Profile. Contents. Shiseido commenced operations as Japan s first Westernstyle. pharmacy in Tokyo s Ginza district in 1872, a time when

Transcription

1

2 Profile Shiseido commenced operations as Japan s first Westernstyle pharmacy in Tokyo s Ginza district in 1872, a time when Chinese herbal remedies were the mainstream in Japan. The name Shiseido derives from a Chinese expression meaning praise the virtues of the great Earth, which nurtures new life and brings forth new values. In line with this expression, Shiseido remains committed to its founding spirit of serving customers and contributing to society by bringing together all things on Earth to create new value. Contents Our Mission, Values and Way 4 Shiseido s History of Creating Value 6 Financial Highlights 8 Message from the President & CEO 10 Feature: The Growth Strategies of the New Three-Year Plan 16 Brand/Line Overview 24 Review of Operations Domestic Cosmetics Business 26 Global Business 29 Initiatives Based on Our Way 32 Toward Consumers 33 Toward Business Partners 37 Toward Employees 38 Toward Society and the Earth 40 Environmental Data 44 Social Data 45 Shiseido s Management Structure 46 Board of Directors, Corporate Auditors and Corporate Officers 47 Corporate Governance 50 Risk Management 55 Main Subsidiaries and Affiliates 58 Financial Section 59 Six-Year Summary of Selected Financial Data 60 Management s Discussion and Analysis 61 Consolidated Financial Statements 76 Notes to the Consolidated Financial Statements 82 Independent Auditors Report 103 Investor Information 104 Corporate Information 105 Forward-Looking Statements In this annual report, statements other than historical facts are forward-looking statements that reflect the Company s plans and expectations. These forward-looking statements involve risks, uncertainties and other factors that may cause actual results and achievements to differ from those anticipated in these statements.

3

4 Our Mission, Values and Way 1. We consistently strive to research, develop, manufacture and sell safe and excellent products and services that deliver true satisfaction from the standpoint of consumers. 2. We sincerely strive to enhance satisfaction and trust at all points of contact with consumers. 3. We continually strive to increase the value of all of the Shiseido Group s brands. 1. We select business partners properly, and engage in fair, transparent and free competition and appropriate business transactions. 2. We do not provide or accept gifts or entertainment that may cause suspicion regarding our fairness. 3. We respect all of our business partners who share our aims, and work together with them toward sustained growth. 1. We strive to continuously enhance the Shiseido Group s corporate value by making full use of its tangible, intangible, financial and other assets. 2. We comply with rules concerning corporate governance and internal controls, and follow proper accounting procedures. 3. We place importance on dialogues with shareholders and investors, and strive to earn their trust. 1. We respect the character and individuality of everyone in the work place, in all their diversity, and strive to develop and grow together. 2. We work conscientiously and maintain a clear distinction between professional and private matters. 3. We strive to create a safe, healthy work environment and enhance employees comfort and sense of fulfillment. 1. We abide by the laws of each country and region in which we operate, and maintain sound ethical behavior as well as respect human rights. 2. We promote environmental initiatives in line with our own stringent standards, and consider biodiversity as we aim for a sustainable society in which humanity and the Earth coexist beautifully. 3. We engage in a broad dialogue with society and strive to cooperate in solving social challenges. 4 SHISEIDO ANNUAL REPORT 2011

5 Our Mission sets out a universal raison d être that is core to Shiseido, and our corporate message This moment. This life. Beautifully. symbolizes our mission. We created it to communicate throughout society our aim of being even more customer-oriented in order to respond sincerely to the desire among people worldwide to be beautiful. Over its history, Shiseido has done much to help people live beautifully. As we move into the future, we will satisfy customers even more by providing appealing products and attentive services while fulfilling our responsibilities to society. We want to assist society, customers and all people in experiencing This moment. This life. Beautifully. SHISEIDO ANNUAL REPORT

6 Shiseido s History of Creating Value 139 Years of Evolution Building New Business Models After opening Japan s first Western-style pharmacy in 1872, Shiseido entered the cosmetics business by launching the lotion Eudermine. Since then, we have constantly evolved through unique initiatives such as research and development akin to that of the pharmaceutical industry and serving customers with a spirit of omotenashi (hospitality) to give people health and beauty. Japan s first network of voluntar y chain stores. Individualized beauty consultation at sales counters that started with the introduction of Miss Shiseido. These are but a few examples of forward-looking new business models that Shiseido has built to exceed customer expectations. Our will and passion in taking on challenge after challenge generates growth for Shiseido Initiated Shiseido chain stores, Japan s first voluntary chain store system 1934 Introduced Miss Shiseido, the predecessor to modern beauty consultants 1937 Launched member organization Hanatsubaki Club with the goal of popularizing proper cosmetics techniques 1957 Established Taiwan Shiseido Co., Ltd. and began full-scale overseas operations Entered the cosmetics business by launching Eudermine lotion 1918 Launched Cold Cream, Japan s first true beauty cream Launched Deluxe, the highestgrade cosmetics of their day Launched MG5, the first true cosmetics for men in Japan 1976 Launched Inoui, a brand created for global development 6 SHISEIDO ANNUAL REPORT 2011

7 Nurturing Diversity on a Global Level Shiseido has successively developed operations in countries and regions worldwide since establishing a subsidiary in Taiwan in By flexibly responding to customer and market changes, we have made steady Continuously Innovating to Create Sublime Beauty We complement brand assets that we originate and refine, including clé de peau Beauté and the global brand, by adding energetic brands such as NARS and Bare Escentuals. Our tradition of continuously innovating to create unique value is the source of the sublime beauty we create. progress in globalization. One of our greatest strengths is the diversity engendered by our global progress. An organization that recognizes individuality and embraces differences in values is the foundation for creating new value Began sales of cosmetics in Beijing, China 2006 Expanded R&D operations to five regions around the world with the establishment of Shiseido Southeast Asia Research Center 2006 Opened the first Shiseido Life Quality Beauty Center 2010 Constructed a new factory in Vietnam as a base for the masstige market Launched China-only brand AUPRES Launched top-end prestige brand clé de peau BEAUTÉ 2000 Acquired the U.S. makeup brand NARS Launched MAQUILLAGE, the first mega line 2010 Acquired U.S. company Bare Escentuals, Inc. SHISEIDO ANNUAL REPORT

8 Financial Highlights Shiseido Company, Limited, and Subsidiaries For the years ended March 31, 2009, 2010 and 2011 Percent change Millions of yen Thousands of U.S. dollars (Note 1) 2011/ Operating Results: Net sales +4.1% 690, , ,701 $8,066,158 Operating income ,914 50,351 44, ,672 Net income ,373 33,671 12, ,830 Financial Position: Total assets 4.5% 606, , ,184 $8,901,792 Net assets , , ,191 3,862,790 Please refer to page 60 for an in-depth six-year summary of selected financial data. Net Sales (Billions of yen) Operating Income / Operating Profitability (Billions of yen / %) Net Income (Billions of yen) (Years ended March) (Years ended March) (Years ended March) Operating income Operating profitability 11 Return on Equity Net Income per Share Cash Dividends per Share (%) (Yen) (Yen) (Years ended March) (Years ended March) (Years ended March) 11 8 SHISEIDO ANNUAL REPORT 2011

9 Percent change Yen U.S. dollars (Note 1) 2011/ Per Share Data: Net income (Note 2) 62.0% $0.39 Net assets (Note 2) Cash dividend ± Financial Ratios: Operating profitability 7.2% 7.8% 6.6% Return on equity Payout ratio (Consolidated) Notes: 1. All dollar amounts herein refer to U.S. currency. Yen amounts have been translated, solely for the convenience of the reader, at the rate of to US$1 prevailing on March 31, Net income per share (basic) is calculated based on the weighted average number of shares outstanding during each respective year. Net assets per share is calculated before dilution. Net Sales by Reportable Segment (Billions of yen) (%) (Years ended March) (Years ended March) (Years ended March) Domestic Cosmetics Business Domestic Cosmetics Business Americas Europe Global Business Others Global Business Others Asia/Oceania Overseas Sales Ratio Net Sales by Geographic Area (Billions of yen) (%) Profitability by Reportable Segment Operating Profitability by Geographic Area Overseas Sales / Overseas Sales Ratio (Billions of yen / %) Interest-bearing Debt / Interest-bearing Debt Ratio (Billions of yen / %) (Years ended March) Japan Americas Europe Asia/Oceania (Years ended March) Japan Americas Europe Asia/Oceania (Years ended March) Interest-bearing debt Interest-bearing debt ratio Notes: 1. Net sales by reportable segment and geographic area represent sales to external customers only and do not include intersegment/interarea sales or transfers. 2. Profitability by reportable segment and operating profitability by geographic area do not include eliminations/corporate. 3. Effective the fiscal year ended March 2011, the Company has reclassified its operations into three segments for reporting purposes, in line with its application of Accounting Standards Related to Disclosure of Segment Information. The new segments are: Domestic Cosmetics Business, Global Business, and Others. The domestic professional business, previously included within the Domestic Cosmetics segment, is now included in the Global Business segment. 4. Interest-bearing debt ratio = Interest-bearing debt Invested capital* * Invested capital = Interest-bearing debt + Total net assets SHISEIDO ANNUAL REPORT

10 Message from the President & CEO Profile 1959: Born in Tokyo (currently 52 years old) 1982: Joined Shiseido Co., Ltd. After six years of experience as a sales manager in Nara, Japan, began handling strategy formulation and other projects at the head office. 2005: Designed and formulated the Three- Year Plan in the Corporate Planning Department. Worked with President and CEO Maeda (now Chairman) in promoting reform. Subsequently became General Manager of the Business Planning Department. 2008: Corporate Officer and General Manager of Corporate Planning Department 2009: Corporate Officer (Director) 2010: Corporate Executive Officer (Director) 2011: President & CEO (Representative Director), effective April 1 Hisayuki Suekawa President & CEO (Representative Director) 10 SHISEIDO ANNUAL REPORT 2011

11 Shiseido aims to become a global player representing Asia with its origins in Japan. Under the theme of getting into a growth trajectory, the new Three-Year Plan will guide Shiseido in achieving a turnaround in Japan and accelerating globalization to evolve into and remain an outstanding company in the future. The previous Three-Year Plan achieved strong growth overseas, but unfinished issues remain in the Japanese market. I am Hisayuki Suekawa. I became President & CEO of Shiseido in April I received the baton of reform from my predecessor, Shinzo Maeda, and will carry it forward as the head of the Company. I intend to lead the advance of Shiseido s innovation. I would like to begin my explanation of Shiseido s management policies and strategies by providing an overview of the various reforms we implemented in Japan and overseas during the previous Three-Year Plan, which had the theme of improving the quality of activities across the board. The year ended March 2011 was the final year of the previous Three-Year Plan. Overseas sales increased solidly, with strong growth in China and the rest of Asia complemented by the sales of Bare Escentuals, Inc., which we acquired in the year ended March In the domestic market, some sectors such as the self-selection category showed signs of recovery. However, the mid-priced market, a crucial market segment for Shiseido, was challenging and remains an area we must work on. Operating income decreased partly because of lower sales in Japan and nonrecurring costs associated with the acquisition of Bare Escentuals. Our progress overseas during the past three years was impressive. In addition to strengthening cultivation of the global brand, we worked aggressively to enhance competitiveness through initiatives such as accelerating growth in China by concentrating on channel-specific marketing. As a result, we achieved solid sales growth at a compound annual growth rate of 13 percent on a local currency basis. We generated substantial sales growth in all the regions we serve, with compound annual growth rates of 26 percent in the Americas, 11 percent in Asia/Oceania, and 5 percent in Europe. For the year ended March 2011, the overseas sales ratio increased to 42.9 percent, leading me to conclude that we have cultivated strong businesses with a solid foundation. In Japan, however, sales continued to decrease. We focused on key areas in each channel and concentrated resources. As a result, our efforts were successful at department stores and priority voluntary chain stores, but we experienced difficulties selling mid-priced products at drugstores and general merchandise stores. Two factors SHISEIDO ANNUAL REPORT

12 have weakened domestic sales: marketing reliant on new products and insufficient response to evolving customers and markets. During the previous Three-Year Plan, we implemented all reforms as planned. Some of them succeeded, but we also recognize that our reforms are only halfway complete. My mission is to drive Shiseido s evolution by taking charge of and accelerating the reforms we have been implementing. We must quickly achieve a domestic business turnaround and accelerate globalization to get Shiseido into a growth trajectory. In 2008, Shiseido declared its goal for the coming decade of becoming a global player representing Asia with its origins in Japan, and drew up a 10-year roadmap for achieving it. Our goal for the year ending March 2018 is to become a company with consolidated net sales in excess of 1 trillion and an overseas sales ratio of more than 50 percent that can consistently achieve operating profitability of 12 percent or higher and return on equity (ROE) of 15 percent or higher. The new Three-Year Plan is Phase II of this roadmap, and has the theme of getting Shiseido into a growth trajectory. Taking a fresh look at Shiseido at the start of the new Three-Year Plan, we have entered a new phase of globalization in which overseas sales account for about 40 percent of net sales, and similarly, approximately 40 percent of our employees are not Japanese. During this period of major management transformation, guidelines that help all employees of the Shiseido Group share the same raison d être, values, and spirit in initiatives are essential. We therefore revised our existing Corporate Philosophy to create Ten-Year Roadmap New Three-Year Plan Shiseido Shiseido Paradigm shift through fundamental reforms Globalization Phase Improve quality of activities across the board Establish a presence in Asia Globalization Phase Get into a growth trajectory Globalization Phase Make a leap forward Become a global player Year ending March 2018 Accelerated transformation into a global company (Integration of domestic and overseas business operations) Customer-oriented marketing reforms 12 SHISEIDO ANNUAL REPORT 2011

13 Message from the President & CEO a new and evolutionary Corporate Philosophy for the Shiseido Group: Our Mission, Values and Way. In creating it, we drew on the opinions of Group employees worldwide, involving more than 5,000 people. I believe that we will achieve sustained growth with all employees sharing this Corporate Philosophy and putting it into practice every day, and I will take the lead in activities to inculcate it. My top two priorities in getting Shiseido into a growth trajectory will be revitalizing our business in Japan and accelerating globalization. We will take radical steps to quickly turn around and energize operations in the challenging domestic cosmetics market. We will also generate growth by keeping pace with our global competitors as we further expand our global business. This is the only way for us to evolve. With this rationale as a starting point, for the new Three-Year Plan, we will carry on the three Visions we introduced in 2005: Rebirth as a 100% Customer-Oriented Company ; Brighten Our Brand, a Valuable Management Resource ; and Fill the Shiseido Organization with People with Their Own Appeal. We have also formulated four growth strategies and will support the Visions and these strategies with measures that reinforce the management base. We will continue to take on greater challenges by executing our four growth strategies. Four growth strategies underpin the new Three-Year Plan. The first is the Global Mega- Brand Strategy, in which we will consider markets beyond regional boundaries and focus deployment of resources from the perspectives of distinction and concentration. Our aim is to become a Global Multiple-Brand Company that has several brands with 50 billion to 100 billion in annual sales each. We plan to select three brands each from the prestige and masstige* categories, and will focus on developing them as global mega-brands. Next is the Asian Breakthrough Strategy. We aim to expand our overall share in the Asian market, which is expected to become the world s largest by 2020, by designating Asia as our priority area. Our first step will be revamping marketing and sales strategies in the crucial Japanese market to achieve growth that exceeds that of the overall market. We will also emphasize initiatives in China, where we are strong, and in other Asian countries in order to reinforce our management base. Third is the New Frontier Strategy. Shiseido will increase points of contact with customers in new sales channels through full-scale Web-based marketing. In Japan, we are establishing a new business format that links the Internet and existing stores, and will begin full-scale development from April At the same time, we will work to develop emerging markets as future engines of growth. Fourth is the Customer-First Strategy. The aim of this strategy is to become No. 1 in terms of customer support worldwide through dramatic reforms that put customers first in all of our business processes. This will involve thoroughly refining product development and sales activities. (Please refer to The Growth Strategies of the New Three-Year Plan on pages 16 to 23 for more detail on Shiseido s growth strategies.) *Masstige: A word coined from mass and prestige. Masstige products are positioned as more expensive than massproduced products, but more moderately priced than prestige products. SHISEIDO ANNUAL REPORT

