Special Feature: President and CEO ◊ Outside Director Discussion

INCREASING VALUE for stakeholders

We held the special feature program under the theme of "Increasing value for stakeholders".
Mr. Jun Makihara, Outside Director with extensive experience in finance both in Japan and overseas, and Mr. Hideyuki Kudo, Representative Director, President and CEO, had a discussion how to increase corporate value over the medium- and long-term.
This program was moderated by Mr. Yoshinobu Yamada, the banking sector senior analyst at Deutsche Securities Inc.

Special Feature : GROUP INTEGRATION

From left

Mr. Yoshinobu Yamada(Moderator)
Managing Director, Senior Analyst Global Markets Research Deutsche Securities Inc.
Hideyuki Kudo
Representative Director, President and CEO Shinsei Bank, Limited
Mr. Jun Makihara
Outside Director Shinsei Bank, Limited

Value provided to stakeholders

Yamada:What are the methods for increasing over time stakeholder value? Does it ultimately come down to profits?

Kudo: Of course that is the case. A very simple truth is that without increasing net profits, we cannot make all our stakeholders happy. The key is how to steadily increase net profits. Moreover, beyond increasing the absolute size of our earnings, it is important to assure the stock market, for example, that we can keep sustainable growth, and ultimately, confidence in our ability to deliver will impact share price valuation. On the basis of these two perspectives, I think the initiatives we are working on are probably right and that we have probably found a good balance.

Makihara:Unlike manufacturers, financial institutions do not have patents, so when something we try starts off well, rivals will copy us. We must always look for new ideas but we cannot rely solely on new ideas. Regarding sources of sustainable, stable revenue, what I think has the most promising outlook is our relationship with individual consumers.They feel safe in borrowing money from a bank. If they feel they can count on us to do business safely, it will be hard for a competitor to swoop in from the side and snatch them away. I feel a very big piece of Shinsei Bankís future is our relationship with consumers, including Shinsei Financial Co., Ltd. and APLUS FINANCIAL Co., Ltd.

Yamada:Considering that taking on risk can translate into higher profits but not doing so can lead to stagnation, how does Shinsei Bank plan to manage the risks that come from business expansion going forward?

Makihara:For exmple, Our Board of Directors as a whole is very aware that expanding overseas would be a highrisk venture, so apart from pursuing niches we are really confident will go well, there is not much of an inclination to go after overseas opportunities. All of our Board members have had a variety of experiences overseas, so each of them can be objective in weighing risk against reward in making business decisions. When an opportunity overseas comes up for consideration, the debate is quite rigorous.

Kudo:This may seem counterintuitive but if our Board were entirely Japanese, I imagine we would debate going overseas to seek opportunities because of the limited scope for growth in Japan. But when we listen to an American for instance, he would tell us that doing business in the U.S. is not a simple proposition. Given our Board composition, executive officers at the Bank realize they must gather enough materials to be able to convince all our directors. On that basis, we look at various overseas opportunities.

Roles outside directors are expected to fulfill and what outside directors expect of management and executive officers regarding the Shinsei Bank Groupís efforts to increase corporate value over the medium- and long-terms

Yamada:Mr. Makihara, how does the role of an outside director at a bank differ from that at a normal non-financial company?

Makihara:From a general theory perspective, they are the same. Yet, given their oversight responsibilities, I think boards tend to be conservative. They tend to focus on risks. So how does the Board of Directors at a bank differ? Banks face many intangible risks. I also serve as an outside director at a tobacco company, and I understand the risks and whether or not what I am told is consistent. In contrast, banks have many intangible risks. For an outside director of a bank, information that comes to the Board from management and information that we exchange with management are very important. Unless both good and bad information are both properly escalated to the Board, our decision-making will become more and more skewed.
At a normal non-financial company, shareholders are the most important stakeholder but at a bank, shareholders and regulators are. Banks perform key public functions and if they cause problems for depositors, it becomes a national problem. A bankís board must pay attention to shareholders but they must also keep an eye on regulatory authorities as well. This is one way banks differ from non-financial companies.

