Balanced Scorecard Collaborative, Inc. • 55 Old Bedford Road • Lincoln, MA 01773 • Tel: 781.259.3737 • Fax: 781.259.3389 • bscol.com

Introducing Global Standards to Build a Strategy- Based Culture at Bank of Tokyo-Mitsubishi

BSCol North American BSC Summit Presentation

October 7-10, 2003

Takehiko Nagumo, VP, Corporate Planning Group, Planning Office for the Americas, HQA

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Discussion TopicsDiscussion Topics

• Background and Context– Overview of BTM for the Americas– Japanese and American corporate culture

• The Balanced Scorecard design and re-design process– Initial Design: Taking a “bottom up” assessment– Re-Design: Re-aligning strategy from the “top down”

• Implementation: Linking the BSC to key programs– COSO-based control self-assessment– HQA committee structure– Regional banking network

• Key takeaways

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BTM OverviewBTM Overview: The NY-based regional headquarters of BTM, BTM HQA manages one of the largest foreign-owned wholesale banking businesses in the Americas.

• BTM is the largest subsidiary of Mitsubishi Tokyo Financial Group, a bank holding company listed on the Tokyo, Osaka, NY and London stock exchanges.

• Formed in 1996 by the merger between Bank of Tokyo and Mitsubishi Bank, BTM is a leading Japanese bank providing retail, commercial, and investment banking products and services.

• BTM operates in 44 countries and territories with more than 350 offices located in all of the major commercial centers of the world.

• In the Americas region, BTM focuses on wholesale banking business with 11 branches/agencies, 10 subsidiaries, 2 loan production offices, and 4 representative offices.

•Subsidiary: 6

•Branch/Agency: 8

•Loan Production Office: 2

•Rep Office: 2

•Subsidiary: 4

•Branch: 3

•Rep Office: 4

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BTM for the Americas Organizational StructureBTM for the Americas Organizational StructureLe

vel I

IILe

vel I

ILe

vel I

Leve

l IV

BTM for the Americas[Enterprise Level]

BTM for the Americas[Enterprise Level]

Business Unit 1:

Treasury

Business Unit 1:

Treasury

Div

isio

n 1

Business Unit 2: Global

Corporate Banking

Business Unit 2:Global

Corporate Banking

Business Unit 3:

Investment Banking

Business Unit 3:

Investment Banking

Business Unit 4:

Corporate Center

Business Unit 4:

Corporate Center

Div

isio

n 2

Div

isio

n 3

Div

isio

n 1

Div

isio

n 2

Div

isio

n 3

Div

isio

n 1

Div

isio

n 2

Div

isio

n 3

Div

isio

n 1

Div

isio

n 2

Div

isio

n 3

Groups Groups Groups Groups

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WhyWhy Introduce theIntroduce the BSCBSC atat BTM?BTM? - BTM needed a modern corporate governance framework to cope with 7 major organizational challenges.

Diversified Cultures Expatriate vs. Local

Complex Organization 4 Business Units housed in a single legal entity, each reporting independently to respective Head Office in Tokyo

Sub-Optimized Network Centralized direction vs. Local Autonomy

Tug-of-War Misalignment between business promotion and credit approval

Red Tape Ambiguous goal-setting in support and oversight functions

Bottleneck Insufficient communication along the supply chain

Accountability Insufficient internal controls in some areas

7 Major Challenges

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What is Strategy for BTM?What is Strategy for BTM?:: In many ways, BTM’s Headquarters for the Americas (BTM HQA) represents the merging of two distinct cultures.

