DLOGUE 01

Approach to Transcending Dichotomy between
ROE and ESG by Harnessing the Power of Business    The following is a discussion between Professor Kunio Ito, who advocates ROESG, a new
integrated indicator for achieving high levels of ROE and ESG in the pursuit of sustainableimprovements in corporate value, and MARUI GROUP President Aoi on the topic ofco-creation sustainability management for transcending dichotomies.

Kunio Ito
Specially Appointed Professor
Graduate School of Business Administration,
Hitotsubashi University

Poison Contained in ROE and ESG
Aoi: MARUI GROUP’s 2050 Vision is “Harnessing thepower of business to build a world that transcends
dichotomies.” Professor Ito, today, I would like to ask
you about how we can transcend the dichotomy
between ROE and ESG.
Ito: That is a task that must be addressed through apractical approach at the management level. In 2014,
I published the Ito Report, which cast light on the lowemphasis placed on capital productivity by Japanesecompanies and encouraged companies to target ROEof at least 8%. Today, the average ROE of all companies
listed on the First Section of the Tokyo Stock Exchange
is on the cusp of reaching this level. However, the focus
on ROE can poison other areas. There are those managers who truly understand the essence of ROE andpractice management accordingly. However, thisemphasis on ROE threatens to give rise to those managers who focus only on short-term numbers andsometimes look to inappropriately adjust profits basedon this limited perspective. An emphasis on ESG also
carries such poison in its potential to become an
excuse for low capital productivity. I think it is best toharmonize ROE and ESG through a company’s corebusiness activities. Dialogue is a powerful tool for overcoming this dichotomy. President Aoi, I understand thatyou are advocating the power of dialogue to drive

Hiroshi Aoi
President and Representative Director
Representative Executive Officer, CEOMARUI GROUP CO., LTD.

co-creation. Dialogue presumes differences of value,
seeking to bridge the gap caused by these differences
through extensive and ongoing communication aimed
at determining from where these differences arise.
With this belief, I find that various parts of the management stance of MARUI GROUP and of you yourself
resonate with me.

Dichotomies Arising from Differencesin Timeframes
Aoi: MARUI GROUP is generally evaluated by investors
from the perspective of the traditional retail sector,
resulting in many questioning our actual industry andhow we should be evaluated. However, there are in factmany other companies for which the industry is unclear.
Ito: It is currently impossible to box companies into asingle industry or sector. Given this reality, companies
should stress in dialogue the fact that they have a large
staff of talented individuals capable of creating newbusinesses and business models that do not conformto conventional industry boundaries. Effective dialogue
is thus about how best to communicate that, fundamentally, employees are acting as the value creators intheir companies.
Aoi: It is common practice for personnel expenses andhuman resource investments to be recorded as costs
instead of as assets for accounting purposes. I thinkthat this practice represents another textbook example

Kunio Ito
Graduating from Hitotsubashi University in 1975, Kunio Ito later became a speciallyappointed professor at this university. Professor Ito has been chairman of the Ministry ofEconomy, Trade and Industry’s “Competitiveness and Incentives for Sustainable Growth:
Building Favorable Relationships between Companies and Investors” project. In addition, theIto Report integrated report published in 2014 garnered a great amount of attention, evenoverseas, elevating Professor Ito to the position of a leading figure in corporate governancereforms in Japan. He has written various works on topics including management for overcoming crises, new corporate value evaluation methods, and accounting of intangible assets.
Ito Report 2.0 (Japanese only)
www.meti.go.jp/press/2017/10/20171026001/20171026001-1.pdf

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It is important to recognize that transcending
dichotomies is not the same as compromising.
Rather, transcending the dichotomy between
Vector A and Vector B requires the establishmentof a third Vector C.
Kunio Itoof a dichotomy. The more investments a company
makes, the more it seems that their profits decline.
At the same time, the more a company invests, the more
it will be able to generate value over the long term.
Ito: Baruch Lev, one of the writers of The End ofAccounting and the Path Forward for Investors andManagers, criticizes our current accounting practices
for how they record R&D expenditures and otherinvestments in intangible assets as expenses, inviting
bearish economies by encouraging managers to limit
such investments. I believe that differences in timeframes, between short-term and medium-to-long-term
perspectives in this case, are a source of dichotomies.
There is no clear answer on how to transcend thisdichotomy, but I think that a good start lies in being
able to effectively explain how one’s company is prefacing management on a medium-to-long-term perspective while doing their utmost to achieve success in theshort term.

