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Management Policies of the Toshiba Group Moving Forward (Issues to be Addressed)

(Source: Reports for the 181st Fiscal Period)

Toshiba Next Plan

In November 2018, the Company formulated the Toshiba Next Plan, the overall business plan that aims to transform Toshiba for the upcoming five years. The details of the plan are as follows(If there is change of parts of the Toshiba Next Plan as of today, the details below is updated):

1. Overview and Vision

The Group aims to become Infrastructure Service Company with cyber-physical systems ("CPS") (Note 1) technology by combining the knowledge and capabilities accumulated over years of experience in a wide range of businesses, ranging from infrastructure to electronic devices, with its strengths in information processing, digital and AI technologies. To reach this goal, the Group has developed the Toshiba Next Plan to establish the direction and measures that will transform its business to realize future growth, including five-year numerical targets.

The Group intends to continue contributing to the development of society by providing services and solutions that can help to solve issues facing the world today.

(Note 1) CPS means the system to collect data from the physical world to be analyzed and processed using digital technology. CPS create value through a constant feedback loop between the cyber and physical worlds.

2. Outline of the Toshiba Next Plan

(1) Targets and Four Reforms

The basic objective of the Toshiba Next Plan is to enhance shareholder value by maximizing enterprise value and generating value for its customers, business partners and employees. For this purpose, the Group will implement measures to improve core earning power, and will also secure investments for growth. At the end of fiscal year 2021, the Group aims to generate sales of 3.7 trillion yen and ROS of over 6%. By the end of fiscal year 2023, we are targeting to raise sales to 4 trillion yen and ROS to the 10%. By the end of the plan's five-year timeframe, we are working to maximize corporate value and expand TSR (Note 2) through profitable growth.

The Group will deploy four reforms to improve core earning power. Through structural reform, the Group is working to exit non-focused businesses, optimize its work force, reorganize its production bases and reduce the number of subsidiaries. In August 2019, the Group completed the sale of its liquefied natural gas (LNG) business. To reform procurement, the Group will apply various measures to lower its cost rate. Reforms of sales activities will improve overall efficiency while strengthening the sales force. Measures are also now in place to strengthen evaluations in accepting project order. In process reform, investments will be made to renew IT infrastructure and to change numerous processes throughout the Group toward improving operational efficiencies.

Additionally, the Group has planned capital expenditure of approximately 810 billion yen and R&D investments of approximately 900 billion yen to grow new businesses, improve profit margins and generate future cash flows.

(Note 2) TSR stands for Total Shareholders Return, and refers to the overall yield and return on an investment, including capital gain and dividends, received by shareholders.

(2) Business Portfolio and Action Plans

The Company will thoroughly manage its existing business portfolio by checking the competitiveness of each business and their markets. In businesses where expansion is anticipated, the Company will cultivate organic growth with appropriate investments. Action plans, restructuring its business portfolio, are in place to improve margins in currently low performing businesses. Progress will be monitored regularly and firmly.

(3) Policy on Shareholder Returns

In November 2018, the Company's Board of Directors resolved matters concerning the repurchase of the Company shares of up to 700 billion yen and completed the entire amount of said repurchases by November 2019. The Company intends to maintain average consolidated dividend payout ratio of at least 30%(*), Shareholder's equity in excess of the appropriate level of shareholders' equity will be used to provide shareholder returns, including share repurchases. Appropriate level of shareholders' equity will be periodically reviewed by the Board of Directors.
While the Company will focus in the short term on ensuring its financial stability during the unpredictable COVID-19 situation, it is the Company`s intention in principle, to return the majority of the net proceeds from any KIOXIA Holding Corporation divestiture to shareholders. Furthermore, if the external environment stabilizes, enabling capital markets and the global pandemic to be more predictable in the Fall, the Company expects to be in a position to undertake more proactive portfolio streamlining and divestures, including the assessment of highly accretive M&A opportunities to continuously improve capital allocation in order to further enhance shareholder returns and the long term value of the Company.

(Note 3) For the time being, equity in earnings or losses of KIOXIA Holdings Corporation is excluded from the Company's policy on shareholder returns.

