Initiatives to Comply with the Code
- Reasons for not implementing certain Corporate Governance Code principles
- Disclosures pursuant to Corporate Governance Code principles
Reasons for not implementing certain Corporate Governance Code principles
Supplementary Principle 3-1-3:
[Sustainability initiatives]
The Company recognises the importance of contributing to solving issues aimed at realizing a sustainable society through the Group’s business activities.
In May 2023, we established a Sustainability Committee and put in place a system to promote and strengthen sustainability initiatives across the Company. Furthermore, in July, we formulated a Basic Sustainability Policy and identified important issues that should be prioritised for the sustainable development of the Group and society. Going forward, we will continue to examine systematic initiatives and appropriate disclosure of KPIs, etc.
[Investment in human capital and intellectual property]
We recognise that human resources are the most important management resource in the Group’s business activities. We believe it is important to bring together diverse and highly specialised human resources from all over the world, create an environment where they can be nurtured, and provide them with a place to flourish, in order to meet the diversifying demands of our corporate clients.
Details of our strategy, development of our internal environment, and initiatives related to enriching human capital are described in “Sustainability Policy and Measures” in the securities report for the fiscal year ending June 2023.
In the future, we will continue to consider the formulation of basic policies on sustainability, identification of key issues in relation to our business activities, and appropriate disclosure of systematised initiatives and KPIs.
[Impact of climate change-related risks and profit opportunities on the Group's business activities, earnings, etc.]
The Group recognises that, due to the nature of its business, its dependence on natural capital is relatively low. Nevertheless, the Group views the response to climate change as an important management issue, and we aim to reduce our own energy consumption and contribute to solving a wide range of environmental problems as well as supporting the innovation of consumers and corporate clients toward preserving the global environment through our business activities.
In July 2023, we expressed our support for the TCFD recommendations and participated in the TCFD consortium. Going forward, we will continue to identify the impact of climate change on our business activities, risks, and profit opportunities, collect and analyse the necessary data, and consider the appropriate disclosure of information in accordance with the TCFD framework.
Disclosures pursuant to Corporate Governance Code principles
Principle 1-4:
The policy of the Company in relation to cross-shareholdings and its standards for the exercise of voting rights are as follows.
- Policy in relation to cross-shareholdings:
The Company will not hold cross-shareholdings unless it is necessary for a business relationship or collaboration with the Company that involves a capital alliance or stock holding from the viewpoint of avoiding share price fluctuation risks and improving asset efficiency.
- Standards for the exercise of voting rights for cross-shareholding stock
The exercise of voting rights for cross-shareholding stock is decided case-by-case, and we decide how to vote after confirming whether it is reasonable as to whether it impedes the realization of the purposes of the shareholding, whether it may harm the enterprise value of the subject company, etc.
Principle 1-7:
The Company will decide whether to implement a material transaction with a related party with a resolution of the Board of Directors as required pursuant to laws, regulations, and internal regulations. The terms and conditions of transactions with related parties are similar to those of ordinary transactions taking market prices into consideration and based upon the opinions of external advisors. Overviews of material transactions with related parties are disclosed in the securities reports, etc.
Supplementary Principle2-4-1
We do not classify employees on the basis of age, gender, history with the Company, etc. when promoting employees to management positions. Instead, we have developed an HR assessment system in which employees with the motivation and skills receive equal opportunities. Therefore, there is no particular bias in age, gender, history with the Company, etc. among our core human resources who can contribute to our operations.
As for the appointment of women, foreign nationals, and mid-career hires to management positions, about 48% of the Group’s employees are women at present, and women make up about 27% of managers (these figures are for the entire Group, including overseas). In addition, the Group has expanded to 10 countries, including Japan, through its subsidiaries, and about 30% of the Group’s overall employees are located overseas and have foreign nationalities. We are working to acquire highly specialized human resources who can work with us as the business of entire Group expands, and we promoted approximately 15% of mid-career hires to management positions in the fiscal year ending June 2023.
Details of our strategy, development of our internal environment, and initiatives related to enriching human capital are described in “Sustainability Policy and Measures” in the securities report for the fiscal year ending June 2023.
Principle 2-6:
Some Group companies offered defined-benefit corporate pension plans through 2014, but at present, a defined-contribution pension plan has been adopted. The administration and management of the defined-contribution pensions is entirely entrusted to an outside asset management company, etc. We do not systematically hire and appoint personnel with appropriate qualities for administration, but the HR general affairs division appropriately monitors the performance of the investments and others managed by this outside company.
