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Principal Discussions at Board of Directors Meetings Held in Fiscal 2014

photo:Principal Discussions at Board of Directors Meetings Held in Fiscal 2014

At Capcom Board of Directors Meetings, three external directors take the lead in offering aggressive opinions and advice to ensure management transparency and corporate health. We strive to ensure corporate governance is functioning properly through lively and detailed discussions regarding appropriate disclosure and accountability to shareholders and investors.
This page provides examples of the heated discussions led by external directors.

Note:Light blue highlights indicate external director comments

Item 1: Measures Related to Earnings Outlook Revisions During the Fiscal Year Ending March 31, 2015

Morinaga
(In response to an explanation) I want to ask about the explanatory materials announcing the downward revision to earnings. In addition to the PS business as one contributing factor, what is the reason for the launch timing change of some game titles?
Ichii
Changes to the "Title A"'s development structure were a major factor. Although the development structure was changed in consideration of the 52-week map, under the current structure, it is difficult to supply personnel for the development of core title sequels. Thus, we reallocated some developers involved with "Title A" to the development of core titles. This delayed the launch window of "Title A" but along with improving the finished product's design, it enabled us to maintain the sales launch timing of core titles.
Matsuo
I have a question regarding operating income being unaffected by the 19% drop in sales proceeds. Without the revision to the rules for administering Pachislo model certification methods, net sales and operating income should be increasing significantly. Does this not contradict the external explanations and announcements up to this point?
Kenzo Tsujimoto

Operating income declined 1.3 billion yen due to the delayed launch of Pachislo machines in the Amusement Equipments business. At the same time, ongoing digital download sales of highly profitable catalogue titles in Europe and the United States, as well as mobile and PC Online cost of sales and SG&A expense reductions caused the Digital Contents sub-segment to increase 1.5 billion yen.

In each business profitability improvements surpassed the figures upon which we based our outlook, and as a result of each division making modest efforts, we were able to supplement the decrease in profit from the decrease in sales.

Oda

There were no problems with external announcements. Of course, this did not fall under the Tokyo Stock Exchange timely disclosure standards (30% or higher increase/decrease in net sales or 10% or higher in increase/decrease in profits). We probably should provide a slight supplement to explanatory details in the second quarter reporting, but the reason for the change was explained in detail and resolved.

Also, from the stock market's perspective, although net sales declined significantly, the company should be commended for its efforts in maintaining operating income. I imagine we might get questions like, (1) "How were you able to maintain operating income despite the 15 billion yen drop in net sales?" (2) "Can you continue the effect of (1) into fiscal 2015?" (3) "If net sales recover, profit will grow significantly, so how do plan to improve sales?"

Morinaga
If we answer in that way, will the stock market understand? For example, can we explain the decline in operating income in terms of the 15 billion drop in net sales, or that business structure reform cost reductions are one factor in maintaining operating profit?
Oda
Analysts are aware of each of our businesses' markets when conducting detailed analysis on Capcom, so if we explain segment conditions I do not think there will be a problem. However, assuming an explanation will be necessary, we should prepare data for each figure. Also, as we posted special losses three times since fiscal 2010, I suspect the market will want to know if we are going to post another one this fiscal year, so we need to let them know there will be no special losses this fiscal year.

Item 2: Discussion on Corporate Governance Codes

Note: This discussion includes those that took place at Board of Director meetings, as well as in individual meetings, phone conversations and other non-official locations.

Kenzo Tsujimoto
I would like to have a serious discussion about the proper form for Capcom's unique governance structure in light of revisions to the Companies Act and the enforcement of the Corporate Governance Code (hereinafter the "Code") between May and June 2015. The objective is to promote an appropriate growth strategy. Additionally, promoting a growth strategy will increase management risks, so one use of governance is to provide a mechanism for risk control. There are many items worth considering, for example, a company with an audit and supervisory committee, Board of Director duties, a remuneration system, and so forth. Going forward, I want to establish regular discussions along these lines.
External director
I know this discussion is forthcoming, but what is the reason for introducing a company with an audit and supervisory committee? This year, approximately 190 companies have moved in that direction, but I don't see any companies who can convincingly explain the reason for this move. Is it simply to address concerns about easily securing external directors?
Oda

For example, currently a company with a corporate auditor system naturally has no voting rights at Board of Director meetings. With a corporate auditor committee, directors (corporate auditor committee members) will have voting rights, which makes it easier not only in terms of legal compliance as corporate auditor committee members, but also in terms of auditing legitimacy, which strengthens the auditing function. This is the idea I want to discuss going forward.

External auditor
Regarding the remuneration system, it is true that at present, set amounts are based on monthly compensation incorporating bonuses and separate performance-based incentives. If remuneration is linked too heavily to performance, won't this impact management decisionmaking? What about introducing a stock-based compensation system?
Oda
We'd have to start from scratch, but I'd like to discuss it in terms of the necessity of reviewing the remuneration system. Even if we were to increase the performance-based ratio and link it to medium- to long-term performance, we should consider it an incentive as the result of sustainable growth.
External director
As an initiative ahead of the Code going into effect, what do you think about strengthening dialogue with shareholders in terms of takeover defense measures?
Oda
That was rejected last year, but we are considering it again this year. We need stable management to advance the growth strategy, so we think these measures are necessary. The specific reasons are (1) IP value is the core of Capcom's corporate value, (2) if an entity purchased the company and tampered with or changed development policies, some developers might quit, affecting future game development and (3) our IP is off-balance sheet, so any corporate valuation by a purchaser would have to be judged to determine whether or not it's appropriate. For this reason, I think we need to set aside time to discuss management and development policies.
External director
We've seen cases where foreign investors increased their holdings and repealed takeover defense measures, as well as examples where the measures were abandoned just before the general shareholders' meeting. However, if a company is firmly committed to its stance that this measure is necessary to execute growth strategy, they should submit the measure for approval at the general shareholders' meeting. Fulfilling management responsibilities is also the reason why the term for directors was changed to one year, a change shaped from the evolution of our stance up to this point.
External director
Management is aware that the best way to prevent takeovers is to raise performance and increase the share price. At present we are working to accelerate the growth strategy, and as a company, if this requires that we have a takeover defense in place, it should absolutely be brought up at the shareholders' meeting.
External director
The takeover defense measure proposal was rejected last year, and this year we are facing conditions that are even more severe. However, in the past year we have enhanced dialogue with institutional investors and announced an ROE growth target in light of investor opinions, which is a big step forward compared to last year's proposal. These measures are necessary to alleviate concerns including those pertaining to business development in the Asia region. If management is intent on respecting shareholder opinions, this issue should be brought up.
Kenzo Tsujimoto
We plan to submit a report based on the Code by the end of this year. Critical items will be thoroughly discussed up until the deadline. We want to skillfully employ corporate governance to achieve ongoing, sustainable growth. To this end, I ask for your continued cooperation.
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