Yamada:Given that, how do you feel about Shinsei Bankís current corporate governance? Or are there issues you would like to raise?

Makihara:I think corporate governance at Shinsei Bank is very robust. Outside directors comprise a majority on the Board. Each director has a distinct personality and confidently states his views. Board meetings go on for five or six hours, so we debate many issues in detail. Many of our directors are unwilling to move on to the next item even if discussion goes past its allocated time, so each issue is thoroughly debated. In that sense, I think governance is robust. On the matter of information provision, both good and bad information is steadily escalated to the Board, which is also a positive from a governance standpoint. I consider Shinsei Bank to be a governance valedictorian.
Mr. Flowers, Mr. Higa and I all have years or experience overseas and monitor what is happening both in Japan and overseas, and overseas standards and Japanese ones have both strengths and weaknesses, so we can weave all those elements into our debates. Mr. Kani and Mr. Tomimura also weigh in on our debates from their differing viewpoints. The collection of outside directors we have assembled each has his own areas of expertiseóan important attribute in my view. Various data, reports, and other materials are escalated to the Board for review, and if any of us has even a morsel of doubt about what we are reviewing, then we delve into the issue and look hard for answers and debate what we find. I believe one of the important functions of governance is keeping executives on their toes. I think the Bankís executive officers constantly ask themselves how the Board will see their decisions and actions.

The ways outside directors are expected to increase the Shinsei Bank Groupís corporate value over the medium- and long-terms

Yamada:President Kudo, what are your expectations for outside directors?

Kudo:There are two roles I would like outside directors to fulfill. First, as Mr. Makihara said, while I will state it somewhat differently than him, I think "very high-level amateurs" are fine for this role. In my view, it is entirely unnecessary for them to have a complete understanding of banking operations but each outside director must have their own important entry points into discussions. For one, that is IT, and for another, it is governance. All of our outside directors have areas of focus that are important to running a bank, and they must be rigorous in pressing executive officers for answers in these areas. At many companies, Board members ask questions after listening to explanation from executive officers. At that stage, executive officers respond and debate ends when directors signal understanding but at Shinsei Bank debate does not end there. Directors follow up with more questions, asking executive officers "why?" and "what for?" Executive officers must then provide even more in-depth answers. I think challenging executive officers for more detailed responses is an extremely important role for outside directors in their key areas of focus. Unless outside directors are willing to pursue high-stake matters in such a manner, just adding several more members to the Board would not add value.

Shinsei Bank Groupís ambitions for increasing corporate value over the medium- and long-terms

Yamada:How would you as President summarize the strategy, position, and challenges facing the Shinsei Bank Group over the medium- and long-term from here?

Kudo:Chance has conferred on the Shinsei Bank Group some nice pieces, and we have also benefited from several very favorable elements in the business environment. I think, for example, credit cards, shopping credit, and unsecured personal loans are important functions for the Group in our medium- to long-term strategy.
We also do not bear responsibility for a specific region of Japan nor is it necessary for us to worry about Japanís macro-economic fundamentals. We are in a position to simply search for our competitive domains, flexibly design our Groupís composition without any constraints or impediments, and respond to the needs of our customers. Furthermore, we have steadily recorded profits for several years, so we have enough capital to direct some to growth investments if we deem that to be the proper course and we could increase shareholder return. In many ways, we are a position to be flexible.
I think this is an exceedingly important stage for us in terms of how swiftly can we convert this wherewithal into the accumulation of competitive advantages in actual business competition. I think the next two or three years will be decisive. With our competitors still on the fence, the extent to which we can gain and extend a lead will be important, I believe, given latent prospective rivals outside of the banking sector. For that reason, we plan to try various stratagems.
I think the Shinsei Bank Groupís position and way of businesses are likely to be different in the future from now. I hope we can swiftly reach a point where the ultimate evaluation of our customers and how our customers view us will be as "cool" or "interesting." Behind the curtain in operations, we will rigorously seek to improve our productivity but in our customer-facing exteriors, we will need to deploy a variety of functions with very high cost efficiency in ways that favorably impress our customers with the interesting services we offer.

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