Selection of Managers as First Stepin Effective Corporate Governance
Ito: If a manager who will only hold their position for
four years attempts to postulate on their company’s
medium-to-long-term outlook, investors will perceive it
merely as idealism or as an official stance. This is why
the first step to effective governance lies in the selection of a company’s manager.
Aoi: I think it is crucial for Japan to develop corporate
governance frameworks based on timeframes that

20enable managers to commit to fulfilling their duties
over the long term.
Ito: You are exactly right. To add to this point, managers
need to have experienced setbacks in the past if they
are to hold their positions over the long term. A personthat has never experienced setbacks will crack underpressure should a crisis occur. Of course, governancesystems will also need built-in frameworks for dismissing managers that do not exhibit satisfactory performance. What is perhaps most important of all is thedegree to which a manager is self-driven. In otherwords, governance should involve others monitoring
the extent to which a manager can exercise a selfdriven approach.
Aoi: I am the eldest son of the eldest son of ourfounder. When I took up the mantle of president, I thus
assumed that I would be in this position for around 20years. This assumed tenure has greatly influenced myactions as president. Faced with a management crisis
that had lasted seven years, a commitment to moving
forward welled up inside me when I realized that I still
had more than a decade to go. Whenever I would visit
the founder’s grave during this period of adversity,
I could not help but think that, if I were to bring about
the end of the Company, my ancestors would haunt me.
The pressure was enormous.
Ito: When a manager inherits a business from a family
member, it is common for them to be able to effectively
micromanage, being aware of the subtle inner workingsof the company, while also acting based on exceptionally long timeframes. In this manner, these managers
are often able to singlehandedly overcome

dichotomies. My research organization is currently performing pilot tests on ROA and ROIC. On average,these metrics peak when managers have a term of 10to 11 years. If a manager recognizes that they will not
be around to reap the benefits of structural reforms,
they will simply refrain from those reforms.
Aoi: This is why it is important for presidents to beappointed when they are relatively young. A president
appointed in their 30s or 40s will have time to failwhen they are still new and to learn from and overcome
this failure to succeed.
Ito: A president appointed while younger will have time
to build a track record of success that they can takewith them to other companies. This will also create anecosystem in which such individuals are able tobecome investors that nurture the growth of start-up
companies. Conversely, presidents that assumed theirpositions when older will have limited options for after
they leave that position, which may lead them tobecome complacent. In this manner, age is important.
However, this also presents another dichotomy, making
it difficult to determine the appropriate weight to placeon age in the selection criteria for managers.

ROESG Indicator Integrating ROE and ESG
Aoi: You yourself lauded 2019 as the first year of initiatives based on the recommendations of the Task Forceon Climate-related Financial Disclosures (TCFD).

Hoping to adopt these recommendations, we decided
to conduct a scenario analysis based on the TCFD recommendations. Do you think that the TCFD will serve
as a catalyst for the integration of financial and nonfinancial information?
Ito: Scenario analyses based on the TCFD recommendations include both quantitative and qualitative perspectives. As the qualitative perspective pertains tonon-financial information, these analyses will naturally
lead to information disclosure that incorporates bothfinancial and non-financial information. I am currently
researching management based on ROESG, an indicator that integrates ROE and ESG. However, even if weunderstand this concept, it will be a difficult andunprecedented undertaking to actually incorporate thisconcept into management. It is important to recognizethat transcending dichotomies is not the same as compromising. Rather, transcending the dichotomy
between Vector A and Vector B requires the establishment of a third Vector C.
Aoi: That is why sustainability is a field that allows us toexercise the greatest creativity and is therefore among
the most motivating and interesting fields.
Ito: The underlying principle of sustainability is a desire
to evolve, whereas being a going concern only means
continuing to exist. These two concepts are therefore
completely different. Japan places too much importance on the simple continuation of companies.
Sustainability, meanwhile, entails continuing to existing
while evolving, and it is corporate governance thatunderpins this pursuit.

This assumed tenure has greatly influenced my actions aspresident. Faced with a management crisis that had
lasted seven years, a commitment to moving forward
welled up inside me when I realized that I still had morethan a decade to go.
Hiroshi Aoi

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