Discussion between Independent Outside Directors

[ Image ] Discussion between Independent Outside Directors

Ongoing Creation of Value through True Digital Transformation Shaped by Discussion

The following is a discussion between Hiromichi Shinohara and Naoko Yoshizawa, new independent outside directors appointed at the General Shareholders’ Meeting held in June 2021, in which they assess the current state of corporate governance at Yamaha and their expectations for the future of the Company. This discussion took place in June 2022, one year after their appointment.

How has your view of Yamaha changed since you were appointed as an independent outside director and what new discoveries have you made about the Company?

Yoshizawa: My time at Yamaha has deepened my respect for the Company’s dedication to pursing the utmost limits of sound and the technological might that underpins these efforts. I have had the opportunity to tour piano and wind instrument factories, and these tours have allowed me to see, first hand, the commitment to sound and the technological excellence of the employees who stand on the production floor. I even saw an employee play an instrument that they had made, and was struck by the beauty of the tones it produced.

Shinohara: I think that Yamaha is a very diligent company that exhibits a sense of integrity in its approach toward product creation. Before taking up my position as director, I had figured that discussions at Board meetings might be a bit artistic or involve sudden bouts of inspiration. Perhaps this is because Yamaha is a company that deals in artistic products that based on aesthetic tastes. However, the truth was just the opposite: Yamaha takes an extremely logical approach toward its business.

There are some striking differences between Yamaha’s business and the telecommunications field, where I have worked for years. For example, in the telecommunications field, we provide value to customers in the form of efficiency and convenience. The value Yamaha supplies, meanwhile, comes in forms like joy, fun, and inspiration. As such, the approach toward setting targets and defining indicators is completely different.

Yoshizawa: I think is it wonderful that Yamaha has a clear vision of the value it provides to customers through its technologies: fun. I built my carrier at a technology company, where research and development was our business. For this reason, I admire how Yamaha has a well-defined purpose in mind for the technologies it develops.

Given what you have seen over the past year, how would you assess the current oversight functions of the Board of Directors and its effectiveness?

Yoshizawa: Yamaha has installed the frameworks it needs for corporate governance by means of the establishment of Companywide committees for discussing specific themes such as risk management and sustainability. More impressive still is the strong sense of commitment that management exhibits toward making Yamaha a better company through effective corporate governance. This commitment was apparent in the discussion process for formulating the new medium-term management plan. We spent a lot of time talking about activity policies and themes. When it came time to identify material issues and decide how to express these issues, Board meetings saw a flurry of opinions on how to communicate the Company’s priorities and the underlying thinking of management to external stakeholders.

Shinohara: The breadth of opinions that come up at Board meetings is a reflection of the diverse backgrounds of directors and how these diverse directors are utilizing their respective expertise and experience in oversight. If I were to point out an area with room for improvement, I would have to cite the need for an increased number of women on the Board. In addition, I think it might be necessary to reconsider the skill set that will be required on the Board to facilitate the pursuit of ongoing growth. Today, it is common for companies to disclose a “map” that highlights their directors’ skills. However, the majority of these skill maps are populated by somewhat “standard” skills, such as legal, financial, and R&D insight. It seems like the skill sets required by companies should change based on their growth stage or their industry.

Yoshizawa: I feel there is a need for Yamaha to discuss exactly what type of diversity it requires most. At the moment, Yamaha’s Board of Directors is only comprised of individuals from privatesector companies. I therefore think that it might be possible for the Company to gain a completely new perspective if it were to invite someone with experience in government agencies to join the Board.

Shinohara: Another possible improvement that I would like to mention in terms of improving effectiveness by facilitating deeper discussion would be to clearly identify those agenda items needing thorough discussion and those for which it is enough for a consensus to be reached and approval to be issued. In fact, there may even be those items for which a single formal Board meeting will not suffice. In these cases, there might be a need to take a flexible approach, like agreeing to continue discussions at the next Board meeting or arranging another forum for discussion.

Yoshizawa: At the moment, the Board is responsible for comprehensive examination and monitoring activities of all business divisions and committees. However, given that time is finite, an overly comprehensive range of responsibilities can cause a failure to get to the heart of issues that require substantial discussion.

Shinohara: I also want to make a request with regard to the briefing materials that are distributed in advance of Board meetings. We independent outside directors look over the items contained in these documents and prepare to the greatest of our ability before meetings. However, as our understanding of Yamaha is not as robust as that of internal directors, there are some things that we cannot fully comprehend from the briefing materials alone. With some more careful planning, I think these materials could be made into even more effective tools for facilitating understanding, and thus contribute to more meaningful discussion.

Yoshizawa: It is not enough to simply explain the details of the item at hand; we need to know the steps that led up to the current situation, the decisions examined during this process, and what type of objections or alternatives were raised. An understanding of the background and process of these matters can lead independent outside directors to adopt new approaches.

[ Image ] Hiromichi Shinohara

I feel confident that Yamaha is a company with the power to deliver the value sought in the current era, which is exemplified by concepts like well-being.

