Outside Director Interview

As part of our five-year plan that ends in 2026, THK is aiming to achieve growth that exceeds the average market growth rate. Even as we strengthen our corporate governance code to establish a firm base for bolstering corporate value, our team of internal and external directors and audit and supervisory committee members is collaborating to improve the effectiveness of our Board of Directors for the sake of responding soundly to the various demands of our external stakeholders.
In this interview, two of our outside directors, Tomitoshi Omura and Yoshiki Ueda, discuss the highlights of our efforts to strengthen governance and our future challenges.

Ever since you were appointed as outside directors, what has been your impression of the effectiveness of the Board of Directors?

Ueda: Since I was appointed in 2016, the Board of Directors has steadily become more effective. This is because THK has a firmly established corporate culture of open communication, where even the Board of Directors constructively deliberates on the various proposals we present them with, and they handle affairs with earnestness. As a small sample of the proposals we’ve brought up, we have told them that we want them to start holding the Board of Executive Officers and Board of Directors meetings on separate days to allow for more relaxed deliberation, and that they should have deeper conversations with a focus on the medium to long term by holding quarterly reporting sessions for both the industrial machinery and automotive and transportation divisions. When it came to these proposals, then-President (now Chairman) Teramachi and the entire Board of Directors immediately implemented them. Furthermore, they put consideration into making sure members understand the current situation, including sending out materials prior to Board of Directors meetings so everyone has sufficient time to read through them. As an outside director, it’s also very reassuring that the executives are strongly aware of the corporate governance code.

Omura: I agree. Similar to Mr. Ueda, I was appointed in 2016, and the Board of Directors at that time was still just an extension of a decision model mindset. However, in accordance with the establishment of the Audit and Supervisory Committee that year, they took positive steps toward strengthening oversight. As one example specifically regarding the evaluation of effectiveness, we proposed that it would be better to have outside experts involved in the discussion rather than just having the directors analyze and evaluate themselves, and that suggestion was implemented starting from the next year’s Board of Directors meeting. I feel that this demonstrates how the Board of Directors executes a highly effective PDCA cycle. The acuity of deliberation has also increased as both divisions report on the progress and future course of their medium-term management plan. Additionally, I feel it is crucial to be familiar with the atmosphere in the workplace, so along with other outside directors, I visited several locations in 2023, including the Yamagata, Yamaguchi, Gifu, and THK RHYTHM Hamamatsu plants. In the end, I spoke with 31 branch heads and managers, observing the changes that have occurred over time while exchanging information with management, which brought a number of useful things to my attention. I also work closely with departments that perform critical corporate functions such as the finance, accounting, and internal audit teams, and we occasionally have very in-depth conversations about corporate accounting. I think that this kind of dialogue involving the entire company lays the groundwork for the Board of Directors to evolve.

What is necessary to make the Board of Directors even more effective?

Ueda: The challenge moving forward will be revising the criteria for discussing matters in Board of Directors meetings. The current criteria were established before the 2015 corporate governance code came into place, so I can’t deny there are aspects that don’t align with a monitoring model. I think the discussion criteria need to be updated to consider the requirements of the corporate governance code, and there needs to be more in-depth deliberation regarding the medium- to long-term management strategy and policy.

Omura: Precisely. In preparation for 2026, the final year of the medium-term management plan, THK requires the alignment of not only the perspectives of its executives, but those of a variety of stakeholders, including external ones. Fortunately, as outside directors, we are also given frequent opportunities to offer input from numerous stakeholders, so we definitely want to revise our discussions about where our focus should realistically be placed according to that input.

Ueda: Our new President Teramachi, who assumed his new position in January 2024, also pays close attention to the matters we bring up for consideration. The fact that THK possessed the necessary climate and framework to quickly transition its operations and Board of Directors meetings to a virtual format for the coronavirus pandemic starting in 2020 is due to the new President (then-Director) Teramachi having always spearheaded and pushed forward with DX. I think that the agility with which the top executives respond to societal trends has caused the effectiveness of THK’s governance to steadily increase. We want to do our part in helping THK become an even more robust company.

From your perspective as outside directors, how do you view THK’s risks and opportunities as well as the current initiatives and challenges in relation to both?

Ueda: The Risk Management Committee deliberates regularly based on highly accurate risk maps, and the contents are reviewed annually by the Board of Directors. One of our current challenges is the profitability of our automotive and transportation business, but we have already taken a number of countermeasures, and the groundwork is being laid to turn risk into opportunity.