(4) Development of New Growth Fields

The Company sees opportunities in changes in the environment brought about by destructive innovation amid such mega-trends as growing urban infrastructure needs, expanding mobility of people and goods, automation through advanced technological development, expanding advanced medical technologies, and the shift to renewable energy. We aim to grow new businesses by bringing together the Group's unique technologies and resources and investing the management resources for growth. .MicroRNA is a disruptive technique that can detect 13 types of cancer from stage zero with 1 drop of blood with 99% accuracy. We plan to begin a pilot trial for early cancer detection in the near future, targeting 1,000 people. The biodegradable liposome is a technology relating to gene therapy for cancer. We co-developed a "cancer-oriented liposome technology" with Shinshu University which enables accurate and high-efficiency transport of therapeutic cells to target cancer cells.

In Quantum Key Distribution filed, the group pursues commercialization with the aim of becoming the de fact global standard with "cryptographic key supply service" based on our word-leading technology. We are participating in tests and demonstrations in the UK, US, and other countries to validate its utility, and in Japan, we are about to start a proof-of-concept study in multiple locations.

(5) The Company's Digital Transformation

As the digital revolution is increasingly felt throughout society, the Group will transform itself by promoting cultural change throughout the organization in order to adopt to digitization. The Company will build a standardized IoT architecture that defines the basic design and design philosophy of hardware, operating systems (OS), networks, and applications software. We will develop IoT services for electric power generation, railways, buildings, logistics and manufacturing companies by bringing together Toshiba's demonstrated knowledge across diverse business fields.

(6) Establishing the Structure for Execution

To revitalize the venture spirit that is an integral part of Toshiba's DNA, the Company will introduce an initiative to incubate entrepreneurship. Furthermore, to accelerate its digital transformation, the Company will take measures to develop internal talent while proactively seeking to hire new talent from outside.

The organizational structure will be changed to strengthen business operations and secure faster decision making through simplification that consolidates business units and removes layers within the corporate hierarchy. Internal control functions will be reinforced by widening the expanding the scope of internal auditing. In order to ensure executive compensation is in line with shareholder's interests and that effective incentives are in place to maximize long term enterprise value. The Company has decided to change its executive officer compensation system. The majority of performance linked compensation will be paid in restricted stock.

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Implementation of the Toshiba Next Plan

I. Monitoring Business

The status of businesses targeted for monitoring in the Toshiba Next Plan is as follows.

1. System LSI business

Although we reduced development expenses by streamlining our product areas, we were affected by declines in sales volume stemming from the deterioration of the Chinese market. In the future, we will further narrow our focus to analog and microcomputer fields applying our strengths in automotive digital and motor control technologies. We decided to exit the Logic LSI (advanced ASIC) business with the exception of automotive digital technologies and support for existing customers. Considering the intensified US-China trade friction and the post-COVID-19 market environment for our focus areas such as automotive, we believe these factors will have more than a temporary impact, requiring further in-depth consideration.

2. Thermal power business

Due to internationally accelerated efforts to prevent emissions of greenhouse gases, investment in coal-fired power has been restrained and investment has shifted to renewable energy, and as a result, the number of new thermal power projects has declined significantly. In response to the current environment, we have been strengthening our services and solutions business, reforming the layout of manufacturing facilities, and optimizing the allocation of personnel.

3. Industrial motors

Changes in material prices and foreign exchange rates caused by global economic developments and the trade policies of different countries have affected manufacturing costs and profitability. In response, we have shifted to higher efficiency models and reorganized our production system, including relocating production of low voltage motors from North America to Vietnam. Due to these measurements, standards of monitoring list were met in both FY 2019 and FY 2020, industrial motors has been removed from the monitoring list. These initiatives have enabled this business to achieve monitoring thresholds in terms of both actual results in fiscal 2019 and targets in fiscal 2020. As a result, we have removed this business from the monitoring watch-list.

4. Mobile HDD

We recognize that the market size of the Mobile HDDs will contract. In response, we are working to stabilize earnings by accelerating automated manufacturing and by ensuring consolidating mobile HDD manufacturing functions in the Philippines. In addition, we are accelerating a shift toward nearline HDDs for data centers and are working to develop nearline HDDs and secure product certification from customers.

5. Printing

Mainly due to the intensified US-China trade friction and the post-COVID-19 market environment, it is necessary to improve the profitability. We closely monitor Toshiba TEC's structural reforms and discuss necessary measures from the perspective of Toshiba Group's business portfolio strategy.

