Corporate governance implementation structure

Corporate governance structure

Dentsu Group Inc. (hereinafter, the Company) has adopted a corporate governance structure defined as a Company with an Audit and Supervisory Committee that promotes swift and decisive management decisions by delegating certain authorities from the Board of Directors to Executive Officers. This strengthens the supervisory function provided by the Board of Directors, which includes at least four independent Outside Directors, and enhances effectiveness of auditing and internal control, in an attempt to enhance corporate value.

Under this system, the Company will realize effective corporate governance based on the following basic policy in order to fulfill its responsibilities to its stakeholders including shareholders, clients, employees and local communities, ensure sustainable growth, and enhance its corporate value over the medium to long term.

• To respect shareholders’ rights and ensure their equal treatment.
• To consider the interests of stakeholders, and cooperate with them appropriately.
• To appropriately disclose company information and ensure transparency.
• To enhance the effectiveness of the supervisory function of the Board of Directors concerning business execution.
• To engage in constructive dialogue with shareholders who have an investment policy that conforms to the medium- to long-term interests of shareholders.

1. Board of Directors

The Company has adopted a form of governance with an Audit and Supervisory Committee, and has transferred authority for important business execution in part from the Board of Directors to Executive Officers in order to realize an expeditious and effective business execution system. As well as exercising a supervisory function over business execution, the Board of Directors determines core management matters for Dentsu Group, such as the establishment of Group management strategy, important management issues, and appointment of Executive Officers.

At present, the Board of Directors is composed of 13 Directors from both within and outside the Company, including five independent Outside Directors, all of whom have advanced knowledge and expertise.

Main agenda items of the Board (which met 18 times in FY2020)

• Medium-term Management Plan
• Comprehensive review of business operations and capital efficiency
• Group capital policy
• Internal Control and Risk Committee reports
• Acceptability of strategically held shares

2. Audit and Supervisory Committee

The Audit and Supervisory Committee is a body composed of all Directors who are Audit and Supervisory Committee members. Working in coordination with the internal control division and the accounting auditor, it engages in audit and supervision of the Executive Officers and Directors who are not Audit and Supervisory Committee members, from the perspectives of compliance and adequacy. The Company presently has five Directors who are Audit and Supervisory Committee members, of which one is from within the Group, and four are independent Outside Directors (of which two have extensive finance and accounting knowledge).

Main agenda items of the Audit and Supervisory Committee (which met 16 times in FY2020)

• Audit plan formulation
• Status of establishment and implementation of internal control systems
• Assessment of Group companies audit status
• Agreement on compensation, evaluation and reappointment of accounting auditors
• Judgement of appropriateness of accounting auditor’s audit
• Opinions on the appointment and compensation of Directors

3. Nomination Advisory Committee

The Nomination Advisory Committee was established as an advisory organization to the Board of Directors in April 2020 by reorganizing the Nomination and Compensation Advisory Committee. The majority of the committee members are Outside Directors, and it is chaired by an independent Outside Director. In response to inquiries received from the Board of Directors, the committee deliberates and reports on matters relating to nomination and succession planning concerning Directors and Executive Officers, and submits items to be decided by the Board of Directors.

The main topics discussed by the Nomination Advisory Committee (which met five times in FY2020)

• Nomination policy
• Succession planning
• Candidates for the positions of Directors and Executive Officers
  

4. Compensation Advisory Committee

The Compensation Advisory Committee was established as an advisory organization to the Board of Directors in April 2020 by reorganizing the Nomination and Compensation Advisory Committee. The majority of the committee members are Outside Directors, and it is chaired by an independent Outside Director. In response to inquiries received from the Board of Directors, the committee deliberates and reports on matters relating to compensation concerning Directors and Executive Officers, and submits items to be decided by the Board of Directors.

Main topics discussed by the Compensation Advisory Committee (which met six times in FY2020)

• Amendment of the performance-based stock compensation plan
• Implementation of a management compensation survey by a third-party agency
• Individual compensation for Directors and Executive Officers
  

Reference: Nomination and Compensation Advisory Committee

The Nomination and Compensation Advisory Committee was established in July 2019 as an advisory body to the Board of Directors, with a majority of Outside Directors and an independent Outside Director as its chairperson. The committee was reorganized into a more specialized advisory body separating the nomination, appointment and dismissal functions from compensation on April 1, 2020, resulting in the Nomination Advisory Committee and the Compensation Advisory Committee.

Main topics discussed by the Nomination and Compensation Advisory Committee (which met three times in FY2020)

• • Succession planning policy
• • Skills matrix of Directors

5. Dentsu Japan Network Board

6. Dentsu International Board

The Company established the Dentsu Japan Network Board (under Dentsu Japan Network, an internal company) to deliberate important matters pertaining to Group companies engaged in the Japan business, and the Dentsu International Board to deliberate important matters pertaining to the Group’s international business, thereby dividing the business execution system into the Japan business sector and the international business sector. Each is delegated responsibility for profit and authority for its respective region.

