アズビル（6845） – [Delayed]Corporate Governance Report

CORPORATE GOVERNANCE CORPORATE GOVERNANCE Azbil Corporation Last update: December 23, 2021 Azbil Corporation President and Group Chief Executive Officer Kiyohiro Yamamoto Contact: General Affairs Department Tel: +81-3-6810-1000 Securities Code: 6845 https://www.azbil.com/jp/ The corporate governance of Azbil Corporation (“the Company”) is described below. I. Basic Approach to Corporate Governance, Capital Structure, Corporate Attributes and Other Basic Information 1. Basic Approach and Policy Basic Approach In order to respond to the trust of all stakeholders, including shareholders, the Company not only complies with laws and regulations and Articles of Incorporation, but also fulfills its social responsibilities and social-contribution responsibilities based on corporate ethics. The Company’s basic approach to corporate governance is to continuously improve corporate value through efficient and transparent management; this is positioned as the most important management issue. Basic Policy (1) Ensuring the rights and equality of shareholders In order to ensure that shareholders’ rights are substantially secured, the Company takes appropriate measures in accordance with laws and regulations, and, giving due consideration to foreign shareholders and minority shareholders, is promoting the development of an environment in which shareholders can exercise their rights equally and appropriately. (2) Appropriate cooperation with stakeholders who are not shareholders In order to achieve sustainable growth and increase corporate value over the medium to long term, we believe that the Company must be strongly aware of its corporate social responsibility and conduct management that is appropriate for our various stakeholders. In order to achieve this, we have adopted the corporate philosophy of “human-centered automation” to realize safety, comfort and fulfillment in people’s lives and contribute to the global environment. To this end, we have instituted a Business Conduct Policy and established a Code of Conduct to provide specific guidelines for all officers and employees of the Company and the azbil Group. Also, we set our SDGs (basic goals and targets) toward achieving the UN’s SDGs. With the SDGs as our new guidepost, we aim to connect the philosophy, Guiding Principles, code of conduct, and management strategy “in series” leading to a sustainable society and to realize a balance between resolving social issues and sustainable growth. As regards achieving diversity in human resources, we are actively working to promote the advancement of female employees based on the recognition that having diverse values within a company is essential when it comes to achieving sustainable growth. With regard to the internal reporting system, we believe it is important to (a) encourage employees to use this system by dispelling any concerns that in so doing they might be put at a disadvantage, and (b) ensure that the information thus conveyed is used appropriately. We have therefore established a user-friendly reporting & consultation system—the CSR Hotline—which ensures that the information received is reported to the president & CEO, Audit & Supervisory Board members, and outside directors. (3) Ensuring appropriate information disclosure and transparency The Company strives to disseminate information so as to ensure transparency and fairness in decision-making, thus realizing effective corporate governance. Specifically, in order to ensure that all stakeholders have a proper understanding of financial information, such as the Company’s financial position and business results, as well as non-financial information, such as management strategy, management planning, management issues, and information relating to risk and governance, we actively disclose information on a voluntary basis in addition to the information stipulated by law. The Company also discloses policies and procedures regarding the appointment of directors and Audit & Supervisory Board members, as well as the selection and dismissal of senior executives including the CEO, and policies for deciding on the remuneration for directors. We will continue to 1 strive to increase the information covered by these disclosures and ensure transparency. In addition, we are taking appropriate measures to ensure proper audits by the independent accounting auditor: the Company provides sufficient time for audits to be conducted, arranges for the accounting auditor to interview the president & CEO and the director in charge of finance on a regular basis, and conducts quarterly report meetings between the accounting auditor, the Audit & Supervisory Board members, and the Internal Audit Department. (4) Responsibilities of the Board of Directors, etc. The basic mission of the Company’s Board of Directors is to achieve sustainable growth and increase corporate value over the medium to long term. As set forth in the Board Rules, important items for deliberation include basic management strategy and plans. Appropriate decisions are reached through free and constructive discussion. In addition, in order to ensure transparency and fairness in management, systems have been established for timely disclosure, internal control, and risk management. Additionally, the Audit & Supervisory Board and its members are responsible for conducting appropriate audits of management and expressing their sentiments while regularly exchanging opinions with the Internal Audit Department. The Company recognizes the important role played by independent outside directors in ensuring that the Board of Directors fulfills its role and responsibilities appropriately, and has thus appointed five (5) independent outside directors with extensive experience in corporate management and supervision, as well as exceptional expertise and professional knowledge. These independent outside directors, with their diverse backgrounds, fulfill their responsibilities—such as supervising management and advising on how to enhance corporate value—employing a wide range of perspectives. In order for the Board of Directors to effectively fulfill its role, we believe that it is important both to appoint directors and Audit & Supervisory Board members with sufficient diversity to provide a good overall balance of knowledge and experience, and to ensure transparency and objectivity in making these appointments. At a Board of Directors meeting held on May 14, 2021, we established the skills expected of the directors with respect to the realization of the Company’s medium-term plan and other management strategies, and confirmed the independence, diversity, and expected skills of the current Board of Directors. For details, please refer to Principle 3-1(4) and Supplementary Principle 4-11-1 in the “Disclosure based on the Principles of the Corporate Governance Code” section of this report. With regard to succession planning for the Company’s senior management, the Nomination and Remuneration Committee—which serves as an advisory body to the Board of Directors—deliberates on the status of training and selection of candidates, and records the results of these deliberations as well as the discussion process itself. This ensures that succession planning is implemented appropriately and objectively. More than half of the Nomination and Remuneration Committee is comprised of independent outside directors, and it is also chaired by an independent outside director, who reports on the Committee’s deliberations to the Board of Directors when appropriate. The Board of Directors is thus actively involved in succession planning, a process that is undertaken systematically, ensuring that sufficient time and resources are