Discussion by the three Outside Directors

Masato Akiyama Outside Director

Worked at Nichirei Corporation, Nichirei Logistics Group Inc., Logistics Network, Inc. and Tokyo Danchireizo Co. After serving at Tokyo Association of Refrigerated Warehouses and Japan Association of Refrigerated Warehouses, was appointed as Director of the Company in June 2020.

Mika Takaoka Outside Director

After serving as Assistant Professor of Institute of Economic Research at Osaka City University, now Professor of the College of Business of Rikkyo University. Also currently serving as Outside Director at Mos Food Services, Inc., Kyodo Printing Co., Ltd. and FANCL Corporation. Was appointed as Director of the Company in June 2018.

Osami Sagisaka Outside Director

Worked in the Ministry of Home Affairs, the Fire and Disaster Management Agency and the Ministry of the Environment, before serving as a part-time lecturer at Waseda University and a Consultant at Hideaki Ozawa Law Office. Served as Vice Chairman of Emergency Medical Network of Helicopter and Hospital (HEM-Net), Chairperson of Saitama International Association and Director of Japan Municipal Training and Research Foundation. Was appointed as Director of the Company in June 2019.

Opening new paths under a new management setup to resolve issues faced by logistics and various issues faced by the Group ⇒See last year’s discussion

We asked our Outside Directors, Mika Takaoka, Osami Sagisaka and Masato Akiyama to discuss issues and their expectations in SG Holdings’ governance, management strategy and the new management team.

Review of FY2023/3

Please review the SG Holdings Group’s efforts in the fiscal year ended March 31, 2023.

Mika Takaoka  Outside Director

Takaoka: One of the efforts I would like to recognize in the fiscal year under review is that the Group was able to address both short-term issues and medium- to long-term issues such as responding to changes faced in the management environment and sowing seeds for responding to long-term management issues. Last year, I mentioned the necessity to conduct management with vision and strong will, and the importance of open innovation creating new businesses. I think management conscious of these two points was carried out in FY2023/3.

It was a year in which we were forced to respond to drastic changes in the external environment occurring in front of our eyes such as the yen remaining weak in foreign exchange markets and fuel costs remaining high. However, the management team worked to receive appropriate freight tariffs to enable workers such as drivers to work with fulfillment, connecting to both the increased earnings of the company and a rise in the income of workers. Also, efforts made from a long-term perspective must not be neglected. A good example of these is “SG HOLDINGS HIKYAKU LABO.” This is a Groupwide initiative using open innovation to create new forward-looking businesses and services leading to the development of society. Many companies run internal business competitions, but the Group’s initiative to implement a competition extending outside the company is innovative and movements leading to the next generation of business can be seen.

It is important that steps taken in the three years covered by the Mid-Term Management Plan and steps taken for the realization of the Long-term Vision are considered by separating allocation of resources in terms of people, goods and money. The company must endure, so I highly rate the fact that management has been directed toward the future with strong will rather than simply focusing on the present.

Sagisaka: As Ms. Takaoka mentioned, the business environment underwent significant changes during the fiscal year under review. It is easy to surmise that management was forced to navigate a difficult course in the execution of business. Even in such a difficult management environment, and it was very good that management maintained a stance of steadily implementing measures mentioned in the Mid-Term Management Plan with a view to the Long-term Vision. Something I hold in particularly high regard is the strong stance of thinking and acting with partners to overcome adversity. I think this is particularly important for overcoming challenges put in front of us.

I focused on the two following points in initiatives taken with a long-term perspective over the past year. One is strengthening of global governance. Over the past several years, overseas Group companies have come to earn significant revenue amid the heightened demand for e-commerce, and collaboration with overseas companies and strengthening of governance are gaining importance. The management team has recently been addressing this point with a high level of awareness. The other point is initiatives aimed at resolving long-term social issues including responses to SDGs. In particular, pioneering environmental initiatives have been taken centered on Sagawa Express in the past, and I think these issues have also been handled without any problem. I have a strong impression that action has been taken based on a long-term vision rather than simply dealing with immediate issues.

