Enhancing governance through structure and operation

Koike I understand that dentsu has been recently steadily implementing structural governance enhancements, such as reducing strategic cross-shareholdings and transitioning to be a company with three committees (Nomination, Audit and Compensation). To begin, could you share about your initiatives thus far?

Igarashi Dentsu transitioned to a pure holding company structure in 2020 and has taken this opportunity to strengthen its governance. Primary examples include the transition to be a company with three committees, the separation of management oversight and execution functions, the appointment of a non-executive director as chairman of the Board of Directors, the establishment of a majority of outside directors on the Board of Directors, the appointment of a Chief Governance Officer and a Chief Culture Officer, and the appointment of a General Counsel who is U.S. based. However, we have not yet finished and will continue to promote the establishment of a governance system that is recognized both within Japan and other regions.

Koike While you are pursuing these enhancements on one hand, dentsu was indicted for an alleged violation of the Antimonopoly Act in connection to the bidding for the test events of the Tokyo 2020 Olympic and Paralympic Games (Note: An employee of dentsu's Japanese subsidiary was indicted on suspicion of violating the Antimonopoly Act, and the current Dentsu Group Inc., which was called Dentsu Inc. at the time in 2018, was indicted as a legal entity under the Dual Criminal Liability Provision.). In contrast to the development of various hard structural aspects mentioned above, some believe there are still operational issues, such as in the corporate culture. Based on this, what are your thoughts as CEO on improving governance even more in the future?

Igarashi I am chair of the "dentsu Japan Reform Committee" which will take the lead on pursuing "Mindset and Behavior Reform" for the entire group, including corporate culture. We will be working to prevent recurrence, while also striving to restore trust by establishing an organizational culture where integrity is prioritized.
Our internal culture and employees' mindsets toward their work have been cultivated over many years. We are conscious of the fact that it cannot be changed easily. In order to achieve this goal, we believe it is necessary to take a multilayered approach, spanning revision of the HR system and redefining the qualities we seek in leaders. The Chief Culture Officer of dentsu Japan, a position that was established following the global Chief Culture Officer, is taking the lead by promoting dialogue with employees.

Koike Viewing the skill matrix for your Board of Directors, while there are many member that are strong in supervisory areas, it seems there are few with experience in legal/compliance matters. Though dentsu is a company that prides itself on having strong influence within society, how do you view enhancing the Board's skill matrix and functions to control risks?

Igarashi I think that's a fair point. Our company is keenly aware of the importance of optimizing the balance between audit, business, and compliance. In addition to one board member who is a lawyer and was a public prosecutor, we have also added a new outside director in 2023 who is a certified public accountant formerly with an auditing firm and who has a long history of global compliance management. We look forward to her advice contributing to compliance enhancements.

Redefining Business beyond the Advertising Company Framework

Koike Let me turn the subject to business. The recent evolution of technology is remarkable, and we have seen a shift from mass media to the Internet as the primary means by which people obtain information. As the industry related to media and communications changes structurally, what initiatives do you intend to take to maintain and strengthen your competitive advantage?

Igarashi We are generally perceived as an advertising company, but the reality has changed dramatically. For example, when pitching in Japan or in other regions our competitors have expanded to include consulting and tech companies. In addition, strategic alliances with leading companies outside the advertising industry have become so important in winning pitches and orders from clients. In this context, we are moving into a convergence of marketing, technology and consulting.

Koike Does that mean that your business domain is shifting away from mass media?

Igarashi  There is no change in the fact that television and other forms of mass media make up a certain portion of our business. However, it is also true that this is not enough to meet the needs of our clients. Clients are looking more closely at the effectiveness of their marketing investments, and we need to be more responsive across our marketing-service platforms, which includes data, technology, and analytics. It is our responsibility to solve our clients' challenges, such as the improvement of marketing effectiveness. Moreover, we aim to remain a committed partner in their business growth.

Koike It's clear that dentsu is evolving beyond the advertising company framework. So how should we classify the current dentsu?

Igarashi  It's difficult to classify our company into a single industry framework. Though we could be loosely called a marketing company, it is not a perfect fit. That is why we are introducing dentsu as a company that commits to all of our clients' marketing efforts through the convergence of marketing, consulting, and technology.