allocated for the training of candidates. As of June 24, 2021, the total number of directors is eleven (11), with outside directors accounting for more than one third of the Board of Directors. The Board composition demonstrates ample diversity, including that of nationality and gender. (5) Dialogue with shareholders In order to meet requirements for corporate accountability while contributing to sustainable growth and the enhancement of corporate value over the medium to long term, the Company is working to develop and implement a system for promoting constructive dialogue with shareholders and investors. For more information, please refer to Principle 5-1 in the “Disclosure based on the Principles of the Corporate Governance Code” section of this report. Regarding the publication of management strategies and plans, as well as presenting basic policies such as earnings plans, the Company strives to provide straightforward explanations of the qualitative and quantitative targets (sales, operating income, ROE, etc.) in our new medium-term plan, as well as outlining strategies for achieving those targets. [Reasons for Non-Compliance with the Principles of the Corporate Governance Code] Updated The Company complies with all principles of the Corporate Governance Code. (This is based on the Corporate Governance Code revised on June 2021.) [Disclosure Based on the Principles of the Corporate Governance Code] Updated 2 [Principle 1-4] [Strategic shareholdings] Taking into account our business strategies, business relationships, and cooperative business affiliations, the Company holds listed shares if they are judged to contribute to the enhancement of the Company’s corporate value from a medium- to long-term perspective, and to be instrumental in maintaining and strengthening our long-term business relationships. The Company’s Board of Directors regularly verifies the significance of individual stocks to our business, including financial returns, to determine whether these holdings are sufficiently advantageous from the viewpoint of economic rationality and capital costs. The results of this verification are reported along with any risks involved in holding a stock. Should it be determined, as a result of this verification, that holding an individual stock is not sufficiently advantageous, and that it cannot be judged to contribute to the improvement of the Company’s corporate value from a medium- to long-term perspective, our policy is to reduce our holdings of that stock by selling shares when deemed appropriate in light of stock prices and market trends. The Company’s strategic shareholdings are disclosed in the Securities Report, with the current number of shares of each stock, the purpose of holding the stock, and whether reductions have been made, etc. When it comes to exercising voting rights, an issuer’s financial position and governance status are regularly monitored, and the details of each proposal are reviewed to determine comprehensively whether or not medium- to long-term shareholder value will be enhanced and whether there will be any impact on the Company’s corporate value or on the significance of holding the stock. In dealings with companies that hold the Company’s stock as strategic shareholdings, the economic rationale of each transaction is given appropriate consideration. In addition, even if such a company indicates its intention to sell these shares, the Company will not engage in any conduct intended to prevent the sale, such as suggesting a scaling-back of business. [Principle 1-7] [Related Party Transactions] The Board Rules stipulate that self-trading and competitive transactions by the Company’s directors, Audit & Supervisory Board members and executive officers require both prior approval and post-transaction reporting. Furthermore, to establish whether or not there have been any transactions involving corporate officers and their close relatives, a questionnaire-based survey is conducted each year, in accordance with the separately established Corporate Governance Guidelines. In addition, based on the Code of Audit & Supervisory Board Auditing Standards, the Audit & Supervisory Board members monitor and verify whether any directors are in violation of their obligations. As for shareholder transactions, there are no major shareholders as defined by the Financial Instruments and Exchange Act, and thus no such transactions have taken place. [Supplementary Principle 2-4-1] [Ensuring diversity in the appointment, etc. of core personnel] For details on ensuring diversity in the appointment, etc. of core personnel, please refer to the Other section (p.26 of this document) of 3. Measures to Ensure Due Respect for Stakeholders in III. Implementation of Measures for Shareholders and Other Stakeholders. [Principle 2-6] [Functioning as corporate pension asset owner] In June 2015, the transfer of the Company’s corporate pension plan to the defined contribution system was completed. A contractual corporate pension plan was established, however, to manage the assets of those entitled to retirement pensions from the former employees’ pension fund under the defined benefit system. This contractual corporate pension plan is limited to beneficiaries who have already retired, and the pension fund assets will gradually decrease over time. However, in order to ensure the proper operation of the defined benefit corporate pension plan, the Company has established an Asset Management Committee chaired by the officer in charge of finance and comprised of employees who work in such fields as finance, accounting and human resources. Qualified personnel have been assigned to the department in charge of corporate pensions and to the Asset Management Committee office, and also training opportunities are made available to enable the staff to enhance skills relevant to these tasks. The Company had concluded an investment advisory contract with a neutral, independent external consulting firm to call on additional expertise regarding corporate pensions. However, in view of the fact that the policy assets of the contractual corporate pension plan are wholly comprised of life insurance general account and short-term assets, it has been decided that adequate governance of the pension plan can be maintained through regular monitoring of the pension plan’s financial status by the Asset Management Committee. Therefore, the investment advisory contract with the consulting firm was not renewed at the expiration of 3 its term on March 31, 2021. In addition, the management of the reserve funds is entrusted to several investment management organizations. Each of these is able to exercise voting rights appropriately and thus avoid possible conflicts of interest between the beneficiaries of the corporate pension plan and the Company. [Principle 3-1] [Enhancement of information disclosure] As outlined below, the Company discloses information in accordance with relevant laws and regulations, but also proactively publishes additional information on a voluntary basis, and will continue to strive to enhance information disclosure and ensure transparency. (1) Management philosophy, management strategy, management plans Please refer to our website (URL below). https://www.azbil.com/corporate/index.html (2) Corporate governance: Basic approach and basic policy For details, please refer to “Basic Approach” and “Basic Policy” sections in “1. Basic Approach” within “I. Basic Approach to Corporate Governance, Capital Structure, Corporate Attributes and Other Basic Information” in this report. (3) Policies and procedures for determining remuneration for directors Please refer to “Remuneration for Directors (p.19)” and “2. Functions of Business