NEC Corporation (6701) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. My name is Hajime Matsukura. We held the first ESG briefing in 2019. At that time, we received very valuable comments, which we have been incorporating in our management since then. This is our second ESG briefing, and I am looking forward to hearing from Mr. Seto, the Chairman of the Nomination and Compensation Committee. Before his presentation, however, allow me to cover our ESG efforts included in our 2020 midterm management plan. I will be talking about these points listed here. Before diving into the details of ESG I would like to quickly touch upon the NEC Way, which is the basis of our business. In April 2020, which marked the 100 and 20th anniversary of our founding, we revised the NEC Way, redefining the purpose of NEC's existence with the intention to become a purpose-driven company. We carry out all our activities based on the NEC Way, which is comprised of 4 major components, namely: purpose of NEC's existence; principles, which define how we act; and the code of conduct; and the code of values, which shape the values and behavior of each individual. Today, I would like to talk about each ESG initiative based on the NEC Way. Firstly, environmental initiatives. What kind of activities are we promoting toward a sustainable society? As indicated here, after our 2017 announcement of aiming to achieve effectively 0 CO2 emissions by 2050, steady progress is being made. As a milestone, we set up a goal to reduce CO2 emissions by 33% compared to 2017 by year 2030. And in 2018, we obtained the approval for SBT, Scope 1 and 2. Aiming to attain this goal, we have included responses to environmental issues, with the focus on climate change in a materiality management theme in 2018 and promote the various activities for the past 3 years. These are the 4 core elements. Firstly, we have concentrated on realizing 0 CO2 emissions from supply chains. As an ICT company, first and foremost, we work on a significant reduction of our CO2 emission, while at the same time, endeavor to realize a low-carbon society that the world is seeking in attempt to create a safe and secure society that is strong against climate change risks. It is our policy to work on in these 4 areas. Regarding SBT, we are changing the target from well below 2.0 to 1.5 degrees. We are hoping to get an accreditation from the SBT initiative. This slide illustrates the details, the activity to reduce the environmental impact is shown at the bottom. When we built our new factory in Thailand in FY 2017, we installed solar panels on the roof of NEC platforms by company, which is one of our main overseas factories. Not only that, but we implemented ICT to realize maximum power consumption reduction at our Thai smart factory. We are also promoting low power consumption at our data centers. As a result, we have gradually reduced the environmental impact. Furthermore, by using ICT, we are making contributions in the areas of environmental adaptation and impact mitigation. For example, using ICT initiatives to prevent and mitigate natural disasters in smart cities are underway. Food loss, which is a current societal issue, is tackled by using the ICT platform that optimizes supply and demand, resulting in less food losses. With the goal of creating CO2 reduction that is equivalent to 5x the total volume of CO2 emission from our entire supply chain by fiscal year ending March 2021, we have been conducting relevant activities throughout last year. As a result, we have already achieved this goal in March 2020. So throughout March 2021, we have been working to make further contributions through various business activities. Due to our efforts, we are highly evaluated by external organizations. For 2 consecutive years, we have been certified as an A list company in the categories of climate change and water by CDP. In March 2020, we have implemented several measures in the area of engagement and have been selected as the supplier engagement leader, the highest rating of all. Consequently, regarding ESG, we have been included in the Dow Jones Sustainability Indices world, and our efforts have been recognized by other organizations as well. Next, I would like to talk about our initiatives for society and employees. For the past 3 years in our midterm management plan, we have strongly promoted Project RISE, which focuses on transforming the execution capabilities of our employees and management, for we believe that people are the drivers of our midterm plan. To change the behavior and conduct of each and every individual, the code of values was defined in 2018, and it has been incorporated in the NEC Way. We started out by conducting HR assessment based on these code of values, assuring a fair and multidimensional evaluation. Furthermore, regarding the active use of external human resources, which we have been lagging behind in the past, we started to tap on the external resources and hire them as vice presidents and as front line workforce. We have actively promoted young talents as well. All these measures we believe are becoming the catalyst in gradually transforming NEC's culture. With the emphasis on communication reform, BOE management, which makes use of the voices of each and every employee in managing our business is implemented. A quarterly survey is conducted to check on our progress. Here, you see the quantitative changes. The numbers reflect the tangible improvements seen among the employees over the last 3 years. For your reference, here is the code of values. It does not mean that everybody at NEC is already fully living up to these 5 standards. Rather, these 5 items were defined by the