Shiseido commenced operations as Japan s first Western-style pharmacy in Tokyo s

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2 Shiseido commenced operations as Japan s first Western-style pharmacy in Tokyo s Ginza district in 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, our founding spirit of serving our customers and contributing to society by integrating all things on Earth to create new value lives on in our corporate mission of We seek to identify new, richer sources of value and use them to create a beautiful lifestyle. This policy has led to high-value products and services in the cosmetics and other businesses promoting people s beauty and well-being. Shiseido aims to become a global player representing Asia with its origins in Japan, and continues to improve quality of activities across the board under the current Three-Year Plan in order to set the stage for the next Three-Year Plan. By getting into a growth trajectory under these initiatives, we aim to assist society, customers and all people in experiencing This moment. This life. Beautifully.

3 Contents Financial Highlights 4 Shiseido at a Glance 6 An Interview with President Maeda 8 Business Strategy Domestic Cosmetics 14 Overseas Cosmetics 17 Feature: Conclusions and Beginnings 20 Corporate Governance 24 Contributing to Society 28 Environmental Initiatives 30 Board of Directors, Corporate Auditors and Corporate Officers 32 Main Subsidiaries and Affiliates 34 Financial Section 35 Six-Year Summary of Selected Financial Data 36 Management s Discussion and Analysis 37 Consolidated Financial Statements 50 Notes to the Consolidated Financial Statements 55 Independent Auditors Report 75 Investor Information 76 Corporate Information 77 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.

4 Financial Highlights Shiseido Company, Limited, and Subsidiaries For the years ended March 31, 2008, 2009 and 2010 Net sales: billion (Down 6.7%) Domestic sales declined due to cooling consumer sentiment. Overseas sales increased on a local currency basis, centered on Asia, but the impact of the strong yen resulted in a decrease in revenues. Operating income: 50.4 billion (Up 0.9%) Operating profitability: 7.8% (Up 0.6 percentage points) Income rose as efficient handling of SG&A expenses covered the decline in gross profit that resulted from the decrease in net sales. Cash dividend per share: 50.0 The cash dividend per share was 50.0, the same as in the previous fiscal year, and the consolidated payout ratio was 59.1%. Operating Results: Thousands of U.S. dollars Millions of yen (Note 1) (Except per share data) Percent change (Except per share data) / Net sales 723, , , % $6,923,914 Operating income 63,465 49,914 50, ,176 Net income 35,460 19,373 33, ,898 Financial Position: Total assets 675, , , % $8,334,544 Net assets 399, , , ,925,279 Per Share Data (In yen and U.S. dollars): Net income (Note 2) % $0.91 Net assets (Note 2) Cash dividend _ Financial Ratios: Operating profitability 8.8% 7.2% 7.8% 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 based on the number of shares outstanding at the end of each respective year. Please refer to page 36 for an in-depth six-year summary of selected financial data. 4 SHISEIDO ANNUAL REPORT 2010

5 Net Sales Operating Income / Operating profitability Net Income (Billions of yen) (Billions of yen) % (Billions of yen) Operating Income Operating profitability (Years ended March) (Years ended March) (Years ended March) Return on Equity Net Income per Share Cash Dividends per Share % (Yen) (Yen) (Years ended March) (Years ended March) (Years ended March) Business Segment Information (Year Ended March 2010) Net Sales (Outer circle) Operating Income (Inner circle) 3.4 % Geographic Segment Information (Year Ended March 2010) Net Sales (Outer circle) Operating Income (Inner circle) % Overseas Sales / Overseas Sales Ratio (Billions of yen) % Domestic Cosmetics Business Overseas Cosmetics Business Others Japan Europe Americas Asia/Oceania Americas Asia/Oceania Europe Overseas Sales Ratio (Years ended March) Notes: 1. Segment sales represent sales to external customers only and do not include intersegment sales or transfers. 2. Segment operating income does not include eliminations/corporate. SHISEIDO ANNUAL REPORT

6 Shiseido at a Glance Domestic Cosmetics Business Cosmetics Counseling Share of total net sales 61.7% Net Sales (Billions of yen) (Years ended March) The domestic cosmetics business segment handles products/services for the Japanese market, primarily cosmetics. The core cosmetics division manufactures and markets cosmetics, cosmetics equipment and toiletries. The professional division manufactures and markets products/services for hair and beauty salons. The healthcare division manufactures and markets health and beauty foods and over-the-counter drugs. MAQUILLAGE Elixir White clé de peau BEAUTÉ Bénéfique Self-selection Toiletries Aqua Label Integrate Uno Tsubaki Sengan Senka Professional Healthcare Non-Shiseido and Mail-Order PROSYNERGY Qi The Collagen In and On d ici là Soka-Mocka Others Share of total net sales 1.6% The others business segment includes the frontier sciences division, which manufactures and markets cosmetic raw materials, medical-use drugs and beauty care cosmetics, and conducts a variety of other activities including restaurant operation. Note: Segment sales represent sales to external customers only and do not include intersegment sales or transfers. 6 SHISEIDO ANNUAL REPORT 2010

7 Overseas Cosmetics Business Share of total net sales 36.7% Net Sales (Billions of yen) Composed of the cosmetics division and the professional division, the overseas cosmetics business segment handles products for overseas markets. It manufactures and markets cosmetics and other products/services in the Americas, Europe and Asia/Oceania (Years ended March) Cosmetics Global brand Professional SHISEIDO Future Solution LX China/Asia SHISEIDO makeup line SHISEIDO White Lucent JOICO AUPRES DQ Za DECLÉOR Non-Shiseido bareminerals Narciso Rodriguez NARS CARITA Net Sales (Billions of yen) (Years ended March) Bio-hyaluronic acid Shiseido Parlour SHISEIDO ANNUAL REPORT

8 An Interview with President Maeda Aiming to become a global player representing Asia with its origins in Japan, we will continue our drive to improve quality of activities across the board under way since the start of the current Three-Year Plan in the year ended March We will wrap up the present Three-Year Plan in the year ending March 2011, while building a firm footing for getting on a growth trajectory during the next Three- Year Plan. In Japan, we will strengthen cultivation of our brands/lines. Overseas, we will maintain growth in Asia and concentrate on further enhancing our presence on a global scale. Shiseido s aim in these efforts is to become a corporation that earns the support of its stakeholders as it works to increase corporate and shareholder value. June 25, 2010 SHINZO MAEDA President & CEO (Representative Director) 8 SHISEIDO ANNUAL REPORT 2010