14 We will reinforce our management base so that we match our global competitors. Shiseido will support its four growth strategies by reinforcing its management base with multifaceted initiatives that focus on global optimization. In production and procurement, efforts to optimize and strengthen our supply chain will include further enhancing the efficiency of production and distribution in Asia. In addition, we will work to standardize operations and accelerate decision-making by introducing our SAP core business processing system to establish the basis for global information processing. We are also fostering the globalization of human resources in ways such as helping local employees overseas shape their careers and cultivating global executives. Moreover, we plan to deepen our global commitment to the corporate social responsibility (CSR) activities we have been strengthening over the past several years in areas such as the environment and social contribution. Shiseido fulfills its corporate responsibilities by promoting management that contributes to people s beauty and health. I would like to expand on my earlier comments about CSR activities to explain how Shiseido will approach management. The Our Way section of Our Mission, Values and Way, which I mentioned earlier, defines the way we should behave toward our stakeholders. In addition, Our Way includes the Ten Principles of the United Nations Global Compact, which we have participated in since 2004, as well as the principles and reasoning of the world s first CSR standards, ISO In other words, Our Way is Shiseido s CSR charter. Through dialogue and cooperation with stakeholders, Shiseido aims to achieve a sustainable society by undertaking activities that address the issues and expectations of society. Specifically, we will realize our vision for 2020 by working companywide in the three areas in which we can make an important contribution to society: women and cosmetics (beauty); culture; and the environment. Shiseido also believes that assisting in the recovery from the Great East Japan Earthquake of March 2011 is an important responsibility. In April 2011, I visited stores in the stricken areas of Morioka, Sendai, and Fukushima. Many people affected by the earthquake made comments such as I would at least like a mirror and an eyebrow pencil and I feel lost without lotion, which highlighted just how essential cosmetics are in the daily lives of women. We would like to support the recovery through unique activities that deliver the enjoyment and pleasure of cosmetics, including the stable supply of cosmetics and beauty volunteer activities at the emergency shelters. (Please refer to Initiatives Based on Our Way on pages 32 to 45 for more detail on Shiseido s CSR activities.) 14 SHISEIDO ANNUAL REPORT 2011

15 Message from the President & CEO Management Targets of the New Three-Year Plan Compound annual growth in net sales of 6% or higher (Local currency basis) Operating profitability of 10% within three years (Assumed exchange rates: 80 per U.S. dollar, 110 per euro, and 12.5 per Chinese yuan) Shiseido must consistently take on challenges to evolve into and remain an outstanding company in the future. The targets of the new Three-Year Plan are compound annual growth in net sales of 6 percent or higher on a local currency basis and operating profitability of 10 percent within three years. The Great East Japan Earthquake has created uncertainties in materials acquisition, production and business confidence, and its impact on domestic sales will be substantial. At first, we considered revising our numerical targets, but chose not to, deciding instead to work companywide to achieve our goals and vision for the year ending March Our targets are high and achieving them will be a challenge. We will increase investments in areas such as marketing both in Japan and overseas to get Shiseido into a growth trajector y during the year ending March 2012 by steadily enhancing the foundation for accelerating growth from the year ending March We aim to maximize returns to shareholders through direct means and by generating medium- and long-term share price gains. To this end, our fundamental policy is to make strategic investments that drive earnings growth while raising capital efficiency, which will lead to medium- and long-term increases in dividends and share price. Our target for returns over the medium-term is a consolidated payout ratio of 40 percent. Based on this target, we will prioritize payment of stable dividends while implementing share buybacks in a flexible manner. For the year ending March 2012, we plan to keep annual dividends at 50 per share due to the expectation that earnings will increase under the new Three- Year Plan and our continuing emphasis on stable dividends. My mission is to carry on Shiseido s founding spirit of serving customers and contributing to society through beauty and to continue creating new and richer sources of value by discovering many new customers so that Shiseido evolves into and remains an outstanding company in the future. I pledge to devote my heart and soul to this mission. We are counting on the continued support of shareholders and investors as we evolve to meet your expectations. July 2011 Hisayuki Suekawa President & CEO (Representative Director) SHISEIDO ANNUAL REPORT

16 Feature: The Growth Strategies of the New Three-Year Plan Shiseido s new Three-Year Plan ending March 2014 is Phase II of Shiseido s drive to become a global player representing Asia with its origins in Japan. Under the theme of getting Shiseido into a growth trajectory, the new Three-Year Plan has four strategies for achieving a turnaround in the Japanese market and accelerating globalization. This interview with President Suekawa explores Shiseido s four growth strategies and plans for the first year of the Three-Year Plan. Rebirth as a 100% Customer- Oriented Company Brighten Our Brand, a Valuable Management Resource Fill the Shiseido Organization with People with Their Own Appeal Japan China Asian Countries Americas Europe Recovery of growth potential Sustained growth in the markets, which serve as a growth engine Increasing opportunities to discover customers in the expanding middle-income group Refining the prestige image Global Mega-Brand Strategy Asian Breakthrough Strategy New Frontier Strategy Customer- First Strategy Upgrade Shiseido Group brand value Improvement of brand value in the prestige market Full-scale promotion of the masstige market Expanding market share in Asia Promote the priority activities in each country Full-scale entry to direct marketing Enhancement of initiatives in emerging countries Refining product development Refining of sales activities Reinforcement of management base Optimization of production system Improvement of procurement system Establishment of IT infrastructure Globalization of human resources Deepening of CSR Activities 16 SHISEIDO ANNUAL REPORT 2011

17 Growth Strategy 1 Global Mega-Brand Strategy How will Shiseido build its brands in the future? expand the discovery of new customers in the rapidly growing middle-income group, primarily in Asia. Shiseido aims to keep pace with its global competitors as a Global Multiple-Brand Company that has several brands with 50 billion to 100 billion in annual sales each. Conventionally, Shiseido has developed brands originating in Japan, Europe and the Americas globally by enhancing their unique value and presence in each area. With the overseas sales ratio now over 40 percent, our brand strategy entails accelerating globalization. We will continue our ef for ts to maximize brand value by area while designating global mega-brands for priority development through concentrated investments of manpower, marketing outlays and other resources to address markets that extend beyond regional boundaries. We have selected three prestige brands and three masstige brands to become our six global mega-brands. We will enhance the value of Shiseido Group brands in the prestige categor y while increasing opportunities in the masstige category to What are your initiatives for each of the six global mega-brands? In the prestige category, our plan is to accelerate globalization by focusing on the development of three brands: the global brand, clé de peau Beauté, and Bare Escentuals. We will cultivate the global brand SHIS, which is now available in 85 countries and regions including Japan, by strengthening the lines and enhancing the brand concept so that brand presence rivals that of its global competitors from Europe and the United States. We will also enhance the presence of the clé de peau Beauté brand, which was comprehensively renewed in spring 2011, as a brand that appeals to affluent consumers in Asia and the United States. We will maximize synergies with Bare Escentuals, which we acquired in March 2010, with a focus on further growth in the Americas and business Overseas Sales Ratio % 42.9% 6.5% (Years ended March) SHISEIDO ANNUAL REPORT

18 Global Mega-Brands Bare Escentuals Za Global brand clé de Peau Beauté Senka expansion into Europe centering on the United Kingdom, and into Asia from Japan. In the masstige category, the total skincare and makeup brand Za, which is sold in nine Asian countries with a focus on China, per formed strongly. We will position Za as a self-selection and advice brand, taking into account the characteristics of the countries and regions it serves. We will also expand regional coverage for Senka, a skincare brand for the low-priced market in Japan and the masstige market in Asia that we have already launched in Japan and Taiwan. We will emphasize its quality as a product originating in Japan and carefully consider customer needs in the countries and regions we serve with the aim of increasing sales. We also plan to introduce a third brand to expand beyond skincare and makeup. Under the new Three-Year Plan, we will aggressively promote the Global Mega-Brand Strategy to expand growth in the prestige and masstige categories in Asia while enhancing brand presence in the European and U.S. prestige markets. In addition to the six global mega-brands, we have many distinctive brands that are rooted in specific regions. These include the designer fragrance brands of Beauté Prestige International S.A. that originated in Europe, DECLÉOR and CARITA in the professional category, and the NARS makeup brand that originated in the United States. We also have AUPRES and URARA, which we originated in China, along with MAQUILLAGE and Elixir from Japan. We will further enhance the value of these brands/lines to complement our global mega-brands, thus building a powerful brand portfolio with the aim of becoming a Global Multiple-Brand Company. (For further information regarding our brands/ lines, please refer to Brand/Line Overview on pages 24 and 25.) 18 SHISEIDO ANNUAL REPORT 2011

19 Feature: The Growth Strategies of the New Three-Year Plan Growth Strategy 2 Asian Breakthrough Strategy What initiatives will Shiseido execute in its home market of Japan? Shiseido must act on its declaration to become a global player representing Asia with its origins in Japan by increasing market share in Asia, including Japan. In doing so, our top priority will be achieving a turnaround in Japan, which accounts for approximately 60 percent of net sales. Our sales in Japan have been lackluster because of 1) marketing reliant on new products; and 2) insufficient response to evolving customers and markets. We will address these issues by implementing fundamental reforms focused on two key areas: stepping up cultivation of existing products and introducing a new Web-based business model. Our first initiative in stepping up cultivation of existing products will be reducing the number of new products while enhancing value brand by brand. We will take a scalpel to inefficient marketing by intensely promoting a policy of not launching products unless they win customer acclaim. Moving proactively to implement this policy, we achieved solid results during a spring 2011 MAQUILLAGE promotion by developing information and renewing communication. Significantly reducing the number of new products will free up manpower and costs that we will reinvest in the value chain, including research and development, information development, sales activities, and activities of beauty consultants at sales counters. This will increase the quality of all activities. We will also promote flexible front-line sales activities and foster innovation by shifting strategy formulation functions, authority for ordering promotional materials, and certain marketing outlays to a sales subsidiary from our head office. Further, we will create mechanisms for responding quickly by area to changing customer needs. Promoting these reforms will increase sales at stores, which will also support reduction of store inventory. Because initiatives to develop existing products are especially crucial to turning around domestic operations, I will lead them myself. I am visiting workplaces and stores throughout Japan to deepen employee understanding Development in Asia Prioritize allocation of resources to achieve stable growth in the future Sustain double-digit growth by further strengthening our business base China Other Asian Markets Concentrate investment in nurturing existing businesses Develop new Web-based marketing Japan Enhance the prestige business Promote full-scale development of masstige brands SHISEIDO ANNUAL REPORT

20 and get them working on specific activities. Introducing a new Web-based business model, one of the pillars of our New Frontier Strategy, will involve promoting a new marketing approach that capitalizes on the characteristics of both stores and the Internet. I will cover this in detail later. We will strengthen investment to promote these reforms during the year ending March 2012, primarily through marketing outlays. We expect this investment to drive steady growth in the year ending March 2013 and beyond. What will be the focus of initiatives to generate stable growth in Asia? China is an engine of growth for Shiseido, but because of its strong growth potential, our global competitors are investing heavily in aggressive strategies in this market. Shiseido has been doing business in China for 30 years since entering the market in We will maintain our presence in China while putting priority on allocating even more resources to this market to sustain growth. Significantly strengthening investment will reinforce the powerful business base we have created to date as we move to maintain double-digit sales growth and achieve operating profitability of at least 10 percent under the new Three-Year Plan. Our initiatives to build a solid business base involve further enhancing the prestige category and expanding the masstige business. We will thoroughly enhance the global brand and the Chinaonly brand AUPRES in department stores to solidify their appeal in China. We now have contracts with more than 5,000 cosmetics specialty stores. The next stage will involve enhancing performance by further expanding sales per store. We will do so by stepping up cultivation of URARA, Pure & Mild and d ici là. In the drugstore channel, where we market DQ, we will achieve further growth through means including improved communication. We will complement channel-specific initiatives by using the Shiseido Group s comprehensive capabilities to open up markets. For example, we will launch Bare Escentuals, and enhance our presence in salons through the professional business. We will focus investment of personnel, marketing outlays and other resources on these activities with the aim of achieving sustained growth in the Chinese market. In Asian markets other than Japan and China, where the middle-income segment is expected to increase significantly in the future, Shiseido will enhance the prestige business and promote full-scale development of masstige brands. We will reinforce our presence in the priority markets of Taiwan, Korea and Thailand to increase sales. Our goal of increasing sales will include aiming for an even greater share of Taiwan s prestige market and building our presence in key markets such as the Korean market, where we have an opportunity to grow sales, and the Thai market, which is our base in the ASEAN region. In Japan, we will review responsiveness at sales counters and enhance communication of product value. 20 SHISEIDO ANNUAL REPORT 2011 In China, initiatives such as major promotions for AUPRES will help maintain strong growth. In other Asian countries, we will aggressively expand and build the presence of masstige brands such as Za and Senka.

