OSG Values

CorporateGovernanceOSG believes it is essential that corporate governance functions be enhanced so that value may be created through appropriate
efforts to address environmental and social challenges as well as effectively utilize capital.
Four outside directors gathered for a candid discussion about the achievements and challenges of OSG s corporate governancereform.

Takahashi：Consolidated operating income is set as a short-term
incentive for determining officers compensation. I believe italso aligns with the perspective held by shareholders. Somecompanies have also started to add an ESG-related metric toindices for performance-linked compensation. However, there
are also concerns that such a metric may appear to be anarbitrary indicator used because it is easily attainable for thecompany. So, I believe we should continue to prudently discuss
ways of reflecting non-financial metrics in incentivecompensation.
Hara：I feel that it is somewhat difficult at present to directly link
ESG efforts to management compensation incentives. ESG
management does not necessarily produce results that have adirect bearing on operating income in the short-term. Also, atthe beginning of the term, numerical targets for each aspect ofESG management need to be set out and a commitment madeto achieve these targets so that such performance may be linkedto compensation. I believe the Board of Directors needs todiscuss how to translate all ESG management initiatives frompolicy management to target management.

Member, Audit & Supervisory Committee
chairperson, Nomination andCompensation Committee

Member, Audit & Supervisory Committee
vice chairperson, Nomination andCompensation Committee

Kunihiko Hara

Outside Directors Expertise and the Diversity ofSkills & Composition of the Board of Directors
Takahashi：Based on my experience as an attorney and outside
director at other companies, I provide advice and supervision sothat the Board of Directors may address risks and contribute tosustainably enhancing corporate value. Independent outside
directors make up the majority of OSG s directors, and I feel that
we work to reflect external perspectives in decision-making. The
composition of the seven board members provides a foundation
that, I believe, sufficiently ensures a diversity of skills among themembers of the Board of Directors.
Hara：Having served as a director for companies in themanufacturing industry and a private research institute, I
currently teach at a university. Making use of my experience inboth academia and corporate practice, I believe I am able to playa role in ensuring OSG s management spearheads a robust
boost in corporate performance as well as the fulfillment andhappiness of company employees. I also think the skills
maintained by each of the seven directors work in harmony
without any overlap, enabling fair and impartial
decision-making.
Yamashita：While practicing at an audit firm and accounting firmwhere I principally provided consulting services, I discussed
corporate internal controls with many managers and saw
firsthand their limitations. I believe the backgrounds of thecurrent outside directors are effective from the perspective ofcomplying with laws and regulations as well as maintaining
internal controls. However, none of the outside directors is acurrently serving manager. From the perspective of the Board ofDirectors diversity, I feel we would be able to have more
extensive discussions about an offensive stance as well as
adopting defensive governance if we had an outside director
who has experience akin to an executive officer, focusing oncorporate management.

47 O S G R EP ORT 2 0 2 3

Value Creation
Sustainability
StrategyCorporate GovernanceCorporateData

Roundtable Talk with Outside Directors of OSG

Realizing an Effective Monitoring Board

Akito Takahashi

Value Creation
Stories

Member, Audit & Supervisory Committee
Member, Nomination andCompensation Committee

Kayoko Yamashita

Member, Audit & Supervisory Committee
Member, Nomination andCompensation Committee

Yoshitsugu Hayashi

Hayashi：At university, my research focused on civil engineeringand transportation systems. I also have an experience serving asan outside director at an electrical equipment manufacturer.
Currently, I am also taking part in activities of the Club of Rome,a private think tank headquartered in Switzerland. I hope myexperience and knowledge contribute to supporting andoverseeing OSG s sustainability management.

Nomination and Compensation Committee s
Functions and Roles
Takahashi：I feel the trust in OSG s founding family and its
unifying force are one of the company s sources of strength. Inthat context, it is by no means easy to stipulate specific criteria
for determining whether there should be a change inmanagement. On the other hand, it is good for the Nomination
and Compensation Committee to present to stakeholders thebasic approach that we are taking. I hope to discuss this issue inmore detail with the other members of the Nomination andCompensation Committee. At the current point in time, I believe
the company s leadership succession plans should first strive toaugment a system capable of raising the level of managerial
personnel, including at overseas businesses, rather thanfocusing on and developing only a small number of specificcandidates.
Hara：It is a plus having the founding family heading up
management not just at OSG but all companies in terms of
maintaining trust with society. In that case, it is important
shareholders and investors are able to see that personnel
decisions are made in a fair and transparent manner. It issignificant that the Nomination and Compensation Committee
engages in discussions to set out its vision and qualities desiredfor senior management worthy of leading OSG, and share theseresults with the management team. Once this information is
widely circulated, then, I think, it will also be positive forprospective executives as it details what sort of qualities theyshould acquire.

