1. Reason for Adopting the Present Corporate Governance System

Being a high-level specialist manufacturer that requires hands-on speedy business execution, the Company introduced an executive officer system from 2000 as a management system for continuously enhancing its corporate value by enabling management to engage in rapid executive decision making and business execution as well as demonstrate precise management skills. We recognize that strengthening of corporate governance is an important issue. Therefore, in addition to the appointment of several independent Outside Directors, we have established the “Nomination Committee” and the “Compensation Committee,” which are discretionary advisory bodies of the Board of Directors mainly comprised of Outside Directors. With this, we have endeavored to preserve our transparency and accountability.

In addition, we made a transition to a “Company with an Audit Committee,” upon obtaining the approval of the 89th Ordinary General Meeting of Shareholders held on June 25, 2015 in order to stepped up these initiatives to reinforce the auditing and monitoring functions. The transition to become a Company with an Audit Committee was made for following main reasons; i) in light of the current condition in which the ratio of consolidated overseas sales and the foreign ownership ratio are high, we have been working on enhancement of corporate value, with an aim to establish corporate governance system which can gain more understanding from a global perspective; ii) collecting scarce independent Outside Directors and making them a member of the Board of Directors will raise the ratio of Outside Directors in the Board of Directors, allowing for attempts at further improvement of transparency and more active discussion in light of the viewpoints of shareholders; and iii) judging that establishing Audit Committee and granting voting rights in the Board of Directors to Directors elected as Audit Committee Members will lead to enhancement of auditing and monitoring. The Company will continue to enhance corporate value by further strengthening corporate governance.

2. Overview of Company Structure

As aforementioned, the Company adopted the form of a Company with an Audit Committee as governance framework for the purpose of the Companies Act, and an executive officer system, under which responsibility for execution of operations is assigned to Vice Presidents and Executive Officers (including those concurrently serving as Directors) to whom the Company delegates authorities. Subject to the provisions of Article 399-13, paragraph 6 of the Companies Act, we have stipulated in our Articles of Incorporation that the Board of Directors may, upon its resolution, delegate all or part of the decisions on execution of important operations (excluding matters listed in items of paragraph 5 of the said Article). However, for the time being, the execution of important operations shall be considered and decided by the Board of Directors in principle, and by narrowing down the matters to be discussed by the Board of Directors through reviewing the delegation of part of the decisions on execution of important operations to Directors and standards on matters to be discussed by the Board of Directors, we will aim to enhance deliberation and strengthen monitoring function at the Board of Directors’ meetings.

The Board of Directors consists of an appropriate number of managerial personnel in and outside the Company who can contribute to the expansion of businesses and the execution of operations by taking into account the source of the Group’s corporate value, as well as the enhancement of its global management system. The aim is to achieve the Group’s sustainable growth and enhance its corporate value. Pursuant to the Company’s Articles of Incorporation, the number of Directors (excluding Directors elected as Audit Committee Members) is ten or fewer. Directors elected as Audit Committee Members are five or fewer. Hirokazu Hamada, Representative Director, President and Group CEO, has been appointed as Chairperson of the Board of Directors, by the resolution of the Board of Directors pursuant to the provisions of the Company’s Articles of Incorporation.

Currently, 18 individuals are serving as Vice Presidents and Executive Officers (including one non-Japanese and one female).

There are no provisions in the Company’s Articles of Incorporation for the roles or positions of counselor or advisor. Currently, the Company does not have a system or practice of Representative Directors (Group CEO, President) serving in such a role or position and continuing to play a leadership role in the management of the Group after they retire as Directors.

In addition, the Management Strategy Conference has been established as an executive body for the deliberation of important matters, along with the aforementioned Nomination Committee and the Compensation Committee established as voluntary advisory bodies to the Board of Directors.

The Company separates the decision-making and monitoring functions of the Board of Directors from the business execution functions of the Executive Officers.

The Board of Directors system was streamlined in accordance with the adoption of an executive officer system in 2000. Discussion by the small number of people involved facilitates prompt decision-making. Matters to be discussed by the Board of Directors have been stipulated in the Board of Directors Rules and, at the Board meetings, candid and proactive opinions are expressed even by Outside Directors, while matters pursuant to provisions of the Companies Act and the Articles of Incorporation and other important matters relating the Company and the Group are resolved and the status of execution of duties is reported through fruitful discussions. All Directors attended the Board of Directors’ meetings, which were held 13 times during the fiscal year ended March 31, 2020. In addition, as initiatives in each quarter, following the Board of Directors’ meetings, a “free discussion” is held with the participation of all Directors (including Outside Directors and Directors elected as Audit Committee Members), Vice Presidents and Executive Officers and heads of business divisions. At those times, vigorous discussions take place regarding medium- to long-term management issues and others based on presentations and themes relating to the Group’s various businesses.

Important matters related to business execution are deliberated on and resolved by the Management Strategy Conference, chaired by the Group CEO and comprising Executive Directors, Vice Presidents and others. The Management Strategy Conference is held regularly once a month and when necessary to make decisions on global management, the formulation of general strategies on group management and other important matters related to business execution that are not be discussed at the Board of Directors’ meetings, in addition to discussing matters, excluding ones to be resolved exclusively by the Board of Directors, before they are presented to the Board of Directors, in an effort to enhance deliberations.

