トーカロ（3433） – Corporate Governance Report

Corporate Governance Report Last Update: December 27, 2021 TOCALO Co., Ltd. Noriyuki Mifune, President and Representative Director Contact: HR & General Affairs Division (+81-78-303-3433) Securities Code: 3433 https://www.tocalo.co.jp The corporate governance of TOCALO Co., Ltd. (the “Company”) is described below. I. Basic Views on Corporate Governance and Capital Structure, Corporate Profile and Other Basic Information 1. Basic Views The Company recognizes that effective corporate governance is one of the most important management issues. Based on the recognition that “a company is a member and public entity of society,” our basic stance on corporate governance is to ensure management transparency and to further strengthen the trust placed in us by all of our stakeholders, those being our shareholders, business partners, employees and local communities. Alongside that, we aim to increase corporate value and achieve sustainable and sound growth of the Group as a whole, and thereby contribute to society through our surface treatment processing business. [Reasons for Non-compliance with the Principles of the Corporate Governance Code] [Supplementary Principle 2-4-1 Ensuring diversity in the appointment of core human resources, etc.] As of March 31, 2021, the Company had 62 female employees, or 8.9% of all regular employees, including one female manager which accounts for 0.8% of all managers. Additionally, the Company has recruited two foreign nationals from 2018 to the present through its activities, such as accepting students from overseas and making inquiries to universities whose foreign graduates have been recruited by Japanese companies, from the standpoint of securing personnel who are to be seconded abroad for its future global business expansion. The Company also regularly recruits mid-carrier employees based on its in-house workforce plan. As of November 30, 2021, mid-carrier hires account for 42.3% of all regular employees and 40.0% of all managers. In ensuring diversity, the Company respects diversity in the workplace, regardless of gender, and strives to help each employee find fulfillment in work and build his/her career through its new personnel system introduced in April 2021. Moreover, the Company has been working to advance diversity focused on women’s empowerment since July 2020 by reviewing its internal environment and work regulations, and other activities, so as to create a workplace where both men and women feel comfortable at work and can play an active role on an equal footing. – 1 – The Company has not set “voluntary and measurable goals” yet but will consider doing so as a future course of action. [Supplementary Principle 3-1-3 Sustainability initiatives] As for management strategies, the Company formulated and disclosed its Mid-Term Management Plan in November 2021. Additionally, with its CSR initiatives and Environmental Reports disclosed on its website, the Company engages in environmental preservation activities as it has obtained ISO14001 environmental management system certificate. [TOCALO’s Management Policy, CSR, etc.] https://www.tocalo.co.jp/csr/ [Environmental Report] https://www.tocalo.co.jp/csr/env/pdf/tocalo2021.pdf Issues concerning investment in human capital, intellectual property, etc. are not disclosed currently but may be disclosed when the need arises in the future. Regarding initiatives for sustainability, the Company considers that steadily promoting ESG activities will lead to the achievement of Sustainable Development Goals (SDGs) and will discuss the TCFD recommendations as Group-wide issues over the medium term. [Disclosure Based on the Principles of the Corporate Governance Code] [Principle 1-4 Strategically held shares] 1. Policy on strategically held shares strategically held shares in the future. 2. Criteria for exercising voting rights The Company did not retain any at the end of March 2021. As a general rule, we will not retain any Strategically held shares serve to continuously improve the value of the Company through the associated voting rights. Voting rights would be exercised, for example, in cases where shareholder value is significantly damaged or a serious non-compliance is found. Any decisions whether or not to approve proposals will be made only after collecting sufficient information. [Principle 1-7 Transactions with related parties] Based on the Rules of the Board of Directors, the Company regards matters such as competitive transactions, conflict-of-interest transactions, and the acquisition/disposal of large amounts of equipment/property by directors, as important management issues that should be presented to the Board of Directors, in a timely manner. These matters are deliberated in the interest of the Company and its shareholders as a whole and are treated in the same way even if our business partners are major shareholders, etc. [Principle 2-6 Fulfilling responsibilities as owner of corporate pension assets] Regarding the management of corporate pension reserve funds, the Company issues management guidelines that set forth target investment yield, basic portfolio content and divergence tolerance for achieving targets – 2 – to the asset management institution. Then, we monitor how those funds are managed through reports on the management status, stewardship activities, etc. provided periodically by the asset management institution. The Secretariat for Corporate Pension comprises members with appropriate qualifications selected and assigned from the human resources, finance, accounting, and other departments. [Principle 3-1 Enhancement of information disclosure] 1. Our goals (Corporate Philosophy, Management Policy, Management Indices) For our corporate philosophy and management policy, please visit our website. (https://www.tocalo.co.jp/csr/index.html) Management indices are on a consolidated basis. (1) Ordinary income ratio: Stable achievement of 15% or higher (2) Return on equity (ROE): Stable achievement of 15% or higher (3) Return on assets (ROA): Stable achievement of 15% or higher We have set three goals as shown above. 2. Basic views on corporate governance Our basic views on corporate governance are elucidated in “I-1 Basic Views” of this Report. 3. Determination of remuneration for senior management and directors How remuneration for senior management and directors is determined is described in II-1 Organizational Composition and Operation [Director Remuneration] of this Report. 