Vague DefinedMission and Vision

Incremental Grand DesignStrategy Formulation Process

Operational Efficiency Differentiation / UniquenessCompetitive Edge

Bottom Up (or Middle-Up-Down) Top DownDecision Making

Implicit / Nonverbal / Closed Explicit / Verbal / OpenCommunication Style

Process Orientation Outcome OrientationPerformance Evaluation

Single Culture / Cooperative Diversified Culture / CompetitiveWork culture

Japanese companies American companies

Adapted from “Essence of Failure,” by I. Nonaka

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BSC Initiative at BTMBSC Initiative at BTM: BTM adopted the Balanced Scorecard to create strategic alignment, improve risk management, and enhance corporate governance.

• Clarify and articulate strategy at multiple levels in the organization.

• Integrate risk control framework into the Balanced Scorecard.

• Use measurement to ensure greater accountability and promote collaboration.

• Enhance internal and external communication of the BTM strategy.

• Link compensation and performance evaluation to strategy.

Strategy Execution Level

Risk Management Level

Good Good CorporateCorporate

GovernanceGovernance

High

HighLow

Low

Balanced Scorecard Vision at BTMBalanced Scorecard Vision at BTM

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Inte

rnal

ize

Soci

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tern

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Program TimelineProgram Timeline: BTM first attempted“Bottom-up”approach, but soon shifted to “Top-down.” Now, everyone has a strong sense of BSC ownership.

3Q01 4Q01 1Q02 2Q02 3Q02 4Q02

“OK. Let’s try new version”

“Good. But some metrics are weak…”

Soul SearchingSoul Searching AwakeningAwakening AlignmentAlignment Test RunTest Run

“See if it works…”

“Strategy is everybody’s

job!”

“Strategy should be

Top Down!”

“What is our strategy?”

First ReportingFirst Reporting ImprovementImprovement

Many facilitated discussion sessions

Advisory support from BSCol consultants

Map your strategy

(Bottom Up)

Determine and map CEO’s

strategy

Link to existing

processes

Cascade CEO’s

strategy (Top Down)

Measure performance

Review Completed Balanced

Scorecards

Externalize New Ideas

Discuss Improvements

Make Our Own Balanced

Scorecards

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Inte

rnal

ize

Soci

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Program TimelineProgram Timeline: Now, BTM’s BSC is moving toward a new stage: globalization - Tokyo and UK are conducting a feasibility study on BSC.

1Q03 2Q03 3Q03ExpansionExpansion AccomplishmentAccomplishment Going GlobalGoing Global

“We have become an

SFO!”

“Let‘s apply BSCs in Latin

America”

BSC as our common language

Feel the cultural change

Moving onto a new stage:

Globalization

4Q03

The BSC story Continues….

“Recommend BSCs to HO”

• Tokyo Head Office has established a BSC Project Team at corporate level

• The European Headquarters has started a feasibility study on BSC.

• BTM has started a new project to enhance linkages between BSC and CSA.

• BTM is developing its proprietary BSC- CSA application software

• Tokyo Head Office has established a BSC Project Team at corporate level

• The European Headquarters has started a feasibility study on BSC.

• BTM has started a new project to enhance linkages between BSC and CSA.

• BTM is developing its proprietary BSC- CSA application software

Enhance BSC- CSA linkages

Complete the new BSC-CSA

approach

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Initial BSC Design ProcessInitial BSC Design Process: The initial bottom-up approach revealed the need for greater consistency and improved horizontal and vertical alignment.

• Over 30 groups and departments built strategy maps (like these) within a 30 day period.

• Only a handful of employees in the organization had experience building Balanced Scorecards.

• In many cases, individuals worked independently to complete the exercise.

Financial

Customer

Internal Process

Learning & Growth

Strategy Theme：Increase in Net Income Through Increased Transaction Volume

Increase in Net Income through

Increased Transaction Volume

Increase in Fee Revenue

Ability to Secure Liquidity on

Profitable Terms

Align to Strategy of

Credit Divisions in Charge

Align Individuals’ Assignments to the

Overall Strategy

Develop and Retain

Experienced Staff

Members

Recognition as a Stable Source of

Credit

Build Relationships with Industry

Counter- parties

Accurate Process-

ing

Improve Operation

Increase in Interest Revenue from

Deposit

Ability to Provide Account

Information Promptly

Competitive Pricing

Improve Operation

System

Promote STP

Rationalize/ Re-engineer Operation

center

Streamline Organization

Structure for Global Correspondent

Banking Business

Collaborate with Bene.