Execution, Auditing, Oversight, Nomination, and Remuneration Decisions (p.22)” within “II. Business Management Organization and Other Corporate Governance Systems regarding Decision-Making, Execution of Business, and Oversight in Management” in this report. (4) Policies and procedures regarding the appointment of directors and Audit & Supervisory Board members, as well as the selection/dismissal of senior executives including the CEO Please refer to “2. Functions of Business Execution, Auditing, Oversight, Nomination, and Remuneration Decisions (p.22)” within “II. Business Management Organization and Other Corporate Governance Systems regarding Decision-Making, Execution of Business, and Oversight in Management” in this report. (5) Reasons behind the appointment of individual directors and Audit & Supervisory Board members For the reasons behind the appointment of individual directors and Audit & Supervisory Board members, please refer to the notices of the Ordinary General Meeting of Shareholders. Notice of the Ordinary General Meeting of Shareholders: https://www.azbil.com/ir/stock/meeting/index.html (Notices for past Ordinary General Meetings of Shareholders are also posted.) [Supplementary Principle 2-3-1] [Supplementary Principle 3-1-3] [Supplementary Principle 4-2-2] [Sustainability Policy and Initiatives] The azbil Group’s Sustainability Policy spirit of “freeing people from drudgery”.. Sustainability Initiatives With regard to sustainability, the azbil Group is committed to continuously enhancing corporate value based on mutual trust with stakeholders, to realizing “safety, comfort, and fulfillment in people’s lives” and contributing to global environmental preservation, and to contributing “in series” to a sustainable society. These are achieved through practicing the azbil Group’s philosophy of “human-centered automation” and respecting the values to contribute to society for people’s well-being based on the founding In accordance with the Group’s philosophy, we are contributing to the global environment and addressing various social issues in order to realize a sustainable society. We recognize that tackling sustainability issues is not just about responding to risk, but also about seizing important business opportunities to enhance enterprise value, so we will continue to make contributions that lead “in series” to a sustainable society. Specifically, in response to global environmental issues such as climate change, we will aim to make further contributions by providing solutions for reducing environmental impact, curbing energy demand, and integrating renewable energy, while our new automation, life-cycle and other businesses are serving our customers and society as a whole. We will also contribute to a sustainable society by respecting human rights as part of our corporate activities (affirming the UN 4 Global Compact), giving due consideration to the health and working environment of our employees, treating them fairly and appropriately as part of our health and well-being management, and conducting CSR-conscious transactions, etc. throughout our supply chains, while taking comprehensive measures to strengthen our BCP and crisis management. In the new medium-term plan, based on the above policy, we are comprehensively examining profit opportunities and risk reduction, while formulating and implementing business strategies to improve enterprise value by 2030, including the SDGs. The Company has established a system for examining and promoting sustainability initiatives on a company-wide basis. We have set up a dedicated unit and appointed a corporate officer in charge of all sustainability matters. Chaired by the above officer, the azbil Group CSR Promotion Committee and SDGs Promotion Committee meet regularly. Progress and issues discussed in these meetings are reported to the Board of Directors and the Management Committee. Sustainability Reporting The Company discloses its sustainability initiatives in its annual Securities Report and the azbil Report. In the new medium-term plan, we have also formulated management strategies based on the following three basic policies in order to ensure our own medium- to long-term development and to achieve sustainable enhancement of enterprise value. We are committed to (1) being a long-term partner for the customer and the community by offering solutions based on our technologies and products; (2) taking global operations to the next level, by expansion into new regions and qualitative change of focus; and (3) being a corporate organization that never stops learning, so that it can continuously grow stronger. We are reforming our business and operational structures, strengthening our business profitability, and working to find solutions to the issues facing society. In addition, the Company discloses in its annual report (i.e. azbil Report 2021) a detailed analysis of its efforts to achieve sustainability from the perspective of promoting ESG (Environmental, Social and Governance) initiatives. Also, as regards disclosing how climate-related risks and opportunities affect the Company, we have expressed our support for the TCFD international framework. In line with TCFD guidance, the Company discloses information on governance, strategy, risk management, and metrics and targets in its 99th Annual Securities Report and annual Report (azbil Report 2021), and is progressively enhancing the content of these reports, both qualitatively and quantitatively. Investing in Human Capital and Intellectual Property In formulating our new medium-term plan, strategies for each business portfolio were discussed and reviewed. From FY2021, we have introduced return on invested capital (ROIC) to encourage management that is mindful of the cost of capital. The plan also includes strategic consideration of human capital and intellectual property, and going forward we will continue to ensure effective monitoring of the utilization efficiency of these management resources so as to contribute to the sustainable growth of the Company. [Supplementary Principle 4-1-1] [Scope of matters delegated to management (summary)] The Board Rules sets out what matters are to be submitted/reported to the Board of Directors, and the scope of matters to be delegated to management. Note, however, that even if a matter properly falls within the latter scope, it may be desirable that it be submitted/reported to the Board of Directors. Thus, if the Board, directors and Audit & Supervisory Board members deem it necessary, the Rules allow for such matters to be deliberated by the Board of Directors. Matters to be submitted/reported to the Board of Directors include those specified in laws and regulations and in the Articles of Incorporation, as well as basic management strategies, management plans, corporate governance policies, risk management, and other important management matters. As regards matters concerning business management, etc., monetary thresholds have been established for determining what needs to be submitted/reported to the Board, varying depending on the relative importance to management. As regards those matters falling within the scope of delegation to management, final decisions are made principally by the president & CEO where set forth in the Management Meeting Rules, while for those matters within certain ranges, the authority is delegated to different tiers of management as laid out in the Administrative Authority Rules. [Principle 4-8] [Effective Use of Independent Outside Directors] In order to contribute to sustainable growth and the enhancement of corporate value over the medium to long term, the Company has appointed five (5) independent outside directors with a wide range of experience in corporate