A retiring president should leave the boardroom, not chair it

I am the third consecutive president of Hatsuseki to have spent his whole career in the company. I expect my successor, who should take office at our general meeting in June 2028, to be the fourth. I do not think there is anything wrong with that. A chemical company's knowledge lives in its plants, its customer relationships and its people, and someone who has run a plant at three in the morning and a subsidiary abroad brings knowledge an outsider takes years to acquire. My argument is about something narrower: how the successor is chosen, and what the person leaving does afterwards.

The habit we inherited

For most of our history the choice of president at Hatsuseki was made by one person, the president in office. He consulted the chairman, who was usually his own predecessor, and perhaps the main bank. The board then approved a decision already made. The outgoing president became chairman, and after some years as chairman he became a senior adviser with an office, a car and a standing invitation to be consulted.

The arrangement had real strengths. It produced continuity, and it allowed the new president to draw on the experience of people who had faced similar decisions. It also had weaknesses that grew more serious as the company's problems changed. A president who chooses his successor tends to choose someone who will not overturn his decisions. A chairman who was president has a natural interest in the decisions he made: in the cross-shareholdings he arranged, the plants he built and the businesses he championed. And a new president who must report to his predecessor in the boardroom, and meet him in the corridor afterwards, faces a pressure that no governance code can fully describe.

I experienced a mild form of this myself. My predecessor, Masaru Ebihara, was a good president and a generous chairman. He also disagreed with my proposal to sell most of our cross-held shares, several of which represented relationships he had built. The board approved a slower programme than I had proposed, partly so that he could support it. That compromise had consequences: two years later an activist fund pointed to the shares we still held as proof that we were not serious about capital. He was not wrong to argue his view, and the board was not wrong to listen. The difficulty was structural. The person most invested in the old decisions had the strongest voice in reviewing them.

What a nomination committee needs from a president

Japan's Corporate Governance Code asks boards to oversee succession planning for the chief executive, and many companies, including ours, have created nomination committees with outside members to do so. In my view a committee is only as good as the evidence it receives and the independence with which it weighs it.

Since 2024 our nomination advisory committee has been chaired by an outside director and has had a majority of outside members. It maintains a pool of eleven internal candidates aged between 45 and 56. Each has an agreed development assignment, usually a move into an unfamiliar business, an overseas posting or responsibility for a plant in difficulty. The committee meets each candidate at least once a year without me, reads their assessments from the executives above and below them, and has commissioned an external assessment of the shortlisted candidates against two outside executives it identified for comparison. The outside candidates may not be chosen. Their purpose is to tell the committee whether our internal pool is as strong as we believe.

My responsibilities are narrow. I give the committee my honest view of each candidate, including the ones I like least and the ones who have disagreed with me most. I make sure the development assignments are real jobs with real risk. And I leave the room when the committee deliberates. I have one vote on the board like any other director, and I have told the committee that if its choice is not the person I would have chosen, I will support it publicly and mean it.

The development assignments deserve a further word, because they are where insider succession usually goes soft. In many companies a candidate for president is moved through a sequence of safe posts, each a little larger than the last, so that nothing on the record can count against him. That protects the candidate and tells the committee almost nothing. Our committee asks instead for assignments in which a candidate could visibly fail. One of our candidates now runs Functional Resins, the business whose ownership the board will review in 2028 if it does not earn its cost of capital. Another moved from finance to run the Arizona start-up. A third, who had never worked outside sales, is responsible for the Ichihara plant where our certificate problem began. If any of them struggles, the committee will learn something true, and so will the candidate.

There is a cost to this. Two promising executives have told me that they would rather not be considered on those terms, and one left the company for a safer role elsewhere. I regret losing him. I do not regret the terms.

Leaving properly

The most important commitment I have made is about what happens afterwards. When my successor takes office I will leave the board. I will not become chairman, and I will not take an adviser's post, because in 2024 the board abolished those posts, including the one my predecessor held. I will be available to my successor if he or she wants to call me, and I will not call first.

Some colleagues think this goes too far. They argue that a former president's knowledge is valuable and that leaving entirely wastes it. I accept the first point and dispute the second. The knowledge is available by telephone. What is lost when the former president leaves the boardroom is his authority over decisions that are no longer his, and that loss is the point. A new president should be able to reverse my decisions without my being present to defend them. Several of my decisions will deserve reversing.

For other companies with a tradition of insider succession, I would suggest three tests. Can the nomination committee name candidates the president did not propose? Does it meet candidates without the president present? And does the board's chair, when the president retires, become someone other than the retiring president? A company that passes all three can promote from inside with confidence. One that fails them is not choosing a successor. It is extending a tenure.