executives as the crucial factors in transforming NEC into a company that can create new social values. The code of values is utilized during our one-on-one session with employees during HR assessment and at the time of providing feedback as well. One of the things we have stressed most was work style reform and a corporate culture that enables employees to perform at their best. Even before the COVID-19 pandemic, we have provided PCs and smartphones to all employees so that they can start teleworking. In fact, after the outbreak of COVID-19, we were able to shift to telework rather quickly and maintained the telework rate at around 75%. This program covers not only NEC employees, but it is extended to employees of partner companies and system engineers who couldn't telework before under the previous environment. In addition, we have provided a co-working space in the HQ building. It is called the base. We also expanded satellite offices in order to create an environment where people can work freely without restrictions on time and space. These initiatives resulted in an increase in the number of employees who feel that they were a smart way of working by 42 percentage points. And by working smartly, we are able to provide solutions to our customers using ourselves as a model. The area that we would like to focus on further in the future is inclusion and diversity, fostering a culture in which diverse human resources can play active roles. As you can see here, the percentage of female employees is still too low. Over the past 2 years, we have taken a number of steps to discover and develop competent talent. We have also focused on the recruitment of women and have finally reached 34% as a percentage of females in new graduate hiring, which is a great step forward towards our stretch goal set for 2025. In addition, we are increasing mid-career hiring and creating an environment where a diverse range of people, including people with disabilities, LGBT and foreign nationals can work actively. Last but not least, on human rights initiatives. As shown here, respect for human rights is a very important part of the NEC Way. In particular, as an ICT player, NEC formulated a policy on IT and human rights back in April 2019 and are promoting business execution processes based on this policy. The company also established the digital Trust Advisory Council consisting of export members outside of the company. And in July 2020, revised guideline on responsible business conduct and supply chain was formulated to run the business in a way that stresses human rights, IT security and other relevant issues, not only for us but also for our supply chain partners and other players. Lastly, I would like to discuss briefly about corporate governance. The slide shows the makeup of the existing Board members. Since NEC is a company with a Board of auditors, the nomination and the compensation committee, which is a voluntary committee consisting of 4 members is the forum to discuss about the assignment of Board members and auditors as well as their compensations. In addition, as announced the other day, in an effort to recognize gender diversity, we have nominated Ms. Christina Ahmadjian as a new director candidate with the aim of increasing the ratio of independent directors and strengthening the career skills of directors. As a result, instead of the 11-member Board, as we have today, as shown on the slide, after the ordinary General Shareholders' meeting scheduled for June this year, we will have 12 members on the Board of which 6 are outside directors, including 5 independent directors, 2 female directors and 1 non-Japanese director, adding diversity to the current board structure. A major revision was also made to our executive compensation system back in fiscal year ended in March 2020. By benchmarking with global peers, the new scheme should encourage the board to deliver on clearly defined commitment. The 50-50 split between the fixed compensation and the performance linked variable compensation should help attract in competent talent from outside. And the bonus scheme, where the payment can vary from 0%, all the way to 200% should ensure business management and operation with a sense of urgency. The way all these decisions have been made is reported in the integrated report and other documents to ensure transparency. And here is the overall picture of the succession plan. In addition to the examination of the President's succession plan, the NEC parent company has also tried to develop a comprehensive pool of talent for the future leadership of the entire group, with dedicated talent pool of young talent as well as for female talent, with the specific development plans agreed upon for them with the head of each business unit or CXOS, in order to make sure we expose promising candidates to adequate challenges and opportunities for promotion as part of the development plan. In promoting these initiatives, as mentioned at the beginning, the implementation of the NEC Way is a fundamental key to success. Since the announcement of the NEC Way, in April 2020, it has been widely recognized by employees in the field as well as others in Japan as well as in overseas. Putting this into practice is of critical importance in promoting the purpose-driven management style of NEC. As a result, the latest pulse survey conducted this past January, showed that the recognition level of the NEC Way has become almost 100%. Going forward, we would like to accelerate the progress from recognition to endorsement and from endorsement to practical application and further promote ESG management based on the NEC Way. That's all I have for today. Thank you very much.

