The Hitachi Group Value Creation Story

Independent Director* Dialogue

Harufumi Mochizuki
Chairman of the Board
Chair of the Nominating Committee
Chair of the Compensation Committee

Hiroaki Yoshihara
Chair of the Audit Committee

Board of Directors' Activities that Make Us a

Global Leader
Board of Directors
In what ways is the Board of Directors at Hitachi, a company with nominating committee, etc., conducting
managerial oversight?
Director Mochizuki: Hitachi’s directors may have richly diverse backgrounds,

key elements of the mid-term management plan, which include global

but they all are united in their focus on world-class governance. Based on myleadership; social, environmental and economic value; capital allocation; andpersonal perception, if the executive officers were swords, the directors would

capital cost. All related parties, including the Executive Vice Presidents,

function like a whetstone. We hold extensive discussions as if we wereattended the meeting of the Board of Directors held on the day we announced

grinding swords against this whetstone until it wore down, thereby creating

the mid-term management plan, during which we discussed how we should

shimmering swords. I think it is an important vision for us as directors.

inform individuals both inside and outside of the Company regarding the plan.

The Board of Directors narrows topics of discussions down to matters of key
importance, including budgets, financial results, the Mid-term Management

Director Yoshihara: Additionally, in fiscal 2018, we made business

Plan, M&A and high-risk investments. Our discussions are focused, but

judgements on important matters impacting the entire Company after holding

almost every member of the Board has something to say about each matter

active discussions within the Board of Directors and Audit Committee andon the agenda, which frequently results in discussion regarding a single topic

hearing additional explanations from individual executive officers on an

lasting more than an hour. This may be unique to Hitachi, but we sometimes

as-needed basis. These important matters included decisions regarding thehear explanations regarding important matters in advance at Audit Committee

acquisition of ABB’s Power Grids business and the suspension of the Horizon

meetings, where we proactively make inquiries concerning matters we hold in

Project, a nuclear power plant construction project in the U.K. Every time itquestion. Depending on the situation, we sometimes also ask for executive

faces decisions like these, the Board of Directors conducts analyses andofficers to make preparations at Board of Director meetings.

discussions concerning issues such as market trends, business strategies,

We also considered proposals from executive officers when forming theacquisition prices, post-merger integration (PMI) processes and potential risk

three-year 2021 Mid-term Management Plan that we announced in this May.

from a variety of perspectives. In the past, we have encouraged

We discussed these proposals on five occasions spanning an entire year, firstreconsideration of the projects that are inconsistent with our overall strategy or

focusing on their aims and then moving on to their main points before working

lack accountability in terms of economic rationality.

on formulating drafts. This process gave depth to discussions regarding the18

Hitachi Integrated Report 2019

* The “Independent Directors” are the directors who fulfill the qualification requirements to be outside directors
as provided for the Companies Act of Japan and also meet the independence criteria defined by the Company
and those provided by Japanese stock exchanges where the Company is listed.

How was the Board of Directors involved in profitability
improvement and business portfolio revision, two major
themes of the 2018 Mid-term Management Plan?
Director Yoshihara: In fiscal 2018, the final year of the 2018 Mid-termManagement Plan, we achieved both an adjusted operating income ratio of 8%
and record-high profit. When excluding impact from the suspension of the
Horizon Project, we also exceeded the plan’s targets for net income attributable
to Hitachi, Ltd. stockholders and ROA. Looking back on the three years coveredby the plan, I realize that we achieved the targets we set for each year of the plan(“Prepare for growth” in fiscal 2016, “Change gears toward growth” in fiscal 2017means that analyzing Hitachi takes time, which reduces the amount ofopportunity for people to become interested. It would be a waste for us toreduce our own level of opportunity to be positively evaluated by capital
markets and would also be undesirable from a governance point of view. We
have repeatedly discussed and asked executive officers what kind of company
we would like to become and why we engage in the businesses we do. As aresult, revisions to our portfolio have picked up speed over the past few years.

