Tanaka : The theme of this panel is governance and especially the role of External Board Members. Mr. Walsh, Mitsui makes many global investments throughout the year. How do Mitsui’s External Board Members oversee deliberation regarding these investments, especially the large-scale ones?

Walsh : Firstly, my apologies that I couldn't join you in person. I had a very good friend who passed away and was asked to speak the eulogy at his funeral yesterday. So, I was unable to join you, but I had planned to be there.
Large-scale investments come to the Board generally twice, sometimes more than that. Obviously, there's robust discussion at the Board. In addition, before each Board meeting, there is a pre-Board briefing. That allows the External Directors to ask questions in detail about the project or about the financial return, the risk assessment and mitigation, health and safety, environment, and so on.
Let me assure you, there's very robust discussion by the Board. The fact that it comes into the Board twice allows the Board to ask questions to refine the project or improve the project, or enable the proposer to consider all of the issues that the Board may be concerned about. But there is very, very robust discussion of every project that comes to the Board.

Egawa : The pre-Board meeting briefing sessions are extremely useful, as Mr. Walsh mentioned. In those briefing sessions, we have the opportunity to hear directly from managers handling the projects, so we can ask very detailed questions. It also gives us the opportunity to exchange views among the External Directors.
Another thing we do is the follow-up. For large-scale investments, Mitsui makes a point of reporting back the progress so that we can follow up on them, which is also important for us in order to monitor large-scale investments.

Tanaka : Mr. Hori, how is the advice from External Board Members benefiting Mitsui in making these investment decisions?

Hori : Let me say they're very beneficial for the management team. In particular, the Board discusses whether that particular project is fully aligned with our overall company strategy. I think that is a key discussion point. Sometimes, there are projects whose size is not big enough for Board discussion, but we would take it to the Board anyway so that we could get useful input and make sure that we haven't missed anything. I think those voluntary type of Board proposals are also meaningful.

Tanaka : Let's move on to the management metrics. I know that Mitsui has been focusing on return on invested capital, or ROIC, for a few years. Now Ms. Egawa, please tell us about the changes you've noticed from the increased focus on ROIC management.

Egawa : I noticed two changes. The first is when I joined the Board four years ago, the investment proposals which are brought to the Board included mostly profitability related KPIs such as net profit, cash flow, or internal rate of return. But today, those investment proposals also include ROIC, so there is now a focus on capital efficiency. The second change is the increased frequency on discussions on the portfolio. We have portfolio reviews regularly and in those sessions, we focus on capital efficiency. Since Mitsui’s investments span diverse business areas and geographic regions, ROIC is a very useful measure for allocating resources as well as strengthening investment discipline.

Walsh : ROIC is an important measure. It enables the Board to assess projects competitively to determine exactly how the project would perform. But it also enables us to look outside the Company and look at the type of returns that are achieved elsewhere and compare our projects to that because quite clearly, we need to perform as being best-in-class, so ROIC is a good measure. It's been related to ROE, one of the incentives for Directors. There is a direct line of sight there for the management in ensuring that we achieve satisfactory ROIC.

Tanaka : Mr. Hori, do you feel investors are 100% aligned with Mitsui's vision of focusing on ROIC?

Hori : In our daily engagement with our investors, I think there is an understanding that Mitsui's management's use of key metrics is in line with the analytical tools that our investors have. I think you can see from Mr. Walsh and Ms. Egawa's comments that there is a rigorous process in our Board. We try to compare our own projects with best-in-class global projects and Board discussions keep us on our toes, which I think is very important.

Tanaka : Mr. Walsh, now obviously, you have been on the Board when Mitsui Executives have made big investment decisions. What lessons have management or the Board learned from past investments that didn't go according to plan. How do such past investments influence future investment decisions?

Walsh : Clearly, the due diligence prior to putting a project forward is absolutely key to take into account, every variable and every risk that we manage through the process. Occasionally, you're right, there are projects that don't meet our objectives. I can recall one where it was impacted severely by COVID-19 and the fact that people were not traveling. I think the key lesson for the organization is how quickly we respond to the changing circumstances. What can we do to improve revenue? What can we do to reduce costs? Also, if we consider divestment, we need to move that along swiftly. I think the key learning from projects that are under duress is that we need to have a contingency plan put in place expeditiously. We need to do it as quickly and as effectively as we can so that we can improve the outcome even though it may be a disappointing outcome.

Egawa : I also would like to add that at Board meetings we have lengthy discussions on lessons learned from investments which didn't go according to plan, and make sure that such lessons are shared throughout the Company. One example I heard is that Mitsui began investing in renewable energy when it was still in its very early stages. Mitsui was very early and the market wasn't fully developed, and some of the investments did not go according to plan. Based on those experiences, Mitsui created a special department to focus on these kinds of investments and make sure such lessons are shared throughout the Company. That created the basis for the Company to launch the Energy Solutions Business Unit. So my understanding is that the Company does a very good job of sharing the lessons learned.