Corporate governance implementation structure

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Board members

Initiatives aimed at enhancing effectiveness of governance

Evaluation of the Board’s effectiveness

To continuously increase the effectiveness of the Board of Directors, the Company implements an annual survey regarding the effectiveness and appropriateness of corporate supervision by the Board of Directors. Each Director evaluates the effectiveness of the Board of Directors, which, in turn, are analyzed and evaluated by a third-party institution. On receipt of the results from the secretariat of the Board of Directors, the Board of Directors evaluates the overall effectiveness, addresses issues raised and aims to improve the effectiveness.

Change to the method of evaluation on the effectiveness in the fiscal year ended December 31, 2020

FY2019 issues and progress

Improvement was seen in the “management and supervision of Group companies,” an issue identified in the analysis and evaluation in FY2019 as a result of the transition to a pure holding company. The rating of the “provision of necessary information for deliberation on strategy” improved by the use of online portals and other means to enhance information provision.

However, the “CEO successor training plan” and the “provision of necessary information for deliberation on strategy” were identified as ongoing issues, as there was room for further improvement.

Suggestions and actions for improvement

In January 2020, the Company embarked on major changes to its previous governance system, including the transition to a pure holding company and the promotion of diversity on the Board of Directors, and new suggestions have been made as a result of the process. The Company will aim to further enhance the effectiveness of the Board of Directors and strengthen its corporate governance through measures to consider these suggestions.

• Continuous improvement of the long-term vision, management strategy, and governance system supporting them

  The long-term vision and management strategy should be reviewed in a timely and appropriate manner as the environment for the Company changes, and various measures to improve corporate value are implemented. Furthermore, the Company believes that it should not hesitate to flexibly review the organizational form and governance structure suitable for supporting the realization of the long-term vision and management strategy. What is important is that all Directors share the latest long-term vision and management strategy, and measures are implemented in a speedy manner under an appropriate governance system. Accordingly, the Company will pursue continuous improvement.

• Enhanced discussions on ESG issues and development of the Board of Directors’ common understanding

  Recognizing that ESG issues are an important agenda for improving corporate value, the Board of Directors will deepen discussions on the entire Group’s sustainability strategy and establish a system to supervise subsequent actions.

• Intensified discussions on important topics by the Board of Directors / deeper communications by the Board of Directors

  The Company will examine the annual schedule and other matters, set deliberation topics, and fix a schedule for the Board of Directors, with an aim to deepen the Board of Directors’ discussions on important topics. At the same time, measures to facilitate communication among Directors, including Outside Directors, will be implemented.

Training for Directors and Executive Officers

Directors and Executive Officers are provided with training and ongoing opportunities to acquire the knowledge essential for executing their duties in order to properly fulfill their given roles.

Specific examples of training

Enhancing board transparency

Executive compensation

• Compensation policy
  In order to clarify the linkage between the Executive compensation and Dentsu Group’s business performance and corporate value, and to promote the sharing of interests with shareholders and other stakeholders, the Company determines the Executive compensation under the following policy. This also aims to raise the awareness of the Executive Officers to contribute to the sustainable growth of the Group and the enhancement of corporate value over the medium to long term.
  The compensation system shall:
  • Have a globally competitive structure and level
  • Be based on management results, with an appropriate balance of fixed and variable compensation (monetary: annual bonus; performance-based: stock compensation as medium- to long-term bonus)
  • Be at a level reflecting that in the relevant region
• Variable compensation
  To further promote shared interests among stakeholders—including shareholders as well as Directors and Executive Officers—the indicators that had been used until FY2020 to determine variable compensation were revised in FY2021 (ending in December 2021).
  
  The standard values for indicators determining variable compensation are from now on to be set each fiscal year, taking into account the macro- and micro-economic environment, as well as the Group’s business environment.

Compensation ratios (FY2021 revisions)

Fixed compensation: annual base salary as Executive Officers compensation (■)
Variable compensation:* annual bonus (■), Performance-based stock compensation (medium- to long-term bonus) (■)

If performance indicators meet standard values indicated for each type of variable compensation:

Fixed compensation: 60% Variable compensation: 40%

If performance indicators fall below the lower limit indicated for each type of variable compensation:

Fixed compensation: 100% Variable compensation: 0%

If performance indicators exceed the upper limit indicated for each type of variable compensation:

Fixed compensation: 40% Variable compensation: 60%

• * Variable compensation ratios indicate percentages with the annual base salary as 100%.