The Company has established the Nomination Committee as an advisory body to the Board of Directors, with the aim of improving transparency, objectivity and fairness in the selection and removal of Directors and the resignation of Representative Directors, as well as obtaining advice and recommendations concerning the development of management personnel capacity. The Nomination Committee deliberates and provides recommendations regarding the following matters.

1. Proposals for the selection of candidates for Directors and the dismissal of Directors
2. Advice and recommendations about the assumption and retirement from office of the Group CEO and succession plans
3. Advice and recommendations about proposals for the selection of candidates for Vice Presidents and Executive Officers and the dismissal of Vice Presidents and Executive Officers as well as succession plans
4. Proposals on the members of the Board of Directors (the ratio between Internal Directors and Outside Directors, areas of the members’ expertise, professional careers, etc.)
5. Examination and preparation of the requirements for Directors and their selection criteria
6. Advice and recommendations about the management and operation of several systems (a term of office, an age limit, etc. for each position) regarding the Company’s officers (including Executive Officers) as the whole and revisions of such systems
7. Advice and recommendations about “Training Program for Next-Generation of Executives” as well as training for Directors, Executive Officers or their successors

Furthermore, the Company has established the Compensation Committee as an advisory body to the Board of Directors for deliberating and reporting on the compensation, etc. of Directors, Vice Presidents and Executive Officers, which is an essential matter relating to corporate governance, including bonuses and other performance-based compensation based on the evaluation of performance for the previous fiscal year, as well as the scheme, content, level and balance of distribution, etc. of the compensation of officers for the fiscal year ended March 31, 2019. Moreover, the Company has established the Compensation Committee as an advisory body to the Board of Directors for deliberating and reporting on the compensation, etc. of Directors, Vice Presidents and Executive Officers, which is an essential matter relating to corporate governance, including bonuses and other performance-based compensation based on the evaluation of performance for the previous fiscal year, as well as the scheme, content, level and balance of distribution, etc. of the compensation of officers for the current fiscal year.

Currently, the Nomination Committee and the Compensation Committee comprise six Directors, namely all Outside Directors (four Directors including those elected as Audit Committee Members, namely Takaya Seki, Kazuyoshi Aoki, Norio Igarashi and Keiko Shimizu), and Hirokazu Hamada, Representative Director, President and Group CEO, as well as one Director (Akifumi Kubota) nominated by the Group CEO, while the chairperson of each committee is elected from among Outside Directors.

In addition, an Independent Committee has been operated, comprising only Outside Directors as an initiative since the transition to a Company with an Audit Committee. The Chairperson of the Independent Committee is elected by mutual vote of the Outside Directors as a “Lead Independent Outside Director,” who undertakes the role of summarizing the opinions of Outside Directors, communicating and coordinating with the Company’s top management. As a result, a venue for free and active discussion has been created led by robust and smooth communications among Outside Directors, resulting in facilitating an exchange of information and sharing the same problem recognition among officers from the stance of being independent and objective. The Company expects the Independent Committee to contribute to the enhancement of the Group’s corporate value through the advice provided to the management, recommendations on the evaluation of effectiveness of the Board of Directors and reports on matters for which advice was sought from the Board of Directors.

The Audit Committee sets the “Auditing Standard for Audit Committee,” receives business reports from the Group, investigates the status of business execution and assets and/or exercises its authority to appoint or dismiss the Accounting Auditor. Taking these steps, the Audit Committee conducts an audit on business execution by Directors, the effectiveness of the internal control system, the business performance, the financial condition and the like of the Company. Matters relating to audits including the progress of the audit by the Audit Committee (including the matters relating to the full-time committee members and the chairperson), progress of the internal audit and the accounting audit are stated in “(3) Status of Audits.”

Subject to the regulations under the Article 427, paragraph 1 of the Companies Act, agreements on limitation of liability for damage under Article 423, paragraph 1 of the said Act have been concluded between the Company and Directors who do not execute business (including Outside Directors). The limit of liability for damage in accordance with the relevant agreement is either 10 million yen or the amount stipulated by laws and regulations, whichever is higher. Such limitation of liability is permissible only in cases in which the relevant Directors act in good faith and without gross negligence when performing duties which triggered such liability. The Company has not entered into an agreement on limitation of liability for damage with the Accounting Auditor.

With regard to resolutions concerning the appointment of Directors, the Company has made regulations under the Articles of Incorporation to the effect that Directors shall be elected at a general meeting of shareholders under the condition that shareholders holding more than 1/3 of the shareholders’ voting rights are present, the election shall take place through a resolution of a majority vote of such voting rights, and the election of Directors by cumulative voting shall not be allowed.

The Company has made regulations under the Articles of Incorporation that matters outlined in each item of the provisions of the Article 459, paragraph 1 of the Companies Act can be applied via resolution of the Board of Directors, except where separately regulated under laws and regulations, so that flexible capital policies can be fulfilled.

The Company has made regulations under the Articles of Incorporation to the effect that resolutions regulated under Article 309, paragraph 2 of the Companies Act are made under the conditions that shareholders holding more than 1/3 of the shareholders’ voting rights are present at a general meeting of shareholders and more than 2/3 of such voting rights effectuate a resolution, in order to further assure the preservation of a quorum for a special resolution at a general meeting of shareholders.