June issue: Asset Assembler Model

The Co-Presidents execute the Asset Assembler model to pursue Maximization of Shareholder Value (MSV) by using autonomous and decentralized management based on mutual trust. Every partner company (PC), led by its management team, autonomously aims for sustainable business growth.

I believe many of the risks are in the field. In that sense, risk management can be performed most effectively by PCs, which are well versed in their respective regions and markets, rather than by Nippon Paint Holdings (NPHD), which is a pure holding company. Our PCs are pushing the boundaries of business activities beyond the conventional paint and coatings area into the adjacencies area (Paint++). In these areas, market characteristics vary from region to region, resulting in a good match with our autonomous business operations for producing locally for local consumption. The Nippon Paint Group currently operates in 45 countries and regions with the ratio of sales outside Japan exceeding 80% and approximately 33,000 employees around the world. In order for the Group to continue to grow and pursue MSV, it is crucial to maintain an environment where the management teams of our PCs, whom we selected and trust, can unlock their growth potential to the maximum extent. I believe this will increase the effectiveness of risk management at NPHD as the holding company. The Board of Directors properly monitors and responds to risks at the Group while respecting the autonomous growth of each PC based on mutual trust.

The Board of Directors must be able to constantly confirm that internal controls at each PC, with the oversight of the Co-Presidents, is effective as part of risk management for the entire Group. This is the major premise for the effective functioning of our trust-based autonomous and decentralized management based on the Asset Assembler model. This is why the Board worked with the Co-Presidents to revamp the Group's internal control system in FY2021 with the aim of increasing the effectiveness of the Asset Assembler model.

Based on the redesigned Group internal control system, governance of the management team led by the Co-Presidents is based mainly on "the Global Risk Management Basic Policy" and "the Global Basic Policy of Whistleblowing Hotline," which both comply with "the Global Code of Conduct" and "the Basic Policy on Internal Control System." I will briefly explain each of these guidelines.

"The Global Code of Conduct" is the preeminent guideline. The code sets out a list of 22 dos and don'ts as norms of compliance, ethics, and sustainability that must be shared and observed by everyone in the Group when dealing with integrity, working together, and respecting the environment and communities. This code was drafted under the leadership of the Co-Presidents and with a strong commitment of the heads of key PCs around the world. There were discussions from a global perspective that involved the heads of the compliance, finance, and HR departments with an eye on future growth in each region and market. I believe the code has been widely accepted and endorsed in every country and region precisely because it was drawn up with participation by the heads of our key PCs, rather than being created by the headquarters in a top-down fashion.

The revamped "Basic Policy on Internal Control System" stipulates that the Board of Directors delegates as much authority as possible for business operations to the Co-Presidents. In addition, the policy clearly specifies that every PC belongs to a Partner Company Group (PCG) based on regions or business activities. The Co-Presidents will give the head of each PCG the authority to conduct business operations and the responsibility for internal controls in order to pursue the maximization of autonomous growth of each PCG.

In accordance with the Basic Policy on Internal Control System, we revised "the Global Risk Management Basic Policy" as well as "the Global Basic Policy of Whistleblowing Hotline" that sets out rules for the establishment and operation of the hotline of each PCG.

In accordance with "the Global Risk Management Basic Policy," we started in FY2022 a PCG assurance process, which includes a risk assessment survey called the Control Self-Assessment (CSA). Based on the shared values of the Global Code of Conduct, the heads of the PCGs will be required to perform self-inspections and autonomously evaluate risk items in the CSA, which encompasses important internal control risk factors. The PCG heads will also specify five major risks that they have identified and submit measures to respond to these risks to the Co-Presidents. Based on the reports from the heads of the PCGs, the Co-Presidents will identify risks at the Group in individual regions and businesses. They will give directions about effective monitoring and necessary risk responses by participating in the executive committee meetings of each PCG and on other occasions. The results will be reported to the Board of Directors after deliberations by the Audit Committee.

At the same time, every PCG has been autonomously operating their own internal report hotlines in accordance with "the Global Basic Policy of Whistleblowing Hotline." Reports submitted in each region are submitted to the Co-Presidents and are subsequently reviewed by the Audit Committee and the Board of Directors.

There are challenges and risks that cannot be identified solely by the Group's internal control system, which respects the autonomy of each PCG under the oversight of the Co-Presidents as described above. These are issues that require collective actions by all PCGs or that cannot be solved by activities by a single PCG in its business operations.

Typical examples are challenges and risks related to the six Materiality themes identified by NPHD, including "Climate change," "Diversity & Inclusion," and "Innovation for a sustainable future." I believe we will face more challenges and risks involving changes in global public opinion and our business environment as well as the activities of our competitors.

To respond to these challenges and risks, NPHD reorganized the sustainability structure in FY2022 under the leadership of the Co-Presidents into sustainability teams based on Materiality. Again, rather than using a top-down approach from headquarters, we established autonomous teams for a stronger link between sustainability and business operations. Led by business leaders with expertise in their respective theme areas, our Group is conducting sustainability initiatives globally.

Our sustainability structure started in FY2022 with four teams: "Environment & Safety," "People & Community," and "Innovation," which are based on Materiality, and "Governance," which has even broader coverage. In the second half of FY2022, the Sustainable Procurement team was added, resulting in a five-team structure. The aim is to strengthen our initiatives on ethical procurement, including the incorporation of human rights issues in procurement activities, in all themes of Materiality.

The Board of Directors, working with the Co-Presidents, have reaffirmed that sustainability activities of the Group are premised on our pursuit of MSV based on the Asset Assembler model. We have formulated and announced a Basic Policy on Sustainability that makes this stance clear.

These redesigned frameworks for the Group's internal controls and sustainability have been thoroughly implemented at all PCGs due to the initiatives of the Co-Presidents. This is a key element of the strong mutual trust within our Group. The audit function at each PCG inspects the status of governance by their management team. Then, NPHD's Audit Committee performs audits to confirm that the autonomous audit framework of the PCGs is working properly. By using this "Audit on Audit" system, we have improved the effectiveness and efficiency of the Group's internal controls.

I have explained the key elements of the framework that the Board of Directors has built to fulfill our responsibility to properly monitor business operations at each PC and to respond to the Group's risks through a sound check and balance function under the Co-Presidents, based on the Asset Assembler model that respects for the autonomy of every PC based on mutual trust.

Proper risk management is crucial for pursuing MSV through autonomous and decentralized management based on mutual trust. We will implement and update systems and frameworks wherever needed by closely monitoring trends in society and the status of our Group's internal controls.