9 Overview of the Year Ended March 2010 How did Shiseido deal with the global recession that continued during the year ended March 2010? Please provide an overview of the fiscal year. The year ended March 2010 was the second year of our drive to improve quality of activities across the board under the current Three-Year Plan from the year ended March 2009 as we prepared for future growth. While some tasks remain in our challenging market environment, we strengthened our business base and increased earnings by assiduously stepping up concentration and distinction. In Japan, consumption continued to decrease. We focused on key areas in each channel and concentrated resources. As a result, we performed strongly in the key retail venues of voluntary chain stores and department stores. Unfortunately, however, our performance was not satisfactory at general merchandise stores and drug stores, where we still have work to do. Overseas, we kept pace with our global competitors by strengthening cultivation of the global brand and executing our City Concept strategy of focusing marketing on cities that have a strong ripple effect on their respective countries as a whole. Sales began to recover from the fourth quarter in Europe and North America. Performance in Asia was robust, driven by energetic channel- and brand-specific marketing in China. Even amid weak business confidence, our tenacious, ongoing efforts to build a strong base for growth generated favorable results. Despite all these positive developments, net sales decreased 6.7 percent year on year. By business, sales in the domestic cosmetics business decreased due to the pronounced effect of the protracted recession. In the overseas cosmetics business, sales increased on a local currency basis, but decreased year on year when translated into yen because of the appreciation of the Japanese currency. Operating income increased 0.9 percent year on year because of our success in raising the efficiency of selling, general and administrative expenses centered on marketing costs. Operating profitability improved 0.6 percentage points year on year to 7.8 percent. Moreover, we brought natural cosmetics company Bare Escentuals, Inc. of the United States into the Shiseido Group in a major step that prepares us for growth. This company pioneered mineral foundation, and has performed strongly for many years. Its annual net sales now exceed US 500 million. Shiseido primarily used a tender offer to acquire the shares of Bare Escentuals, listed on the NASDAQ exchange, for a total of US 1.96 billion. It became a wholly owned subsidiary in March 2010, and its sales and earnings will contribute to Shiseido s results in the year ending March The Business Plan for the Year Ending March 2011 How has Shiseido positioned the year ending March 2011, the final year of the current Three-Year Plan? When we announced our current Three-Year Plan in 2008, I declared our goal to become a global player representing Asia with its origins in Japan in 10 years, and the reforms we would implement to do so. Among them, we have identified the year ending March 2011 as a key year for wrapping up our efforts to improve quality of activities across the board and building a firm footing for getting on a growth trajectory during the next Three-Year Plan. We assumed the following review of the future business environment in formulating our business plan for the year ending March First, in Asia we believe that China will be the engine of growth. This trend will continue into the future, and the Asian market including Japan is forecast to become the world s largest market by Moreover, the Japanese market is becoming increasingly polarized between highpriced and low-priced products, and we forecast that it SHISEIDO ANNUAL REPORT

10 will continue to do so into the future. We see this trend as a structural change that represents the effect of evolving customer attitudes, purchasing behavior and channels as well as the impact of the recession. In the year ending March 2011, Shiseido will respond to this environment and establish an undisputed presence in Asia in order to make steady progress toward becoming a global player. Establishing a firm footing for full-scale globalization will be absolutely critical. As announced on June 8, 2010, we forecast that net sales for the year ending March 2011 will increase 9.4 percent year on year to billion, and operating income will increase 0.3 percent to 50.5 billion. I would like to point out that this forecast includes the impact from adding Bare Escentuals to the scope of consolidation. We expect this will increase cost of sales following assessment of the fair value of the inventories acquired as well as incur amortization of marketing rights, and goodwill under Japanese accounting standards. Please see the Management s Discussion and Analysis on pages 37 to 49 for more detail on the forecast for the year ending March Ten-Year Roadmap Sustained growth as a global player representing Asia with its origins in Japan Previous Three-Year Plan Current Three-Year Plan Next Three-Year Plan Establish foundation as a global player Phase 1 Improve quality of activities across the board Phase 2 Get into a growth trajectory Phase 3 Make a leap forward Establish foundation Establish an undisputed presence in Asia Become a global player (Years ended March) Year Ending March 2018: Net sales in excess of 1 trillion (over 50% overseas sales); Consistently generate solid operating profitability (12% or higher); ROE comparable to that of global competitors (15% or higher) Overview of Three-Year Plan Become a global player representing Asia with its origins in Japan; Improve quality of activities across the board Keywords Strategic direction Globalization Create solid brands Strengthen cultivation of the global brand Rollout of masstige marketing Further expand business in China Solidify No.1 position in Japan Accelerate innovation of Beauty Consultant activities Reinforce value creation power Establish global production systems Expand growth potential and improve profitability Establish an undisputed presence in Asia Distinction and concentration Strengthen foundation for raising the Shiseido Group s corporate value Strengthen global solidarity Utilization of external knowledge and resources Improve quality of business management Nurture human resources on global basis Raise organizational capabilities Advance corporate governance Pursue structural reforms Target proactive CSR initiatives 10 SHISEIDO ANNUAL REPORT 2010

11 An Interview with President Maeda Overview of Initiatives for the Year Ending March 2011 Wrapping up and a firm footing are key themes, but what are your specific initiatives for the year ending March 2011? My explanation will follow the key words of Japan, Asia and Global as per the aim of becoming a global player representing Asia with its origins in Japan that I mentioned earlier. Japan refers to the domestic cosmetics business. We will continue focused efforts to nurture mega lines 1 and relationship-building brands/lines 2, while working to develop long-selling brands/lines by focusing on existing hit products to attract and retain loyal customers. We will also further enhance efforts to meticulously combine brands/lines with channels to narrow down our core fields, which was a key policy in the year ended March We will increase the number of core voluntary chain stores, while moving forward at department stores with our program of installing separate counters for the global brand and for clé de peau BEAUTÉ. We will also improve the capabilities of beauty consultants at general merchandise stores and focus on priority chains in the drug store channel. To reinforce these efforts, we have reassessed our channel-specific sales system, and in April 2010 reorganized it into a system that can adapt to markets from the perspectives of both area and store chains. In Asia, we will carefully prepare for the full-scale launch of the masstige 3 business during the next Three- Year Plan. We will develop this business while integrating it with the Japanese market for low-priced products, and will begin some components of this business in the second half of the year ending March Meanwhile, we will also draw on the Vietnam plant, a masstige production base that began operating in April Moreover, we will maintain the momentum of our rapidly growing business in China with the goal of double-digit growth in sales. In department stores, we will work to expand sales of the global brand and the China-only brand AUPRES. At cosmetics specialty stores, we will focus on raising sales of existing stores and plan on raising total contracts with stores to about 5,000 during fiscal In addition, we will aggressively promote expansion in the drugstore channel, which we entered in the past fiscal year, and in the professional business. Global is last but not least. We will move to install new counters and strengthen our lines to cultivate the global brand. We will also execute our City Concept strategy with a focus on Asia. Moreover, we will accelerate our advance into new markets to expand customer contact points. The Acquisition of Bare Escentuals The acquisition of Bare Escentuals was a major step in preparing for growth. What is the background for the acquisition, and how will Shiseido develop this business in the future? In accordance with its long-term business strategy, Shiseido regularly reviews strategic investments in projects that meet its requirements for synergy and new value. Bare Escentuals met our requirements, and we acquired it for the following three specific reasons. One, we acquired new brand value. Bare Escentuals is the leader in the mineral foundation market in the United States. Acquiring its strongly supported brands allows us to structure a brand portfolio that allows us to respond to a broader array of customer needs. Two, we see synergies with distribution, sales and research and development. Bare Escentuals has built a unique business model in which it conducts aggres- 1. Mega lines: Lines aimed at expanding points of contact with customers; Shiseido concentrates advertising and sales promotion by skincare and makeup category in order to attain category leadership. 2. Relationship-building brands/lines: Brands/lines that deepen relationships with customers through counseling. 3. Masstige: A word coined from mass and prestige. Masstige products are positioned as more expensive than mass-produced products, but more moderately priced than prestige products. SHISEIDO ANNUAL REPORT

