セイコーエプソン（6724） – Corporate Governance Report

Corporate Governance Report Last Update: March 18, 2022 Seiko Epson Corporation Yasunori Ogawa, President and Representative Director Contact: Legal and Corporate Governance Department +81-266-52-3131 Securities Code: 6724 https://global.epson.com/ The corporate governance of Seiko Epson Corporation (the “Company”) is described below. I. Basic Views on Corporate Governance, Capital Structure, Corporate Profile and Other Basic Information 1. Basic Views The general principles of corporate governance at Epson are as follows: – Respect the rights of shareholders, and secure equality. – Keeping the interests of shareholders, customers, communities, business partners, employees and other stakeholders in mind, work in an appropriately cooperative manner with them. – Disclose company information as appropriate and ensure transparency. – Directors, Executive Officers, and Special Audit & Supervisory Officers shall be aware of their fiduciary responsibilities and shall fulfill the roles and responsibilities expected of them. – Epson shall engage in constructive dialogue with shareholders. To achieve the goals declared in Epson’s Management Philosophy, promote sustainable growth, and increase corporate value over the medium and long terms, Epson strives to continuously enhance and strengthen corporate governance so as to realize transparent, fair, fast, and decisive decision-making. Operating as a company with an Audit & Supervisory Committee, Seiko Epson will further improve the supervisory function of the Board of Directors, enhance discussions at Board of Directors meetings, speed up management decision-making, and further increase the effectiveness of corporate governance. The general principles and policies regarding corporate governance at Epson are summarized in “Corporate Governance Policy,” which is available for viewing on the corporate website. (https://global.epson.com/SR/organizational_governance/) Reasons for Non-compliance with the Principles of the Corporate Governance Code Epson continuously strives to enhance and strengthen its corporate governance based on the foregoing policy and has implemented all the principles (including the content of the Prime Market, which is to take effect on April 4, 2022) in the Corporate Governance Code after it was revised in June 2021. – 1 – Disclosure Based on the Principles of the Corporate Governance Code Principle 1.4 For the policy on cross-shareholdings, please see Article 5 in Epson’s Corporate Governance Policy. Individual cross-shareholdings in the Epson Group (as of the end of March 2021) were analyzed by the Board of Directors in April 2021 based on Epson’s compliance assessment criteria to determine the purpose of these cross-shareholdings and their associated risks and benefits. Epson is moving toward reducing those cross-shareholdings that were found to be non-essential. Please see Article 6 in the Corporate Governance Policy for Epson’s standards for exercising voting rights for cross-shareholdings. Principle 1.7 Please see Article 8 in the Corporate Governance Policy for procedures relating to transactions with related parties. Supplementary Principles 2.4.1 [Our policies for ensuring diversity in the promotion to core human resources] Please see Article 11 in the Corporate Governance Policy for our policies for ensuring diversity. [Our measurable goals and their status for the promotion of women to core human resources] In 1983, Seiko Epson eliminated the gender pay gap and has sought to enable employees to enjoy a good work-life balance by providing leaves of absence, shorter workdays for women with young children, and financial assistance to help cover babysitter expenses. These and other actions have met with some success, as women stay with the company longer than men, on average. However, there is still a gender gap when it comes to promotion to management and other leadership positions in Japan. Seiko Epson recognizes this as an issue and is taking additional action to support the advancement of more women in the workplace. We will take action to ensure that female employees can take an increasingly active part in our company going forward. At the end of FY2020, women accounted for 3.2% (26 persons) of employees with management responsibilities and 6.3% (303 persons) of the leader class (equivalent to assistant managers). Specific efforts we are making include aiming to raise those numbers to 5% (40 persons) and 7% (350 persons) respectively and expanding the scope of candidates so we can increase the number of female employees with management responsibilities in future. For details, see “Promotion of Diversity” at our website. (https://global.epson.com/SR/our_people/diversity.html) [Our measurable goals and their status for the promotion of foreign nationals to core human resources] Epson has sites around the world to accurately identify and swiftly and flexibly meet the changing needs of customers in different regions. The Epson Group currently employs about 80,000 people. Epson is vertically integrated, which means we have control over the value chain. A high-performing, diverse workforce is essential for achieving vertical integration, making it vital for our operations divisions in Japan and Epson Group companies overseas to be on the same page in terms of business