II. Growth Phase 2

The Company is implementing measures for stronger basic profitability through four reforms, and the effects of these measures are beginning to materialize. While taking steps to further strengthen profitability in the future, the Company will now shift to a growth trajectory as Phase 2 of the Toshiba Next Plan, and work toward realizing the Toshiba Group's vision as a CPS technology company five to 10 years in the future.

As a precursor to these efforts, the Company established Toshiba Data Corporation in February 2020 as a new company that will engage in the business of transforming data into a valuable commodity for implementation in society.

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The agreement related to LNG in the US

The Company has considered various measures for its liquefied natural gas (LNG) business in the United States, taking into account the risk of future losses and other uncertain market conditions.

On August 30, 2019, the Company fully exited the LNG business after transferring all of the outstanding shares of Toshiba America LNG Corporation, the Company's subsidiary in the United States, to Total Gas & Power Asia Private Limited, a subsidiary of energy major Total S.A. located in Singapore, while completing the transfer or cancellation of all the Group's contracts related to the LNG business, including trading agreements concluded between the Group and customers and each contract relevant to the LNG business concluded among Group companies.

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Toshiba Memory Corporation

In June 2018, the Company transferred all shares of the former Toshiba Memory Corporation to K.K. Pangea and re-invested 350.5 billion yen in K.K. Pangea. Thereafter, in August 2018, K.K. Pangea carried out an absorption-style merger with the former Toshiba Memory Corporation with K.K. Pangea as the surviving company and the former Toshiba Memory Corporation as the absorbed company, and K.K. Pangea changed its name to Toshiba Memory Corporation (currently Kioxia Corporation). It also implemented a sole-share transfer making Kioxia Corporation the wholly owned subsidiary in the share transfer and establishing Toshiba Memory Holdings Corporation (currently Kioxia Holdings Corporation) as the parent company in March 2019. The Company acquired the shares of Kioxia Holdings Corporation and made Kioxia Holdings Corporation equity-method company of the Group.

With respect to the shares the Company owns in Kioxia Holdings Corporation, the Company will cooperate to realize the new listing of the shares in accordance with the shareholder agreement concluded.

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Compensation for Officers

A relative TSR of three years was newly added to the executive officer compensation plan introduced under the Toshiba Next Plan in order to create an incentive system directly linked to better increasing shareholder value over the medium to long term.

Additionally, the Company introduced restricted stock compensation for outside Directors and expanded the eligibility of share-based performance-linked incentives to non-executive persons in charge and persons in charge on staff.

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Shareholders Returns

In November 2018, while securing the necessary resources to implement the Toshiba Next Plan, including investment in growth fields, etc., for the portion of the significant amount of capital gains recorded with the completion of the transfer of the shares in former Toshiba Memory Corporation with no immediate plans for use, to secure ample room for growth investment in the future, and in consideration of maintaining a sound shareholders' equity ratio based on the nature of the business, the Company decided that returning an amount of those capital gains that would not impact the risk tolerance to our shareholders and would lead to enhanced ROE (return on equity). After considering the cost of capital, we determined that a shareholder return would be appropriate from the standpoint of further enhancing shareholder value, resolving a share repurchase of up to 700.0 billion yen, from November 9, 2018 through November 8, 2019. As a result, the share repurchase was completed by November 7, 2019. In addition, to distribute surplus, the Company resolved to pay an interim dividend of 10 yen per share to shareholders on the date of record as of September 30, 2019, and to pay a year-end dividend of 10 yen per share. As a result, the total full year dividend will be 20 yen per share.
After or in FY 2020, the Company intends to maintain an average consolidated dividend payout ratio of at least 30% (*Note4), and shareholders' equity in excess of the appropriate level of shareholders' equity will be used to provide shareholder returns, including share repurchases. The appropriate level of capital shall be reviewed by the Board of Directors on a regular basis. While the Company will focus in the short term on ensuring its financial stability during the unpredictable COVID-19 situation, it is the Company`s intention in principle, to return the majority of the net proceeds from any KIOXIA Holding Corporation divestiture to shareholders. Furthermore, if the external environment stabilizes, enabling capital markets and the global pandemic to be more predictable in the Fall, the Company expects to be in a position to undertake more proactive portfolio streamlining and divestures, including the assessment of highly accretive M&A opportunities to continuously improve capital allocation in order to further enhance shareholder returns and the long term value of the Company.

