Special Interview 3Interview with Tadaaki Sugiyama, Executive Officer, Senior Vice President, Legal & Compliance,
Kao Corporation

Kao Corporation Was Awarded Grand Prize forBest Corporate Governance in Japan in 2017
By Japan SPOTLIGHT
Corporate governance reform is considered an engine to promote Japanese business firms’ earning
capacity. The growth strategy in Abenomics defined this as one of the key structural reforms of Japanesebusiness and industries. The adoption of the Corporate Governance Code by the Tokyo Stock Exchange in2015 was aimed at enhancing transparency of management and encouraging a company to maximize
shareholders’ interests through Return on Equity (ROE)-oriented business management. Three years after
the adoption of the code, what consequences and changes have Japanese companies seen?
The Japan Association of Corporate Directors, an NGO reviewing the outcome of corporate governancereform by selecting the company with the best corporate governance performance each year in an event
titled “Corporate Governance of the Year”, awarded Kao Corporation, a Japanese cosmetics and toiletrycompany, as the “Winner Company” (second best) in 2016 and as the “Grand Prize Company” (best) in
2017.
Tadaaki Sugiyama, executive officer and senior vice president (legal and compliance) of Kao
Corporation, kindly responded to our questions as below.
(Interviewed on July 28, 2018)

Introduction

be outsiders. Since the beginning of
the 2000s after these revisions of
JS: You are now not only
the Companies Act, Kao has beenheading Kao Corporation’s
discussing how it would recruit
legal and complianceoutside directors and outside audit
section but also working
and supervisory board members
for the Association of
who can be well integrated at the
Corporate Legalboard meetings and how they could
Departments, an NGO
realize their maximum potential.
working on corporate legal
Another big issue of corporate
issues, as chairman.
governance is the compensation
Could you briefly tell us
system for directors. Kao devises its
about your involvement incompensation system for the
corporate governancedirectors working as executive
Tadaaki Sugiyama
related issues so far?
officers and other executive officers
to reflect not only the current
Sugiyama: I have been working for Kao for nearly 40 years. Whenbusiness term but also mid- to long-term achievements. Kao
I joined the company, there was no technical term like “corporate
introduced Economic Value Added (EVA) as one of its management
governance”. My job in the company’s legal section then was toindicators in 1999. We made EVA be reflected in compensation foradminister board meetings and general meetings of shareholders inexecutives and at the same time abolished their retirement benefits
accordance with the Companies Act, and thus trying to keep goodand introduced stock options to maintain consistency between
relations with the shareholders. Then, after a number of revisions ofexecutive compensation and mid- to long-term shareholder benefits
the Companies Act in the 1980s and 1990s, in the domain of corporate
and perspectives. Kao has been working on reform of executives’
governance, the function of audit and supervisory board members wascompensation system since the early days. In this reformed system,
strengthened around the year 2000. Then the term of office of the
we assess the performance of our management team to see if they
audit and supervisory board members was extended from two years,
create sufficient economic value from the capital entrusted by ourthe same as for directors, to three, then to four years. In the case ofshareholders and reflect this assessment in their compensation.
large companies, they were obliged to have more than three audit andReform of corporate governance can be compared to a big tanker
supervisory board members and more than half are legally required tounable to make a quick turn. We believe if we want to make a turn 10
32 Japan SPOTLIGHT • September / October 2018https://www.jef.or.jp/journal/

Special Interview 3
kilometers from here, we must start to steer this big ship right now.
Kao’s two decades’ efforts since the 2000s for the reform of corporate
governance as a base for its development and continuous efforts evennow helped us to receive the Grand Prize Company in 2017, I believe.
However, I do not think we should be satisfied with the current
corporate governance of our company. Today’s business environment
will change tomorrow. Even though our governance system was thebest when we received the award, it will need reform again in a year’stime. We could fall behind the trend if we stay with the same
governance next year. In Kao’s corporate philosophy which we call
“The Kao Way”, we have “continuous improvement and innovation” as“value”. In the light of “The Kao Way”, I believe we will need to catch
up with the continuous improvement and innovation in the businessenvironment and adjust ourselves to them. Corporate governance isno exception. Kao’s president, Michitaka Sawada, is always saying “Weneed to transform ourselves to drive change.” Kao considers corporate
governance as a means to achieving a goal and not as a goal itself. We
have a mission to strive for the wholehearted satisfaction andenrichment of the lives of people globally and we believe one of theimportant means to achieve it is our corporate governance.