vision and policies. That is why we have a variety of international programs to promote communication and interaction among people at various levels within our operations divisions, Head Office, and other internal organizations. For details, see “Promotion of Diversity” at our website. （https://global.epson.com/SR/our_people/diversity.html） Thus, Seiko Epson and the entire Epson Group are developing business processes globally and establishing environments and systems whereby diverse personnel can play an active role regardless of nationality, race, and the like. For that reason, we have not at this time established any voluntary and – 2 – measurable targets for the percentage of employees with management responsibilities who are non- Japanese at Seiko Epson. Going forward, we will continually consider the necessity of setting such targets to ensure further diversity. [Our measurable goals and their status for the promotion of midcareer hires to core human resources] Midcareer hires account for a greater percentage of employees with management responsibilities than they do of employees overall, as we have been actively appointing people with a wide range of career backgrounds to core positions. We have not at this time established any voluntary and measurable targets for this, but we will continually discuss and consider ways to ensure greater diversity. [Our policies and implementation for human resource development and internal environment development to ensure diversity] See “Promotion of Diversity” at our website for information about our human resources development policies and internal environment development policies to ensure diversity and for information about the status of those efforts. （https://global.epson.com/SR/our_people/diversity.html） We have not at this time established any human resources development policies or internal environment development policies for midcareer hires, but we will be considering policies and measures on such matters as enabling more diverse work styles in order to acquire diverse human resources. Principle 2.6 As stated in Article 13 of the Corporate Governance Policy, the Seiko Epson Corporate Pension Fund manages the Company’s corporate pension reserves. The Company has adopted a funded corporate pension plan to help assure the appropriate management of conflicts of interest between the Company and corporate pension beneficiaries, and it has worked with the corporate pension fund and labor union to build a system for monitoring and supervising the management of the corporate pension. The Company systematically promotes and assigns qualified individuals to manage the corporate pension fund and provides them with ongoing educational opportunities so that they can increase their professional knowledge of corporate pension fund management and fulfill the functions expected of them as asset owners. In March 2021, the Corporate Pension Fund announced that it would support and accept the purpose of the Japanese Stewardship Code as an “institutional investor as an asset owner.” The Fund, since it does not directly engage in stewardship activities, including exercising voting rights, requires institutional investors who manage assets to fulfill its stewardship responsibilities by improving and fostering the investee companies’ corporate value and sustainable growth through constructive engagement or purposeful dialogue. Principle 3.1 (1) The Company’s management philosophy is shared with the public. The Company has also shared the Epson 25 Renewed Corporate Vision, which includes a mid-range business plan). Details are provided on the Company’s corporate website. Management Philosophy: (https://global.epson.com/company/epson_way/management/) Epson 25 Renewed Corporate Vision (and mid-range business plan): (https://global.epson.com/company/corporate_vision/?fwlink=global_top) (2) The Company’s basic principles and policies regarding corporate governance are set forth in the Corporate Governance Policy, which is available on the corporate website. (https://global.epson.com/SR/organizational_governance/) – 3 – (3) The policies and procedures that the Board of Directors follows when deciding Director compensation are stated in “Policy on Determining and Calculating Compensation” under II 1. “Director Compensation” in this Report. (4) The policies and procedures that the Board of Directors follows when nominating Director candidates and dismissing Officers are stated in Article 24 of the Corporate Governance Policy. (5) The reasons for the selection of Directors who were selected at the General Meeting of Shareholders held on June 25, 2021, are stated in the convocation notice of the 79th Ordinary General Meeting of Shareholders. (https://global.epson.com/IR/information/meeting.html) Supplementary Principles 3.1.3 [Our initiatives on sustainability] For details, see “Implementation of Environmental Activities, CSR Activities etc.” in “III. 3. Measures to Ensure Due Respect for Stakeholders” in this report. [Information on investments in human capital and intellectual property] Investments in human capital and intellectual property are disclosed in the Company’s Epson 25 Renewed Corporate Vision (including the mid-range business plan). （https://global.epson.com/company/corporate_vision/?fwlink=global_top） Also see “Proactive Intellectual Property