Principle 3-1:
(i) Our corporate philosophy, management plans, etc. are published on the Company website, in the financial results briefing materials, etc.
(ii) Our basic corporate governance policy is stated on the Company website, in corporate governance-related reports, and in securities reports.
(iii) The compensation of directors who are not Audit Committee Members is determined by delegation to the Nomination and Compensation Committee by resolution of the Board of Directors pursuant to the “Policy Relating to Determination of Individual Compensation and Other Terms for Directors” resolved by the Board of Directors after deliberation by the voluntary Nomination and Compensation Committee, of which a majority of members and the Chairman are independent outside directors, within the total compensation limits resolved by the General Meeting of Shareholders, taking into consideration company performance, details of management, economic conditions, etc. The compensation of directors who are Audit Committee Members is determined through discussion by the Audit Committee within the total compensation limits resolved by the General Meeting of Shareholders, taking into consideration company performance, details of management, economic conditions, etc.
(iv) The policies and procedures for the appointment of the executive team and nomination of director candidates are debated by the Board of Directors following deliberation by the voluntary Nomination and Compensation Committee, of which a majority of members and the Chairman are independent outside directors, with a comprehensive determination as to their ability to grasp the issues of their responsible divisions and cooperate with other officers and employees to resolve issues, their knowledge to ensure compliance with laws, regulations, corporate ethics, etc., considering the current scale and stage of the business of the Company and based on the corporate philosophy of the Company, and a resolution of the Board of Directors is obtained as a proposal for the election of the directors at a General Meeting of Shareholders.
In relation to the independence of outside directors, we believe that they are independent in that they do not have any special personal relationships, capital relationships, or other conflicts of interest with the Company in accordance with the independence requirements provided by the Tokyo Stock Exchange.
With regard to removal, if it has become clear that an officer does not conform to the standards for election or nomination, etc., such as by becoming unable to supervise or manage their areas of responsibility or damaging the enterprise value of the Company through acts in violation of laws, regulations, the Articles of Incorporation, the corporate philosophy of the Company, etc., the Board of Directors debates whether removal is appropriate following deliberation by the Nomination and Compensation Committee, and a resolution of the Board of Directors is obtained as a proposal for the removal of the director at a General Meeting of Shareholders.
(v) In the election and removal of directors, the Board of Directors makes a comprehensive determination of their knowledge to ensure compliance with laws, regulations, and corporate ethics, etc., in addition to their abilities and experience corresponding to their role, and makes a decision based upon their suitability, etc. from the perspective of increasing the social value of the company and improving corporate governance. To determine whether directors (including outside directors) meet the foregoing criteria, we disclose their principal career experience forming the basis for their election in notices of general meetings of shareholders and securities reports.
Supplementary Principle 4-1-1:
The Board of Directors of the Company has clearly provided the material matters for the Company and its group companies to be determined by the Board of Directors in the “Board of Directors Regulations,” “Affiliated Company Management Regulations,” and “Authority Regulations,” in addition to the matters that the Board of Directors is required to decide pursuant to laws, regulations, and the Articles of Incorporation. In addition, aside from the Board of Directors, the matters to be decided by the Representative Director, President and CEO, Director and CFO, directors responsible for business, executive officers, division managers, etc. are clearly provided in the “Authority Regulations.”
Principle 4-9:
The Company determines the independence of officers based upon the requirements provided by the Tokyo Stock Exchange. Three outside directors have been elected as independent officers, and each independent officer maintains their independence without bias toward the interests of management or specific interested parties. Candidates who are able to supervise management independently from an objective standpoint and who have broad insights are elected as outside directors, and their election is debated by the Board of Directors following deliberation by the voluntary Nomination and Compensation Committee, of which a majority of members and the Chairman are independent outside directors, and a resolution of the Board of Directors is obtained as a proposal for the election of the directors at a General Meeting of Shareholders.
Supplementary Principle 4-10-1:
Three of the Company’s five directors are independent outside directors, and independent outside directors make up the majority of the Board of Directors.