Study Competitors’

Pricing Trends

Example

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Initial BSC Design ProcessInitial BSC Design Process: While the initial effort to design scorecards demonstrated a lot of progress, several key gaps in alignment were apparent.

Observations

• Beyond the four perspectives, the scorecards lacked a unifying structure.

• The expression of cause and effect through arrows created confusion.

• On most strategy maps, the internal perspective lacked a sufficient description of the key processes required for success.

• The interdependencies between groups was not clear on the scorecards, suggesting the need for making horizontal alignment more explicit on the strategy maps.

Decisions

• Re-build maps from the top-down.

• Focus on a high-level story of the strategy (Strategy maps should describe cause and effect generally, not precisely).

• Re-group or re-define objectives according to a limited number of themes.

• Categorize objectives according to topic and organize them according to type – common, shared, or unique.

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BSC ReBSC Re--Design ProcessDesign Process: To align the organization vertically, BTM established a strategic foundation upon which all scorecards would be built.

BTM Strategy Map Foundation

Category #1:Relationship

• Understanding customer needs• Being a trusted advisor

Fina

ncia

lC

usto

mer

Inte

rnal

Pro

cess

Hum

anC

apita

l

Category #2:Product• Features• Price

Category #3:Service• Timely• Accurate

Category #1:

Revenue• Interest Income

• Non-Interest Income

Category #2:

Risk• Credit Costs

• Litigation Costs

Category #3:

Eff iciency• Reduce Costs

• Increase Productivity

Increase Net Income

Category #1:Skills

• Training, sucession planning, etc.

Category #2:Work Environment

• Ethics, culture, etc.

Category #3:Compensation

Pay-for-performance, etc.

Theme #1:

GROW REVENUE

• Customer Relationships•Cross-selling efforts• Market Research

• Etc.

Theme #2:

MANAGE RISK

• COSO Self-Assessment• Regulatory Risk• Technology Risk

• Etc.

Theme #3:

ENHANCEPRODUCTIVITY

• Reengineering• IT Init iatives

• Quality Control• Etc.

Customer: Internal / External (Description)

BTM Strategy Map Foundation

Category #1:Relationship

• Understanding customer needs• Being a trusted advisor

Fina

ncia

lC

usto

mer

Inte

rnal

Pro

cess

Hum

anC

apita

l

Category #2:Product• Features• Price

Category #3:Service• Timely• Accurate

Category #1:

Revenue• Interest Income

• Non-Interest Income

Category #2:

Risk• Credit Costs

• Litigation Costs

Category #3:

Eff iciency• Reduce Costs

• Increase Productivity

Increase Net Income

Category #1:Skills

• Training, sucession planning, etc.

Category #2:Work Environment

• Ethics, culture, etc.

Category #3:Compensation

Pay-for-performance, etc.

Theme #1:

GROW REVENUE

• Customer Relationships•Cross-selling efforts• Market Research

• Etc.

Theme #2:

MANAGE RISK

• COSO Self-Assessment• Regulatory Risk• Technology Risk

• Etc.

Theme #3:

ENHANCEPRODUCTIVITY

• Reengineering• IT Init iatives

• Quality Control• Etc.

Customer: Internal / External (Description)

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BSC ReBSC Re--Design ProcessDesign Process: In revising their strategy maps, each group defined its strategic objectives according to bank-wide themes, categories, and types.Key steps:1. Referring to the BTM strategic foundation (on the preceding page) as a starting point,

each group created a customized version according to how its goals align to the themes and categories defined in the foundation.