Hiromichi Shinohara

What are your thoughts regarding the Nominating Committee, the Compensation Committee, and the Audit Committee?

Shinohara: Only a year has passed since I became a member of the Nominating Committee and the Compensation Committee. Over this year, discussions at meetings of the Nominating Committee have centered on succession planning while we primarily talked about how best to link compensation to performance at meetings of the Compensation Committee. An important part of succession planning is the establishment of nomination processes. However, it can take time for people to develop. There is thus a need for discussions and preparations from the perspective of cultivating future leaders.

Yoshizawa: Yamaha has adopted a management approach of creating value through sustainability. To effectively implement this approach, the Company will need to foster people who can promote growth by transforming sustainability into value.

Shinohara: Discussions on compensation were not just about how to evaluate to degree of progress toward financial targets; we also talked about how to reflect Yamaha’s management approach of positioning sustainability as a wellspring of value in compensation. These discussions eventually culminated in the decision to include the degree of progress toward non-financial targets, specifically those pertaining to the Company’s material issues and the related progress, into the evaluation criteria for performance-linked compensation. These new non-financial targets were implemented in conjunction with the launch of the new medium-term management plan.

Yoshizawa: The Audit Committee is tasked with overseeing the Group as a whole. As a member of this committee, I try to provide advice for creating more effective and efficient management frameworks. For example, I might propose that we take the best practices that have been implemented in the efforts of subsidiaries to strengthen their specific governance systems and apply these on a Groupwide basis. Oversight for the purpose of ensuring appropriate operations includes turning the spotlight to the root of issues troubling management and frontline operations in order to help find resolutions to these issues. Information is imperative to this type of oversight. Luckily, I am able to obtain a great deal of information from audit officers, the Audit Committee’s Office, and the Internal Auditing Division. I also have opportunities to observe frontline operations, which further arms me for effective discussion of such issues. My interactions with audit officers are particularly beneficial as the close communication lets me get answers to any questions I might have on matters that are unclear from briefing materials.

[ Image ] Naoko Yoshizawa

I think is it wonderful that Yamaha has a clear vision of the value it provides to customers through its technologies: fun.

Naoko Yoshizawa

What are your opinions of Yamaha at the moment based on your backgrounds in digital technologies and digital transformation?

Yoshizawa: Yamaha already has a strong technological foundation for promoting digital transformation, particularly when it comes to AI technologies. However, this strength presents the risks of the Company becoming overly preoccupied with technologies and thus forgetting the transformation part. To prevent this from happening, we probably need to engage in more discussion on exactly how Yamaha will seek to create value going forward. Yamaha aspires to deliver music and musical instruments to people around the world and to enrich people’s lives through this process. As it already has a clear goal in mind, all that is left is think about how to use technologies to accomplish this goal.

Shinohara: I fully agree. Yamaha has already installed the necessary data linkage functions, such as customer information management systems and supply chain management systems. It is thus now at a stage in which it needs to look at how it will utilize the data gained through these systems. However, what the Company needs to be careful about is avoiding putting the cart before the horse by focusing too much on what can be accomplished through data usage. The proper course is to set a goal, determine what data is needed to accomplish that goal, and then think about with whom coordination should be pursued to collect said data.

Yoshizawa: A good example of Yamaha’s goals could be seen in the music schools the Company is currently developing in more than 40 countries and regions around the world. I understand that Yamaha started building music schools some 70 years ago. The original goal of these activities was to make the joy of instrumental music performance, previously a thing only available to the wealthy, something that can be enjoyed by everyone. This in itself was a form of transformation and is connected to the corporate value of Yamaha today. With this history of transformation, I am sure that Yamaha is equipped to succeed in digital transformation.

What topics do you feel need to be addressed at Board of Directors’ meetings with regard to the new medium-term management plan?

Shinohara: It is crucial to pursue new heights of competitiveness in existing product lines, no matter how the operating environment might change. Based on this preface, I want to discuss more about how Yamaha can adopt an approach that is different from the values it has embraced thus far, an agile development approach, for example.

Yoshizawa: In terms of product creation, I think that the reinforcement of business foundations, including supply chain resilience, is an area requiring attention. Earlier, we talked about the new type of value that constitute the essence of digital transformation. I hope to be able to drill down on this subject with other Board members in order to chart a course to business success for Yamaha in the field of digital technologies.

Shinohara: I feel confident that Yamaha is a company with the power to deliver the value sought in the current era, which is exemplified by concepts like well-being. I therefore believe that we should be talking more about how to provide new forms of lifetime value. Lifetime value involves going beyond simply selling products to provide and sell experiences and thereby develop a business that involves forging ongoing relationships with customers. We must also examine the type of technology portfolio that is needed to capitalize on Yamaha’s capabilities to create new value.

Yoshizawa: Providing experiences as services requires people and capabilities that were not necessary under the prior productcentered approach. How best to acquire and cultivate such human resources will need to be an ongoing topic of discussion going forward.