4. Appointment and dismissal of senior management and nomination of candidates for directors and Audit & Supervisory Board members As an advisory body for the Board of Directors, the Company has established a Nomination and Remuneration Advisory Committee, with a majority of the members being independent outside directors and chaired by an independent outside director. The Committee deliberates proposals on the appointment/dismissal of director candidates and gives advice and recommendations to the Board of Directors. Director candidates, who as directors are expected to have broad experience and deep insight that they can utilize to manage the Company, are selected by the Board of Directors based on the advice and recommendations of the Nomination and Remuneration Advisory Committee. The Board submits the selected candidates to the General Shareholder Meeting for approval in the form of a resolution. Audit & Supervisory Board member candidates must have expertise and knowledge in auditing. They are selected by the Board of Directors after their qualifications have been deliberated and agreed to by the Audit & Supervisory Board, more than a half of which is comprised of Outside Audit & Supervisory Board members. The Board submits the selected candidates to the General Shareholder Meeting for approval in the form of a resolution. Regarding the dismissal of directors and Audit & Supervisory Board members, if a director/Audit & Supervisory Board member has committed fraud or seriously violated laws, regulations or – 3 – the articles of incorporation in the course of executing his/her duties, or if no longer meets requirements, a resolution that clarifies the reason for dismissal is made by the Board of Directors and submitted to the General Shareholder Meeting for approval. 5. Explanation of individual appointments, dismissals and nominations The reasons for the appointment of individual outside directors and outside Audit & Supervisory Board members are described in II-1 Organizational Composition and Operation [Directors] and [Audit & Supervisory Board members] of this Report. With regards to appointments, the background of each candidate and the reasons for appointment are described in the Convocation Notice of the General Shareholder Meeting. When a dismissal takes place, it will be disclosed as appropriate according to its [Supplementary Principle 4-1-1 Scope of delegation to senior management] The Board of Directors is operated based on the important matters stipulated in the Rules of the Board of Directors. Based on the management strategies, plans, policies, etc. approved by the Board of Directors, decisions concerning business execution are delegated to the senior management in charge of business [Principle 4-9 Judgement criteria for independency of independent outside directors and their The criteria used to judge the independency of independent outside directors and their qualifications is described in II-1 Organizational Composition and Operation of this Report. [Supplementary Principle 4-10-1 Authority, role, etc. of the Nomination and Remuneration Advisory As an advisory body for the Board of Directors, the Company has established a Nomination and Remuneration Advisory Committee, with a majority (three out of five) of the members being independent outside directors and chaired by an independent outside director. The Committee deliberates the appointment of director candidates (including successor plans), remuneration for directors, and other matters, and gives advice and recommendations to the Board of Directors based on which Board resolutions At the Company, there are one male and two female independent outside directors who have a broad range of specialized skills in legal affairs, finance and accounting, internationalism and diversity, and environmental and social issues, and they provide recommendations based on their expertise. [Supplementary Principle 4-11-1 Policy for ensuring diversity in the Board of Directors, etc.] When appointing members to the Board of Directors, our first priority will be to seek persons who have demonstrated leadership in business execution as a department head and have the knowledge and insight to importance. execution. qualifications] Committee] are made. – 4 – oversee our business from multiple perspectives. The candidates are then selected through deliberation by the Board of Directors, after fully considering their management skills, aptitude and contributions made to the company, and ensuring balance and diversity among our human resources. As for the experience and expertise expected of each candidate, a skills matrix is presented in the Convocation Notice of the General Shareholder Meeting and the Securities Report for the fiscal year ending in March 2021. Additionally, based on the resolution at the Ordinary General Shareholder Meeting held on June 25, 2021, one independent outside director with management experience at other companies has been appointed. [Supplementary Principle 4-11-2 Status of concurrent position of directors and Audit & Supervisory Board members] If directors and Audit & Supervisory Board members, including outside directors and outside Audit & Supervisory Board members, also serve as officers of other companies, the Board of Directors confirms the details thereof and ensures that said dual service does not pose any problems for the business of the Company. The status of any concurrent positions held by officers as of the date of account closing is described in the “Business Report” of the Convocation Notice of the General Shareholder Meeting, and that of any candidates to be appointed as new officers, in the “Reference Material for the General Shareholder Meeting”. [Supplementary Principle 4-11-3 Evaluation of the effectiveness of the Board of Directors] At the Company, all directors and all Audit & Supervisory Board members evaluate the effectiveness of the Board of Directors based on questionnaires prepared by the Secretariat for the Board of Directors. In fiscal 2020, the Board of Directors was evaluated as being generally appropriate in terms of composition, operation, agenda and other relevant matters. The results were reported to all directors and all Audit & Supervisory Board members. Efforts are being made to further enhance the effectiveness of the Board of Directors. [Supplementary Principle 4-14-2 Policy on training for directors and Audit & Supervisory Board members] Directors of the Company acquire knowledge of roles, responsibilities, laws and regulations by actively participating in external courses and