2. Each group discussed and agreed upon how to express its strategic objectives within this framework. (For each perspective, questions were provided in a workbook to guide answers.)

3. Each group re-built its strategy map so that its objectives corresponded to the strategic themes and categories defined on the foundation page. Objectives were depicted in three types of ovals:

Type Definition Example

Bank-wide objectives, mandated throughout the organization on every scorecard

“Enhance cost efficiency” (financial perspective objective)

Inter-divisional objectives shared between two or more units expected to cooperate in order to achieve the result

“Streamline credit approval process” (internal perspective operational efficiency objective)

Intra-divisional objectives describing an activity expected to be fulfilled independently by that group

“Maintain know your customer files” (internal risk management theme objective for Treasury)

Common

Unique

Shared

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BSC ReBSC Re--Design ProcessDesign Process: Using the strategic foundation, strategy maps were re- built from the top-down. Interdependent groups shared objectives.

Grow RevenuesGrow Revenues Manage RiskManage Risk Enhance ProductivityEnhance Productivity

Increase fee income

Increase fee income

Maximize income from

core customers

Maximize income from

core customers

Minimize credit costs Minimize

credit costsEnhance

cost efficiency

Enhance cost

efficiency

Be #1 foreign wholesale bank in the Americas

Be #1 foreign wholesale bank in the Americas

Be a reliable source of

credit

Be a reliable source of

credit

Provide global

network banking

Provide global

network banking

Provide speedy and

accurate service

Provide speedy and

accurate service

Develop succession

plan

Develop succession

plan

Provide training on credit and products

Provide training on credit and products

Competitive environment:

teamwork, safe and fair

Competitive environment:

teamwork, safe and fair

Competitive compensation Competitive

compensation

Segmentation and tier up

Segmentation and tier up

Close collaboration between RMs

and POs*

Close collaboration between RMs

and POs*

Increase net incomeIncrease net income

Enhance disaster recovery/business

continuity plan

Enhance disaster recovery/business

continuity plan

Enhance risk management in Latin America

Enhance risk management in Latin America

Streamline credit approval process Streamline credit approval process

Enhance collaboration throughout

supply chain

Enhance collaboration throughout

supply chain

Strategically focus on regional

opportunities

Strategically focus on regional

opportunities

Proactive risk management and

compliance

Proactive risk management and

compliance

Execute major technology and

efficiency projects

Execute major technology and

efficiency projects

Tie-up between business strategy and risk appetite

Tie-up between business strategy and risk appetite Bankwide common objective

Objective unique to GCBU

Predetermined shared objective

FinancialPerspective

CustomerPerspective

InternalProcess

Perspective

HumanCapital

Perspective

Sample Strategy Map

Sample Strategy Map

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• Once BTM articulated the strategy for all levels of the organization from the top- down, it became easier to identify and assess risks associated with implementing strategy.

• COSO-based control risk assessment (CSA) was introduced on a bankwide basis to proactively manage risks derived from the strategy execution process. This process was adopted as a bank-wide common objective called “Proactive Risk Management and Compliance” in Balanced Scorecards.

• CSA was conducted at the lowest organization level and CSA results were aggregated from the bottom.

• The BSC-CSA linkage created a Strategy-Risk management double loop for BTM.

Proactive Risk Management and

Compliance

Proactive Risk Management and

Compliance

Cascading Strategy

(Top-down)

Aggregating Risk

(Bottom-up)

Implementation Implementation – Linking COSO to the BSCLinking COSO to the BSC: With strategies clearly articulated, BTM integrates COSO-based risk management framework into BSC.

Corporate level

BU level

Division 1

Division 3

Division 2

StrategyStrategy--Risk Management Double LoopRisk Management Double Loop

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Implementation Implementation – Linking COSO to the BSCLinking COSO to the BSC: Risks in the strategy execution process are proactively identified and controlled through COSO-based CSA.