Koike Looking at your company's disclosure materials, you've identified CT&T (Customer Transformation & Technology)*1 and IGS (Integrated Growth Solutions)*2 as growth strategies and areas. While I now have a better understanding of these concepts, I would like to see quantifiable results from an investor's perspective, such as how your client services are reflected in your balance sheet or profit/loss statement. By providing a quantitative breakdown of your business and increasing the visibility of your business, I believe you'll increase the amount of materials available for investors and increase your appeal as a target for investment.

Igarashi This was pointed out in our meetings with investors. Investors have told us they understand the direction of our efforts to strengthen CT&T, but it's difficult to see the details. We feel a responsibility to explain this.
We consult with clients regarding their business challenges and offer solutions based on data and analysis. Then, we implement marketing activities as final outputs. Our strengths and defining factor is our ability to engage in end-to-end behavior change for our clients from a marketing perspective.
We are able to create a wide range of value that contributes to our clients' business growth. In Japan, this is classified into AX (Advertising Transformation), BX (Business Transformation), CX (Customer Experience Transformation), and DX (Digital Transformation). Our focus is to bring about a cycle of transformation and growth in our clients' businesses through cross-domain linkage and collaboration by starting from one of the aforementioned categories and expanding to others. There isn't a single recipe for this, which makes explaining CT&T and IGS rather difficult.
I believe the percentage of successful pitches and our work pipeline could be used as indicators. Also, analyzing how a relationship with a key client is developing could be a way to analyze the outcomes of CT&T and IGS.

Increasing Growth Potential via Strategic M&A

Koike I would also like to hear more about dentsu's efforts in M&A. Dentsu acquired the UK company Aegis in 2013 and the US company Merkle in 2016, thereby strengthening your competitiveness in the global market and digital realm. Along with the recent acquisition of the UK's Tag Worldwide Holdings, dentsu has positioned M&A as an important growth strategy. While reflecting on dentsu's M&A activity thus far, could you share your strategies and direction moving forward?

Igarashi The acquisitions of Aegis and Merkle that you mentioned helped us make significant progress in our commitment to strengthening our global network and transforming our offerings. We believe these major M&A examples are progressing according to expectations.
However, not all of our M&A activities have been successful. Based on this experience, we have been giving more attention to whether the integration process diverges from our initial plan or whether sufficient synergies have been created, and this added attention is leading to improvements. Also, in light of the increase in acquisition prices, we are strongly committed to identifying the assets our company needs and linking them to sufficient economic returns.

Koike Dentsu has a strong image in Japan, but about 60% of the Group's net revenue is already generated from overseas, strengthening its global appearance. Given the changes in business patterns and your company's geographic expansion from Japan to global, I believe there will be greater opportunities in the future for companies outside your existing framework to be potential M&A candidates. Can you share some of the challenges involved in managing such diverse organizations and human capital, as well as any related initiatives?

Igarashi  It is important to create a system through which we can quickly grasp accurate information. In order to do so, we believe it is necessary to have both an organizational structure that simplifies decision-making and guarantees diversity. In 2023, our company shifted its management structure to a "Group Management Team," with the aim of creating an open system in which executives can fulfill their roles' accountably while respecting one another. Our company prides itself on being unique within the industry, and we will continue to promote the fusion of our respective strengths within and outside of Japan so that this uniqueness will lead to greater competitiveness.

Beyond BtoB: Addressing Social Issues with Clients

Koike Finally, I would like to ask you about dentsu's relationship with broader society. Your company has been advocating a management model called B2B2S (Business to Business to Society) that addresses not only the business issues of its clients but also the social issues that lie ahead. In the world of asset management, impact investing, which aims to both address social issues and achieve investment returns, is attracting increasing attention, so the concept is very relatable. What is the goal of this model and what are your own feelings on it?

Igarashi  B2B2S was also the message that I communicated to our employees when I became CEO of the group in January 2022. We provide B2B services, but our clients are also working to address social issues as part of their businesses. In other words, we believe that client problem solving is synonymous with social problem solving. Responding to various social issues, such as environmental issues, is important for corporate citizens like us, and we feel that the need to address these issues has become even stronger since the COVID-19 pandemic.
This is also related to our company's vision "to be at the forefront of people-centered transformations that shape society." It is always people who lead transformation in the society, and our people are passionate about creating significant impacts on society together with our clients by integrating diverse capabilities.

Koike  I have high expectations for your further growth and increased corporate value as one of Japan's representative corporations. Thank you for today's fruitful discussion.