21 Feature: The Growth Strategies of the New Three-Year Plan Growth Strategy 3 New Frontier Strategy Please explain Shiseido s new Web marketing initiative. In order to succeed in the global market of the future, we need to respond quickly to changing customers and markets while identifying and developing growth markets. In the new Three-Year Plan, we aim to expand points of contact with customers through full-scale marketing efforts in Japan and overseas that center on the rapidly growing activity on the Internet. First of all, we will initiate e-commerce in the United States and China. At the same time, in Japan, while leveraging the strengths of our large network of stores, we will establish a new Web-based cosmetics sales store business model. In 2012, we will begin full-scale development of the new cosmetics sales store business model, starting with an online shopping mall called the Beauty Platform. We will cultivate it as a comprehensive website for beauty and health where not only the Shiseido Group but also many companies involved in areas such as beauty, healthcare, medical products and fashion will participate. As of April 2011, we forecast that the customer organizations of Shiseido and companies considering participation would have a total of approximately 20 million registered members. Customers will visit the Shiseido website via the Beauty Platform. In addition to attractive content, we will present optimum beauty solutions by using our database encompassing customers, products and stores. Many customers say they want to try out the scent, look or feel of cosmetics before making a New Cosmetics Sales Store Business Model Customer Discovery Shopping Mall (the virtual online stores of various companies) Diverse Content Platform Business Deepen Relationships with Customers Introduce Customers Store Navigation Beauty Platform Online Counseling Beauty Content Shiseido Website Online Shop Direct Marketing Sales of Existing Brick-and- Mortar Stores Existing Brick-and- Mortar Stores SHISEIDO ANNUAL REPORT

22 purchase. The Shiseido website will have a store navigation function to introduce these customers to stores that sell our products, and will also offer a convenient online shop where customers can purchase approximately 3,000 products. This unique business model that leverages the Internet to expand points of contact to discover customers and introduce them to brick-and-mortar stores will be indispensable to future growth. Growth Strategy 4 Customer- First Strategy What is the background of Shiseido s Customer-First Strategy and what initiatives will it entail? How will Shiseido develop emerging countries into its next growth engine? Shiseido is working to accelerate expansion in new markets. Under the previous Three-Year Plan, we newly entered 13 countries. As of March 31, 2011, our products were available in a total of 85 countries and regions, including Japan. In the new Three-Year Plan, Shiseido will expand the regions in which its products are available while further strengthening initiatives in emerging countries that offer significant opportunities for growth. In Russia, which has seen strong growth particularly over the past several years, we will enhance in-store activities that focus on our strength in skincare. We aim to become one of the top five companies in Russia s prestige market. Number of Countries and Regions Where Shiseido Products Are Available The term customer-first has two meanings. One is putting customers first in all activities and processes. The other is becoming No. 1 in terms of customer support worldwide. This strategy is at the heart of the new Three-Year Plan and is relevant to all corporate activities to become a global player representing Asia with its origins in Japan. We will put customers first by returning to our roots and thoroughly refining manufacturing as well as product development and sales activities. We will execute a complete overhaul of all areas of the value chain, from research, development and production to marketing, sales and beauty consulting, without clinging to our past successes. We will work to maximize customer satisfaction and prevail in global competition by developing information that communicates value commensurate with product price and having all beauty consultants worldwide ser ve customers in the full spirit of Shiseido s unique omotenashi (hospitality) (Dec.) 2011 (Mar.) 22 SHISEIDO ANNUAL REPORT 2011

23 Feature: The Growth Strategies of the New Three-Year Plan Performance Forecast for the Year Ending March 2012 Strategy in the First Year of the New Three-Year Plan During the new Three-Year Plan, we are aiming for compound annual growth in sales of 6 percent or higher on a local currency basis and operating profitability of 10 percent within three years by implementing the four strategies I have just outlined. For the year ending March 2012, we forecast that net sales will increase 1.4 percent year on year to 680 billion, assuming that the Great East Japan Earthquake will have the effect of reducing domestic sales by approximately 10 billion, the markets of Europe and North America will continue to recover, and sales will increase in Asian markets, particularly China. Breaking down this forecast, we believe that domestic sales will be essentially unchanged compared with the year ended March 2011, while overseas sales will increase 10 percent on a local currency basis and 3.2 percent on a yen basis. However, we forecast that operating income will decrease to 40 billion from the year ended March 2011 because we will invest heavily in areas such as marketing in order to achieve growth in the year ending March 2013 and beyond. These investments will total approximately 20 billion 7 billion in Japan and approximately 13 billion overseas. We will reinforce existing businesses in Japan by increasing marketing outlays in areas including adver tising as well as sample and promotional expenses for front-line sales. We will also invest aggressively in marketing to build a solid foundation for our new Web-based business model that we will launch in Overseas, we are emphasizing China, where we will increase marketing outlays to expand our presence and market share. We also plan to strengthen sales by shifting personnel including sales and beauty consultants from Japan to China. Worldwide, we will energetically invest in cultivating the global mega-brands in both the prestige and masstige categories. We forecast that net income will increase 64.2 percent year on year to 21 billion because other expenses and tax payments will decrease significantly. We therefore forecast that increasing investment to generate future growth in Japan and overseas will reduce operating income for the year ending March However, steadily accelerating growth through this investment will help us achieve the targets of the new Three-Year Plan. Performance Forecast for the Year Ending March 2012 (Billions of yen) Year-on-Year Year-on-Year Change Forecast Change (Local currency basis*) Net sales % 4% Domestic sales % Overseas sales % 10% Operating income % Net income % Overseas sales ratio 43.7% 0.8 points Operating profitability 5.9% 0.7 points * Assumed exchange rates: 80 per U.S. dollar, 110 per euro, and 12.5 per Chinese yuan SHISEIDO ANNUAL REPORT

24 Brand/Line Overview Shiseido aims to build a powerful brand portfolio by combining global mega-brands developed on a priority basis to extend beyond regional boundaries and brands for which it is enhancing presence in specific regions. Domestic Cosmetics Business Domestic Cosmetics Division Counseling Self-selection Global Mega- Prestige REVITAL GRANAS J MAQUILLAGE J C A Aqua Label J C A Global brand SHISEIDO J C A U E ELIXIR SUPERIEUR J C A Bénéfique J A Uno J C A Toiletries Integrate J A clé de peau BEAUTÉ J C A U Tsubaki J C A E SEA BREEZE J A Healthcare Division Non-Shiseido Bare Escentuals bareminerals The Collagen J In & On J IPSA J C A d ici là J C A J U E 24 SHISEIDO ANNUAL REPORT 2011

25 Main Regions of Availability Japan: J China: C Asian countries: A North America: U Europe: E Global Business Overseas Cosmetics Division Brands Non-Shiseido Masstige ISSEY MIYAKE J C A U E NARS J C A U E narciso rodriguez J A U E China Za C A AUPRES C DQ C URARA C Pure & Mild C Senka J A Overseas and Domestic Professional Divisions One Brand Targeted for Category Expansion (New Launch Planned) JOICO C A U DECLÉOR J C A U E Qi J C A CARITA J A U E SHISEIDO ANNUAL REPORT

26 Review of Operations Domestic Cosmetics Business The Domestic Cosmetics Business manufactures cosmetics and toiletries for sale in Japan. In a difficult, contracting market, the Domestic Cosmetics Business continued to emphasize concentration and distinction in promoting measures to strengthen sales through rearrangement of targeted stores and brands according to specific channels. Business Overview Share of Total Net Sales Net Sales / Segment Income Net Sales (Left scale) (Billions of yen) Segment Income (Right scale) (Billions of yen) % (Years ended March) Sales by Division (Year Ended March 2011) Sales (Billions of yen) Percent change Counseling cosmetics % Self-selection cosmetics % Toiletries % Domestic Cosmetics Division % Healthcare Division % Others % Total % Note: Effective the fiscal year ended March 2011, the Company has reclassified its operations into three segments for reporting purposes, in line with its application of Accounting Standards Related to Disclosure of Segment Information. The new segments are: Domestic Cosmetics Business, Global Business, and Others. The domestic professional business, previously included within the Domestic Cosmetics segment, is now included in the Global Business segment. A leading company in Japan s cosmetics market, Shiseido operates in the primarily high-priced, highvalue-added counseling product category, the spot counseling category centering on mid-priced items, the self-selection market encompassing low-priced products, and the toiletries category. Shiseido s high-value-added counseling products are sold at voluntary chain stores, department stores and general merchandise stores. Midpriced and self-selection products are mainly sold at drugstores. Among these channels, Shiseido is capitalizing on the advantages of the voluntary chain stores and department stores that can provide the quality services and counseling that the Company aims for. Overview of Performance in the Year Ended March 2011 Against a backdrop of factors such as cooling consumer sentiment, the domestic over-the-counter cosmetics market has continued to contract since the second half of the year ended March In the year ended March 2011, the market shrank a further 1 to 2 percent. Structurally, the markets for high- and low-priced products were relatively firm. However, weak sales in the mid-priced product market were a key factor Trends in the Domestic Over-the-Counter Cosmetics Market (Shiseido estimates) Year-on-year change in sales Year ended Year ended Year ended March 2009 March 2010 March % 3 4% 1 2% 26 SHISEIDO ANNUAL REPORT 2011

27 clé de peau Beauté Shiseido s largest-selling top-end prestige brand in the Domestic Cosmetics Division. Moving to enhance it as a global brand, we generated strong results by renewing the brand s skincare products in January 2011 and its makeup products in February causing overall sales in the Domestic Cosmetics Business to decrease 6.6 percent compared with the previous fiscal year to billion. Segment income (operating income) decreased 13.8 percent compared with the previous fiscal year to 33.6 billion. Efforts to deploy selling, general, and administrative expenses such as marketing costs more efficiently did not fully compensate for the significant reduction in marginal income due to lower sales. Overview of Performance in the Year Ended March 2011: Domestic Cosmetics Division During the year ended March 2011, we continued fostering mega lines and relationship-building brands/ lines 1 to achieve long-seller product status. We also continued executing measures to strengthen sales by narrowing priority areas in each channel and concentrating resources in them. For primarily high-priced, high-value-added counseling products, we achieved steady results at department stores with the ongoing implementation of our Double Counter strategy entailing separate counters for the global brand and the top-end prestige brand clé de peau Beauté. In the second half of the year, we undertook a comprehensive renewal of the clé de peau Beauté brand lineup, including package design and image model. Ongoing implementation of our PS Program 2 generated strong results at voluntary chain stores by focusing on improvement at approximately 800 participating stores. In the spot counseling category, centering on midpriced items and one-point counseling (tips), we stepped up initiatives to foster the MAQUILLAGE line in its fifth year on the market. We also renewed the Elixir Superieur line. While these initiatives resulted in solid performance by clé de peau Beauté and other high-priced brands/ lines, the impact of contraction of the market for midpriced items and weak sales of flagship lines such as MAQUILLAGE A core total makeup line in the Domestic Cosmetics Division. In the spring 2011 promotion, Shiseido concentrated on renewing communication used in the July 2010 launch of MAQUILLAGE Rouge Enamel Glamour. This approach is an example of successful cultivation of existing products. SHISEIDO ANNUAL REPORT

28 Elixir and MAQUILLAGE caused overall sales of counseling cosmetics to decrease 8.5 percent year on year. In the self-selection category, we launched new Anessa sunscreens that offer exceptional ultraviolet ray protection and do not require special cleansers for removal. We also continued to cultivate the Integrate line of mineral foundations, which remained a hit. However, self-selection sales decreased 3.7 percent year on year because of lackluster performance of the Uno line, in which we launched Fog Bar in the previous fiscal year, and the Aqua Label line. In the toiletries category, the SEA BREEZE line popular primarily among teenage users performed well, supported by a hot summer. The strategic skincare brand Senka targeting the low-priced market was also a solid performer. However, Tsubaki struggled because of intense competition in the shampoo market, which caused overall toiletry sales to decrease 10 percent year on year. As a result of the above, overall sales in the Domestic Cosmetics Division decreased 7.5 percent year on year to billion. According to Shiseido estimates for the year ended March 2011, our over-the-counter sales for counseling and selfselection cosmetics contracted 2 to 3 percent year on year. Consequently, our store inventory (inventory in the process of distribution) also decreased year on year. Anessa Senka ANESSA has the top share in Japan s sunscreen market. New products performed well because we made them more pleasing to use and employed unique technology to enhance sun protection. Sales of Senka were strong, with 2.5 million units shipped in the first 11 weeks after its launch in September We also began sales in Taiwan in October 2010, and plan to launch the brand successively in other Asian countries. Overview of Performance in the Year Ended March 2011: Healthcare Division Shiseido stepped up efforts to cultivate brands, augmenting The Collagen, the top-selling line of supplements in the collagen market in terms of over-the counter sales. We added High-Activated Beauty Powder, which can be taken by dissolving it in food and beverages. We also launched new products, including Kirei no Susume, a balanced beverage product, and IHADA, a pharmaceutical for skin problems that cosmetics cannot resolve. As a result, sales in the Healthcare Division continued to expand, increasing 2.6 percent to 15.6 billion compared with the previous fiscal year. 1. Relationship-building brands/lines: Brands/lines that deepen relationships with customers through counseling. 2. PS Program: A strategy for nurturing voluntary chain stores with growth potential that want to strengthen cooperation with Shiseido. The program involves the formulation of shared goals and focused execution tailored to each store s unique characteristics. 28 SHISEIDO ANNUAL REPORT 2011

29 Review of Operations Global Business The Global Business manufactures cosmetics for sale overseas and products for hair and beauty salons for sale in Japan and overseas. In the year ended March 2011, the Global Business enhanced its presence in Western prestige markets and concentrated on maintaining strong growth in China and expanding points of contact with customers in the Asian masstige market. Business Overview Share of Total Net Sales Net Sales / Segment Income Net Sales (Left scale) (Billions of yen) % Sales by Division (Year Ended March 2011) Overseas Cosmetics Division Overseas and Domestic Professional Divisions Segment Income (Right scale) (Billions of yen) (Years ended March) Sales (Billions of yen) Percent change % +32.0% % +5.1% Total % +27.6% 0 Percent change (Local currency basis) Notes: 1. Exchange rates for major currencies for the year ended March 2011: 87.8 per u.s. dollar, per euro, and 13.0 per Chinese yuan 2. Effective the fiscal year ended March 2011, the Company has reclassified its operations into three segments for reporting purposes, in line with its application of Accounting Standards Related to Disclosure of Segment Information. The new segments are: Domestic Cosmetics Business, Global Business, and Others. The domestic professional business, previously included within the Domestic Cosmetics segment, is now included in the Global Business segment. Shiseido operates in a wide array of countries and regions. The global brand was available in 85 countries and regions including Japan as of March 31, Shiseido operates in the prestige category in Europe and the Americas, centered on the global brand. In the United States, the makeup brand NARS also has strong customer support, and Bare Escentuals has the leading share of the mineral foundation market with a unique business model that includes direct marketing via television and over-thecounter sales at retail outlets such as department stores and cosmetics specialty stores. In Europe, Shiseido s potent brands include the designer fragrances of Beauté Prestige International S.A. Shiseido has been in the Chinese market for 30 years, ahead of other global cosmetics companies. Shiseido is implementing a channel-specific brand strategy that involves selling the global brand and the China-only brand AUPRES at department stores and the URARA and Pure & Mild brands at cosmetics specialty stores. We are building a powerful store network; as of December 31, 2010 it encompassed approximately 190 stores selling the global brand, 920 stores selling AUPRES, and 5,200 cosmetics specialty stores. Overview of Performance in the Year Ended March 2011 The high-end markets of Europe and North America improved as a result of economic recovery. Strong SHISEIDO ANNUAL REPORT

30 growth continued in the markets of Asia including China, and emerging countries as strong economic expansion increased the number of middle-income earners. Under these conditions, overall sales in the Global Business increased 27.6 percent compared with the previous fiscal year on a local currency basis as sales increased in the Americas, Europe and Asia/Oceania. Excluding the sales of Bare Escentuals, sales increased 10.0 percent on a local currency basis. As a result of the appreciation of the yen, sales increased 20.9 percent on a yen basis to billion. Segment income (operating income) decreased 5.4 percent to 9.0 billion because of nonrecurring costs associated with the acquisition of Bare Escentuals. Excluding these costs, segment income would have increased 22.0 percent year on year to 11.6 billion. concentrate on promoting Za and MAJOLICA MAJORCA. A marketing campaign in collaboration with retailers in Thailand generated particularly strong results. Complementing the steady performance of these brands, sales of Aqua Label increased substantially. Shiseido maintained an aggressive channel-specific brand strategy in China, demonstrating an ongoing commitment to Global Brand Shiseido complemented prior efforts to enhance lines in ways such as introducing newly designed counters to strengthen the brand s presence in the prestige category. Overview of Performance in the Year Ended March 2011: Overseas Cosmetics Division Results were strong in both the prestige and masstige markets during the year ended March In the prestige market, the global brand achieved sales growth in various countries. Shiseido executed focused programs to cultivate the brand, including the introduction of newly designed counters and promotional activities to increase product awareness. The Future Solution LX premium skincare line and the BOP (Bio-Performance) highperformance skincare line were among the lines that performed strongly as a result. After Shiseido acquired Bare Escentuals, the two companies began collaborating in a project to achieve synergies that enhanced Groupwide efficiency by integrating production functions and distribution facilities and strengthened sales at stores and via the website. As a result, Bare Escentuals achieved sales and income targets for the year ended March In addition, sales of NARS increased by more than 30 percent, while growth recovered in the designer fragrance and travel retail businesses. In Asian masstige markets, Shiseido continued to bareminerals Bare Escentuals primary brand. Featuring a mineral powder containing no preservatives, fragrances, oils or talc, it has gained a towering share of the U.S. mineral foundation market. 30 SHISEIDO ANNUAL REPORT 2011