What Is “The Kao Way”?
JS: “The Kao Way” (shown in the diagram) seems tocontain a long-term business perspective to achievea long-term business goal. However, I think the
majority of Japanese companies are today thinking
and behaving only with a short-term perspective.
Could you please tell us why Kao is different fromthe others?

Sugiyama: Tomiro Nagase, the founder of Kao Corporation, came toTokyo from his home town in a rural area in 1887 with the ambition ofachieving success in business, and started a Western sundry goods
dealership. At that time, Japanese soap was cheaper than imported
soap, was low in quality and when women washed their face it caused
them pains. Also, imported soap was very expensive and difficult toget. Nagase decided to produce high-quality soaps as good asimported ones to meet the needs of Japanese women. This was theorigin of our company. This spirit to do the best to produce what
people need most on every occasion has not changed.
After World War II, while insanitary conditions in civic life continued,
under the slogan “Clean lifestyles are the foundation of a prosperous
society”, Kao restarted production of soaps, shampoos and detergentsby using its wisdom of cleanliness and technologies from its pre-war
soap production. With the spread of washing machines, our laundry
detergents, having matched the development of washing machines,
became popular and Kao was successful in achieving explosive salesof these products and established a basis for today’s businessdevelopment.
Kao’s functional drinks named “Healthya”, a Food for Specific HealthUse, were born exactly in the same context. The company’s technology
to make body fat easy to be burnt inside the human body by using the

The Kao Way (corporate philosophy) Image: Kao Corporation“The Kao Way” is the foundation of Kao Group business activities through Yoki-Monozukuri
from the consumer/customer’s perspective. https://www.kao.com/global/en/about/policies/kaoway/green tea ingredient catechin and prevent it from accumulating in the
body was found to be a useful remedy for contemporary diseases
caused by accumulated body fat. We are developing to meet people’s
needs by taking advantage of our existing technologies over time andI believe these efforts are leading to Environmental, Social andGovernance (ESG) or Corporate Social Responsibility (CSR).
On Feb. 1, 2018, when Kao announced its business results,
President Sawada said, “We are proud of dealing in ESG from theperspective of creating a sustainable society. I had been thinking up to
now that investment in ESG from our profits would be at our own cost,which we would think to reduce as much as possible, but now I foundthat investment in ESG must be nothing other than our investment for
Kao’s sustainable growth.”
JS: Having heard about your founder, I think since its

foundation Kao has been pursuing growth byfulfilling CSR. Corporate governance should be themeans to achieve this. The spirit of today’s
corporate governance reform in Japan is to enhancetransparency of management and also achieve awider perspective on business and management by
taking account of the views of outside directors.
“The Kao Way” seems to share this spirit.

Sugiyama: Yes, you are right. Our ancestors in the Meiji Era (18681912) in Japan must have been dreaming about their personal
success and promotion, but at the same time they must have been
seriously thinking about how they could make a contribution to theirnation under development. Kao’s founder, Nagase, was one of thosebusinessmen. And that has become the company’s philosophy andthe management team has been seriously thinking about theircontribution to our society and nation through their own resources
and capacity. This has been reflected in our selection of outside
directors. At certain times, we have asked global business experts tobe outside directors who could provide us with advice on how topromote our sales worldwide, but on other occasions we have asked
Japan SPOTLIGHT • September / October 201833

Special Interview 3

experts on maintaining product safety to be outside directors who
could provide advice on this. We are always thinking about what weneed now or will need in three or five years’ time in selecting outside
directors.