seminars for self-improvement. Our full-time Audit & Supervisory Board members, as members of the Japan Corporate Auditors Association, enhance their knowledge by attending seminars and so on, and share information with other Audit & Supervisory Board members. [Principle 5-1 Policy on constructive dialogue with shareholders] Company management or personnel in charge of IR hold financial results briefings and small meetings for institutional investors every time we announce our quarterly financial results, and hold briefings for individual investors as well. We also accept requests for individual interviews. By posting IR-related information and an inquiry form on our website, we provide a platform where general shareholders can obtain information and ask us questions. – 5 – 2. Capital Structure Foreign Shareholding Ratio More than 30% [Status of Major Shareholders] Name / Company Name The Master Trust Bank of Japan, Ltd. Custody Bank of Japan, Ltd. TOCALO Employees Shareholding Association BBH FOR FIDELITY LOW-PRICED STOCK FUND (PRINCIPAL ALL SECTOR SUBPORTFOLIO) TOCALO Co., Ltd. NORTHERN TRUST CO. (AVFC) RE FIDELITY FUNDS GOVERNMENT OF NORWAY NORTHERN TRUST CO. (AVFC) RE HCR00 Kumiko Saijo RBC IST 15 PCT NON LENDING ACCOUNT – CLIENT ACCOUNT Controlling Shareholder (except for Parent Company) Parent Company — None Supplementary Explanation — Number of Shares Owned Percentage (%) 14.19 8,628,600 13.98 8,501,300 4.60 2,795,704 4.33 2,634,234 2,381,222 2,288,094 1,554,173 1,395,300 1,036,400 863,000 3.77 3.76 2.56 2.29 1.70 1.42 3. Corporate Attributes Listed Stock Market and Market Section Fiscal Year-End Type of Business Number of Employees (consolidated) as of the End of the Previous Fiscal Year Sales (consolidated) as of the End of the Previous Fiscal Year Tokyo Stock Exchange First Section March Metal Products More than 1000 Number of Consolidated Subsidiaries as of the End of the Previous Fiscal Year Less than 10 From ¥10 billion to less than ¥100 billion 4. Policy on Measures to Protect Minority Shareholders in Conducting Transactions with Controlling Shareholder — – 6 – 5. Other Special Circumstances which may have Material Impact on Corporate Governance — II. Business Management Organization and Other Corporate Governance Systems regarding Decision-making, Execution of Business, and Oversight in Management 1. Organizational Composition and Operation Organization Form Company with Audit & Supervisory Board [Directors] Maximum Number of Directors Stipulated in Articles of Incorporation Term of Office Stipulated in Articles of Incorporation Chairperson of the Board Number of Directors Appointment of Outside Directors Appointed Number of Outside Directors Number of Independent Directors Designated from among Outside Directors 2 years President 15 8 4 4 Relationship with the Company (1) Attribute Lawyer Name Toshimitsu Kamakura Keiko Takihara Yoko Sato Kazuyuki Tomita Relationship with the Company* a b c d e f g h i j k Other CPA From another company * * * Categories for “Relationship with the Company” “○” when the director presently falls or has recently fallen under the category; “△” when the director fell under the category in the past “●” when a close relative of the director presently falls or has recently fallen under the category; “▲” when a close relative of the director fell under the category in the past a. Executive of the Company or its subsidiaries b. Non-executive director or executive of a parent company of the Company c. Executive of a fellow subsidiary company of the Company d. A party whose major client or supplier is the Company or an executive thereof e. Major client or supplier of the listed company or an executive thereof – 7 – f. Consultant, accountant or legal professional who receives a large amount of monetary consideration or other property from the Company besides compensation as a director/Audit & Supervisory Board member g. Major shareholder of the Company (or an executive of the said major shareholder if the said shareholder is h. Executive of a client or supplier company of the Company (which does not correspond to any of d, e, or f) i. Executive of a company at which an executive of the Company holds concurrent position as an outside j. Executive of a company or organization that receives a donation from the Company (the director a juridical person) (the director himself/herself only) officer (the officer him/herself only) himself/herself only) k. Others Relationship with the Company (2) Name Toshimitsu Kamakura Designation as Independent Director Supplementary Explanation of the Relationship — Reasons of Appointment Toshimitsu Kamakura has a high degree of expertise and deep insight as a lawyer. He also has no interests in the Company and is judged to be an outside director who is unlikely to have a conflict of interest with general shareholders. Therefore, he has been designated an independent officer. Keiko Takihara has considerable insight related to health enhancement as a specially appointed professor of the health and counseling center of a university. She also has no interests in the Company and is judged to be an outside director who is unlikely to have a conflict of interest with general shareholders. Therefore, she has been designated an independent officer. As a certified public accountant, Yoko Sato has expertise in finance and accounting. She also has no interests in the Company and is judged to be an outside director who is unlikely to have a conflict of interest with general shareholders. Therefore, she has been designated an independent officer. Kazuyuki Tomita has experience in developing thin coatings, semiconductor processes, etc., which was gained by working for a major manufacturing company, and has deep insight as a manager of a subsidiary of the said Keiko Takihara — Yoko Sato — Kazuyuki Tomita — – 8 – company. He also has no interests in the Company and is judged to be an outside director who is unlikely to have a conflict of interest with general shareholders. Therefore, he has been designated an independent officer. Voluntary Establishment of Committee(s) Corresponding to Nomination Committee or Remuneration Committee Established Status of Establishment of Voluntary Committee, Composition, and Attributes of Chairperson Committee Corresponding to Nomination Committee Committee Corresponding to Remuneration Committee Nomination and Remuneration Advisory Committee 5 Nomination and Remuneration Advisory Committee 5 0 2 3 0 0 Outside Director Outside Director Committee’s Name All Committee Members