Tanaka : Mr. Hori, how do you shift course when an investment is not going as planned?

Hori : Although there are very few in number, unfortunately some projects do require improvements to be made. For example, the environment has changed, and we need to adapt to it. In these situations, we would be very open with the Board. We try to report almost on a real-time basis what is happening, what progress is being made, and the milestones, so that we could, together with the Board, make quick decisions that would cut the loss or that would minimize future losses. We think that is very important. It is also important for our people on the ground. They know that management is behind them, and they also know that for certain situations, the Board is behind them. This helps the flexibility and the dynamics of our team on the ground who are working in these distressed situations.

Tanaka : Ms. Egawa and Mr. Walsh, you've both served on Mitsui's Board for a long time. As External Members, what are your expectations for new External Members? What advice do you give to them?

Egawa : There are actually four points regarding what I tell new Directors. The first is that Mitsui values the inputs and feedback from the External Directors. Therefore, we should be very frank with our opinions. The second point is that there is little handholding. For example, for this panel discussion, they gave us the topics beforehand but asked us to respond freely in our own words. This is different from some Japanese companies, which are very cautious and try to give us suggested responses. The third point is that we should be proactive in obtaining information. Some of the major projects actually have a long lead time, sometimes over five or 10 years. When those projects come to our Board meetings, the board material may not include a very detailed historical background. In those situations, we should be proactive in obtaining information to fully understand the background. The fourth point is that the site visits are very useful. Mitsui provides us opportunities to visit the actual sites overseas and then see firsthand what they are engaged in. Such visits give us the opportunity to speak to the people who are working on the ground or maybe partner companies, and really give us in-depth understanding of the projects.
I expect very diverse views from the new Board Members who join us, because we try to bring in a diverse group of people. I enjoy discussions with them and learn a lot from them.

Walsh : I think Ms. Egawa has answered very eloquently. But let me just comment on a critical issue for new Directors, which is to bring them up to speed as quickly as possible so that they can take a very active role in Board discussions. For me, in particular, my focus has been in supporting, encouraging, and nurturing the new Directors so that they feel comfortable in raising issues. Each Director brings a specific skill set and then obviously, general skills that Directors have. To encourage them to actually draw on an area of expertise, and also to ensure them that there is an environment of nurturing and is supportive of Directors so that we do have an active discussion.
I've got to say that generally, at Board meetings, each External Director gets to make a comment or wants to make a comment. That's very helpful in terms of, as Ms. Egawa said, getting a diverse viewpoint, getting a diverse experience base behind talking about a project or talking about the tracking issues of finance or safety and so on. That's important that we actually draw on that expertise. I have got to say that our External Directors do come up to speed quickly, and they do actively engage very, very quickly.

Tanaka : Before we move on to the Q&A session, let me ask one last question, which is kind of interesting from a journalist perspective as well. This is about green transition, which at my news publication we write about every day and is something we all read about every day. As an External Board Member, how do you oversee investments in greenhouse gas (GHG) reduction while maintaining profitability.

Walsh : That is an important issue for us going forward, and is also part of our growth strategy, not only to assess projects that are put forward to the Board, but also to track the overall performance in Mitsui's decarbonization journey. Certainly, that's something that the Board is particularly focused on and particularly interested in. For every project that comes to the Board, there is an assessment of that project's impact in terms of how it performs in relation to GHG, so that the Board can actually assess our journey of halving our GHG impact by 2030 and then achieving net zero by 2050. It is an important area, not just for Mitsui, but for the world, and we need to ensure that Mitsui performs its part. I do believe that decarbonization is a potential revenue and profit maker for the Company. We can take a lead in terms of renewables, whether it's wind power or solar power or just in terms of improving overall GHG reduction.

Egawa : Mr. Walsh explained very eloquently. The only point I'd like to add is that, for the executive compensation, the KPI for GHG impact is included as a long-term incentive. We monitor this very carefully.

Hori : I'm very appreciative of the Board because they have been allocating a lot of their time and effort to this important discussion of climate change, not only through individual projects, but through free discussions that we have from time to time at the Board. We take time, and we try to lay out a direction for Mitsui. Mitsui's efforts in managing traditional fuel in a cleaner and responsible way, while at the same time pursuing economically viable projects for GHG reduction, are quite important. We would like to do both and it makes sense to do both. The complementary efforts of our energy unit, infrastructure business, as well as businesses dealing with chemical molecules and biogenic material for next-generation fuel, all of these are going to be combined and the Board discussions regarding this cross-industrial approach is very beneficial.

