Case Study: OMRON – Creating Value through Integrated Reporting
Presentation by Nigel Blakeway, Managing Executive Officer, OMRON Corporation, Chairman, OMRON Management Centers of America, Europe & Asia Pacific, CEO, OMRON Management Center of America and Tsutomu Igaki, Executive Officer | Global Investor & Brand Communications | May 17, 2021
- Founded in 1933
- The origin of the name OMRON is from “Omuro”, the district in Kyoto city where the company was first established
- Four major businesses; industrial automation (52%), electrical and mechanical components (13%), healthcare (17%), social systems, solution and service (17%)
- 148 Group companies worldwide
- Operates in 120 countries and regions
- 28,000 employees
- 2020 net sales 678 billion Yen, gross profit margin 44.8%
- Market capitalization 2.0 trillion Yen
The OMRON Principles
- Mission: To improve lives and contribute to a better society
- Innovation driven by social needs – be a pioneer in creating inspired solutions for the future
- Challenging ourselves – pursue new challenges with passion and courage
- Respect for all – act with integrity and encourage everyone’s potential
- Management philosophy: We believe a business should create value for society through its key practices. We are committed to sustainably increasing our long-term value by putting our mission and values into practice.
OMRON’s mission, vision and management philosophy are based on the company creating value for society and its key stakeholders. OMRON uses its Integrated Report to communicate its value creation story to global investors. Using integrated reporting has enabled OMRON to improve its dialogue with its investors by providing insights in a clear and credible way into its business and management approach. This has enabled OMRON to increase its share ownership and corporate footprint outside of Japan.
Over the last ten years, OMRON’s footprint has globalized with 45.9% of net sales derived in Japan and 18.6% in China, 16% in Europe, Middle East and Africa (EMEA), 10% in the Americas and 9.3% in Asia Pacific. OMRON’s shareholder base has also diversified with more than 50% of institutional shareholders outside of Japan - 49.2% being in Japan, 28.3% in US and Canada, 10.5% in the UK, 6.5% in Europe, and 5.5% in other countries and regions. This global shareholder base has also provided OMRON greater weight in the M&A space.
Integrated reporting has enabled OMRON to integrate its sustainability initiatives and contribution to society with its ability to optimize earnings and return on invested capital (ROIC).
OMRON has four major businesses (industrial automation, electronic components, social systems, and healthcare). Its business model has been evolving rapidly in recent years with high growth in healthcare, OMRON’s only business focused on direct business-to-consumer sales. In all its businesses, OMRON’s focus is on innovation driven by social needs linked to the SDGs, and on delivering the products that consumers need (OMRON has been selected as top 100 global innovator for four consecutive years).
Management Based on OMRON Principles
The OMRON Principles are the cornerstone of corporate decision making and actions, and are cascaded down the organization. OMRON is sustainably increasing long-term value by putting its Mission and Values into practice across all business units and regions.
Sustainability initiatives are driven through a long-term management plan (Value Generation 2020 /VG2.0), OMRON Group Management Policy, and proactive stakeholder engagement to cultivate strong relationships with all stakeholders.
In 2011, OMRON started its VG2020 plan that outlines a 10-year vision for the company. VG2.0 represents the medium-term management plan launched in 2017, and defines a long-term strategy to respond to social change beyond the timeframe.
Using the SDGs as a frame of reference helps OMRON anticipate the world in 2030 and define the social issues that need addressing. OMRON is currently setting its management targets for 2030 which within the context of the key drivers of societal changes (aging society, climate change and econmic inequality), defines the corporate activities for solving social issues based on a collaborative value creation approach with its key stakeholders.
A “GLOCAL” (global and local ledership) management approach is important given societal needs in the context of the SDGs is culture specific. Local management in different regions interpet the SDGs in meaningful ways for local markets so that the global management philosophy and principles address local challenges. This approach requires strong local leadership reporting back to the HQ in Kyoto. The approximately 60 business units are subject to a portfolio management system (see below).
OMRON aligns its VG2.0 goals with its sustainability initiatives and targets to pursue sustainable corporate value through the generation of social value. Sustainability initiatives and targets/KPIs are linked to VG2.0 business strategies. Accountability and governance for sustainability involves integrating the SDGs into business strategies by clearly identifying social issues and stakeholder expectations to be solved through its business model. OMRON’s sustainability goals are then linked to fiscal goals and targets.
Sustainability Management Structure
The governance and management structure drives OMRON’s plan-do-check-act (PDCA) cycle for material issues through the entire group and business units. This is driven by the CEO and supervised by the Board of Directors. The integrated risk management structure is also based on the PDCA management cycle and is conducted throughout the year to analyze and respond to material risks, and engage in crisis management.