12 sive direct marketing using television shopping, mainly in the United States, while simultaneously retaining customers through sales at locations including department stores and its company-owned stores. Shiseido sees excellent synergies for Bare Escentuals in using the distribution and sales infrastructure of Shiseido and Shiseido s strong presence in Japan and Asia. Moreover, we expect joint product development that makes use of Shiseido s skincare-centered R&D strengths to further enhance the products of Bare Escentuals. Three, we strengthened our business base in North America. Adding Bare Escentuals and its strong base in North America has expanded Shiseido s sales in the North American market to a level equivalent to sales in Europe. We moved to build synergies with Bare Escentuals by initiating meetings with Leslie Blodgett, chairperson of Bare Escentuals, and her management team following the acquisition. We subsequently established collaborative projects and are now studying specific strategies to maximize synergies. The acquisition of Bare Escentuals has given Shiseido competitive brands covering Asia, Europe and North America, with the global brand from Asia, Beauté Prestige International S.A. s designer fragrance brands from Europe, and the Bare Escentuals brand from North America. We will work to further strengthen this brand portfolio and our presence in Europe and North America in working to generate steady growth as a global player. Establishing a High-Quality Management Foundation What lies ahead as Shiseido continues its emphasis on building a high-quality management foundation? Under our current Three-Year Plan, establishing an unsurpassed, world-class quality of business management is essential to increasing growth potential and profitability. We have been nurturing human resources on a global basis and promoting diversity by both globalizing Japanese employees and nurturing employees in local markets overseas. Concurrently, we have been removing barriers related to age, gender and nationality in creating an organization that attracts the most suitable people for the most suitable roles. Our environmental activities include ongoing promotion of the Shiseido Earth Care Project, an environmental initiative conducted by Shiseido employees worldwide, with the aim of achieving new lifestyles in which uniquely Shiseido beauty and the environment coexist. We are also undertaking initiatives in the three areas of CO2 reduction, resource conservation and biodiversity. The Shiseido Life Quality Beauty Program is a uniquely Shiseido CSR activity. We have enhanced initiatives under this program in ways such as strengthening cooperation with healthcare institutions and increasing beauty seminars overseas. Please see pages 24 to 27 for more detail on corporate governance, pages 28 to 29 for more detail on CSR and pages 30 to 31 for more detail on environmental initiatives. Shareholder Returns Shiseido made a major strategic investment in the year ended March Please explain shareholder return policies going forward. Shiseido has changed its policy for shareholder returns. Our former income distribution policy was a total return ratio of 60 percent in the medium term, calculated as the sum of dividends paid and share buybacks, as a proportion of consolidated net income. During the current three-year period, in which we have aimed to establish our base and raise quality of operations, we have not undertaken large-scale investments for growth. Therefore, 12 SHISEIDO ANNUAL REPORT 2010

13 An Interview with President Maeda the intent of our policy was to aggressively provide returns to shareholders by distributing a majority of net income to shareholders, while giving consideration to increasing return on equity. However, the next threeyear period is positioned as a phase for getting into a growth trajectory. In light of this, we are implementing more aggressive growth strategies such as the acquisition of Bare Escentuals. Therefore, Shiseido will appropriate a majority of net income for investments in growth. In addition, we will raise the predictability of shareholder returns by removing the uncertain component of flexible, ad hoc share buybacks, and will change to using the payout ratio as a numerical target. We may flexibly conduct share buybacks as a means of incrementally increasing shareholder returns. As a result of the above, our new target for shareholder returns over the medium term is a consolidated payout ratio of 40 percent. However, we emphasize stable dividends, and plan to maintain cash dividends per share at for the year ending March 2011, for a consolidated payout ratio of 69 percent using our forecast for net income. Message to Shareholders and Investors In closing, please describe your vision of Shiseido s future presence in global markets. The acquisition of Bare Escentuals was a major step forward for Shiseido as a global corporation, and we will continue to devote all of our strengths to the challenge of becoming a global player representing Asia with its origins in Japan. This will further enhance our presence in global markets and propels Shiseido toward a new growth trajectory. At the same time, we recognize that business development and corporate citizenship are both important for sustained growth, and therefore intend to place even more emphasis on efforts to protect the environment and fulfill our obligations to society. Let me repeat my strong conviction that Shiseido will be the choice of customers worldwide by creating the value that only Shiseido can. We must continue to be a company that is needed. Exercising Shiseido s unique strength, which is its commitment to realize the beauty of customers and enrich their hearts to complement their outer beauty, will be our motive force as we work to succeed in the new challenges we are taking on. We are counting on the continued support of shareholders and investors as we implement further reforms. Cash Dividends per Share and Consolidated Payout Ratio ( ) Cash dividends per share Consolidated payout ratio (%) (Years ended March) (Forecast) SHISEIDO ANNUAL REPORT

14 Business Strategy Net Sales / Operating Income Net Sales (Left scale) Operating Income (Right scale) (Billions of yen) (Billions of yen) (Years ended March) 0 Sales by Division Other 8.9% Healthcare 3.8% Professional 3.5% Toiletries 11.7% Domestic Cosmetics Self-selection cosmetics 21.4% Counseling cosmetics 50.7% Cosmetics 83.8% Note: Segment sales represent sales to external customers only and do not include intersegment sales or transfers. Domestic Cosmetics: Business Environment and Strengths The domestic over-the-counter cosmetics market began to contract in the second half of the year ended March 2008, a trend that has continued due to rapid deterioration of the economy since September In the year ended March 2010, it apparently shrank a further 3 to 4 percent. Structurally, the market further polarized between high- and low-priced products, and the low-priced market expanded. Although deflationary trends seem to have moderated to some extent, consumption has continued to decrease. In this market, Shiseido is concentrating resources such as people and marketing outlays on the two core areas of mega lines and relationship-building brands/lines. Shiseido s 21 core brands/lines in these areas are top brands or vying for top share in their categories. Shiseido is also concentrating its efforts on cultivating core stores in each channel and has superior operations at voluntary chain stores and department stores that can provide the quality services and counseling that the Company aims for. The Domestic Over-the-Counter Cosmetics Market (Shiseido Estimates) Year Ended March 2008 Year Ended March 2009 Year Ended March H 2H 1H 2H 1H ± 0% 1 to 2% 1 to 2% 3% 2H 3 to 4% 3 to 4% ± 0 to -1% annually -2 to -3% annually -3 to -4% annually Note: In the year ending March 2011, Shiseido plans to begin using the business segments of Domestic Cosmetics, Global Business and Other. As a result, domestic professional division results will be included in Global Business rather than in Domestic Cosmetics as in the past. 14 SHISEIDO ANNUAL REPORT 2010

15 Overview of the Year Ended March 2010 In the year ended March 2010, Shiseido responded Please see Management s Discussion and Analysis on pages 37 to 49 for more detail on Domestic Cosmetics results. to its rapidly changing markets by targeting stores and brands/lines to strengthen sales in each channel and implemented focused initiatives. While results were not completely satisfactory at drug stores and general merchandise stores, we achieved strongly positive results by introducing the PS Program * at approximately 600 voluntary chain stores where we are focusing on improvement and following up with solid support. At department stores, we concentrated on major stores, and increased share through means including the promotion of our Double Counter strategy entailing separate counters for and clé de peau BEAUTÉ. However, in spite of these aggressive initiatives, results for counseling cosmetics, self-selection cosmetics and toiletry products decreased year on year because of the impact of cooling consumer sentiment and price sensitivity among customers. As a result, domestic cosmetic sales decreased 3.6 percent year on year. High-priced counseling cosmetics largely outperformed the overall market but midpriced counselling and low-priced self-selection products were down year on year. Initiatives in the Year Ending March 2011: Brand Strategy In the year ending March 2011, Shiseido will work to increase brand value, centered on mega lines. We will assiduously develop long-selling brands/lines by focusing on existing hit products to attract and retain loyal customers. For example, in March 2010 we added a goldcolored Head Spa series for scalp care to Tsubaki, thus creating a third series in addition to the red series for luster care and the white series for damage care. As a result, we are better able to meet a wide range of customer needs during the year ending March This will further strengthen the clear product value the Tsubaki line delivers in the highly competitive haircare market. Moreover, a completely new men s hair styling agent, Uno Fog Bar, became a hit product in the year ended March 2010, and in March 2010 we launched In and On, a line that exemplifies our unique concept of internal and external beauty because it counters the effects of aging on the skin as both a cosmetic product and a 21 Core Brands/Lines 6 Mega Lines 5 Relationship-Building Brands/Lines 21 Core Brands/Lines * 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. SHISEIDO ANNUAL REPORT

