CAPCOM｜Conversation: An External Director's Perspective on Capcom's Governance

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Conversation: An External Director's Perspective on Capcom's Governance

Kenzo Tsujimoto　Chairman and Chief Executive Officer(CEO), Capcom Co., Ltd. / Makoto Matsuo External Director, Capcom Co., Ltd.

Establishing a More Proactive Governance via Decisions Based on Transparent Operations and Judgments Made from Society's Perspective

Japan's Corporate Governance Code, formulated by the Tokyo Stock Exchange, went into force on June, 2015. This code requires listed companies in Japan to observe global standards for governance. Chairman Kenzo Tsujimoto and External Director Makoto Matsuo discuss the proactive governance targeted by Capcom and the role of external directors in achieving this objective.

Strengthening Dialogue with Shareholders in
Advance of Governance Code

Matsuo: Up to now, corporate governance in Japan has placed emphasis on defensive measures such as enhancing internal controls and mitigating risks. However, the focus going forward will be on offensive measures such as improving profitability and capital efficiency. I applaud Capcom for being one of the first corporations in Japan to revise their governance. In light of new developments such as the Corporate Governance Code, I am interested to once again hear your thoughts on corporate governance.

Tsujimoto: Up to now, Capcom has strengthened governance from the perspectives of effectiveness and visualization while ensuring management transparency, soundness and legal compliance in recognition of the fact that sustainable growth is a necessary condition for appropriate corporate governance. Likewise, in terms of the Corporate Governance Code emphasis on dialogue with shareholders, we have always focused on our obligations to shareholders and investors.

Matsuo: I was surprised by the numerous measures Capcom undertook during the past year in anticipation of the Governance Code. First of all, the notice for the shareholders' meeting was impressive. You reported on enhancements to Capcom's governance structure, including increasing the ratio of external directors on the Board, while addressing the necessity of takeover defense measures within the growth strategy. You also provided extremely detailed explanations using charts and graphs to ensure shareholder and investor understanding

Tsujimoto: At the shareholders' meeting in the previous fiscal year the takeover defense measure had been rejected, so during the past year we proactively engaged in dialogue pertaining to this item with shareholders and institutional investors more than we have in the past.
Presently, there is significant opposition to corporate takeover defense measures in general, thus shareholder and institutional investor resistance is not limited to Capcom. However, if a large-scale purchaser could easily change development policies, potentially weakening the development structure, I think this would result in reducing Capcom's corporate value. Following through with growth strategies, enhancing corporate value over the mediumto long-term, increasing ROE and fulfilling our responsibility to shareholders and investors—this is Capcom's management approach.

Matsuo: External directors were also of the opinion that improving performance and raising the share price were the best defense measures, but management is already cognizant of this as a major premise. In addition, we stressed that since the value of our IPs are not accounted for on the balance sheet, they are thus not reflected in the economic valuation of the company.

Tsujimoto: Throughout more than 30 years of history, Capcom has generated a copious amount of brands via our content, which are recognized the world over. Any attempt to take those brands, with no development policies in place, and simply try to make money off of them, will result in damaging the brands' value. This must be prevented for the sake of shareholders' interests as well. In addition to clearly conveying this idea, we revised the content based on a wide solicitation of shareholder opinions, resulting in a 75% approval and passage at this year's shareholders' meeting for the takeover defense measures that had been rejected just last year.

Matsuo: This is surely the result of the increased efforts to engage shareholders in dialogue. However, the takeover defense measures are a double-edged sword, as we cannot forget that not all shareholders gave their approval.

Tsujimoto: I got that feeling during conversations with shareholders, I got that feeling during conversations with shareholders, and I always keep minority shareholder opinions in mind. Also, behind the success of these dialogues over the past year, external director calls for explaining whether or not there are actual takeover threats, as well as the necessity for introducing these measures and the rationale involved, have been huge. Given that measures were rejected last fiscal year, they suggested we provide shareholders with more thorough explanations.