31 Review of Operations Za AUPRES Shiseido created this China-only brand using its many years of research into climate and the skin of Chinese women. Sales have consistently increased since the brand s launch in 1994, building a powerful position in the prestige market. A core brand targeting middle-income earners in Asia. Shiseido is energetically promoting the brand in Thailand, Taiwan and elsewhere in Asia to enhance its presence as a dedicated Asian skincare/ makeup brand. ISSEY MIYAKE NARS Shiseido acquired this makeup brand in Its powerful brand cachet in the United States continues to expand. This Beauté Prestige International designer fragrance has potent brand cachet and is available in more than 100 countries. Beauté Prestige International also sells the narciso rodriguez brand. this crucial market where exceptional growth is forecast. We continued to introduce new counters at department stores while enhancing the AUPRES lineup. At cosmetics specialty stores, we nurtured the URARA brand sold only in this channel and the Pure & Mild brand, while introducing d ici là, a high-end brand. As a result of these activities, we maintained double-digit sales growth in China that exceeded the growth rate of the overall market, as well as a high level of operating profitability above 10 percent. Shiseido further accelerated its ongoing efforts to expand business in new markets. The number of stores handling our products in Russia tripled year on year to 900. We also began doing business in the three Balkan countries of Albania, Kosovo and Macedonia and expanded our operations in other new markets. With the growth in existing businesses and the contribution of newly consolidated Bare Escentuals results, the Overseas Cosmetics Division substantially exceeded results for the previous fiscal year. Sales increased 32.0 percent year on year on a local currency basis and 25.0 percent year on year on a yen basis. Overview of Performance in the Year Ended March 2011: Overseas and Domestic Professional Divisions In Japan, business conditions remained difficult amid economic recession and intense competition. Overseas, sales grew in Asia, where market expansion continues. Results were also robust in Europe and North America, supported by ongoing economic recovery. As a result, sales of the Overseas and Domestic Professional Divisions increased 5.1 percent year on year on a local currency basis. On a yen basis, sales decreased 0.3 percent year on year to 40.9 billion because of the appreciation of the yen. SHISEIDO ANNUAL REPORT

32 Initiatives Based on Our Way Our Way denotes appropriate conduct toward stakeholders under the Shiseido Group Corporate Philosophy Our Mission, Values and Way. Based on Our Way, we are working to achieve a sustainable society by enhancing dialogue and cooperative activities with stakeholders and creating health and beauty for people. Toward Consumers Toward Business Partners Toward Shareholders This section introduces Shiseido s efforts to meet people s needs for beauty and health through research and development activities and response to consumers. Toward Employees P33 Respect for employee diversity. Comfortable, fulfilling workplaces. Find out about Shiseido s unique initiatives for employees here. P38 We work together with our business partners to create new value. This section explains our collaborative efforts with business partners along with issues such as our approach to procurement. P37 Toward Society and the Earth This section introduces how Shiseido leverages its strengths through initiatives in three areas to resolve various issues concerning society and the Earth. P40 Learn about Shiseido s corporate governance policies, structure and efforts to maximize corporate and shareholder value in this section. Please refer to Corporate Governance on pages 50 to 54. For further information regarding our CSR activities, please refer to the Shiseido CSR section on the Shiseido website. It covers topics including Shiseido s latest CSR activities, Stakeholder Dialogues, Third-Party Evaluation, and GRI Guidelines balance sheet. Environmental Data P44 Social Data P45 32 SHISEIDO ANNUAL REPORT 2011

33 Toward Consumers 100% Customer-Oriented Manufacturing Based on the Shiseido Group Corporate Philosophy, Our Mission, Values and Way, we aim to serve our customers and society. Products and services that satisfy consumers are created by combining tangibles consisting of cosmetics products and associated intangibles such as various information and beauty methods. Shiseido achieves this by conducting cosmetics research from the three perspectives of functionality, sensitivity and sensations, and safety to create value that exceeds consumer expectations. For functionality, Shiseido conducts research with a focus on creating healthy, beautiful skin. Research for sensitivity and sensations involves investigating usability, scent, color and beauty methods to make products pleasing, delightful and exciting. Safety is the most important of the three perspectives. We ensure that the products we develop are safe for consumers and can be used worry free. Today, consumer beauty and health needs are becoming more sophisticated and diverse. We are responding by promoting further technological innovation for cosmetics from a global perspective as well as from new perspectives such as beauty therapy cosmetics and healthcare. Three Approaches in Research and Development Skin and hair research Physiological mechanism of skin Developing medicinal agents and raw materials Searching, synthesis, and biotechnology Beauty care research Beauty information development, color research, sensory evaluation Developing store fixtures Skin condition diagnosis and counseling system Developing formulations Physical properties, scent, color Beautiful skin, Youthful skin Functionality Customers Safety Considering effects on body and environment Quality assurance Stability, safety, and microbiological safety Human science research Physiological psychology and cognitive science Enjoyable feel, Emotional satisfaction, Joy Sensitivity and Sensations Developing formulation techniques Emulsification and dispersion, etc. Developing packaging and wrappings Convenience and eco-friendliness Verifying solutions and methods Design goal check and customer s perspective In manufacturing, Shiseido is strengthening quality assurance so that consumers can be confident its products are safe. ISO22716* (Cosmetics GMP) standards introduced in 2007 have been adopted as regulations in many countries. We have established internal standards that are even more rigorous than ISO22716 so that we can maintain safety and reliable quality. We are further strengthening manufacturing to ensure consumers can use our products with peace of mind. Shiseido is also enhancing its agility and speed to flexibly and quickly respond to changing consumer needs. We manufacture flexibly, rather than relying on mass-production lines, by cultivating multi-skilled employees so that a single technician can oversee all production processes and focusing on the development of facilities technology that increases productivity through means such as improvements to manufacturing facilities. Going forward, we will place the highest priority on consumers in our actions as we return to our origin as a manufacturer, with the aim of earning the greatest support of our customers. In addition to products, we will innovate our entire value chain, from information development, which is important for linking customers and sales counters, to marketing activities and descriptions used in advertising. * ISO22716: International standards for cosmetics manufacturing drafted by the International Organization for Standardization Mechanisms to Leverage Customer Feedback Shiseido works to achieve 100% customer-oriented manufacturing by making efforts to incorporate valuable feedback from customer consultation and requests and other sources in the development of products and improvement of services. Specifically, it helps us quickly detect consumer and societal changes and reflect them in corporate activities. We therefore collect, analyze and use customer feedback information, sharing it throughout the Company and requesting relevant divisions to develop or improve products and beauty information, and refine services. This supports our 100% customeroriented vision. In Japan, our Customer Information Center receives approximately 120,000 customer comments and inquiries SHISEIDO ANNUAL REPORT

34 annually via toll-free calls, , letters and other means, and beauty consultants use terminals to submit another 130,000 comments received at sales counters. These are among the venues and methods through which we collect customer feedback. We manage the information using our computer system and have organized it for analysis by relevant parties as required. We take these opinions and evaluations seriously and use them as reference in making product improvements. They provide us with background and allow us to understand how consumers feel about the cosmetics they use in their daily lives. Employees share the feedback we receive via an intranet so that we can use it to create more satisfying value. Aiming to become a global player representing Asia with its origins in Japan, Shiseido is currently in the midst of promoting globalization. Quickly grasping customer opinions worldwide and putting those opinions to work in management are indispensable to our globalization program. We have established systems in China in addition to Japan, and are collecting and analyzing consultations and requests, sharing them internally, and effectively reflecting them in corporate activities. However, other overseas subsidiaries have yet to introduce such systems, making a globally shared system a priority. To achieve this goal, Shiseido has developed global specifications for the system it has used in Japan since 1996 to collect and use customer feedback. Named Mirror*, the system was introduced in Japan in April 2011 and overseas in July This is strengthening our framework for sharing and using feedback from customers worldwide. The introduction of Mirror will uniformly raise the level of The Mirror System for Collecting and Using Global Customer Feedback Customers Inquiry Input, investigation and response functions Point of customer contact Japanese version Customers Inquiry Point of customer contact English version Reflect in risk management, marketing and other corporate activities Customers Inquiry Point of customer contact Chinese version Mirror Data analysis and aggregation Examples of Products That Reflect Customer Feedback clé de peau BEAUTÉ New Skincare An easy-to-grip container design with an easy-to-push dispenser and a stable container height that also allows easy storage improved the convenience of this lotion and emulsion. In addition, Shiseido made the product easy to understand. For example, larger type size makes the package insert easy to read, the bottle color makes the item easy to identify, and the simple product names are easy to remember. We also introduced a cream refill to enable extended use of the original container. 34 SHISEIDO ANNUAL REPORT 2011 HAKU Melanofocus W We developed a refill container that preserves the quality of the contents while allowing the user to easily see how much is remaining. Introducing the refill has reduced the amount of plastic used for containers by 60 percent. After launching the first product, we received and aggregated comments such as I have trouble knowing when to buy more because I can t see inside and Throwing away the container every time I use up the product is wasteful and used them to evolve the container.

35 Initiatives Based on Our Way our response to customer consultation and other requests at all customer information centers around the world. At the same time, the efficient collection and use of feedback from customers worldwide will create value for the Shiseido Group. For further information on representative products created through initiatives to incorporate customer feedback, please refer to the Shiseido website. (Japanese only) * Mirror: The name embodies reviewing our activities through customer feedback, or in other words, the reflection of our image in a mirror. Responding to Customers Beauty consultants fulfill the crucial role of listening to customer requests at the sales counter and introducing products and beauty information according to each person s skin and cosmetics use. Aiming for high-quality counseling activities from our beauty professionals, in 1998 Shiseido was the first in the industry to implement an internal certification system for beauty knowledge and technology approved by the Ministry of Health, Labour and Welfare. From 2005, we moved to achieve 100% customer-oriented store activities by including level of customer satisfaction with service in the evaluation of beauty consultant activities. We share customer feedback with beauty consultants every month, review their activities and determine tasks ahead as a means of enhancing their responsiveness and raising the level of customer satisfaction. We are also emphasizing customer satisfaction overseas, where we have been moving to improve responsiveness since 2009 in order to expand the number of loyal customers. Specifically, we have developed and deployed counter service software for Internet use with the goal of improving skincare A corporate advertisement announcing that Shiseido is using evaluation of level of customer satisfaction to innovate beauty consultant activities, and a questionnaire consultation capabilities. We have also distributed the code of conduct called Shiseido BC Omotenashi Credo, which beauty consultants worldwide use in their day-to-day activities to create the spirit of omotenashi (hospitality) at sales counters. In addition, we conduct an overseas customer survey every six months to confirm that sales counter responsiveness reforms have taken hold and are thoroughly implemented, and to further enhance the level of responsiveness. The results are used in formulating action plans, training and onthe-job training. We have translated the Shiseido BC Omotenashi Credo, a digest of beauty consultant activities, into 22 languages for overseas circulation. Initiatives to Increase Customer Satisfaction Sales Counters Customers Head Office Beauty consultants ask customers to fill out questionnaires Beauty consultants sales counter activities take issues into account Customers fill out questionnaires and mail them to Shiseido Beauty Consultants Based on the results, clarify issues using review and findings, then set goals Questionnaires received and aggregated Results sent to business offices by the end of the month Business Offices Sales counter activities planned using the results SHISEIDO ANNUAL REPORT

36 Shiseido Technology Supports Beauty Shiseido has a broad technology platform spanning research, product development, production and quality assurance. The knowledge we have accumulated over more than a century of research and development is a powerful advantage driving the superiority of our products. Our research is integrated from basic research in interface science and dermatology to the application of the findings in product research. We focus on activities that are indispensable to providing even better products to consumers, such as the development of emulsification technology, which is essential for cosmetics; the development of the effective skin-brightening and anti-aging ingredients customers strongly desire; and the elucidation of the complex mechanisms of skin action and aging. For further information regarding our technologies, please refer to the Shiseido Research and Development section on the Shiseido website. Skin-Brightening Research Shiseido has been at the forefront of skin-brightening research since launching the lotion Hydrogen Peroxide Cucumber in In fact, effective skin-brightening ingredient development is one of our greatest strengths. We have developed approximately one-third of the active skinbrightening ingredients used in Japanese cosmetics, including arbutin and stabilized vitamin C derivative. This record of achievement is particularly impressive given that the development of active ingredients in Japan typically takes about 10 years. Shiseido recently developed a new skin-brightening active ingredient, m-tranexamic acid, which acts on the chronic mild inflammatory condition at the sites of spots to suppress melanocyte activation. We have also patented our latest skin-brightening active ingredient potassium 4- methoxysalicylate (4MSK), in Japan, Taiwan, Korea, the United States and Europe. Anti-Aging Research Shiseido takes multiple approaches in exploring the factors that cause skin to wrinkle and sag with age. Hyaluronic acid is known to help the skin retain moisture. We discovered that vitamin A promotes the synthesis of hyaluronic acid and reduces wrinkles. We are also investigating the mechanism by which ultraviolet rays damage collagen and elastin fibers, and are making progress in developing effective anti-aging pharmacological agents based on our findings. In addition, Shiseido conducts basic research in other areas including dermal immunity and dermatology, energetically exploring skin mechanisms such as moisture retention and barrier functions. Recently, joint research with Sagami Women s University and Kitasato University was the first in the world to clarify the mechanism that produces Natural Moisturizing Factor (NMF), an ingredient that is an integral component related to the skin s moisture retention function. Automated systems that rapidly screen ingredients enable us to quickly apply analytical data to skin-brightening technology development. Acknowledgement of Shiseido s Technologies by Others Shiseido has received numerous awards from a wide array of scientific organizations and other associations including The International Federation of Societies of Cosmetic Chemists (IFSCC), the world s most authoritative congress for cosmetic science and technology. Shiseido won top honors in the Basic Research (Oral), Applied Research (Oral) and Poster Presentation categories at the 26th IFSCC Congress held in September 2010 in Buenos Aires, Argentina. We have won top honors from the IFSCC 13 times, which is the most of all cosmetics manufacturers worldwide. Shiseido also received awards for the findings of five research projects from organizations including the Japanese Society of Aesthetic Dermatology. 36 SHISEIDO ANNUAL REPORT 2011