16 Meticulous Combination of Channels and Brands/Lines Domains Value-Added Counseling Sales techniques in which beauty consultants communicate value to value-conscious customers seeking cosmetics most suited to them Spot Counseling Sales techniques involving mass advertising and one-point counseling (tips) for customers who are very interested in cosmetics trends Self-Selection Sales techniques involving delivery of information at the sales counters for price-conscious customers who make their own choices Combinations of Channels and Brands/Lines Voluntary chain stores, department stores, general merchandise stores X high-priced counseling products centered on relationship-building brands/lines such as clé de peau BEAUTÉ, Revital Granas and Bénéfique Drug stores X mid-priced counseling products centered on mega lines such as MAQUILLAGE and Elixir Self-selection counters at drug stores and general merchandise stores X low-priced self-selection and toiletry products centered on mega lines such as Aqua Label, Integrate, Tsubaki and Uno food product. Uno Fog Bar and In and On are representative of the innovative products we want to launch in the future to deliver new value. Initiatives in the Year Ending March 2011: Channel Strategy At voluntary chain stores, we will accelerate the PS Program and expand it to approximately 800 stores. At department stores, we will continue to focus on major stores and promote the Double Counter strategy. At general merchandise stores, we will strengthen the capabilities of beauty consultants, primarily at major stores. At drug stores, we will narrow our focus to major corporate groups in order to respond to them thoroughly in a manner consistent with their individual characteristics. The Double Counter strategy, entailing separate counters for and clé de peau BEAUTÉ, is aimed at increasing share. To reinforce these initiatives, Shiseido has meticulously combined channels and brands/lines into three domains that reflect customer (buyer) purchasing behavior: value-added counseling, spot counseling and self-selection. We will assiduously cultivate mega lines and relationship-building brands/lines centered on these domains. Initiatives in the Year Ending March 2011: Sales Strategy We restructured our front-line sales organization in April 2010, moving from our former channel-based sales system to a system that can adapt to markets from the perspectives of both area and store chains. We have established a sales division for major store chains, which has enabled responsive value chain supervision for each account via a single point for consistent communication ranging from sales programs targeting the headquarters of structured retailers to counter creation at stores. Meanwhile, reorganized branches will flexibly invest resources across all channels to achieve overall optimization for each area. Using this new system, we will work to enhance our negotiating position by responding meticulously to changes in the retail environment such as channel convergence resulting from alliances among retailers. 16 SHISEIDO ANNUAL REPORT 2010

17 Business Strategy Net Sales / Operating Income Net Sales (Left scale) Operating Income (Right scale) (Billions of yen) (Billions of yen) (Years ended March) Sales by Division Professional 11.5% Cosmetics 88.5% Overseas Cosmetics Note: Segment sales represent sales to external customers only and do not include intersegment sales or transfers. Overseas Cosmetics: Business Environment and Strengths The high-end cosmetics markets of Europe and North America have been stagnant since the Lehman Brothers collapse. However, signs of recovery began to appear slowly from the fourth quarter of the year ended March The global recession affected the high-end cosmetics markets of Asia, but not as much as those of Europe and North America, and growth returned to previous levels from the second half of the fiscal year. In overseas cosmetics markets, Shiseido is particularly strong in China and the rest of Asia. Shiseido began operating in China some 30 years ago, ahead of other cosmetics companies, and has built a powerful position. In Europe and North America, Shiseido is enhancing its presence as a prestige skincare line, and subsidiary Beauté Prestige International S.A. has designer fragrance brands that are strong in Europe. Overview of the Year Ended March 2010 In the year ended March 2010, Shiseido moved to enhance its competitiveness in global markets by bolstering skincare lines and installing new counters to strengthen cultivation of the global brand. We also expanded the City Concept strategy to major cities in Europe, North America and Asia in order to focus marketing on cities that have a strong ripple effect on their respective countries as a whole. Note: In the year ending March 2011, Shiseido plans to begin using the business segments of Domestic Cosmetics, Global Business and Other. As a result, domestic professional division results will be included in Global Business rather than in Domestic Cosmetics as in the past. SHISEIDO ANNUAL REPORT

18 In China, a key market, we continued to energetically implement channel-specific brand marketing. In department stores, we maintained strong growth by strengthening the makeup domain, which included introducing the MAQUILLAGE makeup mega line from Japan and innovating the China-only AUPRES brand. Moreover, we signed up additional cosmetic specialty stores, and sales at existing cosmetic specialty stores were steady because of measures to strengthen sales of the URARA brand, which is only sold in this channel. We are aiming for full-scale development of the masstige business in Asia during the next Three- Year Plan. To strengthen the base of this business, during the past fiscal year we expanded the areas in which we sell Za and MAJOLICA MAJORCA and raised sales of these products. Through these efforts, overall sales in the overseas cosmetics business increased 3.0 percent year on year on a local currency basis, but decreased 9.3 percent when translated into yen because of the impact of the appreciation of yen against other currencies. Please see Management s Discussion and Analysis on pages 37 to 49 for more detail on the results of the overseas cosmetics business. We have translated the Shiseido BC Omotenashi Credo, a digest of beauty consultant activities, into 22 languages for overseas circulation. Initiatives in the Year Ending March 2011: Global Development The City Concept is Shiseido s fundamental strategy for global development, and we will concentrate our efforts on Asia, where major cities have a strong ripple effect on their respective countries as a whole and markets are expected to grow. Concurrently, we will continue to move forward with initiatives in Europe and North America. Initiatives in Asian countries will include area-based billboard campaigns, advertising on public transportation and events at stores. In strengthening cultivation of the global brand, we have been working to strengthen the premium skincare, skin-brightening and antiaging lines. Going forward, we will continue to determine customer needs and evaluate the moves At department stores, we introduced new counters with enhanced design to strengthen the presence of our prestige brand. of competitors while further increasing the speed of initiatives. In addition, we will enhance the responsiveness of beauty consultants, who communicate product value to customers, by developing and introducing overseas versions of customer response software. We will also communicate Shiseido s spirit of omotenashi (hospitality) by distributing the Shiseido BC Omotenashi Credo to all beauty consultants worldwide to improve the quality of their activities. We have been making steady progress in developing business in new markets, and will accelerate these efforts. As of the March 2010, Shiseido operated 18 SHISEIDO ANNUAL REPORT 2010

19 Business Strategy in 73 countries and regions, and in the year ending March 2011 began doing business in Mongolia through a distributor. We also plan to initiate operations in new markets in several other countries. In countries where we already operate we will promote a shift to direct sales through joint ventures or subsidiaries in line with market expansion. Initiatives in the Year Ending March 2011: Development in Asia In the year ending March 2011, we will carefully In China, we complemented our presence in the department store and specialty cosmetics store channels by launching DQ in the drugstore channel. This brand is already receiving strong customer support. prepare for the full-scale development of the masstige business during the next Three-Year Plan. We will build on the successes of and experience gained in the year ended March 2010 to take the steps needed for full-scale development integrated with the lowend market in Japan in the year ending March We expect this program to cover multiple brands from Japan and Asia, and plan to start with certain brands in the second half of the fiscal year. Moreover, the required infrastructure for this strategy includes the Vietnam plant, which began operating in April It will be a key production and shipment base supporting the masstige business over the medium-to-long term. demographic, and will ensure growth in ways such as popularizing skincare products and strengthening the AUPRES lineup. At cosmetics specialty stores, we are effectively using customer data centered on the URARA brand sold only in cosmetics specialty stores to improve our responsiveness to customers. We also continue to energetically promote the addition of new cosmetics specialty stores, with the aim of achieving contracts with 5,000 stores in total during the year ending March In March 2010, we entered the drugstore channel, our third pillar in China, with the launch of the DQ skincare brand. Going forward, we will secure sales Initiatives in the Year Ending March 2011: Development in China Our business in China is a growth driver. We will energetically promote new domains covering new counters at large chains in major cities, with the goal of establishing our presence in 600 stores during the year ending March Also in March 2010, Shiseido began full-scale operations in the professional business in China, and is working to increase the customer groups, channels and businesses in order to market presence of the Professional line maintain strong growth. We will continue to install new counters in department stores. We introduced the MAQUILLAGE makeup line in the year ended March 2010, to win customers in China s crucial New 1980s Generation * and the JOICO brand for hair salons. We are also concentrating on expanding the number of salons that handle our products, with the targets of increasing the number to 700 in Shanghai and Beijing by the end of 2010 and to 2,500 by the end of * The New 1980s Generation: The population segment of approximately 200 million born in the 1980s that grew up under China s one-child and economic reform policies and progressive values, and is now a leading consumer demographic. SHISEIDO ANNUAL REPORT