Omura: Our risks and opportunities have been published and detailed extensively by theme in our Annual Securities Report and Integrated Report. However, another method we could use would be to examine risks and opportunities at each stage of the value chain: development, design, procurement, purchasing, production, distribution, and sales. I think THK’s greatest strengths are its customer focus and innovation, but what risks and challenges would arise if those were put into practice at each stage of the value chain? In particular, THK values its integrated sales and production structure, but it has both pros and cons in terms of geopolitical risks. I think that reexamining the external environment from that kind of perspective will make new challenges more evident.

Ueda: Improving the accuracy of our risk analysis is certainly an area of future growth. Even as our business shifts from “global” to “glocal,” many of the top people in each region are Japanese. We need to shift into a higher gear and create a framework to maximize our utilization of local networks. Companies with locations around the world will often see discrepancies in the earning capacity and talent performance of each region, but that can be an impediment to rapid business development. Fortunately, THK is a company with high levels of loyalty on a global scale, so I believe that once a policy is announced, change will happen. I’d like to capitalize on my past experience at a general trading company to assist with creating a structure to maximize our global management resources.

Omura: I agree with Mr. Ueda’s suggestion of picking up the pace. To increase corporate value, it’s crucial to have a precise and agile response to risks in times of high uncertainty. It’s become more of an established practice recently for THK to analyze risk and opportunity from an ESG perspective, and such deliberations frequently take place even during Board of Directors meetings.

Ueda: Management considers environmental risk to be a priority, and they’re focusing on the opportunities presented by lines of business that meet the needs for motorization and decarbonization. As one example, THK displayed its original electric vehicle prototype, the LSR-05, at the 2023 Japan Mobility Show. I was deeply impressed by THK’s good sense to get ahead of the curve and present a real-life prototype filled with top-class innovation to Japanese and overseas automotive manufacturers.

Omura: I was also surprised by the display of the LSR-05. In witnessing our non-automobile company create a working car and seeing the powerful PR that emphasized the superiority of the automotive components, I was moved by THK’s extraordinary desire for innovation.

What challenges need to be overcome to achieve the management targets and improve corporate value? Additionally, what expectations do you have of employees in relation to these goals?

Ueda: Right now, messages and policies from the executives are broken down and conveyed to employees in the workplace, so a positive top-down flow of information is in place. However, looking ahead toward future growth, THK needs a system that will develop the next generation of management from an early stage. If there were a system to increase opportunities for young employees to see an overhead view of the business and bring the people who are second in command into the forefront, I think the upward pressure on management from below would also be a reinvigorating force. In this day and age, we are able to make data-driven decisions that aren’t necessarily based on any rule of thumb. With that being the case, I hope to see people valuing critical thinking, keeping their ears to the ground, and maintaining a vigorous dialogue in which they can share their opinions with those higher up.

Omura: The ¥500 billion revenue target is achievable if the external environment improves, but I think it won’t be an easy matter to increase the operating income or operating income margin. To make those improvements, you have to either increase your sales prices or reduce your costs. The first option is difficult to carry out in the manufacturing industry, and it comes down to how much you’re able to utilize revolutions in technology like generative AI. However, the second option of reducing costs is something you can see in the numbers if you implement automation and labor savings, and you can also count on innovation in the realm of materials. I would like for THK to have a bold vision when moving forward rather than aiming for a reduction of a few percentage points. When I was taking another glance through THK’s 50th anniversary book the other day, my eye caught on the mention of a past instance when costs were reduced by 50%. THK has generated new trends ever since its founding, and I hope that every single employee who has inherited that legacy will demonstrate an innovative spirit as they work to achieve their targets.

Ueda: The two strengths that Mr. Omura mentioned earlier, customer focus and innovation, are leading to what THK has striven for: the construction of ecosystems for the betterment of manufacturing. In order to further capitalize on one of those ecosystems, , and other such business platforms in the future, it will be critical to increase their global recognition. To borrow the CEO’s words, our immediate challenge is to work “at the speed of light” to make these platforms the de facto standard. I continue to value close communication and hope to be involved in deliberations from the conceptual stage to help THK seize opportunities while keeping an eye on their timing and M&A for the sake of acquiring market share and to make use of the expertise of outside directors, even when making such decisions quickly.