Role of Outside Directors
JS: Japanese companies today have truly started

thinking about fully utilizing outside directors’knowledge and capacity to meet business needs as
efficiently as possible, though in 2015 when the
Corporate Governance Code was adopted they
considered it just as a formal obligation and not as a
trigger for management reform.

Sugiyama: I truly believe they are moving in that direction. In the last
revision of the Companies Act, there was a suggestion that the
introduction of outside directors should be obligatory by law. However,I believe that companies following such an obligation as a formality
will not be able to enjoy fully the merits of outside directors and thoseoutside directors in such companies could not perform to their fullpotential. We proposed at that time that we should adopt a policy of
increasing the number of companies inviting people as outside
directors who could make an active contribution to their management,
rather than just making the introduction of outside directors for eachcompany obligatory by law. That would be far more effective inachieving good business performance.
JS: Kao has six outside directors and audit andsupervisory board members in total. They are allcommunicating and collaborating well with the otherboard members as well as among themselves. Does
the president himself enjoy talking informally withthe outside directors and are the board meetingsorganized in an informal and friendly manner?
Sugiyama: Kao’s current board meeting consists of seven directors
and five audit and supervisory members — a total of 12 members.
Among directors, four are insiders and three are outsiders. Among the
34 Japan SPOTLIGHT • September / October 2018

audit and supervisory members, two are insiders and three areoutsiders. Thus among the 12 board members, the proportion ofoutsiders is 50%. Among those outside directors and audit andsupervisory members, we have members with a wide range ofbackgrounds such as a former chairman of a bank, a businessexecutive of a private company, and a business management
consultant as outside directors, and a business executive with acertified public accountant qualification and a lawyer as outside audit
and supervisory members.
Since Sawada became president, we have further reduced thenumber of board members, and we have organized our board
meetings in an extremely small meeting room where the board
members can talk to each other closely across the desk. Seating has
recently been changing each time except for the chairman’s seat. Thus
each time their neighbors at the table are different. So, we are making
our meetings and discussions more spontaneous. Though thecompany does not have to set any particular meeting only for theoutside directors, the current outside directors and the former ones
spontaneously get together during the lunch break at the board
meetings on some occasions or gather at one of the outside director’s
office. We respect such spontaneous initiatives and we have very
active and good discussions among our board members. However, if
such spontaneous initiatives would not work in the future, thecompany might have to set a place for meetings.
JS: Compliance or corporate governance forpreserving the quality or safety of products seems
to be crucial as well. How do you deal with thoseissues in Kao?

Sugiyama: One issue is management itself and another is a company’sbusiness operations created by the management. Kao has adopted a
global matrix management system. On the vertical axis, we havebusiness divisions, and horizontally we have function divisions such aslegal, accounting or personnel affairs. The heads of the businessdivisions are responsible for the business performance and they may
have a tendency to just focus on results. We could prevent minimum
potential risks in advance by checks by the functional divisions onequal terms with the business divisions.
For example, I am the head of Legal and Compliance and mysubordinates would not mind what the heads of the business
operation sections think about our views of the business operations
when we check them from the legal and compliance perspective. Thissystem would work well in maintaining internal control but thedecision-making and its implementation process would be retarded bydual decisions in the business and functional divisions. Retarded
decision making would discourage the competitiveness of a company.
We would need a balance between internal control and efficiency tobeat the competition in this regard.
The other issue is the function of a tripartite auditing framework.
They are integrated as our defense line against inappropriate behavior
in our matrix management structure, namely auditing in the businessdivisions, auditing in our functional divisions in charge of internal

Special Interview 3
control, and finally our internal audit.
JS: It would need strong leadership by the top

management to balance the need for internal control
and the need for speedy decision making toincrease competitiveness, wouldn’t it?

Sugiyama: At Kao, we consider internal control including complianceas a base for promoting business operations. You must not balancecompliance and business. It needs strong leadership by the top
management.