20 Feature: Conclusions and Beginnings Shiseido will wrap up its current Three-Year Plan in the year ending March 2011 and build a firm footing for getting on a growth trajectory during the next Three-Year Plan. This feature presents four case studies detailing the conclusions and beginnings that support value creation at Shiseido. Case Study 1: PS Program Measures to Support Voluntary Chain Stores April 2009: With the domestic cosmetics business battling in a challenging market environment, Shiseido changed from a uniform approach to all stores to one in which it looks at each channel to determine stores and brands/lines that are strengthening sales, and then concentrates sales promotion and other resources on them. Noteworthy successes of this initiative were seen in the voluntary chain store channel, comprising individual stores with systemized counseling sales. Here, Shiseido introduced the PS Program, which currently supports approximately 600 core voluntary chain stores, and concentrated efforts resulted in significant year-on-year sales growth for participating stores. The PS Program entails sales initiatives focused on the Bénéfique line sold only in voluntary chain stores, including advertising tailored to geographic areas, support for sales counters and expanded distribution of samples. Seminars covering such topics as the use of original skin assessment equipment that Shiseido developed and sales methods for new products have earned the praise of participants, who commented that the seminars helped them raise the number of repeat customers. Even as Japan s cosmetics market as a whole gravitated toward lower price points, in the year ended March 2010 Shiseido achieved a number of successes in the voluntary chain store channel, where it could demonstrate its strength. The next task is to spread the success. Accelerating initiatives to build a firm footing for the next Three-Year Plan, Shiseido plans to increase the number of stores participating in the PS Program to 800 in the year ending March SHISEIDO ANNUAL REPORT 2010

21 As the mega line strategy got started in 2005, President Maeda provided a pointer for the renewal of the Uno line for men: Go beyond plain old hair styling wax. He suggested that Shiseido should throw out the comfortable status quo and create breakout value, because that is how to build lines that capture top share. Under his direction Shiseido undertook to create major hit products that would expand the market for men s hair styling products. In 2007, sales of mainstream wax products had peaked and purchase cycles were lengthening. Men were moving from a hard to a natural look in hair styling, and hair styling agents were evolving in tandem. Shiseido had been developing innovative gel, mousse and wax products every 10 to 15 years and led the market. Shiseido s molecular design research using Fit Polymer, a type of adhesive polymer, resulted in a novel agent that styled hair well without making it hard. It was a breakout product: it wasn t sticky, allowed easy styling with fingers, and allowed repeated restyling. Men s Hair Styling Product Primer Setting Agent (Characteristics) Mechanism Features 1980s Mid-1990s 2009 ~ Gel Mousse Wax Uno Fog Bar Mist Acrylic resin Solid oil Adhesive resin Binds hairs together to set Excellent hold Restyling not possible Solid oil binds hairs together, and resin hardens hair from the outside to set. Excellent stylability Sticky Difficult to maintain style or restyle with fingers Each hair is coated, so all have an adhesive surface. Good styling without hardness Fast forward to August Shiseido had just launched the new hair styling proposal Uno Fog Bar, and sales of this unprecedented hair styling agent took off immediately. Shiseido hit its sales target for the year of 2.4 million bottles just one month after launch. Customers were extremely enthusiastic about this product, with surveys showing 95 percent would purchase Uno Fog Bar again. Shiseido innovation was the key factor in this success. Shiseido will continue to build lines and remain at the leading edge of our markets. Case Study 2: Uno Fog Bar The Breakout Product SHISEIDO ANNUAL REPORT

22 1994: Currently chairperson, Leslie Blodgett became chief executive officer of Bare Escentuals, which was founded in In 1995, she led the company in the launch of the bareminerals brand, which has had a major market impact and continues to grow. bareminerals uses a mineral powder containing no preservatives, fragrances, oils or talc. According to Shiseido estimates, it now has a towering 67 percent share of the U.S. mineral foundation market. Bare Escentuals has aggressively deployed a direct marketing business model in which Ms. Blodgett herself appeared on television shopping programs to promote products while marketing creatively through department stores and companyowned stores to retain customers. Shiseido and Bare Escentuals have been working together to achieve synergies since the acquisition was completed in March The two companies Case Study 3: Bare Escentuals Shiseido s Newest Asset have established collaborative projects and are studying and discussing a broad range of themes to achieve both sales and cost synergies as they successively formulate new plans. Shiseido and Bare Escentuals are also expediting high potential brand building initiatives that deploy Shiseido s R&D strengths centered on skin care and business development capabilities in Japan and Asia. Bare Escentuals products are already succeeding at department stores in Japan, with launches at the Isetan department store in Shinjuku in March 2010 and at the Hankyu Umeda Main Store in June Sales are strong, which also supports growth in television shopping sales. Going forward, Shiseido intends to transform this North American brand into a global brand. Full speed ahead! Bare Escentuals Net Sales and Operating Income (Millions of U.S. dollars Net Sales Operating Income (Years ended December) 22 SHISEIDO ANNUAL REPORT 2010

23 Feature: Conclusions and Beginnings Case Study 4: The Vietnam Plant Key to the Masstige Business Shiseido moved to strengthen its global production system by selecting Vietnam as the site for a new plant, its fifteenth worldwide. Vietnam is situated at the heart of Southeast Asia, which reduces the cost and time for shipments to the other countries of Asia. In addition to its youthful and energetic workforce, Vietnam also positions Shiseido to benefit from the elimination of tariffs among ASEAN nations. Completed in February 2010, the Vietnam plant began operations in April It currently produces facial cleansers and men s hair styling agents for the Japanese market. It will become a key component of the masstige business in the future, with planned manufacturing of products for Asia s rapidly growing middle class. Shiseido forecasts growth in demand for these products, and therefore invested approximately 4 billion to construct a 25,000- square-meter plant on a 100,000-square-meter site. Shiseido designed the plant so it can be tripled in size when needed in the future. The Vietnam plant complies with ISO 22716, and employs stringent standards for production and product quality management that are equivalent to those for the manufacture of oral pharmaceuticals. It is environmentally friendly, featuring the latest energyefficient equipment and a zero waste emission system that employs recycling and reuse. Shiseido is also nurturing people, its most important resource. Fifteen core local employees came to Japan for five months of training covering everything from production technology to Japanese culture, as well as Shiseido s corporate culture and manufacturing philosophy. The Vietnam plant is representative of Shiseido s moves to proactively prepare the infrastructure for new growth from the full-scale development of the masstige business during the next Three-Year Plan. Overview of the Vietnam Plant Address Amata Industrial Park, Long Binh Ward, Bien Hoa City, Dong Nai Province, Vietnam Site area 100,000m 2 Building area for production facility 25,000m 2 and adjacent wing Production capacity Approximately 22 million units (annual) Products manufactured Number of employees Lotions, emulsions, creams, facial cleansers and hair styling agents 132 as of May 2010 (scheduled to increase to about 210 by March 2011) SHISEIDO ANNUAL REPORT