What is the background or the system that allows forfrank and effective discussions?

and “Achieve mid-term management plan to be a globally integrated enterprise”

Director Yoshihara: One reason cited for our ability to conduct frank and effective

in fiscal 2018) and sense a very strong momentum.

discussions is the management team’s wonderful Tone at the Top approach. In

However, these are just results. The Board of Directors holds discussions

particular, I feel that Executive Chairman Nakanishi and CEO Higashihara’s Tone atconcerning topics such as whether the direction the Company is taking is in

the Top approaches are providing us with an environment that encourages frankline with its vision of becoming a global leader or what is necessary to achieveand sincere discussions and enable quick access to information and people within

this vision. When investment, including R&D expenditure, decreases, we

Hitachi. Our top management’s attitude of sincerely working together to create a

conduct intense reviews to make sure that appropriate mid- to long-termbright future based on our fundamental principles regularly appears in their words

growth strategies, including R&D strategies, are not being neglected, even forand conduct. This attitude is what forms the cornerstone of good governance at

departments that are meeting their short-term targets. We also demand that

Hitachi and encourages our independent directors to adopt attitudes that will spareeven departments with particularly high results, such as adjusted operating

no opportunity to support Hitachi’s proper success.

income ratios of 8% or 10%, raise and meet their goals when they are being
outperformed by global competitors. As for less profitable businesses, weDirector Mochizuki: Hitachi’s system of holding annual Board of Director

routinely confirm their progress in terms of improving profitability. Whenmeetings overseas in line with its goal of becoming a global leader may also bebusinesses are continued despite not meeting targets for improved

unique. The goals of these overseas meetings are for all directors to visit locations

profitability, we conduct ongoing follow-ups concerning the reasons for theirimportant to our global businesses together, provide local residents with a deeper

continuation, as well as future countermeasures.

understanding concerning our businesses and raise the awareness of local
employees. During the previous fiscal year, we held this meeting in San Francisco,

Director Mochizuki: Even if we establish plans and implement them perfectly,

where we met with senior management from Hitachi Vantara and other Group

external environments never conform to our expectations exactly. When faced

companies to discuss overseas business strategies related to IT. We also invitedwith changes in business environment, how quickly we can react and how

experts on local circumstances and lecturers from organizations such as thehard we work to meet our initial targets are important factors. Evaluations

World Economic Forum Center for the Fourth Industrial Revolution Japan (C4IR),

concerning this speed, time frames and results are primarily conducted by ourwho provided us with the opportunity to understand front-line trends.

independent directors, who have experience in managing global companies.

Furthermore, we ensure that annual evaluations of the effectiveness of the

Our Board of Directors is characterized by strictness that is unprecedented

Board’s activities are done to completion by holding meetings in which

when it comes to Japanese companies, and I believe that this toughness had

independent directors discuss their results with the goal of improving them.

a significant impact on the improvement of our results.

Although the opinions of individual directors may vary, we feel a strong sense of

Hitachi manages multiple large-scale businesses, so it can be extremely
difficult from the outside to figure out what what kind of company it is. This

unity in that we all share the desire to contribute to the success of Hitachi. I believethat this sense of unity is an essential component of the Board of Directors.

Three Committees
Next, please tell us about the activities of eachcommittee. First, how does the Nominating
Committee select director candidates?

regarding this list. After narrowing down the number of potential candidates, 4members of the Nominating Committee then hold interviews individually witheach of them. The committee then discusses these results before finallyDirector Mochizuki: After thoroughly discussing the ideal composition for thedrafting a list of final candidates, which is submitted at the General Meeting ofBoard of Directors based on considerations of management issues, we try to

Shareholders. Each member of the committee takes pride in Hitachi’s Board

compose images of the individual candidates we believe to be necessary.

of Directors and participates in the establishment of its ideal vision. For theseWe then request that external consulting companies compile a list of
potential candidates based on these images and then hold discussions

reasons, committee members sometimes have different opinions, regarding
which they hold active and frank discussions.

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The Hitachi Group Value Creation Story

Independent Director Dialogue
What about the selection and training of CEO candidates?
Director Mochizuki: The selection of the next CEO is the Board of Directors’
largest mission. The Nominating Committee deliberates concerning the
succession plan after hearing reports from executive officers. First, while
maintaining a common awareness regarding the qualifications that Hitachirequires from a CEO, the Nominating Committee first discusses what kind of
human resources will be needed and at what time. Through discussions andWe are continuously conducting reviews aimed at optimizing our systems as
our management team becomes more diverse, with a growing number offoreign members, and faces changing management issues.