management and supervision, as well as extensive expertise and professional knowledge. These independent outside directors, with their diverse backgrounds, contribute to enhancing corporate value through counseling and supervising decision-making processes in meetings of the Board of Directors. As of June 24, 2021, the total number of directors is eleven (11), with outside directors accounting for more than one third of the 5 Board of Directors. The Board composition demonstrates ample diversity, including that of nationality and gender. [Principle 4-9] [Criteria for Judging the Independence and Qualifications of Independent Outside Directors] In addition to meeting the requirements for outside directors set out in the Companies Act, the Company applies its own criteria (partially revised on May 13, 2020) for judging independence and appoints outside directors who can be expected to make constructive recommendations and offer accurate advice regarding management issues and the enhancement of corporate value over the medium to long term. As indicated in the Securities Report and in the notices of the Ordinary General Meeting of Shareholders, the five (5) independent outside directors appointed by the Company are demonstrably independent and have diverse backgrounds and knowledge, together with extensive experience and expertise. The criteria for judging independence established by the Company are explained in this Corporate Governance Report and are also included in the reference documents provided with the notices of the Ordinary General Meeting of Shareholders. [Supplementary Principle 4-10-1] [Use of voluntary committees, etc.] For details of the voluntary Nomination and Remuneration Committee, which is an advisory body to the Board of Directors, please refer to the Supplementary Explanation (p. 14 of this document) of Establishment of Voluntary Committee Corresponding to a Nominating Committee or Remuneration Committee in II. Business Management Organization and Other Corporate Governance Systems regarding Decision-Making, Execution of Business, and Oversight in Management. [Supplementary Principle 4-11-1] [Views on balancing knowledge, experience and competence in the composition of the Board of Directors, as well as issues of diversity and scale] In a rapidly changing business environment, we believe that the Company needs a Board of Directors that offers diversity and provides a good overall balance of knowledge and experience that will contribute to the enhancement of corporate value over the medium to long term. Based on this fundamental principle, we have appointed directors with executive experience in the Company’s business and management, and also outside directors, from various backgrounds, having wide-ranging experience in corporate management and supervision, independence, extensive expertise and professional knowledge. Of the eleven (11) Directors, two (2) are women (one of whom is a foreign national). Also, at a Board of Directors meeting held on May 14, 2021, we established the skills expected of the Directors with respect to the realization of the Company’s medium-term plan and other management strategies, and confirmed the independence, diversity, and expected skills of the current entire Board of Directors. The skills expected of the Company’s directors (i.e. their skills matrix) are described below in V. Other 2. Other Matters Concerning the Corporate Governance System. In appointing directors, the Board of Directors selects candidates after screening by the Nomination and Remuneration Committee, an optional advisory body which consists of independent outside directors (who constitute a majority) and the representative director, and which is chaired by an independent outside director. Audit & Supervisory Board members are chosen for their knowledge of finance, accounting, and legal affairs, with at least one member having extensive knowledge of finance and accounting. The supervisory function of the Audit & Supervisory Board, comprising five (5) members, is enhanced through appointing three (3) independent outside members, including one certified public accountant. We thus maintain a Board of Directors with a good overall balance. As of June 24, 2021, the Board of Directors consists of six (6) directors with executive experience in the Company’s business and management and five (5) independent outside directors with wide-ranging experience, extensive expertise and professional knowledge, and who enhance diversity, including that of nationality and gender. The total number of directors is eleven (11), with outside directors accounting for more than one third of the Board of Directors. [Supplementary Principle 4-11-2] [Concurrent positions of directors and the Audit & Supervisory Board members] If a director or Audit & Supervisory Board member concurrently serves as a director of another listed company, the Company shall confirm in advance whether this might negatively impact—in terms of time and effort—the individual’s ability to carry out their roles and responsibilities as an officer of the Company. Any such concurrent positions are disclosed in the Securities Report and in the notices of the Ordinary General Meeting of Shareholders. At this time, there are no concurrent positions that affect the Company’s management or the roles and responsibilities of its corporate officers. [Supplementary Principle 4-11-3] [Evaluating the Effectiveness of the Board of Directors］ The Board of Directors makes appropriate decisions following open and constructive discussion and strives to improve corporate value over the medium and long terms. To continue fulfilling its roles and responsibilities properly, the Board of Directors identifies issues and areas requiring improvement with the aim of enhancing the Board’s effectiveness. As last year, members of the Board of Directors and Audit & Supervisory Board have conducted annual self-evaluations and have collected views on the (1) Size and 6 composition of the Board of Directors; (2) Management status of the Board of Directors; (3) Support systems and communication with outside directors and Audit & Supervisory Board members; (4) Decision-making process of the Board of Directors; and (5) activities of the Nomination and Remuneration Committee. Based on this information, the Board of Directors has made an assessment of its current effectiveness, shared information on issues, and engaged in constructive discussions on future action. As a result, we have confirmed that the Board of Directors overall is performing effectively and appropriately. For example, the size, composition, and operating status of the Board of Directors are appropriate, and systems are in place to make important management decisions and supervise business execution. Also, the composition and operation of the Nomination and Remuneration Committee, which serves as an advisory body, are appropriate. And members of the Board—both internal and external officers with wide-ranging experience and expertise—have a profound understanding of their roles and engage in open, active, and constructive discussions based on adequate communication, even when meetings are held on-line using a web conference format because of the changed business environment. In FY2020, in the context of formulating a new medium-term plan for the long-term growth and development of the Company, extensive discussions were conducted regarding the direction of the Group’s future growth and how that should inform the plans for each of our businesses. We also had a series of discussions on how to achieve the SDGs, including our response to changes in the business environment—incorporating the perspective of sustainability—new business