Regarding the supervisory function of the Board, investment discipline for large-scale investments, which was also mentioned previously, is a common topic. I think there are cases where Mitsui successfully reaps the gains from asset sales, which account for a portion of profits, and other cases where you withdraw from projects because ROIC does not meet expectations. Please tell us about the initiatives being taken by the Board regarding divestment discipline.

Egawa : With regard to large-scale investments, we monitor the progress of the project by regularly getting reports on them at Board meetings. If they are not progressing as planned, we discuss what measures can be taken.
The timing is very important, and if things don't work out, we could, for example, sell or find a more suitable partner, and we also consider various other measures and try not to get the timing wrong.

Walsh : Asset recycling is very important for the Company, not only in terms of taking good profit opportunities, but as my colleague, Ms. Egawa said, divesting of projects that are not tracking well. The Board gets to see all of our portfolio during the year and see how projects are actually tracking, not only the projects that come to the Board for approval, but also once a year, we get to see every single project that is approved, i.e. those that are approved below the Board level so that we can get an understanding of how the businesses are traveling. Clearly, asset recycling is an important part of our business. At times, we will invest in something deliberately to add value to a project, to add value for divestment at a later date. That is discussed at the time when the Board initially reviews the project. It is a very active process. As you mentioned, it is an important part of how the Company operates.

Hori : The entire Board is moving in the direction of asset reconfiguration to create a portfolio with higher growth potential, so I think it is correct to say that we are constantly conducting specific verifications and discussions to achieve this.

In the explanation given by Mr. Walsh earlier, he talked about the lessons learned from large-scale investments, and how to respond quickly to changes in the environment. The same is true for the Board. In the Board, which has become increasingly diverse in recent years, what do you do as an External Director to act quickly as a team and enhance corporate value?

Walsh : As the CEO Mr. Hori mentioned, the Board has three discussions, strategic discussions during the year, and that is aimed at ensuring that we are capable of moving fast. It enables management to put forward new initiatives to assess the Board interest, but it also enables the Directors to bring forward their proposals, their ideas in terms of how the Company should be tracking. I've been on a number of Boards in my career, but I think Mitsui can move very, very quickly. It is certainly very inclusive and engaging in terms of its decision-making process, but having said that, the Company can move very, very quickly when that becomes necessary. Now that's not to shortcut any proper governance or approval processes, but it's more to identify that I believe we have an aligned Board and aligned management and that makes it much easier to bring forward proposals and to expedite the implementation. This doesn't mean that the Board always agrees. There have been cases where the Board did not agree and the project was kicked into the long grass. But that's a healthy process. As I said, we have an aligned management and Board and the executive directors and management, they understand that not every project is going to fly. Not every project is going to be something where the risk or the profitability or health and safety or other issues will be a key determinant in making the Board uncertain about a project.

Egawa : As Mr. Walsh just mentioned, there have been times when the Board has made suggestions for revisions or changes to proposals brought forward by the executives. In the past, there have been many times when management has taken these suggestions very seriously and made revisions, and I think this has created a relationship of trust between the External Directors and the executives, and I think this process has ensured a safe environment from a psychological perspective.
As I explained earlier, we hold a briefing sessions the day before the Board meetings, and as they are attended by only External Members, made up of External Directors and External Audit & Supervisory Board Members, it is an opportunity for us to get to know each other better, and we can have various discussions without the presence of the executives, as in the executive session.
At such briefing sessions and on-site visits, we spend a lot of time together, so we get to know each other quite well through our conversations, and I feel that we work well as a team.

I think that asset reconfiguration has accelerated since FY March 2023, but was there a turning point, such as advice from External Directors at Board meetings, that led to this change?

Hori : I would like to hear comments from the two External Directors, but from the perspective of management and internal Directors, Mitsui has always been conscious of the need to constantly reconfigure assets and manage its portfolio.
I think that there have been more opportunities for divestiture in particular over the past few years, and that the projects have tended to be somewhat larger. However, I don't think that the basic policy has changed significantly, and I think that we have been able to seize on opportunities.
During this Medium-term Management Plan period, we have clearly established our Key Strategic Initiatives, so we are increasing our efforts by reconfiguring assets in line with these initiatives and focusing more on growth assets.
In addition, the fact that the whole company is working with high motivation may be a factor in the increase in the number of projects, but I think the underlying principles are the same. While we on the executive side are of this opinion, I would like to hear from the External Directors.

Egawa : I think that Mr. Hori is right in saying that management in particular has a firm idea about asset reconfiguration.
What left a strong impression on me was the sale of Paiton project. This was a very important and promising project for Mitsui, and just after I joined the Board, management was considering selling it while it still had growth potential, so that it would not become a stranded asset in the end.
The sale took a long time to negotiate, and was only recently made public, but I think the fact that they had been thinking about it for some time shows that they have a very high awareness of asset recycling.
Also, as I mentioned earlier, we carry out a thorough review of the portfolio, and as part of this process, we check each asset to see whether it is making a profit or not, and whether the asset efficiency and capital efficiency are being maintained properly. Recycling is carried out as part of this process.