The Company has also established a voluntary Nomination and Compensation Committee, of which a majority of members and the Chairman are independent outside directors and requires deliberation by the Nomination and Compensation Committee before obtaining a resolution of the Board of Directors as a proposal for the election of directors at a General Meeting of Shareholders. Also, the Nomination and Compensation Committee is entrusted by resolution of the Board of Directors to make decisions on compensation for directors (other than Audit Committee members) pursuant to the “Policy Relating to Determination of Individual Compensation and Other Terms for Directors” resolved by the Board of Directors after deliberation by the voluntary Nomination and Compensation Committee.
Supplementary Principle 4-11-1:
The approach of the Company relating to balance, diversity, etc. of knowledge, experience, and abilities in the Board of Directors as a whole is as provided in 3-1(iv) above.
The Company has provided for a maximum of 12 directors (no more than 8 of whom are not Audit Committee members and no more than 4 of whom are Audit Committee members) in its Articles of Incorporation, and considering the current scale of the business, scope of responsibilities, etc., has elected 5 directors (including 3 of whom are currently Audit Committee members).
Supplementary Principle 4-11-2:
Other positions concurrently held by Company directors are disclosed in securities reports, notices of general meetings of shareholders, corporate governance-related reports, etc. The internal regulations of the Company require the approval of the Board of Directors if a director (other than an outside director) concurrently serves as an officer of another company. The Company bases this upon not only the formal number of concurrent appointments, but also whether they can appropriately fulfill the roles and responsibilities expected of them as a director in practice. The Company has also established a voluntary Nomination and Compensation Committee, of which a majority of members and the Chairman are independent outside directors and requires deliberation by the Nomination and Compensation Committee before obtaining a resolution of the Board of Directors as a proposal for the election of directors at a General Meeting of Shareholders, and debates whether they are appropriate, including their number of concurrent appointments at other companies. The Representative Director, President and CEO, CFO and two of the three outside directors who are Audit Committee members concurrently serve as outside directors of other listed companies, however this has no effect on the performance of their duties as directors. The other directors do not concurrently serve as officers outside the Company group. This structure ensures adequate time for them to fulfill the roles and responsibilities to the Company that are expected by the Company.
Supplementary Principle 4-11-3:
The Company’s Board of Directors analyses and assesses the effectiveness of the Board of Directors each business year, considers measures based on the results, and strives to improve functions.
A summary of the results of the evaluation for the year ending 30 June 2023 is provided below.
1. Method of analysis and evaluation
Period of implementation: August 2023
Evaluators: Five directors of Cross Marketing Group Inc.
Method: Secret questionnaire (20 questions in total)
2. Summary of results
Questions that were particularly highly rated
(1) There is an appropriate division of matters to be discussed by the Board of Directors and decisions delegated to management (directors in charge, executive officers)
(2) The basic policies of profit plans and capital policies are thoroughly discussed when formulating and announcing business strategies and business plans. In addition, there is sufficient discussion regarding the formulation of targets for profitability, capital efficiency, etc., and what concrete steps will be taken to allocate management resources to achieve these targets.
(3) Directors, including outside directors, are given the opportunity to request additional information from the Company as necessary and are able to coordinate with the secretariat and Internal Audit Division as appropriate. In addition, the opportunity to obtain advice from outside experts at the Company’s expense is appropriately ensured.
Questions with particularly low ratings
(1) The diversity (knowledge, experience, ability, gender, nationality, age, and other backgrounds) of the members of the Board of Directors is appropriately ensured.
(2) An environment has been created that allows the Board of Directors to engage in discussions that support appropriate risk-taking and prompt and decisive decision-making by management.
3. actions based on the evaluation results
We will work on improvements while respecting the opinions expressed in response to each question.
In particular, the following actions will be taken with regard to the questions in 2. above that were rated particularly low.
(1) The diversity (knowledge, experience, ability, gender, nationality, age, and other backgrounds) of the members of the Board of Directors is appropriately ensured.
Response: Although the Company does not currently have any female or foreign national directors, our policy is to select directors from the perspective of whether they are appropriate as members of the Board of Directors in light of the Company’s management strategy, regardless of gender or nationality. Going forward, we will appropriately examine specific plans to ensure diversity, not only in the members of the Board of Directors, but also in the selection of management (executive officers, etc.), in collaboration with the Sustainability Committee newly established in May 2023 and related divisions such as the Human Resources Division.
(2) An environment has been created that allows the Board of Directors to engage in discussions that support appropriate risk-taking and prompt and decisive decision-making by management.