The PDCA cycle covers:
- PLAN: Annual plans – setting strategies, targets and KPIs
- DO: Implement/promote material issues
- CHECK: Monitor progress and addressing gaps
- ACT: Annual achievements and modiying and developing policies.
Defining and measuring value in financial and non-financial dimensions
OMRON views the maximization of corporate value as a key management target which is represented by the sum of the value essential for solving social issues, as created by corporate activities and capabilities to continue solvng social issues into the future.
The CFO ensures OMRON is on a sound financial footing for implementing its strategy and investing in R&D and future growth. A ROIC management approach is adopted to maximize earning ability and to consider the value to solving the potential social benefit through the project. The ROIC management approach involves breaking ROIC down into key performance indicators to help improve ROIC in each business unit and department, and utilizes portfolio management which involves business units being evaluated based on their economic and market values based on ROIC exceeding cost of capital and sales growth rate.
Management’s focus is primarily on delivering on mid and long term plans. A financial goal might be forgone if it could lead to long term damage to the company. If ROIC falls below OMRON’s estimated cost of capital of 6%, a business unit will be given a period of time in which to improve return on invested capital and to fulfil growth potential, after which point divestiture is considered.
Understanding and communicating non-financial value and performance requires continual checks and balances to validate and respond to changing stakeholder expectations among customers, partners, employees and investors.
The OMRON Integrated Report
OMRON produced its first integrated report in 2012 which integrated its annual and (corporate social responsibility) CSR reports. Its Integrated Report uses the International Integrated Reporting Framework, the World Intellectual Capital Initiative and GRI Sustainability Reporting Standards (see OMRON’s GRI Content Index) to ensure credibility.
OMRON has found that the integrated reporting approach appeals to millennials and helps to target the new generation of investors and customers.
The integrated report has received recognition from various third-party assessments including from Government Pension Investment Fund of Japan which has awarded OMRON’s Integrated Report an integrated reporting excellence award. OMRON has also been recognized for excellence in transparency and disclosure by The Securities Analysts Association of Japan (2018 and 2020) and the Japan Investor Relations Association (2018).
OMRON is also included in various ESG indicies including the Dow Jones Sustainability Indicies (for the 4th consecutive year), the FTSE4Good Index Series (5th consectuive year) and the MSCI ESG Leaders Indexes (6th consecutive year).
OMRON’s integrated report is available in Japanese, English and Chinese.
Role of OMRON’s Accounting Firms
OMRON adopts the organizational structure of “Company with an Audit and Supervisory Board” as stipulated by the Companies Act in Japan. The Audit and Supervisory Board works in collaboration with external auditors to ensure the management and reporting system enables sufficient and appropriate auditing.
OMRON’s independent audit is provided by Deloitte. Strategic and business plans, including sustainability goals as well as quaterly financial performance and analysis of operating results, are shared with the auditor to help ensure they fully understand the company and its performance. This provides Deloitte a better foundation to review the descriptive information of the company as part of OMRON’s annual securities report. OMRON has been expanding audit-related information that is discussed between the auditor and the Audit and Supervisory Board to include other areas in a continuous audit approach covering management strategies, operating results and risk information. This helps the auditor improve its audit planning and risk assessment, as well as the determination and communication of key audit matters (KAMs) if applicable.
In addition to the independent audit of its financial statements provided by Deloitte, OMRON believes independent assurance provided by KPMG is important to improve the accuracy and objectivity of specific elements of its Integrated Report.
The scope of the Independent Practitioner’s Assurance Report covers various elements of the report including key data on governance matters particularly related to diversity (e.g., ratio of women in managerial roles), which is of strategic importance to OMRON. Other data subject to assurance includes GHG emissions and envrionmental contribution.
OMRON’s Audit and Supervisory Board
The Audit and Supervisory Board oversees the evaluation of the performance of directors’ duties, appointment and dismissal of external auditors, and the determination of external auditors’ remuneration.
Audit and Supervisory Board members are elected by shareholders once every two years at the general shareholders meeting. As they perform their duties, the members work to secure the integrity of the OMRON Group toward sustainable enhancement of corporate value. Audit and Supervisory Board members are expected to put the Omron Principles into practice and should have a strong sense of ethics, fairness, and integrity for performing their duties.
They are also expected to have specialized knowledge in law, finance, accounting, management, and other related areas.
This was a presentation to the IFAC Professional Accountants in Business Advisory Group during their March 2021 meeting. See here for the full meeting report: Enabling Purpose Driven Organizations: PAIBs Leading Sustainability and Digital Transformation