Akiyama :The business environment has certainly presented difficulties as pointed out. Looking at Japanese companies overall, some companies in certain industries have performed well due to the benefits of the weak yen, but I think not only the Group but also many other companies have generally been in a difficult situation leading to a decrease in profits. A deep impression I got while attending meetings of the Board of Directors was that there was always an atmosphere of not being bothered by short-term performance. While many companies are panicking, I think the Group has been able to maintain its stance of constantly dealing with situation with a calm approach. Due to the management team having a strong awareness of what has been accumulated with a long-term perspective as mentioned by Ms. Takaoka and Mr. Sagisaka.

Admittedly, Expolanka in Sri Lanka not performing as well as in the previous fiscal year and the difficult business environment surrounding Sagawa Express, which is the Group’s core company, were negative factors. However, no significant problems arose in the business model or business structure of Expolanka. The fact that the performance of Sagawa Express did not drop significantly even when faced with such a difficult business environment is due to building up a sound business until now. The same applies to DX and robotics initiatives. The accumulation of initiatives based on a long-term perspective has created a robust business structure. However, expansion of e-commerce demand will not continue forever, and the market will inevitably shrink unless the problem of declining population is resolved in Japan. That is why it is necessary to continue to create a vision. I mentioned it last year, but great expectations continue to be pinned on overseas business, and it is vital to resolve issues including those related to human resources.

Steps and discussion in the Board of Directors aimed at sustainable growth

Describe your thoughts on future sustainable growth
while touching upon discussion in the Board of Directors.

Osami Sagisaka  Outside Director

Sagisaka: Proposals related to overseas expansion and global governance briefly mentioned earlier are most frequently handled in the Board of Directors and are subject to rigorous discussion. I participate in discussion from the perspective of a supervisory position of business execution, but I have the impression that steady progress is made with a long-term vision. I also look forward to DX initiatives. The Group has a sound basic strategy for DX, and I think it is steadily proceeding not only with improvement of operational efficiency, but also digital support for both customer communication and service. However, the DX being implemented by the Group is enormous and not on a scale that can be achieved overnight. Taking a certain amount of time cannot be helped, but we must hurry with transformation as the overall social trend toward digitalization accelerates. Such DX initiatives are also closely related to the handling of the “2024 problem” the logistics industry is facing. It is necessary to quickly create transportation systems including labor leveraging DX as an effective solution to the labor problems of SALES DRIVERs and others.

Furthermore, in terms of solving social issues as mentioned earlier, it is also important to contribute to carbon neutrality initiatives that are progressing worldwide. In order to reduce CO2 of the supply chain as a whole tracked as Scope 3, it is essential to “co-create with partners” that share the approach of the Group’s long-term vision, and this is a major issue for the Group, which has engaged in pioneering environmental action.

Takaoka: In addition to the environmental action mentioned by Mr. Sagisaka, there has also been active discussion on “human capital” in recent years as an important issue leading to the realization of a sustainable society. Human capital is also a growth driver in the Group’s long-term vision. Sustainable growth of the Group requires not only ongoing capital investment, but also investment in a variety of “people.” Investment in operational personnel leading to increases in productivity and personnel creating new solution business are both positioned as growth drivers, and we make plans for active recruitment and development. The Challenge System for promoting talented young personnel began in February 2023. Consideration for posts and benefits matching one’s own ability is deemed to lead to the improvement of motivation and the retention of junior employees. There is also the “2024 problem” mentioned by Mr. Sagisaka, and I think there is an urgent need to secure and develop personnel able to redesign the logistics business from a high viewpoint because the labor shortage is expected to continue.