Response: We recognize that proposals from executive officers and other divisions, etc. responsible for business execution are essential to revitalizing the Company and ensuring sustainable growth, and we have put in place a system that allows us to accept proposals to the Board of Directors and each director at any time with the vision of “Just go for it!” so that we can be a company that is constantly challenging ourselves.
Therefore, when an executive officer, etc. makes a proposal such as for a new business, the Board of Directors will examine the content of the proposal from an objective perspective after sufficient discussion with the executive officer, etc. who made the proposal. And the Board of Directors approves proposals under a system that supports their implementation. We believe that such support for the decision-making of executive officers and others by the Board of Directors will also lead to the development of the next generation of management. Going forward, we aim to develop the next generation of management while delegating responsibility and authority, and we will work even harder to improve the environment so that the Board of Directors recognizes that there is a sufficient environment in place for discussions that support appropriate risk-taking and decision-making by management.
A summary of the results is disclosed on the company's website.
Supplementary Principle 4-14-2:
The Company provides information to enable directors (including Audit Committee members) to continue their studies and acquire the necessary and sufficient knowledge to fulfill their expected roles and responsibilities and bears the necessary expenses for such training.
Principle 5-1:
The Company elects a director responsible for investor relations and has designated the Group Management Strategy Division as the division responsible for investor relations. Our policy and practice is to hold financial results briefings (or publish financial results briefing videos on our website) for shareholders and investors once every six months in principle, and provide individual reports, etc. as required.
(1) Recognition and analysis/considerations regarding financial condition and operating results
The Group positions ROE, which can aim for profitability while maintaining an appropriate capital structure, as the most important management indicator in order to make the most efficient use of the capital entrusted to management. At the same time, we are working on business management prioritizing sales growth rate and operating profit margin in order to meet shareholders’ expectations for profit growth with the recognition that we are in a growth stage.
[Sales growth rate]
The sales growth rate for the fiscal year ended June 30, 2023 was 0.8% (previous consolidated fiscal year = 30.8%). The main reasons for the YoY decline in sales growth rate were a decrease in the order unit price in our digital marketing business, especially in the media and promotion field, due to cutting of marketing costs by manufacturers of daily goods, beverages, etc. affected by high raw material and resource prices, as well as the 10.4% YoY decrease in sales in the same business.
The impact of the lower order unit price in the digital marketing business is beginning to ease after the price bottomed out in the third quarter of the fiscal year ended June 30, 2023. Against this background, we will work to create synergy between the services of DO HOUSE Inc., which is our core subsidiary in this business, and the businesses of each group subsidiary, and continue to make appropriate growth investments, including M&A, in business areas where high growth can be expected, to ensure a sales growth rate of 10% or more in the medium term for total consolidated sales.
[Operating profit margin]
Operating profit margin on sales for the fiscal year ended Jun 30, 2023 was 7.8% (previous consolidated fiscal year = 10.1%). The main reason for the YoY decline in operating profit margin is an increase in SG&A expenses and, in turn, a jump in the SG&A ratio to 33.6% (vs. 31.4% for the previous consolidated fiscal year), due to investments in human resources for medium-term business growth and an increase in new consolidated subsidiaries through active M&A.
Going forward, we will work to improve our operating profit margin while maintaining an appropriate SG&A ratio.
[ROE]
ROE for the fiscal year ended June 30, 2023 was 17.1% (previous consolidated fiscal year = 31.9%). The reasons for the YoY decline in ROE are: A decrease in (1) net profit margin on sales and (2) total asset turnover that could not be offset by the increase in (3) financial leverage. Each item numbered above is explained below.
1) Net profit margin on sales (net income ÷ sales) was 4.0%, down 2.3 points from 6.3% in the previous fiscal year. This was mainly due to a 2.4-point decrease in operating profit margin on sales from the previous fiscal year due to the reasons mentioned above.
2) Total asset turnover (sales ÷ simple average of beginning and ending total assets) was 1.8×, down from 2.0× in the previous fiscal year. This was mainly due to the sluggish growth in total sales due to a decrease in sales in the digital marketing business, as mentioned above.
3) Financial leverage (ending total assets ÷ ending equity capital) was 2.4×, a slight increase from 2.3× at the end of the previous consolidated fiscal year. This was the result of appropriate financing for business operations through borrowings while the accumulation of equity capital was suppressed through treasury stock acquisition.