Activities” on our website for information about how we are investing in intellectual property. （https://global.epson.com/technology/intellectual_property/） [The impact of climate change-related risks and earning opportunities on our business activities and profits] For details, see “Responding to TCFD Recommendations” at our “Sustainability” website. （https://global.epson.com/SR/tcfd/?fwlink=sr_top） Supplementary Principles 4.1.1 A summary of the scope of matters delegated to the management is provided in Article 16 of the Corporate Governance Policy. Supplementary Principles 4.1.3 The Company’s Director Nomination Committee, which is composed primarily of Outside Directors, discusses enhancements to succession plans and the Director appointment process, reviews the roadmap, selects Director candidates, establishes and implements development plans, and reviews the process for evaluating, narrowing down, and replacing candidates. The Company selects candidates for senior management positions in order to systematically develop these individual as future executives. After their development is assessed, the HR Development Strategy Council, an advisory body to the President, devises and implements a concrete development plan. The state of development and issues are reported to the Director Nomination Committee, and development activities are further enhanced under the supervision and advice of the Outside Directors. Candidates to succeed the President are identified through the aforesaid process and developed by appointing them to key management roles and by providing them with other essential training opportunities. Principle 4.9 The criteria for judging the independence of Outside Directors are described in “Matters relating to Independent Directors” under II. 1. Independent Directors in this report. The criteria are also listed in Appendix 2 to the Corporate Governance Policy. – 4 – Supplementary Principles 4.10.1 For details, see “Supplementary Explanation” under “II. 1. Organizational Composition and Operation, Voluntary Establishment of Committee(s) Corresponding to Nomination Committee or Compensation Committee.” Supplementary Principles 4.11.1 As stipulated in Article 18 of the Corporate Governance Policy, the Company believes that a diverse Board of Directors is useful for facilitating substantive board discussions that cover all angles. Therefore, the Company has a fundamental policy of assembling a Board of Directors that is well- balanced and composed of persons who combine a broad spectrum of knowledge, experience, and skill, without regard to things such as gender, race, ethnicity, nationality, cultural background, or age. The current Board of Directors reflects this policy and has articulated a management organization for realizing the Management Philosophy and corporate vision so as to enable the Company to achieve sustainable growth and improve corporate value over the medium to long term. Please see the Notice of the 79th Ordinary General Meeting of Shareholders for information about the areas and skills where there are particularly high expectations for Directors. (https://global.epson.com/IR/information/meeting.html) Supplementary Principles 4.11.2 Epson Officers who concurrently serve on the boards of other publicly listed companies shall keep the number to within reasonable limits based on Article 21 of the Corporate Governance Policy. As a general rule, Outside Directors in particular shall not concurrently serve as either a Director or a Kansayaku of more than three publicly listed companies other than Epson per the bylaws established by resolution of the Board of Directors. Per Epson policy, Directors shall attend at least 75% of the meetings of the Board of Directors per year. Epson discloses information about Directors who hold important concurrent positions at other companies every year in the reference materials provided along with the notices of Ordinary General Meetings of Shareholders as well as in other business reports. (https://global.epson.com/IR/information/meeting.html) Information about Outside Directors who held important concurrent positions at other companies is provided in “Outside Directors’ Relationship with the Company (2)” under II. 1. Directors. Supplementary Principles 4.11.3 1. Overview of efforts to evaluate the effectiveness of the Board of Directors The Board of Directors of the Company analyzes and evaluates the effectiveness of the entire Board of Directors every year based on Article 19 of the Corporate Governance Policy. Evaluating the effectiveness of the Board of Directors When evaluation is performed: February to March When evaluation results are analyzed and issues are selected: April to May Disclosure of issues in a Corporate Governance Report: June Interim report to the Board of Directors (regarding actions taken to resolve issues): October Final report to the Board of Directors (regarding action take to resolve issues): February of the following year Disclosure in a Corporate Governance Report of the results of actions taken to resolve issues: June of the following year 2. Board of Directors effectiveness evaluation for the 2019 fiscal year – 5 – The Company analyzed and evaluated the effectiveness of its Board of Directors by asking all Board members to complete a questionnaire that covered the topics listed