The holding company can make decisions on investments that go beyond the financial capacity of the operating companies. As Mr. Toyama noted, it would be important to figure out how to circulate funds within the Group going forward.

At the Group Strategy Briefing in May 2023, the Company announced its policy to focus on solving global environmental issues and providing life-long health, safety, and comfort for everyone. Please tell us how you plan to oversee the execution side of the business to fulfill the Group’s vision.

Tsuga: Mr. Kusumi is responsible for the business execution of the entire Group, but he is not the president of any of the operating companies. The executive responsibilities of operating companies are easy to understand, but it is not that easy for us, including Mr. Kusumi, to figure out what the executive responsibilities of the holding company are. This question is profound, in terms of both the foundational question “what is execution?” and the question “is current execution effective and is it yielding results?” Figuring out how we will execute as a holding company under the operating company system will be a challenging matter going forward. In addition, my view is that even if the holding company changes alone, the entire Group will not. After all, if the operating companies do not change, the entire Group will not change.
Looking ahead, it will be important for us to take the time to discuss and improve the quality of execution at both the holding company and the operating companies, and this is nothing but a pleasure to look for. Each operating company has developed its own distinctive qualities and is looking promising.

Toyama: The Panasonic Group consists of a two-tier structure, with monitoring and execution at the holding company and monitoring and execution at the operating companies. Mr. Kusumi is on the monitoring side with respect to operating companies. Our current situation reflects what the founder Konosuke Matsushita once said, “delegate responsibility with a watchful eye.” I believe what matters here is how our Board of Directors makes things function given our current position. It really takes us back to the roots of the founders’ approach to corporate management and corporate governance.

What needs to be done to further improve the effectiveness of the Board of Directors?

Tsuga: The Panasonic Group has been known as a difficult company to understand. When viewing the Company from the outside, people tend to take a one-sided or abstract view of the Company. Accordingly, what we need to do is to make the Company easy to understand from the outside and to make sure that it is properly valued. If we are able to make this happen, we will be able to receive appropriate feedback from the capital markets and other external parties, which will in turn help to improve the effectiveness of our Board of Directors.

Toyama: The phrase “improving the effectiveness of the Board of Directors” could be replaced with “ensuring that the discussions at the Board of Directors flow and lead to the long-term prosperity and growth of the Company.” Naturally, the Board of Directors is not the place to discuss what to do today or tomorrow, and the time frame for the discussions is much longer. This is especially true for the holding company following the transition to the operating company system. The Board of Directors needs to closely monitor operating companies to ensure that they are striving to provide greater service to its customers, receiving appropriate compensation commensurate with the value they add, and creating sources of added value from the short-, medium-, and long-term perspectives. In addition, I believe that having a firm awareness of how the Panasonic Group is viewed by society from a meta-perspective and holding discussions on this topic at Board of Directors meetings will have a major impact on our effectiveness. This is why the selection of Board of Directors members is vitally important. Again, outside directors are not proxies for shareholders, but are representatives for perpetual shareholders. We outside directors also have a fiduciary duty to the shareholders. Board of Directors members must understand this.

Tsuga: I would like to make it so that outside directors, who are not in constant contact with the Company, are able to fully explain the Panasonic Group, including both positive and negative aspects of the Company, which is generally known to be difficult to understand. If we can make this happen, I believe it’s fair to say that the effectiveness of the Board of Directors has improved.