Representative Executive Officer

Courage to Advance Toward the Next Stage, Inspired by Human Capital Management

I see 2023 as the year in which MARUI GROUP embarked on its advancement toward its next stage. This is also a year in which we have finally started to see connections being formed between the various initiatives we have undertaken thus far, and the vision we imagined has thus begun to take shape. Moreover, the times have caught up with our initiatives, and our values are coming to align with those of society.

This realization is underscored by the recent trends pertaining to human capital management. The basic tenets of human capital management are to position people as the primary proponents of value creation and to invest in these people and utilize their talents to heighten corporate value. This approach stands in stark contrast to prior management conventions, which have viewed people as a cost to be controlled. Human capital management has long been a priority in Europe and the United States, but only just recently, specifically since 2020 or so, has Japan been turning its attention toward this approach. Discussions regarding human capital management in Japan have been advanced largely by the Ministry of Economy, Trade and Industry.

These discussions have led to the decision to make disclosure of information related to human capital in a company’s annual securities report mandatory beginning in the fiscal year ended March 31, 2023. This decision resulted in a sharp rise in the amount of attention directed toward human capital management, prompting many to view 2022 as the start of Japan’s full-fledged promotion of this practice. MARUI GROUP was quick to embrace this trend, providing explanations on its human capital management activities for shareholders and other investors at a financial results briefing held in May 2022 (see presentation entitled “Human Capital-Focused Management of MARUI GROUP #1 Corporate Culture Reforms” for more information). We also included human capital-related information in the annual securities report we disclosed in June of the same year.

In these activities, we came to realize that the approach which has come to be known as “human capital management” is shockingly similar to the approach that MARUI GROUP has been taking for the more than 15 years since 2007.

Of course, it is not as though the term “human capital management” existed 15 years ago, and we were thus not engaged in “human capital management” in the literal sense. Rather, what I mean to say, is that the measures we took to become the type of company we envisioned or to work as we desired as part of exercising MARUI GROUP’s corporate philosophy—“equate the development of our people with the development of our company”—have resulted in an approach that matched that of human capital management.

When we became aware of this pleasant coincidence, we found it most empowering. This realization cast light on the fact that the times had caught up with the principles we have cherished thus far, signifying that our values have aligned with those of society. We were presented with proof that both society and MARUI GROUP value the same principles and that our values matched the times. This feeling of empowerment brought us joy and gave us the courage to start our advancement toward the next stage.

Introduction of New Article, “Exercise of Corporate Philosophy,” into Articles of Incorporation to Further Cement Vision

I would now like to continue our discussion of the topic of human capital management by talking about the steps we have taken thus far and the path we will take going forward (see presentation entitled “Human CapitalFocused Management of MARUI GROUP #2 Evolution to Company Resolving Social Issues” for more information).

In 2019, we unveiled MARUI GROUP’s 2050 Vision, which describes our vision of harnessing the power of business to build a world that transcends the dichotomies of impact and profit. This move created the current that would culminate in our definition of impact targets, alongside standard financial targets pertaining to earnings and capital efficiency, in the medium-term management plan that was launched in 2021.

Our impact targets pertain to the social issues MARUI GROUP strives to tackle. The goal in defining these targets was not merely to introduce a new set of targets. Rather, we sought to reshape our approach toward management so that our financial targets would be met as a result of the accomplishment of our impact targets. However, even after we had effectively defined the overarching themes for our impact targets, we still needed to undertake a process of trial and error to determine how best to incorporate these targets into our actual business activities.

As we undertook this process, we began to witness the gradual creation of innovations that enabled us to generate earnings while still having our desired impact on society. Examples of such innovations found in Co-Creation Management Report 2023 include our Kesou brand of sustainable shoes, renewable energy initiatives, social bonds, and the HERALBONY Card. These initiatives may still only be in their infancy, but this does not change the fact that they are helping us produce earnings along with our desired impact.

It is our goal to increase and develop such initiatives in order to generate larger and more wide-reaching results so that MARUI GROUP can evolve into a company that contributes to the resolution of social issues. To further cement this vision, we revised our articles of incorporation to include the new article of “Exercise of Corporate Philosophy” following approval at the General Meeting of Shareholders held in June 2023. Articles of incorporation stipulate the rules that must be followed in the operation of a company and are therefore sometimes referred to as the “constitution” of that company. I recognize that the articles of incorporation are important, not just for shareholders but for all stakeholders. For this reason, we have chosen to include the text of the newly introduced article in its entirety in this report.