Full-time Members Inside Directors Outside Directors Outside Experts Other Chairperson Supplementary Explanation For the purpose of ensuring the transparency and objectivity of procedures related to the nomination and remuneration of directors, the Company has set up a Nomination and Remuneration Advisory Committee with an independent outside director as its chair and independent outside directors accounting for the majority of its members. The Committee deliberates the following matters at the request of the Board of Directors, and provides advice and recommendations to the Board of Directors. (1) Proposals submitted to the General Shareholder Meeting regarding the appointment and dismissal of directors (2) Appointments and dismissals of representative directors and their successor plans (3) Policy on determining details of remuneration for directors (4) Details of remuneration for individual directors (5) Reviews of remuneration in the event of a scandal, etc. (6) Establishment, revision, and abolition of basic policies, rules, procedures, etc. necessary to resolve the preceding items 0 2 3 0 0 – 9 – (7) Other matters stipulated by the Nomination and Remuneration Advisory Committee regarding each of the preceding items [Audit & Supervisory Board Member] Establishment of Audit & Supervisory Board Established Maximum Number of Audit & Supervisory Board Members Stipulated in Articles of 5 4 Number of Audit & Supervisory Board Incorporation Members Department Cooperation among Audit & Supervisory Board Members, Accounting Auditors and Internal Audit Audit & Supervisory Board members meet regularly with the accounting auditors to receive detailed explanations of audit plans, audit results, etc. from the accounting auditors, and actively exchange opinions and information on their own views. Additionally, Audit & Supervisory Board members are present for onsite audits to hear comments made by the accounting auditors and otherwise hold meetings with the accounting auditors. In order to achieve the purpose of the auditing role of Audit & Supervisory Board members, Audit & Supervisory Board members regularly review reports on the results of internal audits, etc. from the Auditing Division and exchange opinions and information with them. Moreover, Audit & Supervisory Board members may request the Auditing Division to conduct investigations as necessary, and use the results as a reference for their audits. Appointment of Outside Audit & Supervisory Board Member Number of Outside Audit & Supervisory Board Appointed 2 Members Members Number of Independent Directors Designated from among Outside Audit & Supervisory Board 2 Relationship with the Company (1) Relationship with the Company* Name Attribute * Toshihiko Yoshida Takuya Nakata From another company Tax Accountant a Categories for “Relationship with the Company” “○” when the director presently falls or has recently fallen under the category; “△” when the director fell under the category in the past “●” when a close relative of the director presently falls or has recently fallen under the category; “▲” when a close relative of the director fell under the category in the past d g k h b c e f i j * * l m – 10 – a. Executive of the Company or its subsidiary b. Non-executive director or accounting advisor of the Company or its subsidiaries c. Non-executive director or executive of a parent company of the Company d. Audit & Supervisory Board member of a parent company of the Company e. Executive of a fellow subsidiary company of the Company f. A party whose major client or supplier is the Company or an executive thereof g. Major client or supplier of the Company or an executive thereof h. Consultant, accountant or legal professional who receives a large amount of monetary consideration or other property from the Company besides compensation as an Audit & Supervisory Board member i. Major shareholder of the Company (or an executive of the said major shareholder if the said shareholder is a juridical person) j. Executive of a client or supplier company of the Company (which does not correspond to any of f, g, or h) (the Audit & Supervisory Board member himself/herself only) k. Executive of a company at which an executive of the Company holds concurrent position as an outside l. Executive of a company or organization that receives a donation from the Company (the Audit & officer (the officer him/herself only) Supervisory Board member himself/herself only) m. Others Relationship with the Company (2) Independent Director Supplementary Explanation of Relevant Items Name Toshihiko Yoshida — Takuya Nakata — – 11 – Reasons of Appointment Toshihiko Yoshida has expertise and knowledge cultivated during his service as a full-time auditor of a publicly listed company. He also has no interests in the Company and is judged to be an outside Audit & Supervisory Board member who is unlikely to have a conflict of interest with general shareholders. Therefore, he has been designated an independent officer. As a tax accountant, Takuya Nakata has expertise in finance and accounting. He also has no interests in the Company and is judged to be an outside Audit & Supervisory Board member who is unlikely to have a conflict of interest with general shareholders. Therefore, he has been designated an independent officer. [Independent Directors] Number of Independent Directors 6 Matters relating to Independent Directors — [Incentives] Implementation of Measures to Provide Incentives to Directors Supplementary Explanation Performance-linked Remuneration The Company pays performance-linked remuneration, which comprises cash remuneration and stock-based remuneration linked to target performance indicators, as an incentive with the expectations of increasing corporate value and further promoting shared value with shareholders. More specifically, the performance-linked remuneration is calculated by applying a multiplier obtained from the Group’s ordinary income, ordinary income ratio, ROE, and ROA to base remuneration. The reasons for having selected these performance indicators are their being optimal indicators for measuring contribution to the increase in corporate value and also their being objectively clear. Additionally, target performance indicators and their values are to be reviewed as necessary in response to changes in the environment so that they are consistent with management plans, and are determined by the Board of Directors based on the advice and recommendations of the Nomination and Remuneration Advisory Committee. The