Walsh : I think that Mr. Hori and Ms. Egawa have made the appropriate comments, but the only change in policy per se that I could see, as Ms. Egawa mentioned, is that decarbonization has expedited our divestment of coal-fired power stations and some coal operations. So, there is a change there, but generally, this is just natural evolution of our portfolio. That's a healthy process that is going on behind the scenes in terms of our review of our investment portfolio.

Ms. Egawa just mentioned Paiton, which I think was also sold with the greater purpose of reducing GHG emissions. Having said that, I think it was sold for a reasonable price and reducing emissions wasn't the only focus.
However, in other companies, there seems to be pressure from external directors who are saying “simply, reduce emissions,” selling off assets for the sake of GHG reductions. What perspective does Mitsui have on recycling in the context of GHG reductions?

Egawa : As I explained earlier, when new investment or divestment proposals are discussed at Board meetings, in addition to the impact on the PAT and cash flow, recently the impact on GHG emissions is also explained. We consider the balance of these two sides.
Of course, we have to consider both and we don't think that simply reducing GHG is enough, because there are projects where reducing GHG impact leads to the next growth opportunity. We are working on this while maintaining a good balance.
As we invest in a diverse range of regions and businesses, we discuss how and when to do things in order to diversify risk and maintain a balance.

Walsh : I don't think that the External Directors put unusual pressure on management to divest of assets. But having said that, we do take an active role in terms of looking at how we're going to meet our GHG reduction goals. Some of that will be reduction. Some of it will be new projects that actually improve our GHG generation. CCS is another opportunity for us to use research and technology to help us reduce our GHG emissions with our LNG projects. There's a range of projects in CCS that is underway.

Mitsui has done great with growth of profits with increasing profitability and focus on ROIC with improved capital allocation. As shareholders, we've been rewarded for that so thank you. In some ways, that was kind of low-hanging fruit. There was no focus around that before. It was an easy place to start and improve the Company and improve corporate value. Particularly as External Board Members, what factors do you think are the most important going forward to continue to improve corporate value and increase the share price? I particularly mean that from internal factors. So less about climate change or geopolitical risks, but internal things that can be changed where there are still some issues.

Walsh : As I mentioned before, it's absolutely critical to me that we compare ourselves to the world's best in whatever area we're working at. I know that there are some people that look at comparing Mitsu with the other trading houses. Well, you can't actually do that because each of the trading houses has different portfolios. But more importantly, we need to be looking at who is the best practice in each segment that we're operating in and whether they're future projects or current projects, where do they stand in terms of world best practice. That's where we need to put the focus. That's where we need to ensure that we're better than competitors related to how we're taking the projects forward. This is in terms of profitability, the way that we're allocating our capital, our returns, our risk management, and how we're mitigating risk in the projects. That very much is a focus for our company.

Egawa : The first thing I want to talk about in terms of future growth potential is our comprehensive strengths. We call this group synergy, but as a global investment and trading company, we operate in a variety of business domains and have networks all over the world.
As Mitsui expanded investment projects, we have to compete with our competitors in each business domain. We are working on this, believing that competitiveness is the key to differentiation.
In fact, from my experience of watching personnel changes, I think that Mitsui is very enthusiastic about strategically moving personnel and improving communication between various businesses within a geographic region. I think Mitsui is probably doing this better than other companies. There are also projects that are going well in the process, so I think they will become a pillar of future growth.
The other point to make is on energy solutions. We have been strong in the area of energy for a long time, so we have a network with various clients. I think we are using our network of partners to create solutions for renewable energy and new energy.
You asked about internal factors, and I think that diversity is a challenge for us. We are doing business globally, but I think that the current problem is that there are not many non-Japanese people at the executive level. When I actually listen to management, there are extremely talented people working in each region and I think that the global network of Mitsui will become even stronger as such people rise to the executive level and play an active role in the future.

Hori : When we look at the next phase of growth of Mitsui, I do look at the uniqueness Mitsui has in its cross-industry approach, so we can combine various domain knowledge in providing a meaningful solution. Some of the best players in the world, we feel are looking to us for that type of solution. So this is something that we are going to work on very hard. Another one that's unique to us is we have an interesting combination between businesses in emerging economies and also advanced economies. I think we have developed over the years a risk-control mechanism that is probably one of our corporate characteristics. We like to enhance that as well.
Finally, we can take a project or a business model that works in one geography to another area. That's something that's also unique to Mitsui. A good example would be what we're learning in the hospital platform in Asia. We have a long-term view that this practice is going to be eventually imported into our home country of Japan. So those geographical movements, I wouldn't say arbitrage, but movements will also be key in the future.