24 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 (customers, business partners, shareholders, employees and society). Overview of Corporate Governance Reforms Management transparency, fairness and speed Strengthen decisionmaking functions 2001 Established Corporate Executive Officer Committee and Policy Meeting of Corporate Officers 2002 Reduced number of directors Clarify allocation of responsibility 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 Enhance management transparency and soundness 2001 Established Remuneration Committee 2005 Established Nomination Advisory Committee Reinforce supervisory and auditing functions 2005 Increased number of external corporate auditors from 2 to Appointed external directors 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. Since adopting a corporate executive officer system in the year ended March 2002, Shiseido has worked to reform corporate governance by strengthening decision-making functions, enhancing management transparency and soundness, clarifying the allocation of responsibility and reinforcing supervisory and auditing functions. Shiseido strengthens these functions by integrating the outstanding features of a company of committees with the corporate auditor structure. The Board of Directors is composed of eight members including two external directors. The small number of members facilitates rapid decision making. The Board of Directors meets at least once a month to discuss all significant matters. Attendance for external directors at the 15 Board of Directors meetings in the year ended March 2010 averaged 86.7 percent. Attendance for other directors was 100 percent. Through the adoption of a corporate executive officer system, we are separating 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 24 SHISEIDO ANNUAL REPORT 2010

25 transfer of authority to corporate officers and accelerates operational decision making. Shiseido s President & Chief Executive Officer chairs this Committee. 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. various duties including proposing the list of candidates for directors and corporate officers. Both committees are chaired by external directors to maintain objectivity. Additionally, since the June 2008 General Meeting of Shareholders, Shiseido has publicly disclosed aggregated results of voting at the meetings. 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 Having external directors has stimulated discussion at Board of Directors meetings and strengthened its supervisory capabilities. Furthermore, Shiseido has designated two external directors as independent directors and three external auditors as independent auditors pursuant to the Tokyo Stock Exchange s Securities Listing Regulations. In addition, Shiseido is actively promoting diversity among directors in such ways as appointing individuals 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. We are also handpicking a small and able group of executive officers in addition to promoting younger members. To increase transparency and objectivity in management, Shiseido established two committees to play an advisory role to the Board of Directors: the Remuneration Committee, which recommends executive remuneration levels, and the Nomination Advisory Committee, which conducts 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 2010 was 100 percent. For external corporate auditors, attendance at Board of Directors meetings was 88.9 percent and for standing corporate auditors, attendance was 100 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. The Company s System for the Management and Execution of Business Appointment, termination Accounting Auditors Resolution at the General Meeting of Shareholders based on laws Audit Advisory committees to the Board of Directors Remuneration Committee Nomination Advisory Committee Proposal of material legal and management issues General Meeting of Shareholders Board of Directors Report Resolution, approval Appointment, termination Supervision Corporate Executive Officer Committee Proposal Audit Resolution, approval Decision-Making Meeting of Corporate Officers Appointment, termination Board of Auditors Advisory committees to the Board of Directors CSR Committee Compliance Committee Policy Meeting of Corporate Officers SHISEIDO ANNUAL REPORT

26 Remuneration to Directors, Corporate Officers and Corporate Auditors Remuneration for directors and corporate officers consists of a basic fixed portion and a performancelinked portion that fluctuates depending on achieving management targets and share price. Effective the year ended March 2009, the performance-linked portion has been revised upward to 60 percent of remuneration. Performance-linked remuneration consists of a bonus based on annual consolidated results, medium-term remuneration based on the achievement of the final year targets of the Three-Year Plan, to be paid 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 mediumto-long-term perspective, not just a single-year focus, and to 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 bonus, medium-term remuneration and long-term incentive stock options, is also set on a case-by-case basis by resolution at the General Meeting of Shareholders. Remuneration to Directors and Corporate Auditors for the Year Ended March 2010 (Millions of yen) Basic Bonuses Stock options Total Directors (10 people) External directors (2 of the 10) Corporate auditors (5 people) External auditors (3 of the 5) Total Notes: 1. In addition to the above payments, for the year ended March 2010 Shiseido recognized an expense of 7 million for stock options granted to three directors at the time served as corporate executive officers but not concurrently as directors. 2. In addition to the above payments, for the year ended March 2010 Shiseido paid 38 million in performance-linked remuneration, in connection with the previous Three-Year Plan that ended March 2008, to one director at the time he served as a corporate executive officer but not concurrently as a director. 3. In addition to the above payments, for the fiscal year ended March 2010 three subsidiaries paid 27 million in basic fixed remuneration and 9 million in bonuses to two Shiseido directors who concurrently served as directors of these subsidiaries. 4. Shiseido provided no additional compensation to directors and corporate auditors other than the above executive remuneration, including the remuneration described in Notes 1 through 3. Remuneration by Type to Representative Directors and Directors Whose Total Remuneration Exceeded 100 Million for the Year Ended March 2010 (Millions of yen) Basic Bonuses Stock options Total Shinzo Maeda Representative Director Kimie Iwata Representative Director Carsten Fischer Director Notes: 1. In addition to the payments above, the Company recognized an expense totaling 2 million for the year ended March 2010 for stock options granted to Director Carsten Fischer at the time he was a corporate executive officer and not concurrently a director. The Company also paid the same director 38 million for the year ended March 2010 as performance-linked remuneration, in connection with the Three-Year Plan ended March 2008, for the period he was a corporate executive officer and not concurrently a director. 2. The above three directors do not receive any remuneration other than that presented in the above table and amounts referred to in Note 1. Remuneration to Accounting Auditors for the Year Ended March 2010 (Millions of yen) Item Amount Remuneration paid for services rendered as accounting 152 auditors for the fiscal year under review Total cash and other remuneration to be paid by the 185 Company and its subsidiaries to their accounting auditors Note: In the audit contract between the Company and its accounting auditors, remuneration paid for audits under the Corporate Law and audits under the Financial Instruments and Exchange Law are not clearly distinguished and cannot be practically separated. Therefore, the total payment for both is shown in Remuneration to Accounting Auditors above. Management System Unique to Shiseido Guided by the idea that fulfilling corporate social responsibility (CSR) is crucial to Shiseido s sustained development, we have established the CSR Committee and the Compliance Committee under the jurisdiction of the Board of Directors as part of our corporate governance structure. Both committees are headed by the Vice President and comprise members elected companywide. They make proposals for and report on plans and results of activities to the Board of Directors. The CSR Committee carries out comprehensive monitoring from a companywide perspective, with the aim of 26 SHISEIDO ANNUAL REPORT 2010

27 Corporate Governance increasing corporate value. The Compliance Committee works to ensure legitimate and fair business practices in the Group, and promotes activities including corporate ethics, risk management and information security countermeasures to enhance management quality. Compliance and Risk Management We have enacted Group-wide Corporate Ideals, The Shiseido Way (Corporate Behavior Declaration) and The Shiseido Code (Corporate Ethics and Behavior Standards), which outline the standards of behavior that individual Group employees should apply in their work, and are actively promoting legitimate and fair business practices. We hold regular workshops on corporate ethics and human rights education, and assign a Code Leader to each office to ensure observance of The Shiseido Code. Code Leaders report on progress in promoting legitimate and fair business practices at their respective offices. We have also established multiple reporting and consultation help lines, which include advice from external lawyers, to detect and correct at an early stage actions that contravene the law, The Shiseido Code or other regulations, and to identify distress in employees. The Compliance Committee takes a cross-departmental approach to dealing with risks. The committee identifies and evaluates risk in management strategy operations and administrative operations, and promotes necessary preventative measures and activities. It prepares manuals for use in emergencies, and in the event of an emergency, it responds by organizing a countermeasure headquarters, project, team, or other grouping as dictated by the seriousness of the situation. Shiseido s Board of Directors has adopted and disclosed a basic policy for internal control systems. In addition, in the year ended March 2009, the submission of reports on internal controls for financial reporting was institutionalized. The Internal Auditing Department establishes and monitors the management of internal controls throughout the Group. The internal control report is disclosed on the Company s website. Corporate Mission We seek to identify new, richer sources of value and use them to create a beautiful lifestyle. Mission Company Rules and Regulations Corporate practice, daily business activities With our customers With our business partners With our shareholders With our employees With our society Through the creation of products possessing true value and exceptional quality, we strive to help our customers realize their dreams of beauty, well-being and happiness. Joining forces with partners who share our goals, we act in a spirit of sincere cooperation and mutual assistance. We strive to win the support and trust of our shareholders through transparent management practices and sound business results achieved by high-quality growth, enabling the retention of earnings for future investments and payment of dividends. The diversity and creativity of our employees make them our most valuable corporate asset. We strive to promote their professional development and we evaluate them fairly. We recognize the importance of our employees personal satisfaction and well-being, and seek to grow together with them. We respect and obey all laws in regions in which we do business. Safety and preservation of the natural environment are among our highest priorities. In cooperation with local communities and in harmony with international society, we employ our cultural resources in creating a beautiful lifestyle. SHISEIDO ANNUAL REPORT