performance-linked cash remuneration is paid evenly every month. As for the stock-based portion of the performance-linked remuneration, the Company grants restricted stocks with a transfer restricted period of 30 years once at some point every year. The restriction on transfer is lifted when any one of the eligible officers or employees of the Company or its subsidiaries retires from his/her post specified by the Board of Directors of the Company. Recipients of Stock Options Supplementary Explanation — [Director Remuneration] Disclosure of Remuneration for Individual Directors Supplementary Explanation No Individual Disclosure There is no single director whose total amount of consolidated remuneration, etc. is 100 million yen or more, therefore individual remuneration is not listed. – 12 – Policy on Determining Remuneration Amounts and Calculation Methods Established Disclosure of Policy on Determining Remuneration Amounts and Calculation Methods The Company’s policy on determining the details of remuneration for individual directors is established by a resolution of the Board of Directors based on advice and recommendations of the Nomination and Remuneration Advisory Committee, after preliminary deliberation by the Committee. The details of the policy on determining remuneration for individual directors are as follows. 1. Basic policy To serve as an appropriate incentive for increasing corporate value, the directors’ remuneration system shall take into consideration the duties and responsibilities of individual directors, including whether full or part- time, performance of the Company, and other factors. More specifically, remuneration of directors, excluding outside directors and part-time directors, consists of base remuneration, which is a fixed remuneration, and cash remuneration and stock-based remuneration, which are paid in relation to performance. For outside directors and part-time directors, who primarily take on a supervisory role, only fixed remuneration retrospective of their duties shall be paid. 2. Fixed remuneration Fixed remuneration, cash remuneration paid monthly, is determined based on duties, responsibilities, and years of service of each director. 3. Performance-linked remuneration Aiming to further promote shared value with its shareholders, the Company pays cash remuneration and stock-based remuneration that are linked to target performance indicators. More specifically, performance-linked remuneration is calculated by applying a multiplier obtained from the Group’s ordinary income, ordinary income ratio, ROE, and ROA to base remuneration. The reasons for having selected these performance indicators are their being optimal indicators for measuring contribution to increase in corporate value and also their being objectively clear. Additionally, target performance indicators and their values are to be reviewed as necessary in response to changes in the environment so that they are consistent with management plans, and determined by the Board of Directors based on the advice and recommendations of the Nomination and Remuneration Advisory Committee. Performance-linked cash remuneration is paid evenly every month. As for the stock-based portion of performance-linked remuneration, the Company grants restricted stocks with a transfer restricted period of 30 years once at some point every year. The restriction on transfer is lifted when any one of the eligible officers or employees of the Company or its subsidiaries retires from his/her post specified by the Board of Directors of the Company. 4. Payment ratio of remuneration, etc. Payment ratio of base remuneration, cash remuneration, and stock-based remuneration (the last two are performance-linked remuneration) when the target performance indicators are achieved shall be roughly 7:2:1, and shall be determined by the Board of Directors based on the advice and recommendations of the Nomination and Remuneration Advisory Committee. This payment ratio shall not apply to outside directors and part-time directors. 5. Delegation of determination of remuneration for individuals Specific remuneration for individual directors is drafted based on the calculation method specified by the Board of Directors, and deliberated in advance by the Nomination and Remuneration Advisory Committee, which is chaired by an independent outside director with the majority of the members being independent – 13 – outside directors. Based on advice and recommendations of the Committee, President and the Representative Director determine remuneration for individuals within the scope of delegation set by a resolution of the Board of Directors. [Supporting System for Outside Directors and/or Audit & Supervisory Board Members] The HR & General Affairs Division, which serves as the Secretariat for the Board of Directors, provides support to outside directors. For outside Audit & Supervisory Board members, the Auditing Division provides necessary support for their audits and serves as the Secretariat for the Audit & Supervisory Board. 2. Matters on Functions of Business Execution, Auditing, Oversight, Nomination and Remuneration Decisions (Overview of Current Corporate Governance System) 1. Overview of business execution, audits and oversight TOCALO is a corporation with an Audit & Supervisory Board and has appointed outside officers. We believe that our audit system involving outside Audit & Supervisory Board members is an effective function for monitoring management and that the current system is appropriate under the current circumstances of the Company. We ask our outside directors for advice to ensure and improve legal compliance and transparency of our corporate management practices and actions. (1) About business execution The Board of Directors of the Company consists of 8 directors and 4 of whom are outside directors. In addition to the Board meeting at least once a month, the Board holds a business policy meeting with the same members to deliberate and discuss important management issues. Moreover, all directors except outside directors attend important internal meetings to give instructions and exchange opinions on business execution. (2) Methods of auditing and oversight (a) Internal audits The Company has set up the Auditing Division under the direct control of President as Internal Audit Department. Based on the internal audit plan, the Auditing Division conducts internal audits of each organization year-round, in principle, and regularly reports results and findings to President to promote improvements. Internal