Goals & Objectives

Goals & Objectives Execution ProcessExecution Process Performance

Evaluation Performance Evaluation

Financial

Customer

Internal Process:

“Grow Revenue”“Manage Risk”“Enhance Productivity”

Human Capital

COSO-Based CSA:

• Business environment risk

• Legal and compliance risk

• Data security risk

• Technology risk

• Business continuity risk

• People risk

• etc.

Financial

Customer

Internal Process:

“Grow Revenue”“Manage Risk”“Enhance Productivity”

Human Capital

F e e d b a c kF e e d b a c k

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BSCBSC

CompensationCompensation

COSOCOSO

Business Risk

Reward

• Linking compensation to the BSC, of which COSO is a key strategic priority, encourages all employees to consider the balance between business and risk.

• One powerful metric being used is “share of issues identified by business lines”, which has a target of 50%. This metric immediately had the effect of making the business lines proactively identify risks they had previously ignored or waited to react to. The associated metric “share of issues closed during period” (target: 100% by deadline) is now forcing quicker resolution of risk issues.

The idea of linking COSO to the Balanced Scorecard is considered unique among

financial institutions – even in the United States

Implementation Implementation –– Linking Compensation to the BSCLinking Compensation to the BSC

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Implementation Implementation –– CommitteesCommittees: Major meetings were not explicitly linked to strategy; now they are clearly linked to the strategic themes and goals of the organization.

Discussions at all major periodic management meetings focus on relevant areas of the scorecard; all areas are reviewed quarterly at the Business Strategy Committee meeting.

Monthly

IT Steering Committee

Quarterly

Human Resources Committee

Monthly QuarterlyMonthlyMonthlyMonthlyQuarterlyFrequency

Credit Risk Mgmt Committee

Bankwide Risk Mgmt Committee

Compliance Committee

Human Capital

Operations Control Committee

Monthly Profit Review

Improve Productivity

Manage Risk

Grow Revenues

Customer

Financial

Business Strategy CommitteeTheme

Committee

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Implementation Implementation –– Rollout to BranchesRollout to Branches: BTM HQA has already begun cascading its scorecards by business area to the branches.

• Balancing centralized HQA business policy and local autonomy at branches

– HQA determines objectives and weighting of emphasis by perspective.

– The predetermined objectives and weighting work as “rules of the game” for branches to compete among each other.

– Branches have autonomy to select metrics and weighting / emphasis within perspective.

• Weighting may change over time – depends on business environment

FinancialPerspective

CustomerPerspective

InternalProcess

Perspective

HumanCapital

Perspective

60%60%

5%5%

5%5%

Grow revenues

Grow revenues

Manage risk

Manage risk

Enhance Produc-

tivity

Enhance Produc-

tivity

30%

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Key TakeawaysKey Takeaways (1 of 2)

• The vertical and horizontal alignment promoted cooperation between the business promotion side and the credit approval side – parties that were formerly isolated. This increased efforts to make service to the customer more consistent.

Tug-of-War

• Rollout to branches helps clarify which items should be governed centrally versus locally.

Sub-Optimized Network

• Through the BSC Initiative, the CEO’s strategy for the Americas was clearly cascaded down to all areas of the organization beyond the organizational boundary and shared among employees.

Complex Organization

• BTM successfully articulated and communicated its strategy to both cultures (multicultural environment).Diversified Culture

Resulting Changes and ImprovementsKey Challenge

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Key TakeawaysKey Takeaways (2 of 2)

Key Challenge Resulting Changes and Improvements

Red Tape

• Support and oversight functions (HR, audit, credit examination, etc.) are now familiar with quantitative approaches to managing performance. They are more focused on the bottom line, and senior management has better control over what they are doing.

Bottleneck• Front, middle, and back offices cooperated more proactively to

enhance productivity and minimize operational errors.

Accountability• Employees realize that performance against strategy has to be

measured and rewarded – Balanced Scorecard is not just a conceptual exercise.