Nanto Bank : Outside Directors’ Forum (437kb)

Support for Value Creation

Corporate Governance

Outside Directors' Forum

We make full use of our diverse range of experience and knowledge in proactively providing recommendations and advice to support the Group's growth and to ensure that it is on the right track to the next generation.

What management issues require resolution if the Nanto Bank Group is to grow with the community as a first-stop bank? How do you evaluate the response of the Group's governance to the need for further reinforced governance? We asked the three outside directors to share their views on these issues from a wide range of perspectives, including their own experiences and responsibilities.

Outside Director	Outside Director	Outside Director
Shuhei Aoki	Matazaemon Kitamura	Hidetaka Matsuzaka

Primary focuses as outside directors over the past year

Developing human resources and succession planning, and encouraging business model reform

Kitamura: I joined the Board of Directors in 2016, and I also serve as Chair of the Nomination and Compensation Committee, which was established in September 2020. The Committee, a majority of whose members are outside directors, is tasked with ensuring transparency in the discussion process.

I have held discussions with the other Committee members on design of a performance-linked compensation system for the Group, and on determining the qualities the directors should possess or, in other words, establishing a skills matrix. In fulfilling our responsibility of nominating directors, moreover, we outside directors seek to evaluate candidates' awareness of the issues involved in determining the proper nature of the Bank objectively. This is the context for my comments.

Matsuzaka: I believe that the Nanto Bank Group is implementing more innovative measures in its governance than other regional banks, including inviting management personnel to join it from outside the Group. In this connection, the things I have been emphasizing at every opportunity over the past year, based on my own experience in corporate and organizational management, are the importance of human resources development and visualization of information.

I have encouraged management to set high expectations so that the Group can reach even greater heights. I want them to ask how we can differentiate our business model from that of other financial institutions. In other words, I am

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concerned about the position the Nanto Bank Group should take and the best ways of developing human resources over the medium to long term in order to realize reforms. When it comes to human resources development, it is particularly important to cultivate personnel in every generation with diverse experiences, something that cannot be achieved through training programs and OJT alone.

Kitamura: The Nomination and Compensation Committee feels similarly challenged. One important future role for us will be to formulate a succession plan. In this uncertain business environment, we hope to develop and construct a system of nurturing future executive candidates who can make and implement appropriate management decisions on regional development as leaders of the Nanto Bank Group.

Aoki: I have two main impressions of Nanto Bank. First, I feel the Bank is setting a steady, prudent course. The other is that it is determined to reform itself. These seem to me to be opposing characteristics. It is only natural for a bank to take a prudent approach to management, but there are in fact many banks that are overly fearful of risk and slow to reform due to their determination to maintain ultra-safe operations. Today's Nanto Bank, by contrast, is showing strong determination to pursue the dual goals of "safety" and "reform" simultaneously. This strikes me as a wonderful thing.

I try to advise a balance between "safety and stability" and "reform and efficiency" at Board meetings to encourage the Nanto Bank Group to maintain this management posture. My particular focus is on reform of the business model. It seems to me that, however much time and energy the executive team invests in developing new businesses as a regional bank, the banking culture's emphasis on safety over change persists, with the result that the requisite boldness and speed of reform have not yet been achieved.

In pursuing these activities as an outside director, I have benefited immensely from my experience in market and settlement system restructuring at financial institutions and in business model renovation in the manufacturing industry. There are so many situations today in which my experience is not applicable, however, that I realize I have to take special care not to neglect learning new things.

Challenges for operation of the Board of Directors

Developing a new framework to put "soul" into the Board of Directors

Kitamura: We receive advance briefings before the Board of Directors meetings. These preliminary explanations enable us to confirm the thinking of the executive team and the process leading to its proposals to the Board. This helps to invigorate the meetings.

Aoki: The Board of Directors meeting is a forum for confirming the careful, thorough execution of business by the management team as well as for providing it with guidance in its efforts to maximize profits. Improving the functions of the Board of Directors further will require it to acquire "form" and "soul" itself. First, the "form" of the Board of Directors should include members with various backgrounds in order to assemble expertise and experience directly or indirectly related to bank management as well as to access the opinions of people of different genders and various ages. It would also be effective to include outside directors and officers who are briefed in detail in advance and primed for the Board meetings so that the meetings can serve as forums for the exchange of ideas. The Bank is in the process of steadily adopting a form of this kind.

