March 31st, 2023

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WICI Japan
Human Capital Subcommittee report- English excerpted version -World Intellectual Capital/Assets Initiatives
0Table of Contents

Executive Summary -------------------------------------------------- 2
Chapter 3 Looking Ahead - Key Point -------------------------------- 3

This English excerpted version was compiled by translating “Executivesummary” and “Chapter-3 Looking Ahead -Key Points” of theJapanese full report into English.

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Executive Summary
An ongoing discussion about human capital management and human capital
information disclosure is taking place among domestic and foreign stakeholders. In thispaper, we share issues that we would like to see developed among these stakeholders,
based on insights gained from discussions among members of diverse backgrounds
during the one-year WICI Japan Human Capital Subcommittee meeting, held fromJanuary to December 2022.
In Chapter 1, we clarify the definition of human capital and address the link between
corporate human capital and value creation. The Subcommittee defines human capital as"the value (as a resource) provided by employees and managers through their skills,
ability to perform tasks, and knowledge." We then focus on the connection between
human capital and value creation, rather than viewing human capital statically. We
dynamically view the value creation process using human capital and emphasize theimportance of active management in driving value creation from human capital. We
also note that Japanese companies need to reconstruct the relationship between
organizations and individuals.
Chapter 2 deals with human capital-related disclosure and dialogue. We share insights
about domestic and international guidance trends and human capital disclosure casestudies and present the Subcommittee's view on how companies should approach humancapital-related disclosure to focus on corporate value creation. We particularly
emphasize the importance of creating a virtuous cycle of value creation involving
internal and external stakeholders by fostering dialogue with key human capitalstakeholders through the disclosure process.
Based on the discussions in Chapters 1 and 2, Chapter 3 presents four perspectives forfuture discussion by domestic and foreign stakeholders: "perspectives on human capitaland value creation," "the role of management and the monitoring function of the boardof directors," "human capital-related information disclosure," and "the society
surrounding the corporation." We present the Subcommittee's views from each of theseperspectives and present a promising approach for the future.
Chapter 4 presents examples from two perspectives. The first perspective involves value
creation utilizing human capital, showcasing a case study of value creation through theuse of human capital. The second perspective focuses on human capital disclosure,
introducing examples of good disclosures from the WICI Japan Integrated ReportingAwards and sharing insights on how they compare with overseas disclosures.

2Chapter 3:

Looking Ahead - Key Points

The debate on human capital is ongoing. Based on our analysis and discussions thus far,
we summarize points that provide insights for future discussions, dialogues, andcorporate actions from four perspectives: "human capital and value creation," "the roleof management and the monitoring function of the board of directors," "human capitalrelated information disclosure," and "society surrounding the corporation."

1. Perspectives on Human Capital and Value Creation(Findings)
The utilization of human capital, rather than the capital itself, leads to corporate valuecreation. The performance of the organization/team, as well as the ability of eachindividual, is also an important perspective. Therefore, the selection of KPIs related tohuman capital should be made from the perspective of human capital utilization leading
to value creation. In many cases, human capital is a core factor that, combined withother intangible assets, creates a company's unique competitive advantage. The timeframe and process of converting human capital into value are unique to each company
and can vary depending on the motivation of employees.
(Preferred Approach)In both management and disclosure, companies should focus on the dynamic
perspective of how human capital leads to value creation, rather than the static value ofhuman capital itself. Companies will select KPIs related to human capital based on theirrelationship with value creation, distinguishing between obligatory indicators fordisclosure (required metrics) and those that are core elements of value creation (KPIs).

2. Role of Management and Monitoring Function of the Board of Directors(Findings)
When considering the dynamism of value creation utilizing human capital, the role ofmanagement in steering the entire value creation mechanism from a long-term
perspective is crucial, and this is what human capital management entails. This is anessential element of management policy, and the role of the board of directors isextremely important in its formulation and steering.
(Preferred Approach)Management should understand how the company's human capital connects to value
creation, and create mechanisms to facilitate more effective use of human capital toenhance value creation and motivate employees. KPIs related to human capital will beselected accordingly. The Board of Directors should also establish systems to facilitate
more effective use of human capital to enhance value creation and motivate employees.
3The Board of Directors should check whether human capital management is functioning
effectively and propose specific necessary measures to management, requiring them toimplement these measures.

3. Disclosure of Human Capital-Related Information(Findings)
Human capital KPIs are not only essential for human capital management for value
creation but also useful for deepening understanding among target stakeholders. By
fostering dialogue with target stakeholders through information disclosure, companies
can create a virtuous cycle of value creation involving these stakeholders. Even
indicators and items related to DE&I, which are easy to focus on, may or may not leadto value creation, depending on the uniqueness of each company's value creation
mechanism.
(Preferred Approach)Companies should explain how they create value by managing human capital, including
the selected human capital-related KPIs, in their information disclosure so that target
stakeholders will be convinced.
If the indicators and items related to DE&I are KPIs, their relationship to value creation
should be clearly explained. Otherwise, it is sufficient to present them in a manner
within the scope required by the rules, and avoid misunderstandings on the part of theviewer by making a sharp distinction between required metrics and value creation
indicators.
The reporting process itself creates a dialogue among management, employees, target
stakeholders, etc. leading to a virtuous cycle toward further value creation by enhancing
the sense of conviction, expanding the circle of empathy, and gaining furthercommitment. To this end, the organization will communicate the uniqueness of thecompany to target stakeholders through the effective use of multiple media, such as
financial reports and integrated reports.

4. Society Surrounding the Company(Findings)
Employees, who are the human capital of a company and a key audience for corporate
information disclosure, are also the recipients of the diverse benefits that the company
creates for society. From the perspective of realizing their own personal path, theychoose where and how they work of their own volition. The trend of increasingawareness of autonomous career development and decreasing psychological hurdles tochanging jobs has become more pronounced over the years and has been further
accelerated by the pandemic, and is expected to continue in the future. The analysis of4

information about human capital by external third parties is also beginning to influence
evaluations by investors, consumer purchasing behavior, and company evaluations fromthe perspective of workers.
(Preferred Approach)As the factors that determine where each individual works are diversifying, companies
should be aware that they are providing value to workers in terms of total rewards,
including compensation, opportunities for skill improvement, and job satisfaction.
Participants should recognize that society's interest in non-financial information,
including human capital, influences the evaluation of a company's economic value, andall stakeholders should be able to accurately grasp the magnitude and time frame of thisimpact.

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