Here, I declare MARUI GROUP’s intention to evolve into a company that contributes to the resolution of social issues by fulfilling its mission of co-creating an inclusive society that offers happiness to all together with stakeholders in accordance with its corporate philosophy We thereby aim to achieve earnings growth while contributing to the resolution of social issues.

Link Between Impact KPIs and Financial KPIs

In conjunction with the revision to our articles of incorporation, we updated the impact targets we announced in 2021 to create the new impact targets 2.0 (see Figure 1). These updated impact targets indicate the path we will take toward exercising our corporate philosophy and fulfilling our mission.

In addition, we have defined impact key performance indicators (KPIs) as well as financial KPIs, and targets have been set for these KPIs to be accomplished by 2030 (see Figure 2). KPIs represent important indicators of progress toward the accomplishment of an organization’s goals and are thus generally expressed in numerical terms. Meanwhile, a company’s social impact is something that is difficult to express in numbers. Despite this reality, we chose to set numerical targets for our impact KPIs in order to confirm that our initiatives are contributing to the progress of our goals.

Another characteristic of MARUI GROUP’s KPIs is how we have chosen to link our impact KPIs to our financial KPIs. This was done to guide us in generating earnings while achieving our desired impact. The question then becomes: How to go about doing this? Determining the ideal approach requires a road map that details how the accomplishment of our impact targets will lead to the accomplishment of our financial targets. For this reason, we employ logic models, representations of the logical cause–effect relationship between an initiative and its intended goal.

IMPACT BOOK 2023, which MARUI GROUP published in June 2023, contains a logic model that illustrates how our initiatives for achieving each specific impact target will contribute to the realization of our desired impact and to improvements in earnings and capital efficiency. This document also provides a report on the progress of said initiatives. I invite anyone who is interested to take a look.

Development of an Organization in Which “Flow States” Can Be Achieved through Work to Fully Exercise Creativity.

It cannot be denied that achieving earnings growth while contributing to the resolution of social issues is something that is easier said than done, an undertaking that can be expected to be incredibly challenging. If we are to accomplish this lofty goal, it will be crucial for all employees to fully exercise their creativity.

When considering how best to help employees fully exercise their creativity, we turned to the idea of “flow” defined by psychologist Mihaly Csikszentmihalyi. “Flow” refers to a state of being so engaged in an activity that one forgets time and themselves. This occurs when the challenge at hand matches the skill level of the individual.

Csikszentmihalyi speaks of how, by experiencing a “flow state,” people are able to fully exercise their creativity to overcome greater challenges and grow as a result. Moreover, this state creates a feeling of joy in relation to the associated experience. By developing an organization in which employees can achieve a flow state through their work, we aim to achieve our vision while contributing to the happiness of employees.

This is a goal that we are approaching from the two perspectives of workstyle and organizational innovation and digital transformation.

Our approach toward workstyle and organizational innovation entails the expansion of project team-oriented workstyles. In addition to traditionally structured organizations, we also look to expand opportunities to engage in project team-oriented workstyles, which involve coordination across ranks and organizations, and to take part in co-creative teams that work together with external initiatives and the start-up companies in which MARUI GROUP invests.

At the same time, we look to develop organizations without direct supervisors. In such organizations, the section managers have traditionally been responsible for overseeing that organizations will be reframed as team supporters, as opposed to organization supervisors. In this new role, these individuals will be expected to create a flat organization in which all members act with autonomy in order to exercise creativity as a team.

We are also stepping up early promotions to management positions. Specifically, we have revised human resource systems to support the early promotion of individuals anticipated to contribute to improvements in corporate value by reducing the minimum age for management positions from 29 to 26. This allows talented individuals to quickly climb the ranks in what has been deemed a form of human capital investment. By providing highly capable young employees with opportunities to exercise their talents earlier in their careers, we look to accelerate the creation of innovation.

Meanwhile, we are promoting digital transformation based on the understanding that digital technologies are imperative for rectifying the disparity between the current state of the Company and its vision. Digital technologies can be used to lend greater speed and leverage to our initiatives. We also recognize the need to employ a rapid cycle of verifying hypotheses if we are to accomplish our lofty goal of achieving earnings growth while producing our desired impact. Unfortunately, though, MARUI GROUP found itself lacking the people necessary to advance digital transformation. This is why we founded Muture Corporation, a joint venture with cutting-edge user experience design company Goodpatch Inc., in April 2022. Through Muture, we have commenced recruitment of the type of specialists who would not normally be attracted by the MARUI GROUP brand. We have thereby been able to attract numerous individuals who are at the pinnacle of their respective industries, and these individuals are helping with the development of apps and web services for MARUI GROUP.

