Lecture on the Creation of Long-Term Corporate Value by Mr. Eiichiro Adachi

In 2015, the adoption of the United Nations’ 2030 Agenda for Sustainable Development (SDGs) and the Paris Agreement at the 21st Conference of Parties for the Framework Convention on Climate Change (COP21) represent the shared recognition within the international community that the world should aim for a sustainable society. For the Mitsui Chemicals Group, fiscal 2016 is the final year of its 2014 Mid-Term Business Plan, which clarifies its stance on contributing to society through business activities.
On July 20, 2016, Mr. Eiichiro Adachi from the Japan Research Institute, Limited gave a presentation to the management team at Mitsui Chemicals, who took advantage of this opportunity to reconsider the direction the Group should take toward realizing the sustainable development of society and the Mitsui Chemicals Group.

Corporate sustainability and the sustainability of the planet and society are two sides of the same coin

The Corporate Governance Code has been adopted as a part of Abenomics to enhance the profit-making potential of Japanese corporations. I am particularly interested in the second General Principle of the Code, which states that companies should have corporate philosophies that focus on the improvement of corporate value over the medium and long terms, as well as the point that companies should take proper actions to address issues related to sustainability, including social and environmental issues. I believe this is evidence that the notion has broadly taken hold that sustainable growth at companies would not be possible without favorable relationships with stakeholders, or to take it one step further, without a healthy planet and society. The word “sustainability” has become quite popular recently. However, corporate management tends to focus on “corporate sustainability”, the side of the coin opposite to “sustainability of the planet and society”. As one and the same, sustainability has become a major trend supported by people around the world.

Investors who focus all the more on corporate risks and opportunities

What exactly does it mean to consider the creation of value for all stakeholders and to properly address issues related to sustainability? I believe the answer to this question is embodied in a company’s responsibility to society. In other words, attention has been drawn to the risks triggered by companies as well as the opportunities they create worldwide. This is the main point of my presentation today. Investors have come to focus more on these risks and opportunities. One aspect of corporate strategy is deciding on which investors to attract for support, and many companies have begun to concern themselves with socially responsible investing and ESG investing.

Companies are nearing a turning point for understanding risks and opportunities

Most companies have used the words “risks” and “opportunities” when discussing business, but I think that a new understanding of these concepts is needed. To date, the word “risk” has been used to mean the emergence of factors that adversely affect corporate activities, and it has often been used in reference to negative external factors that a company confronts. In addition, however, I believe that risk must also be understood to mean the negative impact that companies can have on society, or the emergence of negative factors due to corporate activities. On the other hand, business opportunity has been often used within the context of the economic value that companies create and acquire. Here, I believe opportunity must also be understood to mean the potential and emergence of positive outcomes on social issues from corporate activities. It would be misleading to say that economic value comes later; this concept is concerned with how corporate activities can benefit society, centered on addressing social issues. Once these concepts are embedded in an organization, companies should aim to minimize the negative impact (i.e., risk) they have, while maximizing the positive impacts (i.e., opportunity) they have on society, in my opinion.

  Traditional understanding New understanding
Risk Emergence of factors that negatively impact corporate activities Emergence of negative factors due to corporate activities
Opportunity Economic value created and acquired by companies Potential and emergence of positive outcomes on social issues from corporate activities
Companies should aim to minimize the negative impact (i.e., risk) they have, while maximizing the positive impacts (i.e., opportunity) they have on society

A balance is needed between addressing present risks and future risks

Every year, the World Economic Forum is held in Switzerland, which culminates in the publication of The Global Risks Report. The 2016 report identified risks that are the most likely to materialize over the next 10 years and risks that could have the greatest impact on society. The top risks in each category are “large-scale involuntary migration” and “failure of climate-change mitigation and adaptation.” Ironically, the top concerns of people are now a risk that is present today and a risk that is likely to materialize over the long term, even though it has not taken visual form yet. I believe the day has come where management must delicately steer their companies among near-term risks and long-term risks. In global operations in particular, I think that the addressing of risk from the standpoint of head offices in Japan may not align with international perceptions of risk.