37 Initiatives Based on Our Way Toward Business Partners Approach to Procuring Raw Materials Shiseido s purchasing policies involve integrating all of the Shiseido s Group s capabilities with those of business partners in a spirit of mutual trust to jointly create new value and contribute to customers and society. Shiseido aims to grow together with business partners that share its aims, which include cooperatively building procurement and purchasing mechanisms through joint development of new technology and strategic alliances based on purchasing that lowers costs through fair competition and shared value creation. Shiseido seeks to optimize procurement performance on a global level. We select suppliers regardless of whether they are in Japan or overseas by comprehensively considering elements such as quality, cost, delivery schedule, technology development capabilities, service capabilities, management, and initiatives to contribute to society, such as CSR. We also consider the environment through purchasing activities that reduce, reuse and recycle resources. This includes reducing the use of petroleum, adopting plant-based resources, using non-wood materials and biomass, reducing energy use, and reducing CO2 emissions. Committed to CSR, we always take compliance and social ethics into account, and conduct procurement activities that embrace fair trade and biodiversity. Strengthening Our Relationship with Business Partners In order to respond to changing times and the emerging needs of society, Shiseido s approach to procurement involves obtaining the understanding of business partners in a mutual and sincere commitment to society in promoting product manufacturing. We therefore aim to strengthen our relationships with business partners. The procurement departments in Japan annually hold purchasing policy sessions and separate working groups for particular areas including ingredients, fragrances and materials. Additionally, the departments work to communicate and reaffirm cooperation with Shiseido s approach. Approximately 140 business partner companies participated in the purchasing policy session held in May The Shiseido Group Supplier Code of Conduct Aiming to expand our sphere for creating beautiful lifestyles, Shiseido uses procurement activities in its efforts to research, develop, produce and sell highly safe products and services that satisfy customers. Our suppliers span numerous areas, from raw materials and fragrances to packaging and sales promotion materials. We view them all as partners in the creation of new value, and place the highest importance on mutual understanding, including in the promotion of CSR activities. Shiseido is concerned about the environment. Based on the Green Procurement Standards promulgated in 1999 to specify items required of suppliers, we issued the Shiseido Group Supplier Code of Conduct (formulated in 2006, updated in 2010) to suppliers in Japan and overseas. It codifies our standards for human rights, legal compliance, labor, the protection of intellectual property and confidentiality, environmental conservation, fair commercial transactions and compliance monitoring. While working to inform our suppliers about the code, we conclude purchasing contracts and letters of understanding confirming that they will comply with the Shiseido Group Supplier Code of Conduct. Furthermore, we maintain a qualitative awareness of compliance by conducting annual surveys and face-to-face interviews covering items including environmental and CSR initiatives. In the event that we discover noncompliance with the Shiseido Group Supplier Code of Conduct, we will demand rigorous corrective measures and provide guidance and suppor t for their implementation. The Shiseido Group Supplier Code of Conduct The purchasing policy session held in May 2011 SHISEIDO ANNUAL REPORT

38 Toward Employees Nurturing Human Resources Since its founding, Shiseido has been so committed to nurturing its human resources that people have called the Company Shoseido in a play on words that uses a quaint Japanese term for student. This aspect of our corporate culture has been passed down through our history and endures today, as reflected in the Declaration of Shiseido Co-Excellence adopted in The declaration aims to cultivate people by linking the self-realization of workers and the growth of the Company. We also established Aesthetics, Self-Reliance and Reform Power as indicators of the skills and sensibility that we seek to cultivate, comprising a specific definition of what is meant by people with their own appeal. We are also working to create an environment where employees can develop through a process of mutual growth that is reinforced by daily guidance and training, personnel assignments and evaluations by their supervisors. In accordance with the Declaration of Shiseido Co-Excellence, we opened a corporate university called Ecole Shiseido in 2006 and launched a variety of training initiatives to implement the Company s human resource development Basic Approach to Human Resource Development Appropriately assign responsibilities, set objectives and provide incentives according to required qualifications and personal characteristics Manage and guide daily work activities Provide career direction Increase motivation Assign personnel based on ability, aptitude and interests of the employee Enhance skills and career awareness. Assign personnel with an eye on future development potential Provide opportunities for employees to take the initiative through the Job Challenge and Free Agent programs Management by objective and on-the-job training See employees as unique individuals Training and education Provide appropriate guidance through fair evaluations Promote people appropriately based on ability Improve results and capabilities Fair evaluation and treatment based on achievement Enhance the desire to grow Foster career awareness and provide necessary knowledge and skills Provide opportunities for independent learning policy and oversee companywide training. Ecole Shiseido offers professional training in a variety of fields, interdisciplinary training for new employees and management, and training to develop the skills required in upper management positions. In the year ended March 2011, it conducted approximately 80 training programs. The President & CEO of Shiseido serves as the chancellor of the university, and corporate officers serve as the deans of the faculties that correspond to their own areas of responsibility. Thus they take the lead in developing a pool of interested and talented employees. Ecole Shiseido also operates the Shiseido Beauty Academy, which is a virtual beauty graduate school that is the gateway to becoming a high-level beauty professional. It has provided career development programs to approximately 12,000 employees throughout Japan who are involved in the area of beauty. The academy offers two tracks: one for aspiring managers working to become organizational leaders, and one to help people master the technology of beauty and become high-level beauty professionals. Achieving Gender Equality Since 90 percent of its customers are women, Shiseido focuses on providing new products and services that reflect women s values and current lifestyles. Our female employees, who account for 80 percent of all our employees, must therefore play a central role in management and business activities. Accordingly, Shiseido has introduced a variety of support programs that balance work with childcare and nursing care since Shiseido has been strengthening these initiatives since the year ended March 2006 by planning and implementing the Gender Equality Action Plan (Phase I: year ended March 2006 to year ended March 2007; Phase II: year ended March 2008 to year ended March 2010). The three main components of the plan are 1) cultivating an organizational culture that seeks to change employees awareness Kangaroom Shiodome, an in-house nursery and actions by spreading school at the Shiodome Office for Tokyo area the concept of gender employees, exemplifies the support Shiseido provides to help balance work with childrearing. equality within the 38 SHISEIDO ANNUAL REPORT 2011

39 Initiatives Based on Our Way Company; 2) training and promoting female leaders with a view toward accelerating participation of women in Company management; and 3) achieving work-life balance. As a result, a corporate culture has taken root that truly balances work with childcare and nursing care. In the year ended March 2011, a total of 1,218 people took childcare leave, 1,415 took time off for childcare, 33 took nursing care leave and 21 took time off for nursing care. The theme of Phase III of the Gender Equality Action Plan for the three years ending March 2013 is firmly establishing a corporate culture in which female leaders are continuously developed. The specific action plan under this theme has two core initiatives: strengthening the appointment and promotion of female leaders and human resources development; and reviewing how employees work to raise productivity. Shiseido aims to further energize organizational capabilities by enabling employees with diverse values to take active roles, thereby reaching a stage in which both men and women can advance their careers while balancing work with childcare and nursing care. Promoting Diversity Diversity Shiseido comprises more than 40,000 employees with diverse values, viewpoints and other attributes, including nationality, gender, age, employment status and developmental challenges. Our approach to diversity begins with respect for human rights and aims to realize mutual benefit for the individual and the Company by recognizing and respecting the values of each employee and incorporating their personalities within a diverse internal organization. We achieve this by making every effort to keep the workplace free from discrimination and harassment. Shiseido undertakes various activities to leverage diversity. We promote the Work Improvement Proposal System and the Gender Equality Action Plan, which build on education and operational improvement at every level of the Company to engender respect for diverse work styles. We offer the Career Support Forum that provides management training that encourages female employees to think about developing their careers with the aim of gaining independence and professional awareness. We also conduct the Shiseido Global Leadership Program for managers of overseas subsidiaries. In addition, the special subsidiary Hanatsubaki Factory Co., Ltd. actively hires developmentally challenged individuals. Nurturing Human Resources on a Global Basis Shiseido defines global human resources as people who are globally competent because they have specialized knowledge in global fields, the ability to understand different cultures, and communication skills, and who demonstrate management-level leadership. Shiseido formulated its Global Human Resources Policy in 2008 to nurture such personnel. The three objectives of the policy are 1) to nurture senior managers at overseas subsidiaries; 2) to make effective use of human resources on a global level; and 3) to improve the quality of personnel functions at overseas subsidiaries. With our global personnel strategy currently in its first phase, we are building a personnel platform that we share globally. This platform will be the basis for leveraging human resources from 2010 through Specifically, while continuing to structure global personnel rules, we are building and implementing systems for nurturing local employees at overseas subsidiaries and deploying and transferring personnel on a global level. The first Career Support Forum 2009 was held in March 2010, and 155 female employees and managers working at or near the head office participated. Shiseido aims to hold Career Support Forums for all business offices. In 2009, Shiseido established regional human resource development committees in four regions worldwide to nurture global human resources. SHISEIDO ANNUAL REPORT

40 Toward Society and the Earth Basic CSR Policy Shiseido aims to realize a sustainable society through dialogue and cooperation with stakeholders to develop activities that address society s expectations while contributing to the creation of people s beauty and health. Shiseido has designated the three priority areas of 1) women and cosmetics (beauty), which involves activities that promote total feminine care and well-being; 2) culture, which involves the creation of beauty based on profound sensitivity and intellect; and 3) the environment, which involves realizing a society where humanity and the Earth s environment can coexist beautifully. Activities Related to Women and Cosmetics (Beauty): Shiseido Life Quality Beauty Program Since its founding, Shiseido has helped people achieve the beauty they desire with beauty products and methods. In the Shiseido Life Quality Beauty Program, we aim to enrich people s hearts with the following two activities. Shiseido Life Quality Makeup Shiseido continues to promote Perfect Cover foundation for bruises, dark spots, vitiligo* and skin irregularities and provide makeup advice for serious skin concerns. Shiseido conducts these activities primarily through Shiseido Life Quality Beauty Centers, as well as at cosmetics specialty stores and medical institutions in Japan, and overseas in China and Taiwan. * Vitiligo is an acquired skin condition characterized by pigment loss causing white patches on the face, neck, hands, feet and other areas. Its cause is unknown. Shiseido Life Quality Beauty Seminar Cultural Initiatives Aiming to contribute to a spiritually affluent society through support for the arts, Shiseido exhibits representative examples of the corporate culture it has cultivated to employees and the general public. The Shiseido Corporate Museum in Kakegawa, Shizuoka Prefecture is the center for our corporate culture collections and exhibits. The museum collects and preserves materials such as product packages, posters, television commercials and other materials and selectively exhibits them free of charge. Hanatsubaki, a magazine we launched in 1937, is another medium with a long history of communicating our corporate culture to society. Founded in 1919, the Shiseido Gallery in Ginza, Tokyo is at the core of Shiseido s support for the arts. Guided by a philosophy of discovering and creating new beauty, it provides the next generation of artists with a place to present their works. The Shiseido Gallery also sponsors theater, dance and other contemporary expression primarily focused on modern art. Moreover, some of the pieces exhibited at the Shiseido Galler y are exhibited to the public free of charge at the Shiseido Art House in Kakegawa. Shiseido Life Quality Beauty Seminars Shiseido Life Quality Beauty Seminars are a communitybased activity in which employees visit facilities for the elderly and the developmentally challenged to provide free beauty seminars. These seminars are gaining attention from medical and other institutions as a cosmetic therapy that makes people feel good about themselves, and Shiseido energetically conducts them in Japan and overseas. The President & CEO and other officers of Shiseido join employees in conducting these seminars as an opportunity to help people experience the power of cosmetics. 40 SHISEIDO ANNUAL REPORT 2011 The Shiseido Corporate Museum The Shiseido Gallery

41 Initiatives Based on Our Way Basic Policy for Environmental Activities The name Shiseido derives from a Chinese expression meaning praise the virtues of the great Earth, which nurtures new life and brings forth new values. In line with this expression, Shiseido has consistently shown consideration for the environment since its foundation, with gratitude and esteem for the blessings of the Earth. In April 2009, placing environmental activities at the core of its management, Shiseido started the Shiseido Earth Care Project, an environmental initiative involving all employees throughout the world. The year ending March 2012 will be the third year of the project, the mission of which is to realize a sustainable society where humanity and the Earth s environment can coexist beautifully. In addition to basic environmental activities, which are obvious social responsibilities, the project is aimed at engendering a new lifestyle that links beauty and eco activities through active promotion of Shiseido s unique environmental policies. Overview of Shiseido s Environmental Activities Mission Project Name Activities by all employees throughout the world Goals Our Mission, Values and Way Shiseido Eco Policy Aiming for the realization of a sustainable society where humanity and the Earth s environment can coexist beautifully Environmental activities unique to Shiseido Basic environmental activities Preserve the bounty of the Earth, reduce CO2 emissions and save resources Achieve a new lifestyle linking beauty and eco activities in a way that is unique to Shiseido Environmental Management Framework In 1992, Shiseido formulated the Shiseido Eco Policy as a management policy regarding the environment. In 2010, we accommodated the change in environmental issues from a product lifecycle perspective by establishing the Production Eco Standard and the Sales Promotion Tools Eco Standard to codify environmental initiatives for our products and sales promotions. We also formulated the Office Eco Standard with specific rules for addressing environmental issues in offices. In April 2010, Shiseido established the Environmental Planning Department to step up collaborative environmental activities with related departments to achieve the goals of the Shiseido Earth Care Project. Shiseido s Promise to Society In November 2008, Shiseido expressed to the world its strong dedication to the environment by endorsing Caring for Climate: The Business Leadership Platform, a climate change initiative being spearheaded by the United Nations Global Compact. In March 2009, Shiseido became the first company in the cosmetics industry in Japan to be certified as an Eco-First Company by Japan s Ministry of the Environment. The Eco- First Program was created by the Ministry of the Environment in April 2008 to encourage leading companies in each industry to further expand their environmental protection activities by having them make a commitment to the Minister for the Environment. In addition to reporting the progress of initiatives to the Ministry of the Environment, we will officially announce the results through our website and other channels. Caring for Climate: The Business Leadership Platform (Summary) 1. Take practical actions now to increase the efficiency of energy usage and to reduce our CO2 emissions, set voluntary targets for doing so, and report publicly on the achievement of those targets annually in our Communication on Progress. 2. Build significant capacity within organizations to understand fully the implications of climate change for business and develop a coherent business strategy for minimizing risks and identifying opportunities. Also, engage fully and positively with our own national governments, intergovernmental organizations and civil society organizations to develop policies and measures that will provide an enabling framework for the business sector to contribute effectively to building a low-carbon economy. 3. Work collaboratively with other enterprises nationally and sectorally, and along our value chains, by setting standards and taking joint initiatives aimed at reducing climate risks, assisting with adaptation to climate change and enhancing climate-related opportunities. SHISEIDO ANNUAL REPORT