Matsuzaka: That's right. I appreciate the Bank's efforts to shift the emphasis from form to substance, in such ways as by providing prior explanations of proposals to be presented in upcoming Board of Directors meeting and by emphasizing discussion at opinion-exchange meetings. The Bank has also introduced effectiveness evaluations in cooperation with external organizations, and I believe it is drawing on the results of these evaluations to establish various committees and determine the proper composition of a Board of Directors with awareness of the issues involved. The crucial role of the Board of Directors is to discuss management plans and risk management in consideration of current conditions with a view to the goals of the Nanto Bank Group, however, and to communicate the direction of these plans clearly, both internally and externally.

Kitamura: I agree completely. The current business environment involves a complex combination of uncertainties, including geopolitical risk, market risk, and systemic risk, and the importance of finding ways to control these factors appropriately is intensifying. I believe the Board will need to discuss these issues more deeply in the future. Matsuzaka: No doubt about it. If we are to promote more in-depth discussions in the limited time available at the meetings, I think it will also be important to create an environment that enables outside directors to share information about the Bank on a regular basis, in such ways as by making the contents of discussions concerning Board meeting proposals conducted at management meetings available through a portal site dedicated to meetings of the Board of Directors. Aoki: I agree with both your observations. In addition to these, I mentioned the "form" of the Board of Directors earlier, but I believe that the most pressing issue is the "soul" of the Board. If the executive team repeats and defends the

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Support for Value Creation

Corporate Governance

conclusions reached at management meetings, it will be difficult to consolidate and benefit from diverse ideas. For the Board to conduct wide-ranging discussions and make fully informed decisions, it is essential that the executive team and directors talk with each other informally on a regular basis to create conditions in which both sides are aware of the ideas behind the explanations and statements as well as of the relevant facts. I am informed that the members of the Executive Committee now intend to create a forum for free discussion of various management issues outside the Board of Directors. I look forward to the development of this new framework that will give "soul" to the Board of Directors.

Human resources development and diversity initiatives

The crucial need to create a culture and structures that enhance the Board's effectiveness

Kitamura: If the Group is to continue contributing to customers and the regional community as the roles it is expected to play change, it will need to adopt flexible thinking that is not bound by conventional frameworks. It will also require an organization that permits personnel who embody this flexible thinking to play an active role.

Matsuzaka: I have been speaking about the importance of human resources development because I see a tendency for the Nanto Bank Group to focus too much on short-term performance.

It has assembled a group of unconventional people with high potential, but they are not always fully prepared to respond adequately to changes in the times and the social environment. It is ultimately the Bank's human resources capabilities that differentiate it from other financial institutions. I feel that the key to winning the appreciation of customers is to become a group of people with broad perspectives who have acquired a wealth of experience outside of banking to add to their banking experience.

Since developing human resources is a time-consuming process, it will be necessary to change the Bank's corporate culture to enable employees to gain new job capabilities and experience in other fields without focusing on their immediate performance. As I mentioned earlier, it is important to increase the diversity of every generation of employees. This means establishing systems that enable employees to gain experience outside the bank, not only by seconding branch managers, but also by giving younger employees more opportunities to be seconded to other industries or government agencies. Encouraging side jobs is another good way of broadening the experience of the Bank's human resources.

Kitamura: Efforts are under way to create an environment that makes it easy for the Bank's female employees to remain active after pregnancy and childbirth, including provision of childcare leave and support for their return to work. The fact that the banking industry attracts a relatively high number of female employees makes it all the more important for the Group to expand these efforts further and develop more possibilities for women in management positions if is to continue to grow.

Aoki: Human resources policies such as cultivating unconventional human resources, promoting more active roles for women, and making use of external human resources are all aimed at manpower diversification. In a steadily growing economy in which a company can grow without changing, uniformity in human resources can be beneficial. In the current situation, however, in which economic growth is no longer easy and the environment and customers' goals are changing rapidly, employing human resources with diverse thinking and DNA can be a trump card for corporate

growth and survival. Of course, the process of developing and maintaining diversity is costly. Not only does it complicate the organization's operations and human resources management, but it takes time and effort to set the stage properly.