Good morning, everyone. I am Kaoru Seto. As an outside Director, I would like to talk about NEC's corporate governance. Here is what I am going to cover today. I will start with my biography, then move on to commenting on how I, as an outside Director, look at the effectiveness of NEC's governance. And finally, I will discuss challenges and expectations of NEC's governance with Mr. Matsukura. Myself introduction or CV, if you will. I joined YAMATO TRANSPORT Company in 1970. Then after, I have more or less spent my entire career in packaged delivery services. When we were developing TA-Q-BIN service, I became a member of the working group and made an effort to commercialize the delivery service. Since then, I have been involved in various aspects of the business covering commercialization, servitization and sales activities of YAMATO TRANSPORT and YAMATO Group as a whole, especially when I was in charge of developing Cool TA-Q-BIN, there were many findings. What I learned is that the market need as understood by a seller is quite different from the solution that is sought for by consumers. I am working hard to enlighten people at NEC to look at the world from a consumer's point of view. I really liked working at the forefront and implemented various business reforms based on scientific facts. I am sharing those experiences at NEC's Board of Directors meeting. Since joining YAMATO TRANSPORT, delivery service was my area of expertise. I've assumed the position of a President, then a Chairman. And now I am a special adviser of YAMATO Holdings. I became the outside Director of NEC in 2018. Chairman Endo requested me to join the Board. And at that time, he said that NEC still has a strong product out mentality. He wanted me to help him convert that corporate mentality to market in way of thinking, and I accepted his offer. Now let me touch on the changes of my NEC's impression before and after joining the Board. In my early days, NEC's business performance was sluggish for a prolonged period of time. And from the outsider's point of view, the 120-year history seemed to become somewhat upper burden, constraining NEC's agility. Before I joined the Board, I thought that NEC is a company where people have difficulties communicating with each other, however, I soon found out that, that was not the case. The Board of Directors actively discuss various matters in an engaging manner. I also discovered that NEC responds to changes quite quickly. External talents are widely incorporated into NEC as team members, and I felt that NEC is leveraging on both talents as well as the outside Directors in pursuing its transformation. When I listen to various reports made at the Board of Directors' meetings every year, I am assured that the idea of market-in has become quite prevalent. Another point to note, quite a few overseas M&As are conducted, and most of them are successful. It reflects NEC's management style of giving due considerations to local employees. Next, what are the main matters discussed at the Board of Directors' meetings and how are evaluations conducted? We hold a monthly Board of Directors meeting, covering a wide range of topics such as management policy and strategy, governance and HR measures. To enhance effectiveness, we have launched effectiveness evaluation system as of 2016. The results of the evaluation are discussed by the Board of Directors. Outside Directors' opinions are taken into consideration and I see positive changes. Next, here are the topics discussed by the Nomination and Compensation Committee. The Nomination and Compensation Committee does not convene every month, but we meet quite regularly. The committee conducts discussions on various areas such as succession Planning and executive officer appointment as well as the review of the HR system and the compensation scheme. Next, regarding our understanding of business and human resources, outside directors are responsible for supervising the execution of business from objective point of view. As we fulfill our responsibility, we try to think about how to minimize risks and maximize the enterprise value. So it's important for us to have a deep understanding of NEC's business and human resources. In fact, there are many opportunities for us to gain such understanding. Regarding important matters discussed at the meeting of the Board of Directors, we are given detailed briefing in advance and have opportunities to ask questions and receive answers on various matters. So by the time we actually attend the Board meeting, we have considerable amount of knowledge of these topics. Regarding the medium-term business plan, we have also received interim progress reports on 2 occasions so far and from our point of view, gave various comments and advice. We have actively exchanged views and opinions. In order to understand the business and human resources more in detail, we sometimes go out and visit various sites of the company and attend exhibitions related to technological solutions. And when we go to the sites, we have opportunities to exchange views and opinions with the people in the field. I believe that we have a good understanding of the positions of the people in the field. I was particularly impressed with the research centers. I always look forward to visiting them and listening to their technology presentations. What I found was that the research centers are not just conducting researches anymore. They are exploring technologies from the market or customer perspectives for the ultimate goal of creating social value. In that sense, I believe that the stance of the people at research centers have been changing significantly. Next, I would like to talk about the succession plan. The company made an announcement in November last year that it will change the President to Mr. Morita in April this year. The decision was made after a continued deliberation for the last 3 years or so on the basis of the 3 principles of objectiveness, fairness and integrity. Starting with more than 10 candidates. After 3 different screening processes, we have finally agreed upon Mr. Morita. During the next medium term, globalization is one of the important keys, so global competence was a critical skill we sought after. In that sense, I believe that we have been able to nominate the right person as the candidate for the next president. Next is discussion process and structure to strengthen the Board of Directors. Our approach to this theme is very much dependent on the use of the skill map. We have to make sure that we've acquired all the expertise that are relevant to the success of NEC and recruit those tenants who have well suited for our corporate management strategy. The other area we are focusing is the number of independent directors, so that we can make their fair judgment. As a result, we were able to nominate a non-Japanese candidate, Ms. Christina Ahmadjian. And I personally think it was quite an achievement. Last but not least, in the evaluation of the career skills of the existing directors, if you could look at the slide, the black dots indicate that the Director has a professional expertise. And white dots indicate a Director has a general knowledge. The current skill map shows that we have a good coverage of important competencies with the existing directors. In any case, the nomination and the compensation committee will continue to focus on the succession plans for the President as well as for external directors. In order to identify candidates for future presidents, we have made a list of younger people who appear to be promising. We will be interviewing them going forward. That concludes my explanation. Thank you very much.