below. (1) Board composition, functioning, and operation (2) The function of the Audit & Supervisory Committee (3) The function and operation of advisory bodies to the Board (4) Management team evaluation, compensation, succession planning, and training (5) Dialogue with shareholders (6) Other The results showed that the Board of Directors as a whole is functioning effectively. The Company identified and addressed the issues below to improve Board effectiveness in the future. (1) Further improving the organization and disclosure of business strategy risks and opportunities We have redefined the risks in the Company’s management strategy, concretized the risk items, and clarified the relevance to the business strategy. The management process for further enhancing the effectiveness of risk management has been rearranged and applied since 2021. The Company’s website discloses our view on the risks associated with changes in paper demand, while Integrated Report 2020 states the risks and opportunities for the Company vis- à-vis the social transformation brought about by the Covid pandemic. The Company’s view on the risks associated with changes in paper demand: (https://global.epson.com/SR/tcfd/?fwlink=sr_top ) Risks and opportunities for the Company vis-à-vis the social transformation brought about by the Covid pandemic: (https://global.epson.com/IR/library/integrated_report.html) We will continue to consider whether to further expand the scope of disclosure of risk management items based on a comprehensive assessment, including of the social and competitive environments. (2) Further improving the organization and disclosure of the thinking with regard to business portfolio management. The businesses in the Company’s portfolio have been positioned and broadly divided into three areas according to the product life cycle: a new area, growth area, and mature area. Funds will be allocated and targets set according to the positioning of the business, the PDCA cycle will be implemented for each, and the direction of the businesses will be determined while taking into consideration synergies among businesses. These strategies were articulated in the Epson 25 Renewed Corporate Vision announced in March 2021. In April 2021, we transferred the IC test handler business to Kanematsu Corporation as part of our business portfolio management efforts. The generated cash will be preferentially allocated to growth investments primarily in growth areas, new areas, and the environment. On top of that, the Company will continue to provide stable shareholder returns and build a sound financial structure. 3. Board of Directors effectiveness evaluation for the 2020 fiscal year To incorporate a more objective perspective to the Board of Directors effectiveness evaluation for the 2020 fiscal year, we asked an independent firm to evaluate and provide feedback about each step in the process, from creating a questionnaire to analyzing and evaluating the answers. In addition, the Company dug deeper based on recent corporate governance trends (such as the interests of institutional investors) and identified the following issues in order to improve effectiveness in the future: – 6 – (1) Promote diversity; and (2) Promote digital transformation (DX). In the future, we will work to further improve effectiveness by addressing these issues. Supplementary Principles 4.14.2 Information about the Director training policy is provided in Article 30 of the Corporate Governance Policy. Principle 5.1 The Company’s policy regarding constructive dialog with shareholders is provided in Appendix 1 of the Corporate Governance Policy. 2. Capital Structure Foreign Shareholding Ratio From 10% to less than 20% Status of Major Shareholders Name / Company Name The Master Trust Bank of Japan, Ltd. (Trust Account) Custody Bank of Japan, Ltd. (Trust Account) Sanko Kigyo Kabushiki Kaisha Seiko Holdings Corporation The Dai-ichi Life Insurance Company, Limited Mizuho Trust & Banking Co., Ltd., Retirement benefit trust, Mizuho Bank, Ltd. account Epson Group Employees’ Shareholding Association Mikiko Kidosaki Minako Hattori Custody Bank of Japan, Ltd. (Securities Investment Trust Account) Number of Shares Owned 59,964,200 26,254,100 20,000,000 12,000,000 8,736,000 Percentage (%) 17.32 7.58 5.77 3.46 2.52 8,153,800 7,569,979 6,855,302 6,855,302 6,771,500 2.35 2.18 1.98 1.98 1.95 Controlling Shareholder (except for Parent Company) ――― None Parent Company Supplementary Explanation 1. Information about major shareholders is current as of March 31, 2021. 2. Although the Company holds 53,444,897 treasury shares, the Company is excluded from the above list of major shareholders. Shareholding ratio is calculated by deducting treasury shares. Treasury shares do not include the Company’s shares (210,928 shares) owned by the Officer compensation BIP Trust. 