42 Reducing Environmental Burden Overview of the Year Ended March 2011 Shiseido has been promoting initiatives with the objective of realizing a low-carbon society by reducing CO2 emissions at reduction targets due to changes in the domestic market, but the use of emissions trading allowed us to reach them. We achieved our objectives overseas as a result of initiatives such as the phase 2 installation of solar power generation equipment at a U.S. factory. domestic factories by 15 percent (compared with the year ended March 1991; per unit of production) and by 10 percent at overseas factories (compared with the year ended March 2008; per unit of production) by the year ending March Our efforts at domestic factories did not quite achieve CO2 Representative environmental activities carried out by Shiseido are introduced by number on a special website. Numbered Initiatives Case Study 1: No. 083 Environmental Initiatives in the Renewal of clé de Peau BEAUTÉ Skincare Products Environmental initiatives for a January 2011 skincare product renewal included formulations using fragrances procured from fair trade* sources, the first-ever refill for La Crème, and product packages and inserts made of bagasse paper (a non-wood paper made from sugar cane fiber residue left over in the juice extraction process). clé de Peau BEAUTÉ skincare line La Crème (Cream) La Crème (Cream) refill Case Study 2: No. 071 Introduction of Electric Cars as Sales Vehicles In January 2011, Shiseido Sales Co., Ltd. introduced 10 Nissan Leaf electric cars at its sales bases in the Tokyo metropolitan area. Electric cars do not emit CO2 while in operation because they do not use gasoline, which significantly reduces CO2 emissions. These vehicles prominently display the Shiseido Earth Care Project logo on their left, right and rear. Shiseido is considering the introduction of such vehicles in the future, taking into account issues such as the availability of recharging stations. Case Study 3: No. 051 Phase 2 Installation of Solar Power Generation Equipment at a U.S. Factory The phase 2 installation of solar power generation equipment at Shiseido America, Inc. s U.S. plant was completed and operation began in August Phase 1 consisted of a fixed-tilt solar power system installed in May 2007, while phase 2 is a solar tracking system that changes the angle of panels in step with the position of the sun during the day. The combined systems can generate 2.3 million kwh of electricity annually, enough to supply more than 70 percent of the electricity the factory uses in one year, and are expected to reduce CO2 emissions by approximately 1,200 tons annually. Case Study 4: No. 053 Tree-Planting Activities in China In April 2008, Shiseido addressed concerns about desertification in Lanzhou, Gansu Province, China by launching a 10-year afforestation program. Approximately 23 hectares of Oriental arbor vitae and other species of trees have been planted from the start of the program through Shiseido held the fourth round of this afforestation program in April A total of approximately 60 volunteers participated, including employees from the Shiseido Group from China and Japan and from business partners in China. With the addition of cherry trees, we will plant 17,800 trees over 6.5 hectares during This decade of greening is a means of deepening the bonds of friendship between Japan and China and protecting the environment by reducing CO2 in the atmosphere. * Fair trade involves the sustained purchase of the raw materials and products of developing nations at a fair price, with the aim of helping workers in those nations improve their standard of living and achieve self reliance. Fair trade also contributes to environmental conservation by preventing problems such as overexploitation of resources in order to achieve sustainable use. 42 SHISEIDO ANNUAL REPORT 2011

43 Initiatives Based on Our Way Future Initiatives Shiseido s future environmental initiatives will center on making products environmentally friendly throughout their entire lifecycle and reducing CO2 emissions worldwide. We will make products environmentally friendly throughout their entire lifecycle, from procurement and production to logistics, sales and disposal, based on the Production Eco Standard. Specifically, beginning in 2011 we will work with Toyota Tsusho Corporation to procure sugar cane-based polyethylene from Braskem S.A., a major Brazilian chemical manufacturer, and start using this plastic in cosmetics containers. Other proactive initiatives to promote environmentally friendly products will include increasing the number of refills available and expanding the introduction of product packages that use bagasse paper made from sugar cane fiber residue left over in the juice extraction process. Shiseido is reducing CO2 emissions worldwide as a fundamental CSR activity. We are working to meet the reduction targets shown below. CO2 Reduction Targets Preserving Biodiversity Shiseido bases its environmental activities on preserving the Earth s blessings (biodiversity), the source of the value we create. In all of our business processes, we recognize that the Earth s blessings are both crucial and limited, and that we must manage them rigorously so that they can be passed on to future generations. In 2009, we planted the Shiseido Tsubaki Forest of approximately 3,000 camellia trees in the Tsubaki district of Shirahama-cho, Nishimuro-gun, Wakayama Prefecture and initiated forest conservation activities that will span 10 years. We are also conducting tree-planting programs in China and Thailand as part of our effort to preserve the Earth s blessings both in Japan and overseas. During the third round of volunteer forestry activities in June 2011, Shiseido employees and members of their families planted camellia seedlings. Our efforts to preserve Tsubaki Forest will continue. Target Year Base Scope Year ending Year ending Criteria Year March 2014 March 2021 Production facilities 15% 20% Year ended Absolute Non-production March 2010 amount facilities 5% 14% Production 20% 23% Compared facilities with BAU* Non-production Year ended 4% 11% Absolute facilities March 2010 amount * BAU: Business as usual. Volume of CO2 emitted assuming that particular reduction measures are not implemented. CO2 Reduction Domestic Overseas Rigorous Control of Chemical Substances The Production Process for Sugar Cane-Based Polyethylene Sugar cane Sugar Fermentation of liquid remaining after sugar refining (molasses) Bioethanol Sugar cane-based polyethylene Sugar cane fiber residue left over in the juice extraction process (bagasse) Burned for energy for sugar and ethanol production Raw material for paper (bagasse paper) Shiseido reports to the Japanese government as mandated by the Pollutant Release and Transfer Register Law (PRTR Law), while rigorously managing under its own auspices the use and disposal of chemical substances including raw materials and reagents at facilities such as factories and research laboratories. In addition, Shiseido supports occupational health and safety by ensuring, through systemization and other means, that material safety data sheets are issued when providing customers with semifinished products containing chemical substances governed by regulations including the PRTR Law and the Industrial Safety and Health Act. SHISEIDO ANNUAL REPORT

44 Environmental Data Shiseido has reported the volume of energy used (input) and environmental load (output) determined through environmental accounting for the year ended March The data was calculated and disclosed using GRI s G3 Sustainability Repor ting Guidelines and the 2007 Environmental Reporting Guidelines issued by Japan s Ministry of the Environment. Shiseido will enhance the presentation of its environmental data to the greatest extent and raise the environmental awareness of employees as it works to further promote environmental activities. Environmental Performance Data Domestic Overseas Inputs Outputs Inputs Indicator Electric power (ten thousand kwh) City gas (ten thousand m 3 ) LPG (t) Fuel (kl) Steam (GJ) Water (ten thousand m 3 ) CO2 (t) SOx (t) NOx (t) Wastewater (ten thousand m 3 ) BOD t COD (t) Waste (t) Recycling ratio (%) Electric power (ten thousand kwh) City gas (ten thousand m 3 ) LPG (t) Fuel (kl) Steam (t) Water (ten thousand m 3 ) Scope Production facilities Non-production facilities Production facilities Non-production facilities Production facilities Non-production facilities Production facilities Non-production facilities Non-production facilities Production facilities Production facilities Non-production facilities Production facilities Production facilities Production facilities Production facilities Non-production facilities Production facilities Production facilities Non-production facilities Production facilities Non-production facilities Production facilities Non-production facilities Production facilities Non-production facilities Production facilities Production facilities Production facilities CO2 (t) Outputs Non-production facilities Waste (t) Production facilities Non-production facilities Recycling ratio (%) Production facilities Note: Data for overseas non-production facilities includes major facilities only. Year ended Year ended March 2010 March ,801 3,776 3,890 3, ,720 11, ,873 26,966 18, ,160 1, , , ,293 3,309 3, , ,474 1, , , ,177 3,570 3, Targets Target for year ended March 2011: 15% below actual emissions in the year ended March 1991 (per unit of production) Target for year ended March 2011: 10% below actual emissions in the year ended March 2008 (per unit of production) Environmental Accounting 1. Environmental Protection Costs (Unit: Millions of yen) Category Main initiatives Investment Expenses (1) Cost breakdown by operation (1) - 1 Pollution prevention (1) - 2 Global environmental protection (1) - 3 Recycling (2) Upstream and downstream costs (3) Administrative costs (4) Research and development costs (5) Social contribution costs (6) Environmental remediation costs (7) Other costs Total Water contamination, atmospheric pollution, etc. Promotion of energy conservation, measures to protect the ozone layer, etc. Waste processing, recycling, wastewater re-use, material usage reduction, etc. Costs associated with Recycling of Containers and Packaging Recycling Law, green procurement, product recycling, etc. Personnel expenses (excluding R&D) for environmental management R&D for environmentally friendly products, etc. (including personnel expenses) Support of environmental groups, disclosure of environmental information, environmental advertising, etc. Environmental remediation costs, etc , Environmental Protection Outcomes (Unit: Millions of yen) Earnings Cost savings Total Outcomes Revenue from the recycling of waste generated in main business activities and the recycling of used products, etc. From energy conservation Waste-related From resource conservation Other Economic effect Environmental accounting period: April 1, March 31, 2011 Scope: Domestic and overseas factories, domestic research centers and head office departments SHISEIDO ANNUAL REPORT 2011

45 Initiatives Based on Our Way Social Data The following tables present personnel data in addition to data in the areas of women and cosmetics (beauty) and culture. Shiseido also presents more detailed information, GRI Guidelines balance sheet, and other information not included in this publication on the CSR and Environment website ( in order to deepen stakeholder understanding of Shiseido s CSR initiatives. We will further enhance data relevant to our social activities and personnel with the aim of providing easily understandable information to stakeholders. Data for Social Contribution Activities Area Item Indicator Unit Women and Cosmetics (Beauty) Culture Social Contribution by Employees Shiseido Life Quality Beauty Program Shiseido Children s Seminar 2 Shiseido Running Club Shiseido Female Researcher Science Grant Shiseido Corporate Museum Shiseido Gallery Shiseido Art House Shiseido Hanatsubaki Fund 3 Life Quality Beauty Centers Life Quality Beauty Seminars Number of countries and regions (number of centers) (Note 1) Number of users Number of seminars held Number of participants Number of Beauty Volunteers 1 participating Number of attendees(note 2) Number of running classes held Number of lectures held outside the Company Number of grant recipients Number of exhibits Number of pledges(note 3) Countries and regions (centers) 1. Beauty Volunteers are retired beauty consultants who provide activity support. 2. Shiseido Children s Seminars provide information to pre-adolescents on skin and hygiene and how to care for their changing skin correctly. 3. Shiseido Hanatsubaki Fund: Employees make donations from their wages and voluntarily participate in support activities. There are currently eight support groups. Note 1: Japan (Tokyo); China (Shanghai); Taiwan (Taipei, Kaohsiung). Established in Hong Kong in April Note 2: For fifth- and sixth-year elementary school children. Note 3: 1 pledge = 100; pledge totals for March. Year ended Year ended March 2010 March (4) 3(4) Persons 1,293 1,479 Times 2,993 3,095 Persons 49,707 47,919 Scope Domestic and overseas Domestic and overseas Domestic and overseas Domestic and overseas Persons 2,247 3,515 Domestic Persons 810 Domestic Times 3 2 Domestic Times 6 2 Domestic Persons Domestic Exhibits 1 2 Domestic Exhibits 7 7 Domestic Exhibits 4 4 Domestic Pledges 9,911 12,589 Domestic Personnel Data Number of employees Average age Average years of service Unit Persons Years Years Year ended Year ended March 2010 March ,563 45, Includes Group employees in Japan and overseas (including fixed-term contract employees) Group employees in Japan (excluding fixed-term contract employees) Group employees in Japan (excluding fixed-term contract employees) Remarks Overseas data as of December 31 Hours worked (total hours worked annually per employee) Hours 1, ,812.8 Group employees in Japan (excluding managers and fixed-term contract employees) Scheduled working hours Year ended March 2010: 1,829.0 hours; Year ended March 2011: 1,844.5 hours Ratio of female employees % Group employees in Japan (including fixed-term contract employees) Ratio of female leaders Employees rehired after retirement Ratio of physically challenged employees Employees taking nursing care leave Employees taking time off for nursing care % Persons % Persons Persons Group employees in Japan Group employees in Japan Group employees in Japan Group employees in Japan (including fixed-term contract employees) Group employees in Japan (including fixed-term contract employees) Indicates leaders appointed to management positions Data for Japan program only Data for Japan program only Data for Japan program only Data for Japan program only Employees taking childcare Group employees in Japan Data for Japan program only, including data for shortterm childcare leave program leave Persons 1,123 1,218 (including fixed-term contract employees) Employees taking time off for childcare Kangaroo Staff 4 members Persons Persons 1,252 1,273 1,415 1,417 Group employees in Japan (including fixed-term contract employees) Group employees in Japan Data for Japan program only Kangaroo Staff program available in Japan only 4. Kangaroo Staff members support retail activities during evening hours by filling in for beauty consultants who are taking time off to care for their children. SHISEIDO ANNUAL REPORT

46 Shiseido s Management Structure From left (back) Nobuo Otsuka, Yasuko Takayama, Akio Harada, Toshio Yoneyama, Reiko Kuroda, Carsten Fischer, Taeko Nagai, Shoichiro Iwata, Tatsuomi Takamori, Tatsuo Uemura (front) Shinzo Maeda, Hisayuki Suekawa, Kimie Iwata 46 SHISEIDO ANNUAL REPORT 2011

47 Board of Directors, Corporate Auditors and Corporate Officers (As of June 24, 2011) Directors Shinzo Maeda Representative Director, Chairman of the Board 1970 Joined Shiseido 1996 General Manager of New Cosmetic Marketing Department, Cosmetics Marketing Division 1997 General Manager of International Business Department (I) and International Strategic Marketing Department, International Operations Division 1997 Chief Officer of Asia-Pacific Headquarters, International Operations Division 2000 General Manager of International Marketing Department, Self-Selection Products, Cosmenity Value Creation Division 2001 General Manager of Training Department, Cosmetics Strategic Planning Division 2003 General Manager of Corporate Planning Department 2003 Director, Corporate Officer 2005 Representative Director [incumbent], President & CEO 2011 Chairman [incumbent] Hisayuki Suekawa Representative Director, President & CEO 1982 Joined Shiseido 2007 General Manager of the Business Planning Department 2008 Corporate Officer, General Manager of Corporate Planning Department 2009 Director 2010 Corporate Executive Officer 2011 Representative Director [incumbent], President & CEO [incumbent] Kimie Iwata Representative Director, Executive Vice President Responsible for Corporate Culture, Advertising Creation, Beauty Creation, General Affairs, Legal Affairs, and Executive Affairs Responsible for Committees under Direct Control of the Board of Directors 1971 Entered Ministry of Labour 2001 Director-General, Equal Employment, Children and Families Bureau, Ministry of Health, Labour and Welfare 2003 Corporate Advisor of Shiseido 2004 General Manager of CSR Department 2004 Director, Corporate Officer 2007 Corporate Executive Officer 2008 Representative Director [incumbent], Executive Vice President [incumbent], Responsible for Corporate Culture [incumbent], Responsible for Committees under Direct Control of the Board of Directors [incumbent] 2010 Responsible for Advertising Creation [incumbent] 2011 Responsible for Beauty Creation, General Affairs, Legal Affairs, and Executive Affairs [incumbent] Carsten Fischer Director, Corporate Senior Executive Officer Responsible for Global Business (International Business, China Business and Professional Business), Responsible for Americas Chief Officer of International Business Division Chairman & CEO of Shiseido Americas Corporation 1979 Joined Hans Schwarzkopf GmbH 1999 President and CEO, Wella Japan Co., Ltd Executive Vice President, Wella AG Corporation 2004 President of Professional Care, and Corporate Officer, Procter & Gamble Company 2006 Corporate Advisor of Shiseido 2007 Corporate Executive Officer, Responsible for International Business [incumbent], Chief Officer of International Business Division [incumbent], Responsible for Professional Business [incumbent] 2008 Director [incumbent], Responsible for China Business [incumbent] 2010 Corporate Senior Executive Officer [incumbent] 2011 Chairman & CEO of Shiseido Americas Corporation [incumbent], Responsible for Americas [incumbent] Tatsuomi Takamori Director, Corporate Executive Officer Responsible for Domestic Cosmetics Business, Healthcare Business and Clé de Peau BEAUTÉ Marketing Unit Chief Officer of Domestic Cosmetics Business Division 1975 Joined Shiseido 2002 General Manager of International Marketing Department, Self-Selection Products 2003 General Manager of East Asia Operation Department, International Sales Division 2004 General Manager of China Strategic Planning Department, International Business Division 2006 Chief Officer of China Business Division 2007 Corporate Officer 2009 Director [incumbent] 2010 Corporate Executive Officer [incumbent], Responsible for Domestic Cosmetics Business, Healthcare Business and Clé de Peau BEAUTÉ Marketing Unit [incumbent], Chief Officer of Domestic Cosmetics Business Division [incumbent] SHISEIDO ANNUAL REPORT

