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ANNUAL REPORT 2011

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DISCOVERING OUR POTENTIAL

Sustainability

Discussion - Chairman of the Board Yorihiko Kojima and Outside Director Kunio Ito

Corporate Governance That Supports MC's Growth as a Global Organization

MC is constantly enlarging and diversifying its business activities. Operations extend from trading to business investment, leading positions in various projects as the largest shareholder or a manufacturer. Corporate governance is becoming increasingly important as major changes take place in how companies function. This section presents a discussion of corporate governance by two MC directors. As chairman of the Board of Directors, Yorihiko Kojima supervises the management of MC. Kunio Ito is an outside director and a professor at the Graduate School of Commerce and Management of Hitotsubashi University. Mr. Ito uses his objective perspective and expertise to provide valuable opinions and insights. This dialogue centers on the proper role of corporate governance at MC and goals for the future as MC aims to create sustainable corporate value as an organization that operates on a global scale.

An overview of corporate governance at MC
Mr. Kojima:

MC is an enormous organization with more than 200 offices around the world and over 500 subsidiaries and affiliates. Activities encompass upstream to downstream operations in a broad array of business sectors. MC is always paying attention to strengthening and entrenching corporate governance.

There are three basic themes for strengthening corporate governance at a company with this breadth: reinforcing management supervision, separating the roles of supervising management and conducting business operations, and separating the management and business execution functions.

Based on these themes, MC has created a hybrid framework that incorporates the advantages of both the corporate auditor system and committee systems. To strengthen the supervisory function of the Board of Directors, this framework also includes a Governance & Compensation Committee that serves as an advisory body for the directors. The goal is to ensure that our corporate governance is the best possible match with the type of organization MC is today.

Mr. Ito:

I believe there are three aspects of corporate governance: the management oversight function, the pursuit of greater management efficiency, and the transparency of management.

For the oversight of management, MC is a company with corporate auditors but also a company with multiple committees that serve as advisory bodies. The company's Governance & Compensation Committee is particularly significant because it allows a single unit to examine governance and compensation at once. In addition, the Board of Directors is well balanced by including five outside directors who have a broad range of backgrounds.

To improve management efficiency, MC provides thorough explanations of proposals submitted to the Board of Directors. In addition, key issues involving these proposals are identified in advance. For instance, MC shows directors the conditions that must be satisfied in order to follow through with proposals according to the nature of the project. Not many other companies do this.

The disclosure system is a key point concerning management transparency. MC has established a clear Corporate Disclosure Policy and it conducts IR programs in which executives participate. For these and other reasons, I think that MC has a relatively high level of disclosure.

Mr. Kojima:

Under MC's corporate auditor system, corporate auditors attend meetings of the Board of Directors and various other important meetings, where they provide appropriate opinions and advice. Corporate auditors also perform periodic audits at important offices around the world, including at consolidated companies. I believe that MC has a corporate auditor system that is functioning very well.

Furthermore, MC has formed an International Advisory Committee, which is something no other company has done. Made up of prominent people, including senior executives from other countries, this committee provides advice to the Board of Directors concerning MC's management from a global standpoint.

Compensation for directors and corporate auditors
Mr. Kojima:

For MC's compensation system, we must be certain that individuals receive payments that are not too high or low with respect to their responsibilities and performance. Another requirement is setting compensation at a level that is acceptable to shareholders and all other stakeholders. This is not merely a matter of selecting a particular monetary figure. Achieving the greatest amount of transparency possible for the decision-making process itself is even more important.

Remuneration for MC's in-house directors has four components: monthly remuneration, bonuses, stock options, and reserved retirement remuneration. The Governance & Compensation Committee discusses the overall remuneration system as well as remuneration for individuals. This provides an objective view of compensation issues because the majority of committee members are outside directors and other individuals from outside the MC organization. Final decisions are then reached after factoring in MC's performance, remuneration at other companies and other applicable items.

Mr. Ito:

Many companies have proclaimed their commitment to increasing corporate value in recent years. But I believe that the overwhelming majority of companies probably pay bonuses as long as they generate a profit because management views growth in corporate value and directors' remuneration and bonuses as separate entities. But MC is different. Simply reporting a bottomline profit is not enough. Remuneration and incentives are determined by looking at whether or not earnings actually contribute to corporate value. I think this is one of the greatest strengths of MC's compensation system.

The roles of outside directors and corporate auditors
Mr. Ito:

Contributing to the sound growth of MC's corporate value is definitely the most important role of outside directors. But this role involves more than increasing shareholder value. I believe that outside directors should focus on overall value by adopting the viewpoints of all stakeholders. This is why Midterm Corporate Strategy 2012 has the goal of "creating sustainable corporate value" based on a concept that combines economic value, societal value and environmental value. I am very impressed with MC's broad-based approach to value creation that rejects placing undue emphasis on any single category of value.

Mr. Kojima:

MC believes that objective opinions from a diverse range of perspectives are essential to strengthening the management oversight function. This is why MC places so much importance on the roles of outside directors and corporate auditors.

Some outside directors can draw on years of experience as corporate executives. Others can provide objective views based on an extensive knowledge of world affairs, and social and economic trends. By selecting outside directors with different backgrounds, MC gains access to input from a large variety of viewpoints.

Outside corporate auditors as well are selected from candidates with a broad range of knowledge and experience in various fields. They are asked to perform audits from a neutral and objective perspective. These audits play a vital part in maintaining the soundness of our management.

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