Matsuo: In order for us external directors to understand that these measures are not to protect management, but rather are a necessary aspect of the growth strategy, we frequently demanded more explanations, repeatedly posing the question, "Is that explanation good enough to satisfy our investors?" Hearing the opinions of all external directors and engaging in thorough discussions during Board of Directors meetings was extremely worthwhile from a governance standpoint. At the same time, the confidence in these measures means increased shareholder demands for the promotion of growth strategies and the achievement of medium-term business goals (cumulative operating income and ROE). As representatives of shareholders and other stakeholders, we external directors will continue to monitor your progress toward these goals.

Tsujimoto: Exactly. We have stressed the need for this measure to achieve sustainable growth and increase corporate value over the medium- to long-term, and we are thus prepared to accelerate our growth strategy and achieve our goals. We are creating opportunities to explain progress toward the medium-term business goals within and outside the company on a regular basis. One of our new initiatives with respect to the Governance Code are small meetings for institutional investors led by External Director Takayuki Morinaga.

Matsuo: It is extremely rare for an external director to engage in dialogue with investors. I am sure it was a good opportunity for investors to confirm that external directors are actually fulfilling their management supervisory roles. On the other hand, since this was the first time this initiative was conducted, we received feedback indicating there is room for further improvement in terms of responses to questions and management itself. We external directors will redouble our efforts during Board of Directors meetings so we are able to respond more satisfactorily to shareholder and investor inquiries.

Capcom's Goal of Proactive Governance and the Role Demanded of External Directors

Matsuo: External directors consist of former corporate managers and legal specialists from various areas. On the other hand, we do not have backgrounds in the content industry nor are we deeply familiar with it, so what role do you expect external directors to play?

Tsujimoto: Companies must always hone their unique corporate characteristics to beat the competition. However, if that is all they pursue, there is a possibility they will become overly specialized, and lose sight of social common sense. At Board of Directors meetings, internal directors tend to lead discussions, but I want external directors to validate judgments from an outside perspective and, if necessary, state their objections. External directors are appointed with consideration for their specialization and their command of the highest level of insight in their respective areas and their ability to make objective decisions with regard to Capcom's management and business activities. I think there is tremendous value in looking at management from the perspective of the general public, including that of shareholders and other stakeholders. I expect external directors to determine whether management is adequate from the perspective of the general public and bring risks to our attention.

Matsuo: From my experience not only as an attorney, but also as an external director for other companies who has monitored the management of various corporations, I think successful companies can get trapped by fixating on their successful experiences. For this reason, I will continue to ask, "Is this really alright?" That being said, highly transparent documentation and explanations are also indispensable for objective judgment.

Tsujimoto: To visualize actual business conditions, the material distributed at Board of Directors meetings is mainly quantitative data from management meetings. Of course, we explain the issues pertaining to each item for discussion, but since it is difficult to make correct judgments without knowing the background of decisions made in executive divisions, we think it necessary to provide all background quantitative data.

Matsuo: Certainly, attaching all related background data aids understanding and prevents fudging the numbers. To conclude, Capcom has already announced its growth strategy and is engaged in enhancing corporate value, but promoting the growth strategy also invites the potential for a variety of risks. What steps is management taking to mitigate risk?

Tsujimoto: From the perspective of earnings fluctuation risk, we are constructing a business portfolio with the Single Content Multiple Usage strategy to distribute risk. However, management decision risk is most important, so a mechanism preventing incorrect judgment is essential. To this end, we are taking steps to visualize management quantitatively, identify problems as quickly as possible and address them. I have heard that visualization is also useful for management supervision and monitoring by external directors and external auditors. We also established an Audit Committee consisting of members with backgrounds in accounting and development who monitor operations in conjunction with two veteran external auditors familiar with a wide range of operations. Additionally, this year, we will increase the ratio of external directors on the Board of Directors to 43%, the highest level ever, as part of our efforts to establish more proactive governance. I look forward to your continued cooperation.