Much time is spent in the Board of Directors on discussion on personnel and personnel expenses, and I was able to sense a “stance of finding an answer viewed from a long-term perspective” mentioned by Mr. Akiyama earlier. When discussing the recent rise in personnel expenses, I was impressed by Chairperson Kuriwada’s comment that it is necessary to secure enough profitability to be able to endure continuous increases in personnel expenses rather than simply discussing the increase in personnel expenses over the past year because personnel expenses will continue to increase in future considering rewarding the Group’s personnel. That is exactly right, and I would like efforts to be made to strengthen earning capacity and increase productivity to be able to cover continuous increases in personnel expenses with a view to after the “2024 problem.”

Akiyama: Mr. Sagisaka touched upon discussion of overseas business in the Board of Directors earlier, and I would like to add something because I have personal experience with the logistics business. The expansion of the scale of Group’s overseas business has been striking in recent years. The Group has not only expanding cross-border e-commerce business in Southeast Asia, but have also begun to receive large forwarding jobs in recent years. The contents of e-commerce and forwarding jobs are very different. How to rationally proceed with these two jobs has been handled as an important discussion in the Board of Directors. Although this discussion took some time, progress was seen and I look forward to the future. I also look forward to future business expansion.

Ms. Takaoka mentioned discussion on personnel expenses, and I have the impression that in addition to soundly raising wages, institutional design for properly developing personnel and nurturing them into future executives, and systems for promoting talented personnel have been steadily progressing for some time. Developing candidates for the next generation of officers and president is something that will be discussed going forward, but I expect younger generations to emerge as candidates for president. I think this can be expected looking at the results of human resource development to date.

Expectations in the new management team

The management team was updated in June 2023.
What is your assessment and what are your expectations?

Masato Akiyama  Outside Director

Akiyama: Mr. Matsumoto, who was newly appointed as President, is well versed in the Group’s workplaces and also has experience as a SALES DRIVER. I also feel very reassured that Director Sasamori, who was appointed to be in charge of Special Assignment, is also a person with many years of experience in Sagawa Express workplaces. I have also worked on site in logistics for many years, and I sense that the business of a logistics company cannot be run properly without having the ability to properly control on-site staff. The Group has been guided to growth based on Chairperson Kuriwada’s strong leadership until now, but nothing can be achieved under the new management team unless on-site staff are properly controlled. In that respect, I think there are significant benefits in welcoming personnel with good knowledge of logistics workplaces onto the Group’s management team. Chairperson Kuriwada has led with powerful charisma until now, but I think the presence of President Matsumoto and Director Sasamori in the new management team will be a great ray of hope for all on-site staff, including the heightened expectation that “I could be part of top management some day” and that this will facilitate raising motivation in the workplace.

Sagisaka: President Matsumoto is also young with experience being dispatched to the Ministry of the Environment, and I expect him to work energetically with broad horizons. In particular, I believe he will be able to significantly leverage such experience to run the entire Group with leadership in the area of sustainability management.

I also expect him to make significant contributions to the enhancement of governance especially in overseas subsidiaries. As overseas subsidiaries account for a greater percentage of revenue going forward, I have great expectations that he will be able to utilize his experience gained facing their issues in variety of positions.

Takaoka: As Mr. Akiyama said, I think President Matsumoto being a person with extensive knowledge of the Sagawa Express workplace will be very beneficial for the Group’s management. In terms of the relationship between the holding company and group companies, I think there are many companies where the management team of the holding company does not have any experience in the workplace of group companies, and I personally believe that is more than a minor issue.

We are entering an era in which it will become difficult to secure personnel who work on site, including SALES DRIVERs. It is very important that the head of the holding company understands what is important concerning how to resolve issues faced in the logistics workplace and what is required to raise work efficiency and motivation to grow for people working on site. In this respect, I would like him to actively highlight his extensive knowledge of the logistics workplace to people inside and outside the company.

However, as the head of the holding company, he must also keep track of the appropriate business portfolio for the Group as a whole, and always think of which management resources to use and how they should be specifically strengthened. What path will the Group take to achieve growth? That is what I want him to have a strong awareness of.