Approach to risk management a yardstick for company evaluation

According to a report published by the Sustainability Accounting Standards Board in the U.S., the main sustainability-related risk factors for the chemicals sector are 1) the environment, 2) business models and innovation, and 3) leadership and governance. With regards to the second factor, the report focuses on the safety and environmental stewardship of chemicals. It also states that companies should design products for use-phase efficiency by their end users. Indeed, Mitsui Chemicals has taken a stance that aligns with the concept of creating value from the end user’s perspective. With regards to the third factor, the report states that the largest risks are political spending as well as health, safety and emergency management. All said, these risk factors may seem rather obvious. Nonetheless, I would like to stress that investors, analysts and fund managers interested in sustainability will take reports such as this one into account in their analysis and evaluation of companies.

Risk factors in the chemical sector

1. Environment

  • Greenhouse gas emissions
  • Air quality
  • Energy & feedstock management
  • Water management
  • Hazardous waste management

2. Business model and innovation

  • Safety and environmental stewardship of chemicals
  • Product design for use-phase efficiency

* These items may be better understood to represent opportunities instead of risks

3. Leadership and governance

  • Political spending
  • Health, safety and emergency management

Source: Sustainability Accounting Standards Board’s Chemicals Industry Brief

Strategy for contributing to attainment of SDGs

Many cutting-edge companies have based their strategies on the U.N.’s sustainability development goals (SDGs). In 2015, the U.N. summarized in 17 goals and 169 targets as a path toward solving global social issues by 2030. Governments, university research institutions and corporations have become increasingly aware that they must work together toward achieving these SDGs as issues affecting the entire world.
The task at hand is to figure out how business resources can contribute to the attainment of these 17 SDGs. The Mitsui Chemicals Group has clarified the social issues that it should address in its 2014 Mid-Term Business Plan, and is changing its business portfolio accordingly. I believe there is a very compelling story here. I would like to see the next chapter of this story written about the company’s strategy for solving social issues based on the SDGs, and integrating this strategy with its operations, from the standpoint of advancing this initiative further.

Aiming for CSR to be truly synonymous with management

The Mitsui Chemicals Group, in addition to many other Japanese companies, aims to contribute to the resolution of social issues through business activities, and to make CSR an integral part of management. In my conversations with other companies, I often hear stories about running into roadblocks. I believe these stories can be divided into three categories. The first category entails the opinion that companies have a hard time internally discussing the adverse impact of their activities. The second category comprises the idea that top management must have the willpower to change the business portfolio and reallocate management resources as necessary, while considering risks and opportunities. The third category questions the best approach to solving dilemmas that arise when achieving short-term results. While discussing how to solve these issues internally and raising issues to a higher level, the Mitsui Chemicals Group should aim to achieve CSR that is truly synonymous with management. I believe this will become evident in how social issues are understood internally and the state of business transformation, and would like to see this conversation move toward solutions.

A long-term vision is vital because of turbulence now

Recently, I have heard comments that environmental problems and CSR are issues of lesser importance in the broader world view, and that it is a luxury for companies to discuss social responsibility. Indeed, the world appears to be spinning on a different axis in light of the crisis in Crimea, war in Syria, ISIS, the problem of China, and the U.K. leaving the European Union. In 1989 when the Berlin wall came down, it is my understanding that the world was supposed to take a step toward the ideals of greater freedom and unification, but the disparities that became evident as a result seem to have pushed the world toward greater restrictions and fragmentation instead. Paradoxically, because times are turbulent now, I think that companies should aspire to a long-term vision as a means of avoiding unnecessary turbulence.
I believe Japanese companies are expected to show a conviction that managing risks and seizing business opportunities will lead to greater corporate value over the long term. The debate over sustainability and long-term issues will continue in the course of corporate management. I believe the Mitsui Chemicals Group has taken these issues to heart and is making sound progress along this path.

