Where a chemical president's judgement is tested

When I became president we measured our businesses on sales and operating income. We now measure each of them on return on invested capital against a cost of capital the board approves each year, currently estimated at about 7 per cent for the company and higher for Functional Resins, whose earnings swing with the circuit-board cycle. In May 2023 we published a capital policy that committed us to return on equity of at least 9 per cent by the year to March 2027, ¥35 billion of buybacks over three years and a dividend floor of 3 per cent of shareholders' equity, while reserving ¥110 billion of growth investment for Electronic Materials. We bought back ¥36.2 billion of shares. Return on equity reached 8.6 per cent in the year to March 2026. My judgement is that a capital policy is credible only if it names the businesses that will not receive capital, and ours did.

Japan's Corporate Governance Code asks listed companies to explain their policy on cross-held shares and to have the board examine each holding's purpose and economics every year. We took that review literally. For each of our 41 holdings in 2022 we compared the dividend and the business we could attribute to the relationship with the capital it tied up. Only a handful justified themselves. I then visited or wrote to the chief executive of every company concerned before we sold, because a sale discovered in a shareholding report damages a relationship that a conversation usually preserves. Where the other company held our shares, we told it that we would not regard its sale as unfriendly. By March 2026 we held eight positions worth ¥9.6 billion, and the proportion of our own shares held by banks and business partners had fallen from about 17 to 7 per cent.

After the Ichihara certificates were found to have been altered, we rebuilt quality governance around three changes. Quality assurance staff at every plant now report to a chief quality officer who reports to me and meets the audit and supervisory committee each quarter, so no plant manager can overrule a release decision. Certificates of analysis are generated directly from laboratory instruments, with manual entry removed in all nine plants by the end of 2024. And each month the capability review compares process capability, measured as a capability index, with every customer specification we have accepted. Where the index is below 1.33 we either improve the process or tell the customer we need a different limit. We renegotiated 23 specifications in 2023 and 2024. Two customers declined and moved their business elsewhere. I would rather lose an order honestly than keep one through a certificate.

Electronic Materials is now 59 per cent of our continuing sales and most of our profit. The business sells acids, ammonia-based cleaning solutions and etchants whose metallic impurities are measured in parts per trillion, delivered in returnable containers and qualified separately at each customer's fab. Qualification can take eighteen months, so the decision that matters is where to build capacity before a customer commits. I learnt the business on the plant floor at Yonezawa and at Tainan, where customers' engineers treated a late analysis as a failed one. As president I approved a phased Arizona plant in May 2024: ¥26 billion for a first phase sized at 40 per cent of the original plan, with a customer committing to buy 60 per cent of its output for five years. The head of the business wanted the full ¥58 billion plant. I preferred to be late for the second customer than early for none.

The Toyama chlor-alkali operation founded Hatsuseki in 1936 and gave us the acid from which our electronic chemicals grew. By 2023 it earned an operating margin between 1 and 3 per cent, needed about ¥30 billion to renew its electrolysers and carried most of our exposure to electricity prices. I concluded that it would be better owned by a company whose whole strategy was soda and chlorine. We carved it out as Jinzu Electrochemical Co., Ltd. and sold 66 per cent to Hinomori Soda Co., Ltd. for ¥18.6 billion, keeping 34 per cent and a supply contract for high-purity feedstock. The hardest work was not the valuation but the town: the union, the city of Toyama and retired employees who saw the sale as the company leaving home. We agreed employment terms for three years and kept our name on the gate.

Like many Japanese manufacturers of our age, Hatsuseki has chosen its presidents from inside for decades, and for most of that time the outgoing president chose the successor and then became chairman. I support promoting from inside when the pool is strong. I do not support the outgoing president choosing. Since 2024 our nomination advisory committee, chaired by an outside director and with a majority of outside members, has maintained a pool of eleven executives aged between 45 and 56, with development assignments agreed for each, and has assessed two external candidates for comparison. My role is to give the committee honest evidence about each candidate and then to leave the room. In 2024 the board also abolished the senior adviser posts that former presidents held, including my predecessor's. I have told the board that I will leave it when my successor takes over.