opportunities, technology/R&D, and human resource strategies. Moreover, as part of the evaluation of the effectiveness of the Board of Directors, we conducted our own assessment of the appropriateness of the processes employed for appointing directors and for replacing the president, and we also evaluated the Nomination and Remuneration Committee. This committee, which is an advisory body of the Board of Directors, features a majority of independent outside directors, one of whom acts as chairperson. In addition, to enhance Group management supervision we regularly compile detailed reports on the performance and strategy reviews as well as business management of the major subsidiaries. All members of the Board of Directors recognize the need to share and discuss the progress of the new medium-term plan at Board meetings; to further enhance discussions on aspects of business management, including compliance, and corporate governance; to improve the reporting to the Board of Directors of the deliberations and decisions made by the Nomination and Remuneration Committee; and to expand deliberations at the Board of Directors meetings on receipt of reports from the Nomination and Remuneration Committee. corporate value over the medium to long term. We will continually strive to improve the effectiveness of the Board of Directors so as to achieve sustainable growth and enhance [Supplementary Principle 4-14-2] [Training Policy for Directors and Audit & Supervisory Board members] The Company believes that it is important to provide appropriate training opportunities for individual officers so that directors and Audit & Supervisory Board members can appropriately fulfill their roles and responsibilities. Based on this recognition, external training opportunities are provided for newly appointed directors and Audit & Supervisory Board members to acquire and update the knowledge necessary for the performance of their duties, including their legal authority and obligations as officers. Also, so that they can deepen their understanding of the Company, we operate an introductory program for newly appointed outside directors and outside Audit & Supervisory Board members, providing an overview of the enterprise, its businesses and products; factory tours; and explanations of matters related to corporate governance, etc. Furthermore, we regularly conduct group compliance training for all officers, inviting external lecturers as appropriate. In addition, in order to prepare the next generation of executives, we provide training opportunities for managers to acquire the leadership skills, knowledge of management strategies, and management competences required of top management. [Principle 5-1] [Dialogue with Shareholders] In order to fulfill corporate accountability and contribute to sustainable growth and the enhancement of corporate value over the medium to long term, the Company is working to establish a system to promote constructive dialogue with shareholders and investors as follows. (1) In order to support constructive dialogue with shareholders and investors, the Company has appointed an officer in charge of corporate communications to carefully monitor general dialogue while liaising with relevant internal departments. Dialogue with shareholders is, depending on the purpose, mainly handled by senior management, the corporate communications officer, or the IR office. In addition to individual dialogues with shareholders and investors, the Company is actively engaged in various communications initiatives, conducting briefings on financial results and other topics, and arranging tours. (2) Information and opinions obtained through dialogue are conveyed to the president & CEO and management as well as to the outside directors and Audit & Supervisory Board members to be used as feedback in company management. 7 (3) When preparing to engage in dialogue, both content and scope of information disclosure are clarified in advance, efforts made to ensure information consistency, and appropriate measures taken, such as setting a “quiet period” before the announcement of financial results to prevent leaks of insider information. In order to build, maintain, and develop relationships of trust with our stakeholders, the Company is committed to conducting fair and transparent information disclosure in a timely and appropriate manner, promoting constructive dialogue through a variety of communications activities. This is explained in our disclosure policy, which is made available online. Disclosure Policy: https://www.azbil.com/ir/management/disclosure/index.html [Supplementary Principle 5-2-1] [Basic Policy on Business Portfolio] Guided by the corporate philosophy of “human-centered automation”, our basic mission is to pursue new value creation and business growth that will contribute “in series” to a sustainable society through a business portfolio that is based on automation technologies and focused primarily on our markets (BA/AA/LA*) and solutions (systems and products). The Board of Directors is reviewing the business portfolio for FY2021. * BA: Building Automation; AA: Advanced Automation; LA: Life Automation 2. Capital Structure Foreign Shareholding Ratio 30% or more [Major Shareholders] Updated The Master Trust Bank of Japan, Ltd. (Trust account) Meiji Yasuda Life Insurance Company SSBTC CLIENT OMNIBUS ACCOUNT Custody Bank of Japan, Ltd. (Trust account) Northern Trust CO. (AVFC) Re Fidelity Funds) National Mutual Insurance Federation of Agricultural Cooperatives Custody Bank of Japan, Ltd. (Trust account 7) Mizuho Bank, Ltd. azbil Group Employee Stock ownership JP MORGAN CHASE BANK 380055 Controlling Shareholder (Except for Parent Company) Parent Company － None Supplementary Explanation Updated Name/Company name Number of shares owned（Shares） Percentage (%) 19,078,600 10,428,200 10,150,782 6,036,100 4,342,672 3,356,400 3,222,200 2,809,000 2,588,204 2,511,762 13.70 7.49 7.29 4.33 3.11 2.41 2.31 2.01 1.85 1.80 1. The Company holds 5,977,107 treasury shares. This does not include shares (1, 946,057 shares) owned by Custody Bank of Japan, Ltd. (Trust E) as trust assets for the Employee Stock Ownership Plan (J-ESOP). 2. The numbers of shares related to the trust business are: 9,879 thousand shares held by The Master Trust Bank of Japan, Ltd. (Trust account) and 3,549 thousand shares held by Custody Bank of Japan, Ltd. (Trust account). 3. According to the Report on Large Shareholding dated August 19, 2021, which has been made available for public inspection, 7,274 thousand shares (5.01 % of the total shares issued) are held by Sumitomo Mitsui Trust Asset Management Co., Ltd. and Nikko Asset Management Co., Ltd. as of August 13, 2020. However, as the Company is not able to confirm the number of shares actually held as of September 30, 2021, Sumitomo Mitsui Trust Asset Management Co., Ltd. and Nikko Asset Management Co., Ltd. are not included in the above list of major shareholders. 