Q&A

Managing
Director
Matsuo
The concepts of risk and opportunity are complex, and always involve a tradeoff between the two. A risk to one stakeholder may be an opportunity for another stakeholder. Or the nature of risks and opportunities may change with the times. I feel that there are complex issues involved with deciding how to take a long-term view of this. What is your advice?
Mr. Adachi
You raise a good point. Working to draw up ISO standards, I have debated with over four hundred experts from countries around the world over a period of five years. I had my own impression that Japanese companies were bad a recognizing risk. Instead of waiting patiently for the storm to pass when encountering turbulence, I think companies should improve their ability to recognize a risk for what it is.
From time to time, there are conflicts of interest between the short term and the long term. Two different stakeholders may also have conflicts of interest. While these conflicts present dilemmas, a number of companies in Europe and the U.S. are apparently having discussions at the management level about identifying such dilemmas. In the CSR and sustainability reports of some companies, such dilemmas are being disclosed. Japanese companies tend to see this as disclosing their weaknesses, but they need to understand that identifying risks is not taboo.
One more thing is that dialog with stakeholders is crucial. The Corporate Governance Code includes language about dialog and engagement with shareholders. Overseas companies, especially companies in Europe and the U.S., have long excelled at using external feedback to change themselves. For example, these companies reflect in their decision-making the constructive criticisms of NGOs and shareholders.
President Tannowa
Thank you for coming here today for this important talk. For management, this discussion has been full of essential information. I am acutely aware of the long-term/short-term dilemma. We are inevitably drawn into each circumstance, and when looking at the short term in particular, we tend to take action from the standpoint of earnings and outcomes. Like Mr. Adachi has said, I believe it is especially important to have a long-term vision during times of turbulence. What attributes should employees, and managers as well, have during these times?
Mr. Adachi
Lately, universities have been reconsidering the meaning of a liberal arts education. I think companies as well need to create spaces and opportunities for everyone to get together to discuss matters with a grounding in the liberal arts. Companies must have opportunities to consider long-term and short-term matters. While the sense of time has become shorter, during the past 20 or 30 years, employees working on the front lines also need opportunities to consider long-term matters.
I believe dilemmas are issues that can be argued both for and against from different standpoints. I severely doubt there is always a choice that management can make to maintain a fair and good relationship with all stakeholders. The think it can be said that times have changed so that stakeholders can choose their companies, and companies can choose their stakeholders. For the Mitsui Chemicals Group, I believe one option may be to share the same objective with makers of final products, the objective of creating products that protect the environment and help society, even if they are more expensive, instead of taking a deflationary strategy. Even though it is said that Japanese companies are unable to make drastic changes in their course of direction, such as corporate acquisitions in Europe and the U.S., it is my opinion that it would be acceptable for Japanese companies to move more in this direction.

In closing

In its 2014 Mid-Term Business Plan, the Mitsui Chemicals Group has identified contributing to society and the impact of its business activities on society as key issues to address, and aims to engage in business from the fresh perspective on risks and opportunities that was discussed today. We must internally discuss the dilemma between risks and opportunities as well as the short term and the long term, while deciding on the direction that the Mitsui Chemicals Group should follow. We will make every effort to realize sustainable development along with society through management that strikes a proper balance between the economy, the environment and society.

Haruko Kokue
Deputy General Manager
Corporate Communications Division

Eiichiro Adachi
Counselor, The Japan Research Institute, Limited

Mr. Adachi entered Mitsubishi Research Institute, Inc. in 1986 and then joined The Japan Research Institute, Limited (JRI) in 1990. Currently Counselor at JRI, he previously served in the Management Consulting Department and Technology Research Department. He conducts industrial surveys and corporate evaluations from the perspective of corporate social responsibility. He played a role in issuing the 15th Corporate White Paper by the Japan Association of Corporate Executives in 2003-4. Subsequently, he served as a member of the Japan Association of Corporate Executives’ Committee for Promotion of CSR Management working group. Between March 2005 and May 2009, he was one of the experts in the Japanese delegation to the ISO/Social Responsibility Standards (ISO 26000) Working Group. Currently, Mr. Adachi is a member of the Mitsubishi Corporation’s CSR & Environmental Affairs Advisory Committee and The Research Institute For Local Public Transport’s advisory board.