audits of our subsidiaries are carried out in collaboration with the Corporate Planning Division and Overseas Business Department of the Company and the Internal Audit Department of the subsidiary. (b) Audits conducted by Audit & Supervisory Board Members The Audit & Supervisory Board of the Company consists of four Audit & Supervisory Board members (including two outside Audit & Supervisory Board members). The policy, plan, method and work assignments of audits conducted by Audit & Supervisory Board Members are determined after consultation with the Audit & Supervisory Board. All Audit & Supervisory Board members attend the regular Board meetings and business policy meetings of the Company, and full-time Audit & Supervisory Board members attend other important internal meetings whenever held. Regarding the performance of our subsidiaries, the – 14 – Audit & Supervisory Board of the Company receives a monthly report in writing from subsidiaries and holds a “Group Audit & Supervisory Board Member Liaison Council” meeting every three months, at which Audit & Supervisory Board members of the subsidiaries report on their quarterly performance, audit results, etc. In this way, we are actively exchanging information. (c) Accounting audits For the fiscal year ended March 31, 2021, accounting audit work of the Company was executed by two certified public accountants, Mr. Yukihiro Matsunaga and Mr. Takuya Urakami of PricewaterhouseCoopers Kyoto, with the assistance of three certified public accountants and seven others (who have passed the certified accountant examination, etc.). Both Mr. Matsunaga and Mr. Urakami have been providing accounting services to the Company for five continuous years. 2. Strengthening business execution, auditing and oversight (1) Thorough enforcement of compliance and risk management We have set up a CSR Committee to build and manage a cross-sectional compliance system that includes all Group companies. The CSR Committee deliberates important compliance issues and reports the results to the Board of Directors. Furthermore, the CSR Committee monitors the status of cross-organizational risk management and examines company-wide measures. In order to promote compliance awareness amongst officers, we have adopted a system in which a “Confirmation of Director’s Business Execution” and a “Confirmation of Business Execution of Audit & Supervisory Board Members” are submitted to the Audit & Supervisory Board at the end of each fiscal year. (2) Proactive information disclosure Recognizing that it is extremely important to disclose information in a timely and appropriate manner to all stakeholders, including shareholders and investors, we are striving to enhance management transparency through extensive information disclosure. 3. Reasons for Adoption of Current Corporate Governance System TOCALO is a corporation with Audit & Supervisory Board and has appointed outside officers. We believe that an audit system involving outside officers is an effective function for monitoring management and that the current system is optimal for the current situation the Company is in. Additionally, based on the recognition that “a company is a member and public entity of society,” we believe that the foundation of corporate governance is to ensure management transparency and to further strengthen the trust placed in us by all of our stakeholders, shareholders, business partners, employees and local communities. Alongside that, we aim to increase corporate value and achieve sustainable and sound growth of the Group as a whole, and thereby contribute to society through our surface treatment processing business and it is amongst the most important management issues. In order to address these issues, we recognize that it is desirable for us to further enhance our corporate governance system. – 15 – III. Implementation of Measures for Shareholders and Other Stakeholders 1. Measures to Vitalize the General Shareholder Meetings and Smooth Exercise of Voting Rights Early Notification of General Shareholder Meeting Scheduling AGMs Avoiding the Peak Days Allowing Electronic Exercise of Voting Rights Participation in the Electronic Voting Platform and Other Initiatives to Improve the Voting Rights Exercise Environment for Institutional Investors Providing Convocation Notice (Summary) in English Other 2. IR Activities Supplementary Explanations The Convocation Notice of the 70th Ordinary General Shareholder Meeting (held on June 25, 2021) was sent out on June 3. We try to hold general shareholder meetings early in the reporting season to avoid the peak days in the business community. Electronic voting over the internet has been an effective means for exercising voting rights. Voting rights can be exercised using the electronic voting platform for institutional investors operated by ICJ Co., Ltd. It has been posted on our website. The Convocation Notice has been posted on our website. Supplementary Explanations Explanation Provided by Representative Himself Regular Investor Briefings for Individual Investors Regular Investor Briefings for Analysts and Institutional Investors Posting of IR Materials on Website Establishment of Department and/or Manager in Charge of IR We exhibit at an investment fair for individual investors and hold a mini corporate briefing session once a year. Twice a year (after fiscal year-end and interim account closings), President of the Company holds financial results briefings. When quarterly results are available, we hold small meetings for institutional investors. We publish earnings briefings, Fact Books, financial results briefing materials and other materials. When an important matter emerges, it is posted on our website as swiftly as possible in time with public announcement. (https://www.tocalo.co.jp/ir/index.html) The Corporate Planning Division is the contact point for IR-related inquiries. No Yes – 16 – 3. Measures to Ensure Due Respect for Stakeholders Supplementary Explanations Stipulation of Internal Rules for Respecting the Position of Stakeholders Implementation of Environmental Activities, CSR Activities etc. Our management philosophy stipulates that the Company shall be built on good relationships with and the trust we earn from all stakeholders, including shareholders, business partners, employees and local communities. Additionally, in order to manage important matters related to the business of the Group (internal information), we have established Internal Information Management and Insider Trading Control Rules, as well