48 Directors Shoichiro Iwata 1 External Director 1973 Joined Lion Fat and Oil Co., Ltd. (currently Lion Corporation) 1986 Joined Plus Corporation, Deputy General Manager of Product Development Division 1992 Head of ASKUL Business Project, Sales Division of Plus Corporation 1995 Manager of ASKUL Business Division, Plus Corporation 1997 Representative Director, President of ASKUL Corporation [incumbent] 2000 CEO of ASKUL Corporation [incumbent] 2006 External Director of Shiseido [incumbent], Chairman of Remuneration Advisory Committee of Shiseido [incumbent] Taeko Nagai 1,2 External Director 1960 Joined Japan Broadcasting Corporation (NHK) 1990 Manager of NHK Urawa Station 1993 Chief Commentator of NHK 1995 Retired from NHK 1997 Board Member of Setagaya Arts Foundation 2005 Vice Chairman of NHK 2009 Vice President of Setagaya Arts Foundation [incumbent] 2010 External Director of Mitsui Chemicals, Inc. [incumbent] 2011 External Director of Shiseido [incumbent] Tatsuo Uemura 1 External Director 1977 Lecturer, Faculty of Law, The University of Kitakyushu 1979 Associate Professor, Faculty of Law, The University of Kitakyushu 1981 Associate Professor, School of Law, Senshu University 1986 Professor, School of Law, Senshu University 1990 Professor, College of Law and Politics, Rikkyo University 1997 Professor, School of Law, Waseda University [incumbent] 2003 Director, Center of Excellence - Waseda Institute for Corporation Law and Society Professor, Waseda Law School [incumbent] 2004 External Director, Jasdaq Securities Exchange, Inc External Director of Shiseido [incumbent], Chairman of Nomination Advisory Committee of Shiseido [incumbent], Dean of Faculty of Law and the School of Law, Professor of Waseda Law School and Waseda University 2008 Director, Global Center of Excellence - Waseda Institute for Corporation Law and Society [incumbent] Corporate Officers Michiko Achilles 2 Responsible for Public Relations, Consumer Information, Environmental Affairs, CSR and Corporate Culture Reforms Kozo Hanada Chief Officer of Professional Business Operations Division President & CEO of Shiseido Professional Co., Ltd. Tsunehiko Iwai Responsible for Technical Planning, Quality Management and Frontier Science Business Asa Kimura Responsible for Cosmetics Products Research & Development and Software Development Masaru Miyagawa Chief Officer of China Business Division Chief Area Managing Officer of China Chairman of Shiseido China Co., Ltd. Yoshinori Nishimura 2 Chief Financial Officer Responsible for Finance, Investor Relations, Information System Responsible for Planning and Internal Control Shoji Nishiyama Responsible for Functional Food Research & Development, Innovative Science Research & Development, Research Administration and Technology Alliances Director retired as of June 24, 2011: Director, Corporate Senior Executive Officer Yasuhiko Harada (Retired from position of Corporate Senior Executive Officer as of March 31, 2011) Corporate auditor retired as of June 24, 2011: Corporate Auditor Kazuko Ohya Corporate officers retired as of March 31, 2011: Corporate Officer Shoji Takahashi and Corporate Officer Takafumi Uchida 48 SHISEIDO ANNUAL REPORT 2011

49 Shiseido s Management Structure Corporate Auditors Yasuko Takayama 2 Standing Corporate Auditor 1980 Joined Shiseido 2006 General Manager of Consumer Information Center 2008 General Manager of Consumer Relations Department 2009 General Manager of Social Affairs and Consumer Relations Department 2010 General Manager of Corporate Social Responsibility Department 2011 Standing Corporate Auditor [incumbent] Toshio Yoneyama Standing Corporate Auditor 1978 Joined Shiseido 2000 Chief Officer of Fine Chemical Division 2004 General Manager of Product Development Department, Cosmetics Business Division 2005 President of Institute of Beauty Sciences 2006 Corporate Officer 2008 Chief Officer of Healthcare Business Division 2010 Standing Corporate Auditor [incumbent] Akio Harada 1 External Corporate Auditor 2001 Prosecutor General 2005 External Corporate Auditor of Shiseido [incumbent] 2005 External Corporate Auditor of Sumitomo Corporation [incumbent] 2005 External Director of Seiko Holdings Corporation [incumbent] 2009 External Director of Japan Post Holdings Co., Ltd. [incumbent] 2010 External Director of Turnaround Initiative Corporation of Japan [incumbent] Reiko Kuroda 1 External Corporate Auditor 1992 Professor, Department of Chemistry, College of Arts and Sciences, and Department of Biological Science, Graduate School of Science, The University of Tokyo 1996 Professor, Department of Life Sciences, Graduate School of Arts and Sciences, The University of Tokyo [incumbent] 2008 External Corporate Auditor of Shiseido [incumbent] Nobuo Otsuka 1 External Corporate Auditor 1988 President and Director of Keiseikai Hospital 2007 External Corporate Auditor of Shiseido [incumbent] 2010 Chairman of Keiseikai Hospital [incumbent] Shigeto Ohtsuki 2 General Manager of Personnel Department Yu Okazawa General Manager of International Sales Department, International Business Division President of Shiseido Europe S.A.S. President of Shiseido International Europe S.A. President of Shiseido Deutschland GmbH President of Taishi Trading Co., LTD. Tooru Sakai Responsible for Production, Purchasing and Logistics Youichi Shimatani Responsible for Marketing of Domestic Cosmetics Business and Domestic Non-Shiseido Brand Businesses Mitsuo Takashige General Manager of Corporate Planning Department Ryuichi Yabuki Responsible for Sales of Domestic Cosmetics Business President & CEO of Shiseido Sales Co., Ltd. President & CEO of FT Shiseido Co., Ltd. 1. Independent Director / Corporate Auditor required by Rule of the Tokyo Stock Exchange Securities Listing Regulations 2. New appointment SHISEIDO ANNUAL REPORT

50 Corporate Governance Corporate Governance Policy Shiseido is setting higher standards of corporate governance based on the understanding that maximizing corporate and shareholder value, fulfilling social responsibilities and achieving sustainable growth and development are key to maintaining support as a valuable company from all stakeholders (consumers, business partners, shareholders, employees, society and the Earth). Management and Execution Structure Shiseido has selected a corporate auditor structure with double check functions for business execution: supervision by the Board of Directors and audits of legality and adequacy by the Board of Auditors. Furthermore, Shiseido believes that as a global corporation it must establish corporate governance that earns a high level of stakeholder trust while also strengthening senior management in order to prevail against competitors. Shiseido has therefore worked to reform corporate governance in four areas: clarifying the allocation of responsibility, enhancing management transparency and soundness, reinforcing supervisory and auditing functions, and strengthening decisionmaking functions. Shiseido has strengthened these functions by establishing committees and a corporate executive officer system as well as integrating these outstanding features of a company of committees with the corporate auditor structure. The Board of Directors is composed of eight members, including three external directors. The small number of members facilitates rapid decision making. The Board of Overview of Corporate Governance Policy Directors meets at least once a month to discuss all significant matters. In a change to separate supervision and execution, from April 2011 the Chairman of the Board of Directors no longer holds concurrent positions as a corporate executive officer. Formerly, the President & Chief Executive Officer was Chairman of the Board of Directors. Attendance at the 15 Board of Directors meetings in the year ended March 2011 was 100 percent. The adoption of a corporate executive officer system has separated the decision-making and supervisory functions of the Board of Directors from the business execution functions of corporate officers. The Corporate Executive Officer Committee, which acts as the final decision-making body regarding material issues, furthers the transfer of authority to corporate officers and accelerates operational decision-making. Shiseido s President & Chief Executive Officer chairs this Committee. In addition, the Policy Meeting of Corporate Officers is held once per year to discuss Shiseido s medium-to-long-term strategy and determine its direction. The term of office of directors is one year, and the term limit of corporate officers is four years per position in principle and six years maximum. To obtain an outside point of view and further strengthen the Board of Directors supervisory function in regard to business execution, Shiseido appointed two external directors from the year ended March 2007, and added a third external director in June Having external directors has stimulated discussion at Board of Directors meetings and strengthened its supervisory capabilities. Furthermore, Shiseido has designated three external directors as independent directors and three external auditors as independent auditors pursuant to the Tokyo Stock Exchange s Securities Listing Regulations. Management Transparency, Fairness and Speed Clarify allocation of responsibility Enhance management transparency and soundness Reinforce supervisory and auditing functions Strengthen decision-making functions 2001 Introduced corporate executive officer system 2001 Introduced 1-year term for directors 2006 Set upper term limit per position 2006 Formulated rules governing promotions and demotions for corporate officers 2006 Lowered upper age limit per position for holding office 2001 Established Remuneration Committee 2005 Established Nomination Advisory Committee 2005 Increased number of external corporate auditors from 2 to Appointed external directors 2001 Established Corporate Executive Officer Committee and Policy Meeting of Corporate Officers 2002 Reduced number of directors 50 SHISEIDO ANNUAL REPORT 2011

51 Shiseido s Management Structure In addition, Shiseido is actively promoting diversity among directors in such ways as appointing women, foreign nationals and people who have built careers outside of Shiseido. Wide perspective and advanced insight will promote objectivity and strengthen the Board s supervisory and decision-making functions. In the year ending March 2012, a new female external director joined the Board of Directors, and two people from outside the Company became executive officers. Of the 13 members of the Board of Directors and the Board of Corporate Auditors, eight people, or 62 percent, have built careers outside of Shiseido. Four of them, or 31 percent, are women, and one, or 8 percent, is a foreign national. The 106th General Meeting of Shareholders held on June 25, 2006 adopted Introduction of Countermeasures to Large Acquisitions of Shiseido Co., Ltd. Shares (Takeover Defense). Subsequently, based on regulatory changes, a meeting of the Board of Directors held on April 30, 2008 resolved to discontinue the Takeover Defense, and the 108th General Meeting of Shareholders approved its removal from the Articles of Incorporation. Shiseido will generate and increase earnings for shareholders by steadily executing the Three-Year Plan, which will increase Shiseido s competitiveness in global markets and ability to generate sustained growth, and expand corporate value. Audit Structure Shiseido s Board of Auditors consists of two standing corporate auditors and three external corporate auditors. Corporate auditors monitor the legality and adequacy of directors performance by attending Board of Directors meetings and other important meetings. Representative directors and corporate auditors meet regularly to exchange opinions and resolve corporate governance issues. Shiseido maintains a framework to ensure that corporate auditors discharge their duties effectively. For example, the Company arranges liaison meetings with the accounting auditors and the Internal Auditing Department in addition to assigning full-time staff to assist in audits. Corporate auditor attendance for the 14 Board of Auditors meetings held in the year ended March 2011 was 100 percent (except for one corporate auditor whose attendance rate was 78.5 percent). Attendance at Board of Directors meetings was 100 percent (except for one corporate auditor whose attendance rate was 80 percent). Internal audits of the entire Group are conducted to ensure that business is executed in an appropriate manner, and audit results are reported to the Board of Directors and Board of Auditors. Shiseido employs three types of audits: internal audits, audits by the corporate auditors, and accounting audits. To increase the effectiveness and efficiency of audits, Shiseido has been enhancing mutual cooperation among the parties concerned through means such as regular liaison meetings to report on audit plans and audit results and exchange opinions. Committees With a view to promoting transparency and objectivity in management, Shiseido has established two committees to advise the Board of Directors: the Remuneration The Company s System for the Management and Execution of Business Appointment, termination Accounting Auditors Advisory committees to the Board of Directors Remuneration Committee Nomination Advisory Committee General Meeting of Shareholders Resolution at the General Meeting of Appointment, termination Shareholders based on laws Audit Proposal of material legal and management issues Board of Directors Report Resolution, approval Supervision Corporate Executive Officer Committee Proposal Decision-Making Meeting of Corporate Officers Audit Resolution, approval Appointment, termination Board of Auditors Advisory committees to the Board of Directors CSR Committee Policy Meeting of Corporate Officers SHISEIDO ANNUAL REPORT

52 Committee, which makes recommendations on executive remuneration and performance evaluation guidelines; and the Nomination Advisory Committee, which makes recommendations on director and corporate officer candidates and promotions. Both committees are chaired by external directors to maintain objectivity. On April 1, 2011, Shiseido combined the CSR Committee and the Compliance Committee to establish the CSR Committee, which reports directly to the Board of Directors. This further enhances Shiseido s ability to identify and appropriately respond to society s demands from a unified perspective. The CSR Committee covers all areas in which the Shiseido Group is expected to fulfill its corporate social responsibility (CSR). It monitors the demands and expectations of society and determines the direction for the Group s CSR activities. At the same time, it monitors risks associated with management strategy and business execution and takes necessary countermeasures. Chaired by Shiseido s Executive Vice President, the CSR Committee is composed of members representing a broad cross-section of the Company. It also includes experts from outside Shiseido, and makes proposals for and reports on plans and results of activities to the Board of Directors. Overview of Shiseido CSR Domains Proposing new social values Creating markets Social contribution activities (including philanthropy) Environment Information disclosure, protection of human rights, protection of personal information Compliance with laws and regulations Provision of products and services Collaboration with business partners Profits and dividends, payment of taxes, valuing employees, creation of employment opportunities Continued corporate existence Unique Shiseido CSR (Activities that increase corporate value) Fundamental CSR (Activities that minimize risk and protect corporate value) Shiseido actively promotes both fundamental CSR required of a company and selective CSR unique to Shiseido that increases corporate value. Committees and Their Members Remuneration Committee Chair Shoichiro Iwata, External Director Members Shinzo Maeda, Representative Director, Chairman Hisayuki Suekawa, Representative Director, President & CEO Kimie Iwata, Representative Director, Executive Vice President Taeko Nagai, External Director Tatsuo Uemura, External Director Nomination Advisory Committee Chair Tatsuo Uemura, External Director Members Shinzo Maeda, Representative Director, Chairman Hisayuki Suekawa, Representative Director, President & CEO Kimie Iwata, Representative Director, Executive Vice President Shoichiro Iwata, External Director Taeko Nagai, External Director CSR Committee Chair Kimie Iwata, Representative Director, Executive Vice President Members Carsten Fischer, Director, Corporate Senior Executive Officer Tatsuomi Takamori, Director, Corporate Executive Officer Michiko Achilles, Corporate Officer, Responsible for Public Relations, Consumer Information, Environmental Affairs, CSR and Corporate Culture Reforms Tsunehiko Iwai, Responsible for Technical Planning, Quality Management and Frontier Sciences Business Shigeto Ohtsuki, Corporate Officer, General Manager of Personnel Department Mitsuo Takashige, Corporate Officer, General Manager of Corporate Planning Department Hajime Akatsuka, Chairman of the Central Executive Committee, Shiseido Labor Union Yoko Hayashi, External Member, Attorney at Law, Athena Law Office Mariko Kawaguchi, External Member, Managing Director, CSR Group, Corporate Communication Department, Daiwa Securities Group Inc. Observers Taeko Nagai, External Director Yasuko Takayama, Standing Corporate Auditor Toshio Yoneyama, Standing Corporate Auditor Remuneration to Directors, Corporate Officers and Corporate Auditors Remuneration to directors and corporate officers consists of a basic fixed portion and a performance-linked portion that fluctuates depending on the achievement of management targets and share price. The performance-linked portion of the remuneration of directors other than external directors increases with their degree of responsibility as corporate executive officers. On average, assuming full achievement of the targets of the Three-Year Plan and each of its fiscal years, the basic fixed portion is designed to be about 40 percent of total remuneration and the performance-linked portion about 60 percent. Performance-linked remuneration consists of a shortterm incentive bonus based on annual consolidated results, medium-term incentive remuneration based on the achievement of the targets of the Three-Year Plan, to be paid in cash at the culmination of the plan, and stock options as long-term incentive, primarily aimed at fostering a shared awareness of profits with shareholders. Performance-linked remuneration is designed to give directors and corporate officers a medium-tolong-term perspective, not just a single-year focus, and to 52 SHISEIDO ANNUAL REPORT 2011