Note:Directors who are foreign citizens, in principle, receive the main part of their compensation from overseas subsidiaries at which they concurrently serve as officers, and are thus not subject to the system shown above.

Variable compensation indicators

●Annual bonus indicators

Until FY2020:Dentsu Group consolidated operating profit, based on the International Financial Reporting Standards (IFRS).

From FY2021:Depending on the duties of the corporate officers to be compensated, either the Group consolidated underlying operating profit or the consolidated underlying operating profit of business in Japan, based on the IFRS.

Reason:This indicator of profit assesses ongoing business performance and has been determined to be a more appropriate indicator for evaluating business performance over one year.

●Performance-based stock compensation (medium- to long-term bonus)

Until FY2020: The simple three-year average of the Group’s consolidated revenue less the cost-of-sales organic growth rate.

From FY2021: A combination of total shareholder return and Group consolidated underlying operating profit.

• 1. Where the numerical values for indicators are standard values, ratios represent the percentage constituting performance-based stock compensation (medium- to long-term bonus).
• 2. Six companies comprising WPP plc, Omnicom Group Inc., Publicis Groupe S.A., Interpublic Group of Companies Inc, Accenture plc, and Hakuhodo DY Holdings Inc., were selected as peer competitors of Dentsu Group.

Reason:Total shareholder return is employed as an appropriate indicator in line with the perspective of shareholders and all other stakeholders. To evaluate business performance, it was deemed appropriate to adopt the Group consolidated underlying operating profit that measures constant business performance.

Corporate officer compensation

• 1. Executive Officers compensation, being the annual base salary, is limited to those concurrently serving as Executive Officers.
• 2. Limited to internal Directors who are not Audit and Supervisory Committee members and who also serve as Executive Officers.

Strategic shareholding

In order to enhance medium- to long-term corporate value by maintaining and strengthening business relationships with its business partners, the Company, apart from pure investment, sometimes holds shares in listed companies that are the Company’s business partners.

Of such strategic shareholdings, Dentsu Group Inc., in principle, reviews and considers reducing individual stocks through sale, depending on whether the profit and related profits, such as the dividend, are higher than the target capital costs of the Company’s stocks, or whether the stock ownership contributes to the maintenance and enhancement of the business relationship with the investee company and the promotion of collaboration.

Accordingly, each year the Board shall examine the purpose and economic rationale for owning all strategic shareholdings, from a medium- to long-term perspective, and disclose the results in our Corporate Governance Report or other documents.

Risk management

Risk management structure

To the right is a list of major risks associated with the execution of Group strategies, business and other activities that may affect the decisions of investors. Under the corporate governance structure presented in Corporate governance implementation structure, Dentsu Group is engaged in a variety of measures to minimize risks as future uncertainties with the potential to hinder the achievement of management goals as well as to take advantage of these risks as opportunities.

Risk management process

In 2020, the Internal Control and Risk Committee met three times to identify and assess risks that are important for Group management based on the Enterprise Risk Management (ERM) approach. In order to prevent the materialization of identified risks and minimize the impact if they materialize, the Committee selected risk sponsors, delegated the formulation and implementation of risk response plans to them, and regularly monitored the response status.

In addition, an Internal Control and Risk Committee was established at Dentsu Japan Network (hereinafter, “DJN”), and a Risk Committee continued at Dentsu International (hereinafter, “DI”), with both engaging in risk management activities. In 2020, the DJN Internal Control and Risk Committee met six times and the DI Risk Committee met four times.

Starting in 2021, the evaluation of and response plans to the risks for the Group will be discussed at the Group Executive Management Meeting. The Group Risk Meeting is newly established as its subordinate organization.

Major risks with the potential to affect investor decisions and their countermeasures

• Note:For details, please see “Business and Other Risks” starting on page 8 of the “Financial Report 2021.”
  https://www.group.dentsu.com/en/sustainability/reports/2021/pdf/2021_finance.pdf
  For “Basic Policy on Internal Control,” please check our website.
  https://www.group.dentsu.com/en/about-us/governance/internal_control.html

Promoting compliance

Compliance promotion system

Dentsu Group Inc. formulated the “Dentsu Group Code of Conduct” as a guideline for corporate activities. Compliance is an important pillar of the Group’s Code of Conduct, according to which it formulates rules, produces manuals, conducts training, and carries out other efforts to ensure Directors, Executive Officers and employees are able to carry out their duties appropriately.

The Compliance Committee of Dentsu Japan Network (DJN) was established to promote business in Japan, while the Compliance Committee of Dentsu International (DI) was established to promote overseas business.

In yet a further step, the Company set up the Group Compliance Meeting to supervise the aforementioned committees and make decisions on compliance matters from a global perspective.

Against this background, we are working to maintain and improve compliance through implementation of the plan-do-check-act cycle.