3. Corporate Attributes 8 Listed Stock Market and Market Section Tokyo Stock Exchange, First Section Fiscal Year End March Business Category Electric Appliances Number of Employees (Consolidated) as of the End of the Previous Fiscal Year 1,000 or more Sales (Consolidated) for the Previous Fiscal Year Between 100 billion yen and 1 trillion yen Number of Consolidated Subsidiaries as of the End of the Previous Fiscal Year Between 10 and 50 4. Policy on Measures to Protect Minority Shareholders in Conducting Transactions with Controlling Shareholder － － 5. Other Special Circumstances that May Have a Material Impact on Corporate Governance 9 II. Business Management Organization and Other Corporate Governance Systems regarding Decision-Making, Execution of Business, and Oversight in Management 1. Organizational Composition and Operation Structure of Organization Company with Audit & Supervisory Board Chairperson of the Board President) Company Chairperson (except when concurrently serving [Directors] Number of Directors as Specified in Articles of Incorporation 11 Term of Office of Directors as Specified in Articles of Incorporation 2 years Number of Directors Appointment Status of Outside Directors Appointed Number of Outside Directors Number of Outside Directors Designated as Independent Directors Relationship with the Company (1) 11 5 5 Name Affiliation Katsuhiko Tanabe Takeshi Itoh Waka Fujiso Mitsuhiro Nagahama Anne Ka Tse HUNG From another company From another company Lawyer Other Lawyer Relationship with the Company (*) a b c d e f g h i j k △ * Nature of relationship with the Company: : The director presently belongs to or has recently belonged to the category. : The director belonged to the category in the past. : A close relative of the director presently belongs to or has recently belonged to the category. : A close relative of the director belonged to the category in the past. Categories: 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 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 Company or an executive thereof f. Consultant, accountant or legal professional who receives a large monetary consideration or other property from the Company besides compensation as a director or Audit & Supervisory Board member g. Major shareholder of the Company (or an executive of a major shareholder if the said shareholder is a legal entity) h. Executive of a client or supplier company of the Company (which does not correspond to categories d, e, or f) (the director i. Executive of a company having an outside director or Audit & Supervisory Board member who is also appointed to the Company (the j. Executive of a company or organization that receives a donation from the Company (the director himself/herself only) himself/herself only) director himself/herself only) k. Others 10 Relationship with the Company (2) Name Katsuhiko Tanabe Designation as Independent Director Yes – Supplementary Explanation of the Conforming Items Reason for Appointment Takeshi Itoh Yes – In addition to management experience and Mr. Katsuhiko Tanabe has outstanding expert viewpoints as a lawyer and insights on management, as he has successively served in important posts in the legal field, and has a record of superior performance in corporate legal affairs of global business based on his expert views. In addition, by utilizing his experience as an outside officer at several companies, at Board of Directors meetings of the Company, he not only supervises business execution but also proactively offers his opinions based on his broad knowledge as a legal expert and keen insight on corporate governance, in order to increase transparency and fairness of management, thus fulfilling such appropriate roles as supervision and advising, etc. on business execution. Also, as he falls under none of the above categories (a to k), the Company has designated him as an independent director, judging there to be no possibility of the occurrence of conflict of interest with general shareholders and that he has sufficient independence, in accordance with the Company’s own Criteria for Independence of Outside Directors and Outside Audit & Supervisory Board Members. experience as an analyst in investment banks and investment advisory companies, etc. domestically and abroad, with his long-term overseas work experience and experience in the consulting business including fundraising and M&A advice, Mr. Takeshi Itoh has a record of superior performance in advanced corporate analysis, etc. In addition, by utilizing his experience as executive officer in investment management companies domestically and abroad, at Board of Directors meetings of the Company, he not only supervises business execution but also proactively offers his opinions based on his advanced knowledge and experience as an expert in the fields of international financing and investment, in order to increase transparency and fairness of management, thus fulfilling such appropriate roles as supervision and advising, etc. on business execution. Also, as he falls under none of the above categories (a to k), the Company has designated him as an independent director, judging there to be 11 Waka Fujiso Yes – Ms. Waka Fujiso possesses extensive knowledge no possibility of the occurrence of conflict of interest with general shareholders and that he has sufficient independence, in accordance with the Company’s own Criteria for Independence of Outside Directors and Outside Audit & Supervisory Board Members. and experience that she gained mainly during her activities over many years as a public prosecutor, and, after retiring from the position of public prosecutor at the Supreme Public Prosecutors Office, during her service as a council member at a government agency at which time she also taught at a law school. At Board of Directors meetings of the Company, she not only supervises business execution, but also proactively offers opinions from her extensive knowledge as a legal expert, aiming at more thorough compliance management and risk management as well as the enhancement of management transparency and fairness. In these ways, Ms. Fujiso fulfills such appropriate roles as supervising and giving advice on business execution. Also, as she falls under none of the above categories (a to k), the Company has designated her as an independent director, judging there to be no possibility of the occurrence of conflict of interest with general shareholders and that she has sufficient independence, in accordance with the Company’s own Criteria for Independence of Outside Directors and Outside Audit & Supervisory Board Members. Mitsuhiro Nagahama Yes Mr. Mitsuhiro Nagahama Mr. Mitsuhiro Nagahama possesses broad served as a director at the knowledge and extensive experience in the Company’s lender, Mizuho financial/securities sectors and abroad, as he has Corporate Bank, Ltd. (now: successively served in important posts at financial Mizuho Bank, Ltd.), until institutions. He was appointed as an Outside Audit March 2013. However, the & Supervisory Board Member in 2015, and has amount of the borrowings audited the Company’s overall business with his from said bank is ¥4,778 outstanding insights on corporate governance and million, which is 1.6% of the ideal way of company management, contributing to Company’s consolidated the improvement of the Company’s corporate total assets of ¥284,597 governance and internal control from an million and the azbil Group independent perspective. Furthermore, as an does not effectively have Outside Director since 2019, he has not only loans payable (net balance supervised business execution, but also of loans not exceeding proactively offered opinions from wide-ranging current liquidity deposited at perspectives, aiming at enhancing management such lender.) Thus, said transparency and fairness. In these ways, Mr. bank is not a major lender as Nagahama fulfills such appropriate roles as per the Criteria for supervising and giving advice on business Independence of Outside execution. 