Yamashita：Consolidated operating income is a very objective
metric that I recognize as reasonable and easy-to-understand.
Nevertheless, as capital efficiency is called for, it may be worth
considering adding ROE as a metric. I think the question ofwhether to incorporate an ESG-related metric poses the issue of
how objectively and reasonably the metric can be presented. At
this stage, it is too early to incorporate such a metric when theissue is also viewed from the perspective of accountability tostakeholders.
Hayashi：A transition is steadily taking place as society
transitions from the pursuit of economic efficiency, which isexpressed as the ratio of sales to expenses, to the era ofpersonal sufficiency, which emphasizes the ratio of well-being
to the burden placed on our earth. Sustainable growth cannot
be said to be achieved if large quantities of greenhouse gases
are emitted, placing a burden on society and the environment,
despite short-term profits being maximized. We probably alsoneed to consider an OSG-specific metric that will measure social
value as it leads to the generation of new corporate value. If we
can objectively show enhancements in the well-being ofstakeholders including employees, then I think such metric will
also be effective as a long-term incentive metric for executive
compensation.

Audit & Supervisory Committee s
Functions and Roles
Yamashita：One non-executive inside director and four outside
directors sit on the Audit & Supervisory Committee. In order toevaluate whether appropriate risks are being taken in overseas
M&A and other transactions, the committee would be able tomake more multi-tiered judgments if the committee included
among its members a non-Japanese individual with knowledge
about global management or currently serving manager as I
mentioned earlier in the discussion. There are also challenges inauditing subsidiaries overseas, so the global audit structureneeds to be enhanced through closer coordination with theinternal audit department.
Takahashi：There might also be aspects that are difficult foroutside directors to directly grasp about the degree of overseas
group companies enthusiasm for internal controls. I feel theOSG Group needs to first build trusting relationships with local
managers and, at the same time, maintain a system that checks
their functions. Along with improving internal audits, there may
also be room to consider incorporating financial and legal AI
tools that make it possible to detect signs of fraud in addition toemploying external audits.
Hara：As an outside director that is also a member of the Audit &Supervisory Committee, I believe I am able to function fully as
an advisory board member. However, if I limit my role only toadvising the management team, then investors may view that asa sign we have been unable to extricate ourselves from theadvisor mindset. I feel we constantly need to be aware of this.
With regard to audits of overseas group companies, we need tocontinually monitor them so as to uncover any inconvenient
truths and share these not only with the Board of Directors but
also employees. Actively sharing and disclosing potential risk
factors will deter wrongdoing and strengthen internal controls.
Hayashi：We also need to think about appointing anon-Japanese individual capable of expressing their views froma perspective different from the Japanese way of thinking or aJapanese individual who has been educated outside of Japan toserve as an outside director capable of conducting global audit
work. If AI tools or other devices need to be used to conduct
audits, then that individual would also be required to haveknowledge about IT and AI in addition to auditing expertise.

Capital Efﬁciency and Growth Strategy
Takahashi：While the necessity is fully understood of further
raising awareness about the cost of capital and maximizing
corporate value, I believe that what OSG, a cutting tool
manufacturer, requires first and foremost to continue to steadily
perform its work is to determine daily what customers need andmake several minor refinements that will end up improving ourproducts. To take off only in pursuit of short-term profits by, forexample, drastically reshuffling the company s businessportfolio or making an extreme change is not something, I think,that would instantly fit within OSG s current culture. Under suchcircumstances, I believe Repurchase of Shares by issuing
Convertible Bonds, which were recently issued, and treasury
stock acquisition are avenues for OSG to respond in a way thatshows we are conscious of the cost of capital.
Hara：PBR, a metric for assessing corporate value, is essentiallyan indicator measuring the tireless efforts of management. ROE
may conversely weaken a company s financial standing if it
exceeds a certain level, so I am wary about feeling optimistic or
pessimistic in response to such figures alone. Basically, I believe
it is important to always focus on creating high-value added
products and services, which is the right path for a company totake. The development team needs to talk with the sales
department to set out a clear R&D policy and, at the same time,
make an active effort to develop new products and services.
Yamashita：The purpose behind issuing Repurchase of Sharesby issuing Convertible Bonds was to improve ROE. But, if that s
all it is, then any effect will naturally diminish after a certain
period of time passes. I believe that, as a manufacturing
company, maintaining overwhelming product appeal andcontinuously supplying the products society demands will resultin sustainably generating value that exceeds the cost of capital. I
am in favor of investing more in researching and developing
new products and services.
Hayashi：ROE is also an important metric that affects PBR. In
addition, the ability to offer solutions to environmental andsocial challenges, which is also required by the TCFD and TNFD
disclosure frameworks, significantly affects corporate value. At atime when the true worth of sustainable corporate activities isbeing called into question, I hope the positive effects that
products and services have on the environment and society will
be actively presented and communicated to shareholders,investors, and all stakeholders as being added value that OSG
Group provides.

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