53 Shiseido s Management Structure motivate management to become more aware of Shiseido s performance and share price. External directors receive only basic fixed remuneration because of the importance of a stance independent from business execution in their supervisory functions. Due to the nature of auditing, corporate auditors receive fixed basic remuneration only, to eliminate linkage with performance. Basic remuneration for directors and corporate auditors is within the monthly remuneration limits decided by the General Meeting of Shareholders; performance-linked remuneration, including the short-term incentive bonus, medium-term incentive remuneration and long-term incentive stock options, is also set on a case-by-case basis by resolution of the General Meeting of Shareholders. Remuneration to Directors and Corporate Auditors for the Year Ended March 2011 (Millions of yen) Short-Term Medium-Term Long-Term Basic Incentive Incentive Incentive Total Bonus RemunerationStock Options (for Three Years) Directors (10 people) External directors (2 of the 10) Corporate auditors (6 people) External auditors (3 of the 6) Total Notes: 1. Basic remuneration for directors has the ceiling amount of 30 million per month as per the resolution of the 89th Ordinary General Meeting of Shareholders held on June 29, Basic remuneration for corporate auditors has the ceiling amount of 10 million per month as per the resolution of the 105th Ordinary General Meeting of Shareholders held on June 29, A total amount of 142 million was paid during the year ended March 2011 as bonuses to the eight directors (excluding the external directors) for the year ended March 2010 (based on the resolution of the 110th Ordinary General Meeting of Shareholders held on June 25, 2010). 3. The above payment includes the amounts of the following remuneration, etc., paid to directors and corporate auditors. 1) Remuneration to two retired directors The Company paid 13 million in basic remuneration for the months April through June 2010 to two directors who retired at the conclusion of the 110th Ordinary General Meeting of Shareholders held on June 25, 2010 and recorded 8 million for the year ended March 2011 as expenses associated with stock options granted to said directors. 2) Remuneration to one retired corporate auditor The Company paid 7 million in basic remuneration for the months April through June 2010 to one corporate auditor who retired at the conclusion of the 110th Ordinary General Meeting of Shareholders held on June 25, The medium-term incentive remuneration shall be as per the resolution of the 108th Ordinary General Meeting of Shareholders (held on June 25, 2008). Medium-term incentive remuneration will not be paid to directors, excluding Mr. Carsten Fischer, because the ratio of achievement of the target (10%) for the ratio of operating income to net sales on a consolidated basis for the final year of the Three-Year Plan was less than the minimum ratio required for provision of the remuneration. This remuneration will also not be paid to external directors. As the payment of the medium-term incentive remuneration to Mr. Carsten Fischer is based on the ratios of achievement of targets for operating sales and operating income, each on a cumulative basis for the three years of the business division in his charge in the Three-Year Plan from April 2008 to March 2011; and as the performance for said three years has been determined and the targets have been achieved, the estimated amount of remuneration to Mr. Fischer has been included in the above table. The amount in the table indicates the amount corresponding to the three years. 5. The following remuneration will be paid in addition to the above payments. 1) 6 million was recorded for the year ended March 2011 as expenses associated with stock options granted to three directors of the Company, at the time they served as corporate executive officers not holding the offices of directors. 2) 38 million was recorded for the year ended March 2011 as performance-linked remuneration (linked to the previous Three-Year Plan completed in the year ended March 2008) granted to one director of the Company, who at the time served as corporate executive officer not concurrently holding the office of director. 3) Two subsidiaries of the Company paid 9 million to two directors of said subsidiaries who also served concurrently as directors of the Company until March 31, 2010 as bonuses for the year ended March ) 23 million was recorded as a final retirement payment granted to one director who retired at the conclusion of the 110th Ordinary General Meeting of Shareholders held on June 25, (Payment was made based on the resolution of the 104th Ordinary General Meeting of Shareholders held on June 29, 2004 to grant final retirement payments due to the abolition of the retirement bonus system for directors and corporate auditors). 6. None of the directors or the corporate auditors will receive remuneration other than the executive remuneration described above (including that described in notes 1 through 5). Remuneration by Type to Representative Directors and Directors Whose Total Remuneration Exceeded 100 Million for the Year Ended March 2011 Shinzo Maeda Representative Director Kimie Iwata Representative Director Carsten Fischer Director Basic Short-Term Incentive Bonus Medium-Term Incentive Long-Term Remuneration Incentive (for Three Years) Stock Options % 17.9% 16.5% 19.3% (Millions of yen) Total Notes: 1. As bonuses for the year ended March 2010, 35 million was paid to Mr. Shinzo Maeda, Representative Director, 18 million was paid to Ms. Kimie Iwata, Representative Director, and 50 million was paid to Mr. Carsten Fischer, Director, in the year ended March 2011 (based on the resolution of the 110th Ordinary General Meeting of Shareholders held on June 25, 2010). 2. In addition to the above payments, a total amount of 1 million has been recorded as expenses associated with stock options granted to Mr. Carsten Fischer, Director, at the time he served as corporate executive officer not concurrently holding the office of director. 38 million was recorded for the year ended March 2011 as performance-linked remuneration (linked to the Three-Year Plan completed in the year ended March 2008) granted to Mr. Carsten Fischer, at the time he served as corporate executive officer not holding the office of director. 3. The medium-term incentive remuneration shall be as per note 4 of Remuneration to Directors and Corporate Auditors for the Year Ended March 2011, above. 4. None of the three directors above will be paid remuneration other than the executive remuneration described above (including that described in notes 1 through 3) Remuneration by Type to Directors Other Than External Directors During the Three-Year Plan Ended March 2011 (Millions of yen) Fixed portion of remuneration Performance-linked portion of remuneration (%) Basic remuneration Short-Term Incentive Bonus Medium-Term Incentive Remuneration Long-Term Incentive Stock Options Notes: 1. The graph reflects a decrease in the weight of the performance-linked portion because two representative directors did not receive short-term incentive bonuses for the year ended March 2009 as they did not achieve the predetermined threshold based solely on consolidated performance. In addition, the medium-term incentive remuneration was not paid to directors (excluding Mr. Carsten Fischer). 2. The above figures include remuneration paid by subsidiaries to directors of said subsidiaries who also served concurrently as directors of the Company, and long-term incentive stock options are only for the three-year period ended March SHISEIDO ANNUAL REPORT

54 Compliance In April 2011, Shiseido newly established the Shiseido Group Corporate Philosophy Our Mission, Values and Way. Our Mission defines our corporate mission and business domains, and sets out our raison d être. Our Values define the approach that must be shared by all employees of the Shiseido Group in order to realize Our Mission. Our Way promotes legitimate and fair business practices by defining standards for ensuring the highest level of ethical conduct. The CSR Committee, which reports directly to the Board of Directors, is responsible for improving the quality of the Company in ways including promoting legitimate and fair business practices throughout the Group as well as risk countermeasures. It submits proposals for and reports on action plans and their results to the Board of Directors. At each business office, a manager responsible for instilling and establishing Our Mission, Our Values and Our Way encourages activities that promote corporate ethics and works to preclude or quickly detect and resolve problems. The Company also provides multiple reporting and consultation help lines, which include external lawyers, to quickly detect and correct actions that contravene the law, ordinances, the Articles of Incorporation and other regulations of the Company. In addition, Shiseido conducts Groupwide internal audits to assure duties are being performed appropriately. The results of these audits are reported to directors and corporate auditors. institutional investors. In the year ended March 2011, Shiseido conducted more than 500 such meetings. The President & Chief Executive Officer leads meetings for individual investors twice a year to explain our strategies and results, and Shiseido makes webcasts of presentations and question-and-answer sessions available on its website. In addition, Shiseido also conducts a survey once every six months, primarily of individual shareholders, and uses the results in ways such as improving disclosure materials. Shiseido collects investor opinions and puts them to use in management. The Investor Relations Department obtains shareholder and investor opinions from dialogues and communicates them within the Company in various ways, which contributes to management reforms. Specifically, investor opinions concerning management are analyzed to identify management issues, which are reported in a timely fashion. Every quarter, Shiseido also posts the IR Report, which presents the collected opinions of securities analysts, on the Company intranet. In addition, Shiseido conducts internal communication to convey investor evaluations of the Company to employees. Overview of Investor Relations Activities Activity Activities for individual investors Details Twice-yearly information meetings led by the President & CEO Webcasts of these meetings are posted on Shiseido s website Dialogue with Shareholders and Investors Shiseido is committed to timely and appropriate disclosure. We emphasize dialogue with shareholders and investors to maintain accountability and work to increase corporate value by incorporating their opinions in management. The President & Chief Executive Officer leads meetings for institutional investors twice a year to present first-half and fullyear results, while members of the Investor Relations Department holds teleconferences twice a year to discuss firstand third-quarter results. The President & Chief Executive Officer, Chief Financial Officer and members of the Investor Relations Department also visit investors in Japan and overseas and respond to requests for one-to-one meetings from Activities for securities analysts and institutional investors IR materials available on Shiseido s website Other Twice-yearly meetings led by the President & CEO to announce first-half and full-year results (teleconferences by members of the Investor Relations Department to announce first- and third-quarter results) Individual interviews at Shiseido Meetings with investors in Europe, the United States and Asia Notice of Convocation of the Ordinary General Meeting of Shareholders Annual securities filing and quarterly reports (Japanese only) Corporate Governance Report Timely disclosure materials Signed statements associated with timely disclosure Financial Results Briefing materials Consolidated Settlement of Accounts Annual Report To Our Shareholders and Investors (Printed brochure for shareholders) (Japanese only) IR Report, analyzing investor opinions concerning management and reporting on management issues, is posted on Company intranet Internal communication conveying investor evaluations of Shiseido to employees 54 SHISEIDO ANNUAL REPORT 2011

55 Shiseido s Management Structure Risk Management Fundamental Stance on Risk Management and Approach to Business Continuity Shiseido s fundamental stance on risk management is that the Company s primary responsibility is ensuring the safety of employees and their families while also protecting Company assets, maintaining operating continuity and earning the trust of stakeholders. This fundamental stance is the basis of our belief that we enhance corporate value by quickly responding to risks as they materialize and minimize their impact as a matter of course, and engaging in responsible behavior that prevents social loss and contributes to society. The CSR Committee, which reports directly to the Board of Directors, implements the risk management system by controlling the various risks and compliance issues related to Shiseido s corporate activities and by promoting various policies to preclude risk. Moreover, the risk management organization s three-tier structure Countermeasure Headquarters, Countermeasure Project and Countermeasure Team responds to risks that materialize according to risk severity. In February 2011, we formulated Business Continuity Plan III with the objectives of presenting an easily understandable overview of the flow of operations in each division and Shiseido s activities overall; clearly specifying operational procedures and authority; and ensuring versatility in managing various risks. Built on Business Continuity Plan I and Business Continuity Plan II, which we formulated and had been implementing since 2004 in order to establish a system for managing the business continuity planning cycle, this plan was instrumental in dealing with the Great East Japan Earthquake that occurred in March Identifying Potential Risks Shiseido focuses on verifying potential risks because the Company recognizes that preventing risks from materializing is crucial to business continuity. We make sure to include projections of the social environment and international affairs as well as changes in domestic and international treaties and regulations. To do this, we look at risk from three perspectives: social requirements, risks Shiseido cannot or will not address, and risks Shiseido should address. Through this process, we determine the initiatives we should implement, which we call CSR Actions. Specifically, in accordance with Our Way, Global Reporting CSR Action Process Relevant Head Office Division CSR Status Survey Relevant Domestic and Overseas Group Companies CSR Self Assessment 1. Itemize and prioritize corporate responsibility issues 2. Conduct internal audit Conduct internal audit in accordance with core ISO26000 issues Report Feedback Focus on issues 3. Summarize and define tasks 2. Conduct internal audit Conduct internal audit of issues required for corporate management Report Feedback 4. Feedback on overall conclusions Feedback on overall conclusions of Shiseido Group and conclusions of affiliated companies 4. Feedback on overall conclusions Feedback on overall conclusions of Shiseido Group and conclusions specific to individual companies 5. Confirm plans for and progress of countermeasures Report Report CSR Committee SHISEIDO ANNUAL REPORT

56 Initiative (GRI) guidelines and ISO26000, Shiseido classifies all survey results and other information obtained from institutions involved in socially responsible investing and CSR auditing into categories such as corporate governance, human rights, labor practices, the environment, fair business practices, consumer issues, and participation in and development of the community. We break these down into more detailed categories and scrutinize each one in terms of the Plan-Do-Check-Act cycle: Do we have a specific plan (Plan)? Do we have a system in place for action (Do)? Are we evaluating and validating (Check and Act)? Based on this review, we determine the initiatives we will implement. Issues that we identify are evaluated and prioritized according to their relative impact on our business and degree of interest to society. We use this process for risk mapping, with the CSR Committee receiving reports on the results and the responsible division receiving feedback so that we can quickly formulate and implement plans. Major issues that the CSR Committee has studied through this process include initiatives to promote biodiversity, programs to increase safety awareness, support to empower women in developing countries, business continuity planning and operational system preservation. Furthermore, from April 2011, Shiseido s subsidiaries and affiliates in Japan and overseas began conducting selfassessments using the CSR Action items, thus establishing a system that enables the Shiseido Group as a whole to determine potential risks. Shiseido will constantly ascertain society s perspective and operational exposure in working to respond to risks quickly and appropriately. Specific Countermeasures Products That Are Healthy and Eco-Friendly At the World Summit on Sustainable Development held in Johannesburg in 2002, the United Nations adopted the goal of using and producing chemicals by 2020 in ways that lead to the minimization of significant adverse effects on human health and the environment. With this in mind, Shiseido s fundamental stance is not to sell products that adversely impact human health or the environment, based on information it has collected regarding domestic and international regulatory trends and chemical substance safety, and the latest scientific knowledge. For example, all chemical substances associated with cosmetics and containers shipped within the EU are subject to the European REACH Regulation that came into effect in June 2007 and its prescribed registration procedures. As a matter of course, we keep track of all substances that require registration. We also confirm that our products and containers contain no more than 0.1 percent of Substances of Very High Concern (SVHC), for which information must be provided because they are known to have probable serious effects on human health and the environment. Itemized Verification Sheet Risk Map Level of impact: High Degree of interest to society: Low Level of impact: High Degree of interest to society: Medium Level of impact: High Degree of interest to society: High Level of impact: Medium Degree of interest to society: Low Level of impact: Medium Degree of interest to society: Medium Level of impact: Medium Degree of interest to society: High Level of impact: Low Degree of interest to society: Low Level of impact: Low Degree of interest to society: Medium Level of impact: Low Degree of interest to society: High We have created an itemized checklist of risks and conduct audits from various perspectives. We map risk items primarily according to degree of influence on business and degree of interest to society, and then prioritize the initiatives we will execute. 56 SHISEIDO ANNUAL REPORT 2011