12 Anne Ka Tse HUNG Yes – Ms. Anne Ka Tse HUNG worked at an international (Married Name: Anne Hung Davis) Directors and Outside Audit He had engaged in business execution at the & Supervisory Board Company’s lender, Mizuho Corporate Bank, Ltd. Members established by the (now: Mizuho Bank, Ltd.), until March 2013; he Company and the Company thus falls under category h above. However, said judges said bank is not a bank is not a business partner which influences the business partner nor a Company’s decision making, as shown on the left. lender which influences the Also, as he falls under none of the other categories Company’s decision-making. (a to k, with the exception of h), the Company has designated him as an independent director, judging there to be no possibility of the occurrence of conflict of interest with general shareholders, in accordance with the Company’s own Criteria for Independence of Outside Directors and Outside Audit & Supervisory Board Members. law office as a partner attorney, and supported the conclusion of transaction agreements in international transactions for Japanese companies in addition to overseas corporate matters. She also has ample business experience with Japan-based companies, is familiar with Japanese business customs, and possesses knowledge in the industry to which the Company belongs. The Company expects that she will utilize her abundant experience, insight, and global knowledge as Outside Director of the Company to offer objective indications and advices for the enhancement of management transparency and fairness from wide-ranging perspectives in addition to supervise business executions for the Board of Directors. The Company believes that she will fulfill her appropriate roles in these ways. Also, as she falls under none of the above categories (a to k), the Company has designated her as an independent director, judging there to be no possibility of the occurrence of conflict of interest with general shareholders and that she has sufficient independence, in accordance with the Company’s own Criteria for Independence of Outside Directors and Outside Audit & Supervisory Board Members. Establishment of Voluntary Committee Corresponding to a Nominating Committee or Remuneration Committee Established 13 Establishment of Voluntary Committees, Membership Composition, and Attributes of Chairperson Committee’s Name Standing Members Internal Directors Outside Directors Outside Experts Others Chairperson Total no. of Committee Members 5 5 0 0 2 2 3 3 0 0 0 Outside Director 0 Outside Director Committee Corresponding to Nomination Committee Committee Corresponding to Remuneration Committee Nomination and Remuneration Committee Nomination and Remuneration Committee Supplementary Explanation The Company established its Nomination and Remuneration Committee as an optional advisory body to the Board of Directors. The role of the Committee is to ensure greater fairness, objectivity, and transparency of processes for nominating and remunerating officers, with the aim of fostering the enduring development of the company and improving its medium- and long-term profitability and productivity. It is stipulated that independent outside directors make up the majority of Committee members and that an independent outside director is elected as its chairperson by the Committee members. Currently, Katsuhiko Tanabe (independent outside director) serves as chairperson, the other members being Takeshi Itoh (independent outside director), Waka Fujiso (independent outside director), Hirozumi Sone (representative director), and Kiyohiro Yamamoto (representative director). Independent outside directors thus constitute the majority. The Committee has the following roles and authority, as delegated by the Board of Directors, with respect to the nomination, remuneration and succession planning of officers. With respect to the nomination of officers, the Committee is responsible for deliberating on and screening candidates for the positions of director, representative director, chairperson of the Board of Directors, executive officer with title, and executive officer; for proposing the above to the Board of Directors; and for preparing, deliberating, screening and proposing to the Board of Directors candidates for CEO and other senior management positions (president/CEO, vice president, etc.). The Committee is also responsible for deliberating on and making proposals to the Board of Directors regarding the dismissal of directors, representative directors, chairperson of the Board of Directors, executive officers with titles, and other executive officers, as well as drafting, deliberating, and deciding on proposals to the Board of Directors for the dismissal of the CEO and other members of senior management (president/CEO, vice president, etc.). With regard to the compensation of officers, the Committee drafts, deliberates and decides on proposals to the Board of Directors for the establishment, revision or abolition of compensation systems for representative directors, directors, executive officers with titles, and other executive officers; and also for revisions to the directors’ compensation quota. The Committee also deliberates and determines the responsibility grade, basic remuneration, personal performance evaluation, and bonuses paid to the chairperson, the president and CEO, directors who concurrently perform executive duties, executive officers with titles, and other executive officers. Furthermore, the Committee deliberates and decides on the remuneration of outside directors and non-executive directors. With regard to succession planning and training, the Committee draws up, discusses, and decides on the overall plan for successor training; screens suitable candidates; and discusses and decides on individual training plans. It also periodically checks on the status of successor training. In addition, the Committee deliberates and decides on proposals to the Board of Directors regarding the establishment, revision, or abolition of rules and regulations governing either the concurrent holding of positions by officers or the treatment of officers. The reason for delegating these authorities is that, as mentioned above, the Company judged that having such matters deliberated and decided by the Nomination and Remuneration Committee—an advisory body to the Board of Directors, which consists of a majority of independent outside directors and is chaired by an independent outside director—would ensure a high level of fairness, objectivity, and transparency. Note that, when a proposal concerning a representative director is being deliberated and decided upon, the individual under consideration does not participate. In FY2020, the Nomination and Remuneration Committee met five times, with all members attending. In May 2020, the Committee evaluated the results of individual performance targets in FY2019 and the amounts of bonuses to be paid to individual directors who concurrently performed executive duties and executive officers, and deliberated the basic remuneration to be paid to individual directors who concurrently perform executive duties and outside directors in FY2020. In June 2020, under the Nomination and Remuneration 14 Committee with new members chaired by Katsuhiko Tanabe, an independent outside director, in addition to reconfirming the roles and responsibilities of the Committee, the results of officer interviews for a plan to develop successors were confirmed. In January 2021, both the evaluation results for the selection process associated with the management team changeover and the state of progress on the plan to develop successors were confirmed. In February 2021, a report was made to the Board of Directors on the executive team and the management teams at Group companies in FY2021 following deliberation, and the FY2021 management team was determined at a Board of Directors meeting. In March 2021, the management teams of overseas Group companies and the status of operations of the global personnel system were confirmed, the rules for the Nomination and Remuneration Committee were revised, and concurrent duties at other companies performed by full-time officers were deliberated. Furthermore, at