as a system based on the prompt and fair disclosure of accurate information. TOCALO is a manufacturer specialized in surface treatment processing with thermal spraying as the core. Our environmental philosophy is to contribute to society and protect the global environment through the various advantages that coatings have to offer, such as resource-savings, labor-savings, and environmental load reduction. We have set environmental targets for the following themes. (1) Energy and resource conservation in business activities (2) Contribution to the environment by promoting business activities Moreover, we have formulated an annual budget to actively engage in activities that contribute to communities and society at large, and provided support against the novel coronavirus diseases and aid to international students. IV. Matters Related to the Internal Control System 1. Basic Views on Internal Control System and the Progress of System Development In accordance with the Companies Act and the Ordinance for Enforcement of the Companies Act, the Company decided basic policies on developing a system to ensure Company business is properly executed (hereinafter referred to as “Internal Control System”), as follows, at the Board of Directors meeting held on September 18, 2015. articles of incorporation 1. System to ensure that the execution of duties by directors, executive officers, and employees of a corporate group consisting of the Company and its subsidiaries complies with laws, regulations and the (1) Top management shall familiarize Company officers and employees with the underlying spirit of established corporate action guidelines and compliance rules, so they thoroughly understand that compliance with laws and social ethics is a prerequisite of corporate activities. (2) A CSR committee chaired by the General Manager of the Administrative Headquarters shall be established to implement and manage a cross-sectional compliance system for the Company and its Group companies. The CSR Committee deliberates important compliance issues and reports the results to the – 17 – Board of Directors. The Corporate Planning Division acts as the Secretariat for the CSR Committee and thoroughly ensures compliance among officers and employees. The Internal Audit Department (the Auditing Division) audits the status of compliance in cooperation with the Corporate Planning Division. 2. Matters concerning the storage and management of information related to the execution of duties by directors of the Company In accordance with Document Management Rules and Record Management Rules, the General Shareholder Meeting Minutes, the Board of Directors Meeting Minutes, and other information related to the execution of duties by directors shall be recorded in writing or electromagnetic media, properly stored and managed (or disposed). How the concerned information is managed shall be audited, and the rules reviewed as necessary. 3. Rules and other systems regarding risk management of a corporate group consisting of the Company and its subsidiaries (1) Each department and subsidiary shall report its performance periodically at a meeting attended mainly by directors and conduct risk management through continuous monitoring. (2) Regarding risks pertaining to corporate activities and management strategies of the Group related to compliance, dealing with antisocial forces, environmental considerations, disasters, quality, information security, credit management, investments and loans, export control, etc., the department responsible for the respective matters shall establish rules, guidelines, manuals, and other tools to ensure that everyone is aware of them. In the event of an unforeseeable situation, a Headquarters for Disaster Control shall be set up immediately to take countermeasures in accordance with Disaster Countermeasures Rules. For risks that newly arise other than the above, the Board of Directors of the Company promptly appoints a director who will be responsible for handling the situation and implement the necessary system. (3) The CSR Committee monitors the status of cross-organizational risk management and examines Group-wide measures. 4. System for ensuring the efficient execution of duties by directors and executive officers of a corporate group consisting of the Company and its subsidiaries The efficiency with which duties are executed by directors and executive officers of the Group is improved using the following business management system. (1) When carrying out daily business operations, authority shall be delegated based on Segregation of Duties Rules, Administrative Authority Rules, etc., and persons in charge at each level shall carry out their duties in accordance with rules on decision-making. (2) A Management Policy Council comprised of directors and Audit & Supervisory Board members of the Company shall be set up for prompt decision-making regarding policies for important matters of the Group. 5. System for reporting to the Company matters related to the execution of duties by directors, etc. of the Company’s subsidiaries – 18 – In accordance with Affiliated Companies Management Rules, when making important decisions, affiliated companies are required to consult with the responsible department of the Company Head Office and to report important matters, etc. Along with that, to enhance integrated Group management, affiliated companies shall also obtain prior approval from the Board of Directors and top management of the Company for the acquisition and disposal of important assets. 6. Matters concerning a system of employee assistance requested by Audit & Supervisory Board members, the independence from directors of said employees, and ensuring the effectiveness of instructions to said employees (1) Audit & Supervisory Board members may order employees belonging to the Auditing Division to carry out matters concerning duties necessary for audits conducted by the Audit & Supervisory Board members and duties of the Secretariat for the Audit & Supervisory Board. The employees who receive the Audit & Supervisory Board members’ orders shall ensure independence so they will not be given any instructions or order from directors, superiors, etc. (2) Appointments and transfers of employees who are to assist the duties of Audit & Supervisory Board members shall require the approval of Audit & Supervisory Board members. 