Please tell us about Hitachi’s tripartite audit approach, which
involves close collaboration among the Audit Committee, theinternal audit section and external third-party auditing firm.

individual coaching, the committee narrows down candidates for leadership

Director Yoshihara: The establishment and maintenance of appropriate audit

positions, including CEO, from an unfixed pool of human resources that it

systems are extremely important matters for companies like Hitachi that areattempts to revise at the conclusion of each fiscal year for a period of several

expanding businesses globally. The Audit Committee primarily identifies, assesses

years. This process enables members of the Nominating Committee toand deals with the various risks that face the entire Hitachi Group, which includes

understand the candidates while providing candidates with the opportunity toabout 800 consolidated subsidiaries worldwide. To perform these activities, thelearn a lot from the Nominating Committee. We do not limit our consideration to

Audit Committee, the internal audit section and external third-party auditing firm

the next CEO but also consider subsequent CEOs in the near and more distantcooperate closely to perform their tripartite audit function. This cooperation isfuture. Accordingly, we work to train management from a mid- to long-termbased on mutual trust, transparency and a shared sense of vigilance.

perspective as well, which we do through a variety of efforts, including

Moving forward, Hitachi will aim for further growth overseas. An increase inawareness-raising activities. These activities include lectures conducted by

global growth opportunities also means a simultaneous related increase in

independent directors targeting young employees referred to as the “Future 50.”

potential risk. For this reason, we must be more prepared than ever to verify
and cautiously consider this varied range of risks. Accordingly, it will become

Director Yoshihara: For sure, members of the Nominating Committee areimportant for us to further intensify our tripartite audit approach on a global

deeply involved in Hitachi’s leader development program. Committee

scale. To enable all members of the Audit Committee to more accurately

members hold discussions with candidates for leadership positions regarding

understand global risks, we will provide instructions concerning matters ofactual management issues and contribute to concrete training plans thatpriority to the internal audit section while gathering information from related

involve the creation of opportunities for candidates to acquire actual workbusiness departments and proactively visiting important sites both in Japan

experience through overseas assignments and involvement with various

and overseas, including those of acquired companies, to conduct inspections.

business units. Hitachi promotes diversity as a driver of growth, and thediversification of all levels of its management, in terms of nationality, genderand age, has picked up speed, particularly since Director Cynthia Carroll
joined the Nominating Committee, bringing proactive initiatives along with her.

How does the Compensation Committee makedecisions regarding remuneration?
Director Mochizuki: Our executive compensation comprises basic
remuneration, short-term incentive compensation and medium- and long-term
incentive compensation. We decide payment levels based on considerationsof economic environment, market trends and levels at other companies.
When deciding upon executive compensation that will objectively satisfy the
corporate officers who receive it, we make every possible effort to avoid being
arbitrary, as we believe that it is important for this compensation to lead to thedesire to work toward maximizing Hitachi’s corporate value. Based on thispoint of view, we have been promoting reforms for several years. In fiscal 2019,
we increased the ratio of variable compensation to overall compensation. A
distinguishing feature of this change is the reflection of personal target
evaluations in short-term incentive compensation. Additionally, we adopted a

Director Yoshihara: Members of the committee also request that executive
officers provide explanations regarding other projects that are deemed to carrya high degree of risk. In fiscal 2018, the committee requested explanations
concerning scandals and information security, confirming the validity of
response measures as well as progress on improvement efforts. Whenconsidering projects that have resulted in comparatively large-scale monetarylosses, the committee receives explanations regarding the cause of theselosses and recurrence prevention measures.
As original measures, Audit Committee members hold audit reporting sessions
targeting all corporate divisions and verify the status of initiatives aimed at raising
the corporate value of back-office sections. At least once per year, responsible
parties from about 20 divisions, including human resources, procurement, IT andbrands, provide explanations concerning the execution of these initiatives to thecommittee, which, having gained an understanding of the issues these divisions
face, provides operational advice as well as other support.

growth in corporate value from a medium- to long-term point of view while

How does Hitachi’s tripartite audit approach differ fromsimilar approaches employed at other companies withnominating committees, etc.?

sharing a common perspective with our shareholders. Eligibility for mid-term

Director Yoshihara: I cannot speak for what other companies are doing but,stock-based compensation incentives may be partially reduced depending on

generally, I can say that no matter how magnificent the organizations andhow total shareholder return measures up compared to the TOPIX growth rate.

structures you build happen to be, when it comes to practical implementation, theirrestricted stock compensation system for executive officers with the goal ofproviding an incentive for our management team to work toward continuous

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Other than through on-site inspections, how do you identify risks?