the Board of Directors meetings held in August 2020 and February 2021, reports were given on the status of activities of the Nomination and Remuneration Committee. [Audit & Supervisory Board Members] Establishment of Audit & Supervisory Board Established Number of Corporate Auditors Specified in Articles of Incorporation Number of Audit & Supervisory Board Members Cooperation between Audit & Supervisory Board Members, Accounting Auditor, and Internal Auditing Department The Audit & Supervisory Board members participate in periodic meetings with the accounting auditor, and cooperate in such activities as sharing details regarding the audit plan and critical audit matters at the beginning of the fiscal year and regarding mutual audit results during the fiscal year and at the end of the fiscal year, and conducting timely and appropriate discussions on key audit matters (KAM). At the regular meetings with the internal auditing department, in addition to sharing the mutual audit results during the fiscal year and at the end of the fiscal year and the audit plan and key audit items at the start of the fiscal year, Audit & Supervisory Board Members coordinate closely with the Audit & Supervisory Board members of Group companies to confirm audit results for subsidiaries, working to enhance the 5 5 3 3 effectiveness and efficiency of auditing. Appointment of Outside Audit & Supervisory Board Members Appointed Number of Outside Audit & Supervisory Board Members Number of Outside Audit & Supervisory Board Members Designated as Independent Audit & Supervisory Board Members Relationship with the Company (1) Name Affiliation Relationship with the Company (*) a b c d e f g h k l m Kinya Fujimoto Minoru Sakuma Fumitoshi Sato Certified public accountant From another company From another company * Nature of relationship with the Company: : The Audit & Supervisory Board member presently belongs to or has recently belonged to the category. : The Audit & Supervisory Board member belonged to the category in the past. : A close relative of the Audit & Supervisory Board member presently belongs to or has recently belonged to the category. : A close relative of the Audit & Supervisory Board member belonged to the category in the past. Categories: i j △ a. Executive of the Company or its subsidiaries 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 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 monetary consideration or other property from the Company besides 15 compensation as a director or Audit & Supervisory Board member i. Major shareholder of the Company (or an executive of a major shareholder if the said shareholder is a legal entity) j. Executive of a client or supplier company of the Company (which does not correspond to categories d, e, or f) (the Audit & Supervisory Board member himself/herself only) k. Executive of a company having an outside director or Audit & Supervisory Board member who is also appointed to the Company (the Audit & Supervisory Board member himself/herself only) l. Executive of a company or organization that receives a donation from the Company (the Audit & Supervisory Board member himself/ herself only) m. Others Relationship with the Company (2) Name Kinya Fujimoto Designation as Independent Audit & Supervisory Board Member Yes – Supplementary Explanation of the Conforming Items Reason for Appointment Mr. Kinya Fujimoto has been active as a Certified Public Accountant for many years and has implemented audits at the Company from perspectives relating to finance and accounting, contributing to the improvement of the Company’s corporate governance and internal control. He possesses the required knowledge related to finance, accounting, and legal affairs as an Audit & Supervisory Board member, and his professional discernment based on this knowledge and experience can be reflected in the auditing of the Company’s overall business and in the strengthening of the management of Group companies. He is also independent from the Company so that the Company believes he can further strengthen its corporate governance. Also, as he falls under none of the above categories (a to m), the Company has designated him as an independent Audit & Supervisory Board member, judging there to be no possibility of the occurrence of conflict of interest with general shareholders and that he has sufficient independence, in accordance with the Company’s own Criteria for Independence of Outside Directors and Outside Audit & Supervisory Board Members. important posts at policy-based financial institutions, and in addition to his broad knowledge of international finance and extensive overseas experience, he has management experience at investment corporations and experience as an outside Audit & Supervisory Board member at a globally operating company. He possesses the required knowledge related to finance, accounting, and legal affairs as an Audit & Supervisory Board member, and his professional discernment based on this knowledge and experience can be reflected in auditing of the Company’s overall business and in improvement of the management of Group 16 Minoru Sakuma Yes – Mr. Minoru Sakuma has successively served in Fumitoshi Sato Yes Mr. Fumitoshi Sato Mr. Fumitoshi Sato has successively served in companies. He is also independent from the Company so that the Company believes he can further strengthen its corporate governance. Also, as he falls under none of the above categories (a to m), the Company has designated him as an independent Audit & Supervisory Board member, judging there to be no possibility of the occurrence of conflict of interest with general shareholders and that he has sufficient independence, in accordance with the Company’s own Criteria for Independence of Outside Directors and Outside Audit & Supervisory Board Members. served as a director at important posts at the Bank of Japan, and in addition Horiba Ltd. until March to his broad knowledge in the financial sector and 2017. While the Company has a extensive experience, he has work experience in the management division overseeing accounting, legal transaction relationship affairs, and human resources at an operating company with said company, in in the manufacturing industry, and also management the most recent fiscal experience as a director. He possesses the required year and in the knowledge related to finance, accounting, and legal preceding three fiscal affairs to be an Audit & Supervisory Board member, years, the amount of and his professional discernment based on this these transactions knowledge and experience can be reflected in the represents 0.1% or less auditing of the Company’s overall business and in of the consolidated net strengthening of the management of Group sales of both the companies. He is also independent from the Company Company and said so that the Company believes he can further company, which does strengthen its corporate governance. not make it a major He engaged in business execution at Horiba Ltd. until business partner as per March 2017; he thus falls under category j above. the Criteria for However, said company is not a business partner Independence of which influences the Company’s decision-making, as Outside Directors and shown on the left. Outside Audit & Also, as he falls under none of the other categories (a Supervisory Board to m, with the exception of j), the Company has Members established by designated him as an independent Outside Audit & the Company. Thus, the Supervisory Board member, judging there to be no Company judges said possibility of the occurrence of conflict of interest with company is not a general shareholders, in accordance with the business partner which Company’s own Criteria for Independence of