7. System for directors, executive officers, and employees of the Company, and directors, Audit & Supervisory Board members, and employees of subsidiaries to report to the Audit & Supervisory Board of the Company, other systems for reporting to the Audit & Supervisory Board, and a system in which anyone who reports information shall not suffer from unfavorable treatment (1) Directors, executive officers, and employees of the Company shall report the status of execution of their duties whenever requested by the Audit & Supervisory Board. Moreover, directors, Audit & Supervisory Board members, and employees of subsidiaries shall be instructed to report the status of execution of their duties whenever requested by the Audit & Supervisory Board of the Company. (2) Audit & Supervisory Board members attend meetings of the Board of Directors and other important meetings, and they shall periodically receive reports on business status, financial conditions, etc. (3) If directors, executive officers, and employees of the Company and the directors, Audit & Supervisory Board members and employees of a subsidiary discover or learn of any matter that exerts or may exert a significant impact on the Company, they shall promptly report such matter to the Audit & Supervisory Board of the Company. (4) A whistleblowing system shall be established so that the Audit & Supervisory Board of the Company can receive reports from directors, executive officers, and employees of the Company and directors, Audit & Supervisory Board members and employees of subsidiaries. (5) Directors, executive officers, and employees of the Company and directors, Audit & Supervisory Board members and employees of subsidiaries shall never be treated unfavorably because of information that they provide to the Audit & Supervisory Board of the Company. – 19 – 8. Matters concerning policies related to expenses and liabilities incurred in the execution of duties by Audit & Supervisory Board members and advance payments or redemption procedures for said expenses When Audit & Supervisory Board members request the Company to pay in advance or reimburse expenses needed to execute their duties, such expenses shall be paid in advance or reimbursed appropriately and promptly at the request of the Audit & Supervisory Board members or the Audit & Supervisory Board unless said expenses are deemed unnecessary for the execution of the said duties. 9. Other systems to ensure effective audit implementation by Audit & Supervisory Board members (1) Audit & Supervisory Board members attend the Board of Directors meetings and other important meetings to grasp and audit the business conditions and decision-making process. (2) Internal systems centering on the Auditing Division shall be developed and enhanced so that Audit & Supervisory Board members can perform their audit work more efficiently. (3) Audit & Supervisory Board members shall be guaranteed their access to independent advice and support for their audit work from experts such as lawyers and accountants as necessary. 10. System to ensure the reliability of financial reporting In accordance with the provisions of the Financial Instruments and Exchange Act, the Company and its subsidiaries shall establish a Basic Policy on Financial Reporting and, based on this policy, shall strive to conduct business appropriately and ensure the reliability of financial reporting. 2. Basic Concept on the Exclusion of Anti-social Forces and the Development Thereof It shall be strictly observed as our “corporate ethical behavior” to sever relationships with antisocial forces and groups that threaten social order and public safety. V. Other 1. Adoption of Anti-Takeover Measures Adoption of Anti-Takeover Measures Not Adopted Supplementary Explanation — 2. Other Matters Concerning to Corporate Governance System The internal system for timely disclosure of our corporate information is as follows. 1. System for timely disclosure of our corporate information – 20 – (1) The General Manager of the Administrative Headquarters serves as the Chief Information Management Officer in relation to the management and timely disclosure of internal information (also serves as the “Information Handling Manager” that is the contact point for the Tokyo Stock Exchange), and the HR & General Affairs Division Manager serves as the Manager in charge of Information Management. (The responsibilities of the Chief Information Management Officer of each subsidiary are delegated to the representative director of the subsidiary.) (2) The person in charge of internal information management of the department involved in the generation (including approval) and acquisition of internal information shall be the head of each division (General Manager, Factory Manager, etc.). When internal information is generated, each division head immediately reports the details to the General Manager of the Administrative Headquarters and the HR & General Affairs Division Manager. (3) The Chief Information Management Officer (the General Manager of the Administrative Headquarters) and the Manager in charge of Information Management (the HR & General Affairs Division Manager) are responsible for examining whether or not information should be deemed internal information and give advice to each division head as necessary. (4) Upon receiving decisions on important matters, reports, and approvals of account closing information, etc., from business execution organizations such as the Board of Directors and the Management Policy Council, the General Manager of the Administrative Headquarters immediately consults with the HR & General Affairs Division Manager on the announcement and discloses it in a timely manner. However, if there is an urgent need for the information, etc., the General Manager of the Administrative Headquarters shall obtain approval from President and Representative Director to disclose it in a timely manner. 2. Flow of timely disclosure As shown in the attached diagram. – 21 – Flow of timely disclosure General Managers, (Chief Information Management Officer of each division) Report and inquiry about generation, approval, etc. of internal information Advice, etc. Chief Information Management Officer (General Manager of Administrative Department Manager in charge of Information Management (HR & General Affairs Headquarters) Division Manager) Emergency reporting on matters Proposals to be discussed, reports, etc. Board of Directors Management Policy Meeting (Approval for announcement) President and Representative Director Instruction of announcement General Manager of Administrative Headquarters (Chief Information Management Officer) Timely disclosure Tokyo Stock Exchange – 22 –