Muture made it possible for us to harness the skills of specialists for use in product development. This, however, revealed some new challenges. Specifically, we became aware of the need to make the entire organization more agile if we are to advance product development through Companywide efforts and to continuously evolve these efforts.

MARUI GROUP has developed a prowess in relation to core systems development. However, we are lacking the people capable of leading the development of completely different types of agile organizations. This is why we invited Naofumi Tsuchiya, representative director and CEO of Goodpatch, our partner in establishing Muture, to serve as our CDXO (chief digital transformation officer) in June 2023. Mr. Tsuchiya possesses sophisticated insight in relation to organization development and has the perspective of both a digital technology specialist and a manager. The advice he offers based on these perspectives is anticipated to help us develop more agile organizations.

Definition of Numbers of New Undertakings and Attempts as Action KPIs to Encourage Employees to Work Toward Their Ambitions

As we move forward with the initiatives I have discussed thus far, we are also pressing ahead with the transformation of our corporate culture. In the past, we have sought to develop a distinctive corporate culture through unique initiatives such as encouraging voluntary participation in various initiatives by employees. Going forward, we will seek to function as a social experiment in order to foster a culture of acceptance toward failure and encouragement of ambition. To this end, action KPIs have been identified including the numbers of new undertakings and attempts with the goal of encouraging employees to work toward their ambitions.

Included in the number of new undertakings is the number of participants in project teams, initiatives, and co-creative teams as well as in internal app development and web service development contests. The number of attempts, meanwhile, looks at the numbers of both successes and failures in attempts to create innovation for the improvement of operating processes, the development of new products and services, and the creation of new businesses.

We have set the targets of 5,000 new undertakings and 5,000 attempts by the fiscal year ending March 31, 2031. We have also launched new initiatives to support such undertakings and attempts, including the introduction of the Fail Forward Award into internal award programs, which honors failed attempts to create new businesses, as well as forums for sharing examples of failures. By tackling various new challenges as a form of social experiment, we are working to overwrite the negative connotation of failure to create a corporate culture in which it is deemed only natural for everyone to experience failure and in which people are not afraid to tackle new challenges.

I think that this type of corporate culture is something that many Japanese companies, not just MARUI GROUP, are in dire need of. We therefore look to function as a social experiment and to thereby contribute to society by leading the way in fostering such a culture. Through this experiment, MARUI GROUP will strive to become a company that can constantly create innovation.

High Growth Coupled with High Returns Achieved by Evolving into a Company That Contributes to the Resolution of Social Issues through Human Capital Investment

In conjunction with such initiatives, we are also ramping up our investments in people. Our anticipated internal rate of return for human capital investment is 12.7%, which is higher than the level of 10% that is the standard used for returns from investments in stores and other tangible assets. Given these high anticipated returns, we expect to be able to achieve highly efficient management by investing more than ¥65.0 billion in human capital over the next five years.

The increase in human capital investment is also expected to drive improvements in corporate value. Looking at the portion of corporate value attributable to intangible assets, we will see intangible assets accounting for around 90% of the corporate value of U.S. companies, while the figure for Japanese companies is much lower at 32%. Focusing just on MARUI GROUP, the ratio of intangible assets to total assets is currently 44%. Through our investments in human capital going forward, we look to raise this ratio to the level of 80% seen at U.S. companies by 2030 and to thereby boost corporate value.

In this manner, we plan to adopt a new management approach that transcends the previously perceived dichotomy between growth and returns to achieve high growth coupled with high returns.

Lastly, I would like to touch on the type of corporate value that MARUI GROUP should pursue going forward. By evolving into a company that contributes to the resolution of social issues through human capital investment, we will aspire to raise return on equity from the current level of 10% to 25% and to increase the price-to-book ratio from the present 1.7 times to 5.0 times going forward. It is my goal for us to be able to look back at 2023 five or 10 years from now and to recognize that this year was the year in which MARUI GROUP embarked on its advancement toward its next stage. I will devote my all, or rather, I will achieve a flow state to work toward this goal through co-creation together with our stakeholders. I hope that we can look forward to the ongoing support of our customers, investors, business partners, communities and society, and future generations.