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Third Party Opinion

Keisuke Takegahara
Executive Officer and Deputy Chief Research Officer,
Development Bank of Japan Inc.

In key respects, the Fuji Xerox Sustainability Report 2017 follows the structure of the 2016 report, which introduced a new framework to describe the value creation process. The framework identifies social issues that Fuji Xerox should address from a global perspective, taking these issues as a starting point and linking them to corresponding high-priority management themes that in turn link the issues to value (solutions) provided via Fuji Xerox’s business operations. The result is an outstanding example of nonfinancial information disclosure embodying an “outside-in” approach. Furthermore, the type of company that Fuji Xerox aims to become in the long term as a result of such value creation is set out initially in terms of a broad array of SDGs, then narrowed down to the ultimate goal comprising the eighth SDG 8: “decent work and economic growth.” In my opinion this provides an excellent structure that is very easy to understand as it fits well with the company’s philosophy and business activities.
Such consistency is also evident in the special feature article sections. They focus first on the technological development that underpins Fuji Xerox’s products and services, describing in detail the technological advantages the company has developed to realize its business philosophy of “Better Communications”. Next, they clearly define work process improvement and work style reform as the forms of value created for customers. The resulting narrative is a good example of how the abstract concept of solving social issues can be presented in concrete, easy-to-understand terms. I was particularly impressed by the emphasis on Fuji Xerox’s role in building a platform (or ecosystem) to provide a communication environment and reform work processes, and the fact that this corresponds to the ultimate goal of the company’s value creation process. In general, I thought the special feature article sections were well integrated with the overall concept.
Nonetheless, having noted the above, as well as other outstanding aspects of this year’s sustainability report, I must also refer to the issue of inappropriate accounting practices at the company’s overseas affiliates. The issue is a major theme of this year’s report, which dedicates the Top Commitment and the subsequent four pages to explaining the situation in light of the investigation report released by the Independent Investigation Committee in June. The causes and background problems are analyzed and the responses implemented to resolve the issue are reported in detail. How are we to view this problem within the context of nonfinancial information disclosure?
We could view a company’s nonfinancial information as comprising two layers. One layer relates to the provision of solutions to social issues through business operationsin other words, value creationwhich has been a guiding principle for companies in recent years. The other layer relates to the governance and risk management that provide the basis that supports such value creation activities. A company’s disclosure relating to value creation may be outstanding, but if there is a problem with its disclosure relating to the underlying fundamentals, or relating to the linkage between the two layers, the overall quality of the disclosure is immediately impaired. One implication of the recent accounting issue at Fuji Xerox is that, in a situation where increased ESG (environmental, social, and governance) investment is focusing society’s attention on how well companies do at creating value, we need to return our attention to the importance of the underlying fundamentals, which had come to be taken for granted.
From this perspective, it is clear that certain changes have immediately been incorporated into this year’s report. For example, content regarding the management foundation has been narrowed down to enforcement of corporate governance, enhancement of risk management, and other matters related to internal control, and it was stressed that the robust management foundation is in itself a form of value provided to shareholders and investors.
It will no doubt be necessary to continue adjusting the framework in this way as the company makes progress in implementing its responses to the accounting issue. When making such adjustments, the most fundamental point of contention may be how to balance the relative volumes of information disclosed regarding value creation on one hand, and the management foundation on the other (or between “E” and “S” as opposed to “G”). Increasingly of late, companies are being called on to further enhance their disclosure of governance and related matters to match their more comprehensive disclosure of strategic information. For Fuji Xerox, which can expect its array of remedial measures to come to fruition from now on, this is a point worthy of consideration if it is to further reinforce its outstanding value creation framework.
Even though Fuji Xerox is an unlisted company, as efforts are made to integrate it more fully into the Fujifilm Group, the company’s business operations, as of a key contributor to the overall value provided by the Group, will accordingly elicit greater interest from the capital markets than previously. As a consequence, I believe Fuji Xerox will have more opportunities to provide value not only via its management foundation, but also via its products and services, targeting a wider range of beneficiaries, for example, by treating the Group’s shareholders and investors as stakeholders.
In the medium term, I look forward to seeing further improvements in the way the results of the value creation process are presented. Chapter 3 sets out a range of results, but some of these amount to little more than superficial “output.” I would like to see more depth in the presentation of these results to offer “outcomes” that reflect a greater awareness of their impacts. In conjunction with this, I would like the company to consider linking its CSR indicatorswhich are currently annual targetsto its long-term vision.
In fact Fuji Xerox is not the only company dealing with the types of issues I refer to; there are many others. Fuji Xerox has an excellent value creation framework and I look forward to further advances in its disclosure, given that the company’s course of action in this regard is certain to have a major impact on the way nonfinancial information disclosure develops going forward.