28 Contributing to Society Corporate Social Responsibility (CSR) Policy Shiseido actively promotes both fundamental CSR required of a company and selective CSR unique to Shiseido. In particular, Shiseido s unique CSR activities implement the idea of meticulously addressing all customer beauty needs throughout life, as reflected in the corporate message of This Moment. This Life. Beautifully. Specifically, Shiseido will further strengthen social activities through cosmetics, an approach that is unique to the Company; enhance measures that address environmental problems, which are an important global issue; support women, who make up over 80 percent of Company employees, 90 percent of its customers and 50 percent of its shareholders; and enhance the safety and reliability that are the basis of trusting relationships with customers. Fundamental CSR Fundamental CSR, the most basic responsibilities of any company, involves sustaining business through actions such as providing products and services that satisfy customers, focusing on employees, business partnerships, protecting personal information and respecting human rights. Shiseido addresses these issues as a Group. For example, since about 1990 Shiseido has formulated a variety of support measures to balance work, childcare and family life, making it the first company in the domestic cosmetics industry to introduce initiatives aimed at improving employees work-life balance. In recognition of the establishment and achievements of these systems, in the year ended March 2010 Shiseido received the Work-Life Balance Prize at the 2nd (fiscal 2009) Diversity Management Awards sponsored by publishing company Toyo Keizai, Inc. Overseas, Shiseido has been introducing employee hotlines since the year ended March 2009 as part of its efforts to determine whether legitimate and fair business practices are followed. As of March 31, 2010, we had established hotlines at 14 of the 29 offices where introduction is scheduled. Moreover, as of the same date, no calls had been received. In addition, in the year ended March 2010 Shiseido formulated internal behavior standards for responding to the spread of new strains of attenuated influenza. With these standards and the manual for dealing with virulent strains that was completed in the previous fiscal year, we have established measures to cope with infectious diseases that could have a long-term impact on corporate activities. These measures have further reinforced initiatives aimed at respect for life and business continuity, which are core concepts in our risk management policies. CSR Activities Domain Creating new markets Proposing new social values Social contribution activities (philanthropy) Unique Shiseido CSR Strict compliance with laws and regulations Environmental conservation, information disclosure, protection of personal information, protection of human rights Continued corporate existence Providing high-quality products and services Valuing employees Collaboration with business partners Profit and dividends Payment of taxes and creation of employment opportunities Fundamental CSR Representative Director and Vice President Kimie Iwata receives a prize at the 2nd Diversity Management Awards. 28 SHISEIDO ANNUAL REPORT 2010

29 Selective CSR Unique to Shiseido Shiseido actively pursues social contribution activities through its core business of cosmetics that are unique to the Company and are most expected from society. These activities are referred to as the Shiseido Life Quality Beauty Program. Through this program we improve quality of life (QOL) by leveraging the results of research in the products and methods we have cultivated in the field of beauty since our foundation. The program encompasses two types of activities. The first is Shiseido Life Quality Makeup, which helps people with serious skin concerns such as bruises, dark spots, vitiligo* and skin irregularities choose appropriate cosmetics and gives them makeup advice. As of March 31, 2010, Shiseido provides advice through centers at 369 cosmetics specialty stores and medical institutions in Japan, using Perfect Cover foundation, which it developed through many years of cosmetics research. Centered on the SHISEIDO LIFE QUALITY BEAUTY CENTER inside our Head Office building in Tokyo s Ginza district, these activities are also offered overseas in China (Shanghai) and Taiwan (Taipei and Kaohsiung). We plan to leverage the cosmetics technologies developed through these activities in other products as well. The other type of activities is SHISEIDO LIFE QUALITY BEAUTY SEMINARS, in which staff visit * Vitiligo is an acquired skin condition characterized by pigment loss causing white patches on the hands, feet and other areas. Its cause is unknown. In China, Shiseido is actively conducting SHISEIDO LIFE QUALITY BEAUTY SEMINARS. The Shanghai SHISEIDO LIFE QUALITY BEAUTY CENTER (right) conducted beauty seminars (above) following its establishment. Shiseido established the Beauty Supporter System to enable many employees to participate in SHISEIDO LIFE QUALITY BEAUTY SEMINARS in Japan. (Employees can apply to participate via Shiseido s intranet) facilities for the elderly and the physically challenged in order to communicate basic cosmetics usage and beauty information so people can take care of their skin themselves and experience cosmetics. In the year ended March 2010, we held about 3,000 seminars for about 50,000 people worldwide, including in Japan. We are also actively running seminars through overseas offices, particularly in China. In the year ended March 2010, we held a total of about 30 seminars in locations including Shanghai, Beijing and Hong Kong. Cosmetics make people more positive, raise the desire for rehabilitation and help deepen connections with society. Because of these effects, cosmetic therapy is gaining attention from medical and other institutions. In the year ended March 2010, the Shiseido Beauty Solution Development Center compiled the results of its research to date in order to publish Cosmetic Therapy through Nikkei Business Publications, Inc. Cosmetic Therapy, a sequel to The Psychology of Cosmetic Behavior compiled and edited by Shiseido in 1993, is a compilation of research on the psychology of cosmetic behavior and cosmetic therapy during the subsequent 15 years. For further information regarding Shiseido s CSR activities, please see the Shiseido CSR website. (URL: SHISEIDO ANNUAL REPORT

30 Environmental Initiatives Basic Policy for Environmental Activities Shiseido has consistently shown consideration for the environment since its foundation, with gratitude and esteem for the blessings of nature and the Earth. In the year ended March 2010, placing environmental initiatives at the core of its management, Shiseido started the Shiseido Earth Care Project, an environmental initiative involving all employees throughout the world. The project s mission 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 encompasses active promotion of Shiseido s unique environmental policies. Our goal is to create new lifestyles in which human beauty and the environment coexist. Overview of the Shiseido Group s Environmental Efforts Mission Project Name All employees throughout the world work together Goals Corporate Mission Shiseido Eco Policy Aiming to realize a sustainable society where people, the Earth and beauty co-exist Unique Shiseido activities Basic environmental activities Cutting CO2 emissions, reducing energy use and preserving the Earth s blessings 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 and in 1997 established the Shiseido Eco Standard comprising activity guidelines based on the Shiseido Eco Policy. In the year ended March 2010, we reviewed design standards for environmentally friendly products and promotional materials from a current perspective because environmental issues had changed dramatically since the establishment of the Shiseido Eco Standard more than 10 years earlier. Based on this review, we formulated the Production Eco Standard and the Sales Promotion Eco Standard. At the same time, we formulated the Office Eco Standard with specific rules for addressing environmental issues in offices. Furthermore, we promoted combined efforts with business partners such as ingredient and promotional material suppliers and contract manufacturers using the Supplier Code of Conduct, which was formulated in 2006 and revised in May 2010 to reflect changing times and social demands. In April 2010, Shiseido established the Environmental Planning Department to manage these standards and lead future environmental activities. This department will be central in collaborative efforts by related departments to step up environmental activities aimed at achieving the goals of the Shiseido Earth Care Project. Reducing Environmental Burden Shiseido has promised to work to realize a low-carbon society by reducing CO2 emissions at 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 We also abide by a variety of laws and regulations in order to reduce CO2 emissions and waste materials. Moreover, we are aware that the blessings of the Earth, the source of value in every process of our business activities, are limited. We therefore handle them with due care so that they can be passed on to future generations. At the same time, we are actively engaged in preserving biodiversity and are working to realize a sustainable society. Numerical Targets for the Year Ending March 2011 Location Details Target Terms of Comparison Domestic factories Overseas factories CO2 emissions 15% reduction 10% reduction Compared with the year ended March 1991 (per unit of production) Compared with the year ended March 2008 (per unit of production) 30 SHISEIDO ANNUAL REPORT 2010