Hitachi Integrated Report 2019abilities to perform tasks and the amount of enthusiasm they put into them often
determine their actual efficacy. The three parties that help Hitachi implement its
tripartite audit approach continuously work earnestly to achieve ideal auditing that ismore effective and efficient. All members of the tripartite audit team work to planand implement audits in a manner that is respectful and disciplined while remaining
keenly aware of each other’s roles. Before, we mentioned our top management’s
Tone at the Top approach; our management team, our finance department andother organizations that receive audits have high levels of understanding andawareness regarding governance, which creates a very cooperative environment.
Each year, the Audit Committee receives feedback from the internal audit section,
the finance department and external auditing firm. It then holds discussions
regarding this feedback and earnestly engages in initiatives aimed at further
strengthening and improving Hitachi’s tripartite audit system and framework.

Could you explain your thoughts regarding future
improvements to the Audit Committee?
Director Yoshihara: We are conducting a variety of ongoing initiatives
aimed at enhancing the effectiveness and efficiency of the committee’s
oversight function. For example, starting from the current fiscal year, we areappointing sector auditors who provide support by constructing tripartite
audit frameworks for their individual sectors of responsibility. This support
contributes to the further enhancement of our governance. We are also
discussing the use of digital technology to raise the efficiency of ourauditing operations, which require a great deal of time. Furthermore, weare continuously aiming to enhance our auditing function by working to
uncover human resources with audit capabilities within the Hitachi Group.
At the same time, we hold training and brainstorming sessions targeting
personnel throughout the Group who are involved with audits.

Looking Ahead
Finally, could you explain the key points of Hitachi’s governance? Also, please tell us about the challenges
you will tackle and the points on which you will focus to meet targets in the 2021 Mid-term Management Plan.
Director Mochizuki: The executive officers and directors that make up our

directors provide is essential toward making sure Hitachi is on track toward

management share common targets and work together to refine their abilities

success.

and maximize their performance as managers. I believe that this sharing ofgoals and teamwork define governance at Hitachi.

In our 2021 Mid-term Management Plan, we have identified three key
challenges we must face to achieve our goal of becoming a true global leader.

To become a global leader, we must always think about what is necessaryFirst, we must further strengthen our hiring and development processes to secureand continue to develop our governance sustainably. In terms of meeting

diverse human resources capable of performing globally. Second, we must build atargets in the 2021 Mid-term Management Plan, the most important task

global ecosystem that will support our digital solutions business, which is primarily

facing the Board of Directors is to reliably follow-up on and support thebased in Lumada. Third, the Hitachi Group must continuously revise andimplementation and progress of the plan.

accelerate the development of its business portfolio so that it will enable the

The Nominating Committee will aim to continuously adjust the composition of theGroup to maximize its synergies on a global scale and function as One Hitachi.

Board of Directors in accordance with our management issues. As for our CEO

We are currently experiencing an era of volatility, uncertainty, complexity andsuccession plan, all members of the committee are focusing their full efforts toward

ambiguity (VUCA) in which changes occur daily and quickly and many

selecting our next CEO. However, starting from this year, we have decided toopportunities and risks exist alongside each other. The Audit Committee isstrengthen the involvement of the entire Board of Directors by including directors

prioritizing further enhancement of our global risk management. For example,

who are not Nominating Committee members in the process. As the Compensation

it is extremely important for us to work to reduce risk by strengthening our

Committee has just implemented new compensations structures, we will continue

monitoring of overseas acquisitions. As an independent director, I will continue

to verify whether they have truly increased effectiveness and whether they

to support and supervise the management team in the execution of its duties

contribute to our goal of becoming a global leader.

in accordance with Hitachi’s founding corporate philosophy of contributing tosociety. These efforts will serve to assist Hitachi as it aims to raise the three

Director Yoshihara: Generally, when people talk about governance, we tend

values (social, environmental, economic) targeted in its 2021 Mid-term

to pay attention to the compliance aspect (e.g., legal compliance). However,Management Plan and become a global leader of social innovation.

the essential purpose of compliance is to fulfill the expectations of theshareholders who have placed their trust in us and to raise our corporate

Director Mochizuki: Both the management environment and the issues facing

value by practicing good management. Therefore, it goes without saying that

our management are continuously changing at a dizzying pace. Under these

Hitachi's governance strategy must involve compliance countermeasuresconditions, ideal governance for Hitachi is continuously changing, presenting a

aimed at preventing issues such as anomalous transactions and legal

perpetual challenge for its management. Moving forward, I will continue toviolations. However, from the perspective of true governance, our directors

support Hitachi in its goal of becoming a global leader by continuously

must hold timely discussions with our management team when they makeworking to improve the management of its Board of Directors and all of its

important decisions aimed at raising corporate value and participate in thecommittees, as well as the systems they decide upon, while maintaining aprocess of implementing these decisions. The support and supervision our

trial-and-error approach.

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