(*Note4) For the time being, equity method profit and loss for KIOXIA Holdings Corporation is excluded from Toshiba's policy on shareholder returns.

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Publicly traded subsidiaries

The Company has deeply discussed the matters regarding its publicly traded subsidiaries at meetings of the Board of Directors as an important governance issue pursuant to the introduction of the practical guidelines on group governance systems published by the Ministry of Economy, Trade and Industry. In November 2019, the Company decided to fully acquire the three subsidiaries of Toshiba Plant Systems & Services Corporation, NuFlare Technology, Inc., and Nishishiba Electric Co., Ltd. in order to enhance corporate value.

The Group acquired the shares using public tender offer and completed the prescribed procedures. As a result, Toshiba Plant Systems & Services Corporation was delisted in January 2020 followed by NuFlare Technology Inc. in March 2020, and Nishishiba Electric Co., Ltd. in February 2020.

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COVID-19

In February 2020, the Company established the COVID-19 Response Task Force to prevent the spread of the novel coronavirus pandemic. This task force is addressing the pandemic with employee safety and putting an end to the situation as top priorities. Following the state of emergency declared by the Japanese government on April 7, 2020, the Company has worked to reduce person-to-person contact as much as possible by requiring all employees to work from home and by shortening the number of business days in April by transferring days off. At the same time, the Group operates many businesses and services essential to maintaining social activities, including our social infrastructure business that forms a foundation of people's lives. In order to fulfill our supply responsibilities and social responsibilities for such, the Company has continued its activities to provide delivery, maintenance and services to customers and business partners and conduct businesses essential to maintaining operations and social activities within the scope necessary and after implementing further measures to mitigate the risk of spreading the virus.

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Improvement of Internal Controls Process

The Company confirmed that there are 24 fictitious circular transactions between 2015 and 2019 in Toshiba IT Service. The company deeply regret this occurrence, especially as we have positioned internal control as one of our highest management priorities since accounting problem. The Company immediately reported this incident to Audit committee and management, including Executive Officer, have given top priority to this matter since the company confirmed. In this investigation, the Company conducted large-scale forensic research, interviews with related parties, and thoroughly examined the evidence under the instruction of external experts such as attorneys and accountants.

While the company also confirmed individual fraudulent by employee in Toshiba International Corporation in U.S., the Company intended to implement measures rooted in the root cause of fraudulent incidents, such as "Corporate culture innovation" "IT system modernization", and "establishment of the Compliance Advisory Committeeā€¯ in order to earnestly deal with internal control enhancement since the accounting fraud scandal in 2015 and 3 lines defense against fraud risk.

Frist and foremost, the company believe that it is important for top management to talk about the importance of compliance and to disseminate it throughout the working level. As the Company has implemented so far, the Company will continue to do so in the future. And the Company implemented a personnel system that places importance on behavioral evaluations.

The second line of defense involves checks and balances by the administrative divisions. Functions such as financial accounting and procurement which serve to monitor operations have been repositioned to report to the Corporate Division to separate them from business operations, and this has already been implemented. We will also improve our data collection functions, prevent human errors and achieve visualization by introducing a new risk management system and introducing the next-generation mission-critical system. In addition, we will continue to work to strengthen group governance by reducing the number of subsidiaries as set forth in the Toshiba Next Plan, which is important from the aspect of strengthening internal control.

The third line is the strengthening of auditing functions. In addition to strengthening the check-and-balance function by establishing a Compliance Advisory Meeting with external experts in cooperation with Compliance Committee, which had been conventionally held on the executive side, the Company will strengthen our ability to detect fraud risks by increasing headcount and by strengthening coordination with corporate auditors.Company keenly aware once again that the events like the recent scandal can destroy everything we have built up as a Toshiba group moment and determined to take the lead in thoroughly implementing measures to prevent its recurrence and to further strengthening our corporate governance.

This Web site contains projections of business results, statements regarding business plans and other forward-looking statements. This information is based on certain assumptions, such as the economic environment, business policies and other factors, as of the date when each document was posted. Actual results may differ significantly from the estimates listed here.