Acquiring and maintaining a diverse workforce will require the Bank to develop new recruitment strategies and enhanced training programs, for example, as well as to conduct a thorough review of its performance evaluation and compensation structures. Opportunities for unstructured discussion between the outside directors and the executive team will also be necessary to create a stronger sense of unity between them. Although it takes considerable time and effort to achieve and maintain diversity, however, changes in the business environment are inevitable. The Nanto Bank Group is moving in the right direction with respect to human resources diversification, but I believe the time has come to accelerate its progress in realizing diversity.

Kitamura: Yes, that's right. But it is also important to mention the need to provide

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commensurate treatment for specialists and outside personnel who can play an active role immediately by applying capabilities they have that cannot be acquired through work experience within the Group. It will also be necessary to revitalize the organization and motivate the employees, considering that the commendation system and personnel evaluation system are matters of particular interest for our times.

Matsuzaka: To enhance the effectiveness of these efforts, it will be essential to create a corporate culture in which everyone is free to express their opinions and ideas on management issues. As the Bank's human resources develop, the speed and level of their work will increase, and their productivity will improve. It will be essential to keep this positive cycle going.

The Nanto Bank Group's involvement in the regional economy

Toward realization of sustainable management in cooperation with the regional community

Kitamura: The strength of a regional bank stems from the relationship of trust it enjoys with its customers, and the Nanto Bank Group seeks to be a first-stop bank that regional customers turn to whenever they have needs. The Bank believes that its role and responsibility in the local economy include employing its extensive network to help customers with any issues or concerns that cannot be resolved within the Group alone.

Matsuzaka: As the Nanto Bank's market share of approximately 50% in Nara prefecture suggests, the reginal economy is the very foundation of its business. At the same time, the Bank's stable business operations, including its provision of appropriate business support for customers, is contributing to development of the regional economy. Aoki: The banking industry is built on relationships of trust in which banks and their customers trust each other in monetary transactions. If customers' need for loans decreases due to a slowdown in economic growth, however, the banks' profitability and therefore their creditworthiness are also subject to decline. Regional banks consequently have an urgent need to cultivate profitable new businesses that benefit the local economy. One example in the area of corporate transactions is services that undertake the whole range of backyard operations for small and medium- sized companies. Thus, while banks trust customers to take out loans, customers rely on them to undertake various administrative tasks that contribute to development of the regional economy. This mix of services will provide the basis for the relationship between the Nanto Bank Group and the regional economy going forward.

Kitamura: In its pursuit of sustainable management developed in cooperation with the regional community, the Nanto Bank Group has set a goal of increasing Nara prefecture's GDP, a key indicator of the region's economic strength. To achieve this goal, it will need to accumulate a range of stable operations, such as consulting functions and functions that attract companies from outside the prefecture. Development of Nara prefecture's economy will require proposing high-level solutions to every aspect of the challenges involved, from support for large-scale projects led by the government and others to solutions for individual business customers. Matsuzaka: I see the increase in GDP you referred to as emblematic. In addition to its effects on individual businesses, GDP growth involves synergies among various businesses as well as effects over time, or areas of growth and decline over time, making it extremely difficult to identify direct cause-and-effect relationships between individual businesses. In this connection, I consider it possible to contribute to regional

revitalization by leveraging the Nanto Bank Group's high regional market share and strong ties with government agencies to create structures for services for the elderly as well as to incorporate the SDG perspective.

Aoki: In the world of retail transactions, sophisticated services employing smartphones are multiplying, led by digital banks established by distribution companies. Although there are problems in dealing with customers who are not smartphone users, regional banks will need to provide full-fledged digital services as soon as possible or risk losing their deposit bases all at once. In the digital world, moreover, the term "regional" will lose its geographical significance and become disengaged from geographical locations. "Home base" will lose its geographical significance in much the same way. In this environment, the Nanto Bank Group will maintain a focus on frontiers extending beyond the bounds of its regional economy.

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