Thank you very much, Mr. Seto. Now I would like to exchange some opinions regarding the future of NEC corporate governance. I have listed 3 topics for our discussion. For the past 3 years, Mr. Seto, you have observed NEC in the capacity of the outside Director. Can you share with us your candid view on our change and how you evaluate it?

When I first assumed the outside directorship at NEC, the engagement score came out and I remember it being very low. I was quite concerned and wondered what is the root cause of such a result. But in a matter of only two years, reform progressed at quite a rapid pace and the engagement score dramatically improved. I believe it reflects the result of all your effort. The announcement on HR strategy was made the other day. Once it is implemented, I think the engagement score will further improve. It will be the foundation for NEC to become an excellent company.

Thank you. You have talked about what you expect of NEC in the future. We have leveraged on external talents to make ourselves more robust. But if you can give us your advice as to how we can tackle it going forward, I would greatly appreciate it.

So it's necessary to strengthen the external talent pool continuously. But in terms of technology, outside Directors or even internal Directors may not be able to understand all the latest technologies and research themes. There may be a gap in that sense in this area. So I believe that we should use things like an advisory board for us to be informed of and to keep up with the latest technologies and research themes and stay on top of emerging technological trends.

Thank you very much. The third and final point is about COVID-19. We are still in the middle of the pandemic. It is precisely in these times that the true value of NEC is being questioned. I would like to ask you about your expectations for NEC in this context.

With the ongoing COVID-19 pandemic, people's lifestyles are changing dramatically. And I think that these changes represent great opportunities for NEC and that NEC is expected to provide clear answers to these questions. For example, NEC has accumulated [ abandoned ] technologies over the years. And I hope that the company will leverage them to contribute to the upcoming digital society, including digital government in the future, it will be beneficial for NEC as well as for Japan as a whole. So I wish everyone all the best in this regard. Thank you very much for the very positive feedback. Your point is well taken for our future improvement.