Other Issues Kao Is Pursuing
JS: Good work by the ad hoc committees discussing

nominations of directors or their compensation inyour company was also referred to as a reason fort h e G r a n d P r i z e i n 2017. H o w w e l l a r e t h e yfunctioning?

Sugiyama: The Companies Act defines companies with committee
structure governance and those committees are a Nomination
Committee, Compensation Committee and Auditing Committee. Kao is
not a company with committee structure governance, but a company
with an audit and supervisory board. However, we have spontaneously
adopted a Committee for the Examination of the Nominees for the
directors and a Compensation Advisory Committee as supplementaryfunctions to the board meeting. We have been explaining to ourforeign shareholders holding nearly 50% of the company aboutcommittee structure governance and thus we do not need to transform
into a company with a committee structure. While those twocommittees meet three or four times a year, the first one or two
meetings of the Committee for the Examination of the Nominees for
the Members of the Board of Directors are devoted to discussions on
the desirable size and structure of the board members, such as thenumber of the board members, the percentage of men and women,
the members’ backgrounds etc., to fulfill the board’s responsibility andachieve what is expected upon them. After that, they nominate specificcandidates. The process works very well, probably thanks to thecooperative leadership of the president and the board chair, an outside
director.
JS: A company needs to raise its sales or profit ratio

in the short run, while pursuing long-term goals
such as social responsibility or long-term
contributions to society as mentioned in “The KaoWay”. I guess there needs to be consistency
between the short-term goals and the long-termgoals.

Sugiyama: Yes. We announced a four-year mid-term business plancalled “K20” in 2016. This is the plan for 2017-2020 in order toachieve a desirable business performance in 2030. In this plan, we

defined three business commitments: one is to foster a distinctive
corporate image; the second is to create profitable growth; and thethird is to return benefits to stakeholders, including not only ourshareholders but also our employees, customers and society. We are
now standing on the threshold of being an authentic global company.
We have established a certain business presence in Asia, but not yet inother regions. In order to be a full-fledged global company, we willneed to establish our distinctive corporate image anywhere in theworld. That is our first goal and this will come first before any
numerical target. This is our uniqueness. We have specific numericaltargets such as a 5% annual increase (CAGR) in net sales and a 15%
operating profit ratio to realize the first goal. The primary strategy forachieving these targets is all the members’ commitments to the goal
including the management in running the company with “integrity”
which shows in “The Kao Way”.
JS: Are you also working on promoting health carefor the employees, another important stakeholder?
What kind of projects are you working on in thisregard?
Sugiyama: Yes. One example is that we promote our “GENKI (goodhealth) Project” supporting each employee’s health care under the
responsibility of the managing executive officer who is in charge of
Human Capital Development. This is, I believe, a kind of long-term
investment for the future, just like investment in ESG. If our employees
are in good health, their work performance will stay high and ourhealth insurance expenditure on our budget would be curbed.
JS: I am impressed by the casual and friendly

atmosphere in your company. What about yourengagement to promote diversity in your company?

Sugiyama: When we introduced outside directors in 2002, we invited
Ms. Sakie T. Fukushima, a personnel affairs consultant, to be one ofthem. However since then, as there are very few female executives inthis country, we have not been able to keep female directors, though
we have constantly made them offers. Whether they accept being
board members or not is another story. We are not in a situation where
we can see a significant increase of female executives. The female
employees who joined our company at the time of the implementationof the Equal Employment Opportunity Law are now around the age of50, but unfortunately they may not necessarily have been well trained
as managers. However, in the light of my analogy about a tanker thatwould need to be steered far in advance in order to make a turn later,
I think this is a crucial moment for specific action to achieve truly
substantive equal opportunities between men and women in thinking
about our future and how we can fully utilize diversified humanresources.

Written with the cooperation of Naoko Sakai who is a freelance writer.

Japan SPOTLIGHT • September / October 201835