31 Environmental Communication Representative environmental activities carried out by the Shiseido Group under the Shiseido Earth Care Project are introduced by number on a special website. Case Studies The Shiseido Earth Care Project website No. 061 Ecological Disposal of Beauty Consultants Costumes Since the year ended March 2010, Shiseido has employed chemical recycling, which uses thermal decomposition, to dispose of beauty consultants costumes at the end of their rental periods. Previously, about 50 tons of material were burned with each disposal, which emitted about 100 tons of CO2, but switching to chemical recycling has enabled almost 100 percent of fibers to be recycled as chemical ingredients and other materials. As a result, CO2 emissions have been reduced to nearly zero. No. 062 Reduction of Plastic in Aqua Label Packaging Since the renewal of the moisturizer series of the skincare line Aqua Label in August 2009, Shiseido has replaced plastic boxes with film wrap and moved ahead in responding to the environment. Shiseido took the same step when renewing its brightening series in February 2010 and anti-aging series in August 2010, allowing it to reduce by about 20 tons the roughly 75 tons of plastic it used annually. No. 064 Low-Energy Production of Shampoo Shiseido reviewed the conventional heating and cooling process for shampoo production and developed a new production method called cold processing, which does not require the heating and cooling process due to innovations in ingredient blending methods and process order. This new production method has enabled us to reduce CO2 emissions. If used to make all shampoos at the Kuki Factory, it would reduce CO2 emissions by about 500 tons annually. We already use cold processing to produce some hair and beauty treatment shampoos and will successively expand its application to cover other products. Shiseido s Promise to Society In the year ended March 2009, Shiseido made a promise to society to carry out environmental activities as an environmentally progressive company. In November 2008, Shiseido endorsed Caring for Climate: The Business Leadership Platform, a climate change initiative being spearheaded by the United Nations Global Compact, as an opportunity to express to the world its strong dedication to the environment. 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. Shiseido s Eco-First Commitment (Summary) 1. Shiseido will actively pursue initiatives to prevent global warming. 2. Shiseido will actively pursue initiatives to realize a recycling-oriented society. 3. Shiseido will actively propose activities for realizing a society characterized by the beautiful coexistence of people and the Earth both inside and outside the Company. SHISEIDO ANNUAL REPORT

32 Board of Directors, Corporate Auditors and Corporate Officers (As of June 25, 2010) Directors Shinzo Maeda Representative Director, President & CEO 1970 Joined Shiseido 2003 General Manager of Corporate Planning Department 2003 Director, Corporate Officer 2005 Representative Director, President & CEO Kimie Iwata Representative Director, Executive Vice President Responsible for Public Relations, Consumer Information, Corporate Culture, Advertising Creation, Beauty Solutions, Environmental Measures, CSR, Organizational Climate Reforms and 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 Director, Corporate Officer 2007 Corporate Executive Officer 2008 Representative Director, Executive Vice President Chair of CSR Committee and Compliance Committee Carsten Fischer Director, Corporate Senior Executive Officer Responsible for Global Business (International Business, China Business and Professional Business) Chief Officer of International Business Division 1979 Joined Hans Schwarzkopf GmbH 2004 President of Professional Care, and Corporate Officer, Procter & Gamble Company 2006 Corporate Advisor of Shiseido 2007 Corporate Executive Officer 2008 Director 2010 Corporate Senior Executive Officer Yasuhiko Harada Director, Corporate Senior Executive Officer Chief Financial Officer Responsible for Finance, Investor Relations, Information System Planning and Internal Control 1971 Joined Shiseido 2003 General Manager of Corporate Restructuring Department 2003 Corporate Officer 2005 Director 2006 Corporate Executive Officer 2008 Corporate Senior Executive Officer Hisayuki Suekawa Director, Corporate Executive Officer General Manager of Corporate Planning Department 1982 Joined Shiseido 2007 General Manager of the Cosmetics Business Planning Department 2008 Corporate Officer 2009 Director 2010 Corporate Executive Officer Tatsuomi Takamori Director, Corporate Executive Officer Chief Officer of Domestic Cosmetics Business Division Responsible for Domestic Cosmetics Business, Healthcare Business and Clé de Peau BEAUTÉ Marketing Unit 1975 Joined Shiseido 2006 Chief Officer of China Business Division 2007 Corporate Officer 2009 Director 2010 Corporate Executive Officer 1997 President, ASKUL Corporation 2000 CEO, ASKUL Corporation 2006 External Director of Shiseido Chair of Remuneration Committee Independent Director Professor, School of Law, Waseda University 2003 Professor, Graduate School of Law, Waseda University 2006 External Director of Shiseido 2006 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 Chair of Nomination Advisory Committee Independent Director 1 Shoichiro Iwata External Director Tatsuo Uemura External Director Directors retired as of June 25, 2010: Director, Corporate Senior Executive Officer Toshimitsu Kobayashi and Director, Corporate Senior Executive Masaaki Komatsu (Both have been appointed Corporate Advisor of Shiseido.) Corporate auditor retired as of June 25, 2010: Corporate Auditor Kiyoharu Ikoma (Appointed Corporate Advisor of Shiseido) Corporate officers retired as of March 31, 2010: Corporate Executive Officer Kiyoshi Kawasaki (Appointed Corporate Advisor of Shiseido), Corporate Officer Kazuo Tokubo and Corporate Officer Toshio Yoneyama (Appointed Standing Corporate Auditor of Shiseido) 32 SHISEIDO ANNUAL REPORT 2010

33 Corporate Auditors Kazuko Ohya Standing Corporate Auditor 1973 Joined Shiseido 2000 General Manager of Consumer Information Center 2001 Corporate Officer 2007 Standing Corporate Auditor Toshio Yoneyama 2 Standing Corporate Auditor 1978 Joined Shiseido 2005 General Manager of Institute of Beauty Sciences 2006 Corporate Officer 2010 Standing Corporate Auditor Akio Harada External Corporate Auditor 2001 Prosecutor General 2005 External Corporate Auditor of Shiseido Independent Director 1 Reiko Kuroda 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 2008 External Corporate Auditor of Shiseido Independent Director 1 Nobuo Otsuka External Corporate Auditor 1988 President, Keiseikai Hospital 2007 External Corporate Auditor of Shiseido Independent Director 1 Corporate Officers Kozo Hanada Chief Officer of Professional Business Operations Division Tsunehiko Iwai Responsible for Technical Planning, Quality Management and Frontier Sciences Business Asa Kimura 2 Responsible for Cosmetics Products Research & Development and Software Development Masaru Miyagawa Chief Officer of China Business Division and Chief Area Managing Officer of China Chairman of Shiseido China Co., Ltd. Shoji Nishiyama Responsible for Functional Food Research & Development, Innovative Science Research & Development, Research Administration and Technology Alliances Yu Okazawa 2 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 Taishi Trading Co., Ltd. Toru Sakai 2 Responsible for Production, Purchasing and Logistics Youichi Shimatani 2 Responsible for Marketing of Domestic Cosmetics Business and Domestic Non-Shiseido Brand Businesses Shoji Takahashi Responsible for Americas Chairman & CEO of Shiseido Americas Corporation Mitsuo Takashige Responsible for Personnel General Manager of Personnel Department Takafumi Uchida Responsible for General Affairs, Legal Affairs and Executive Affairs General Manager of General Affairs 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 required by Rule of the Tokyo Stock Exchange Securities Listing Regulations 2. New appointment SHISEIDO ANNUAL REPORT