3. Corporate Attributes Listed Stock Market and Market Section Fiscal Year-End Type of Business Tokyo Stock Exchange First Section March Electric Appliances – 7 – Number of Employees (consolidated) as of the End of the Previous Fiscal Year More than 1000 Sales (consolidated) as of the End of the Previous Fiscal Year Number of Consolidated Subsidiaries as of the End of the Previous Fiscal Year From ¥1,000 billion to less than ¥1 trillion From 50 to less than 100 4. Policy on Measures to Protect Minority Shareholders in Conducting Transactions with Controlling Shareholder ――― ――― 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 Supervisory Committee 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 Number of Outside Directors Number of Independent Directors 14 1 year Company Chairperson (except if the President as serves as the chairperson) 10 5 5 Outside Directors’ Relationship with the Company (1) Name Attribute Relationship with the Company* g d a b c e f h i j k From another company From another company From another company Hideaki Omiya Mari Matsunaga Yoshio Shirai Susumu Murakoshi Lawyer Michiko Ohtsuka * Categories for “Relationship with the Company” * ”○” when the director presently falls or has recently fallen under the category; CPA “△” 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 – 8 – 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 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/kansayaku g. Major shareholder of the Company (or an executive of the said major shareholder if the shareholder is a h. Executive of a client or supplier company of the Company (which does not correspond to any of d, e, or f) legal entity) (the director himself/herself only) i. Executive of a company, between which and the Company Outside Directors/kansayaku are mutually appointed (the director himself/herself only) j. Executive of a company or organization that receives a donation from the Company (the director himself/herself only) k. Others Outside Directors’ Relationship with the Company (2) Name Hideaki Omiya Membership of Supervisory Committee Designation as Independent Director ○ Supplementary Explanation of the Relationship Important concurrent positions held at other companies Senior Executive Adviser, Mitsubishi Heavy Industries, Ltd. Outside Director, Nomura Research Institute, Ltd Reasons of Appointment Reason for nominating Hideaki Omiya as an Outside Director Mr. Omiya has served as a President and CEO and a Chairman of the Board of Mitsubishi Heavy Industries, Ltd. and has a wealth of experience and insight as a corporate executive and engineer. He has monitored corporate management by expressing opinions actively including findings and proposals regarding overall managerial issues from a perspective of a corporate manager well-versed in the global corporate management in the heavy industry, a different business field. We have nominated him as a candidate for independent Outside Director with the expectation that he will utilize his wealth of experience and insight to monitor corporate management appropriately in order to achieve sustainable growth and improve the Company’s corporate value over the medium and long terms. Independence of duties Mr. Omiya was involved in business affairs at Mitsubishi Heavy Industries, Ltd. The – 9 – Mari Matsunaga ○ Important concurrent positions held at other companies ――― Company has had no transactions with Mitsubishi Heavy Industries, Ltd. in the past three years. He owns a very small number of shares in the Company, and there are no human, capital, business or other interests between him and the Company. The Company has registered Mr. Omiya as an Independent Director with the Tokyo Stock Exchange. Reason for nominating Mari Matsunaga as an Outside Director Ms. Matsunaga has created new business models and has a wealth of experience and considerable insight through her involvement in the management of multiple companies as Outside Officers. She has effectively monitored corporate management by actively speaking out on and proposing solutions to managerial issues, particularly from the viewpoint of promoting open innovation. We have nominated her as a candidate for independent Outside Director with the expectation that she will utilize her wealth of experience and insight to monitor corporate management appropriately in order to achieve sustainable growth and improve the Company’s corporate value over the medium and long terms. Independence of duties The Company has had no transactions with Ms. Matsunaga in the past three years. She owns a very small number of shares in the Company, and there are no human, capital, business or other interests between her and the Company. The Company has registered Ms. Matsunaga as an Independent Director with the Tokyo Stock Exchange. Reason for nominating Yoshio Shirai as an Outside Director Yoshio Shirai ○ ○ Important concurrent – 10 – positions held at other companies Outside Director, Audit & Supervisory Committee member, Fujikura Ltd. Susumu Murakoshi ○ ○ Important concurrent positions held at other companies Attorney-at-law – 11 – Mr. Shirai has served as a Director at Toyota Motor Corporation, Hino Motors, Ltd., and Toyota Tsusho Corporation. He has considerable insight, a wealth of experience as a corporate manager, and a track record of achievements as an Outside Director and member of the Company’s Audit & Supervisory Committee. We have nominated him as a candidate for Outside Director and Audit & Supervisory Committee member with the expectation that he will appropriately supervise and contribute to the soundness of the Company’s management so as to achieve sustainable growth and improve the Company’s corporate value over the medium and long terms. Independence of duties Mr. Shirai was involved in business affairs at Toyota Tsusho Corporation in the past five years. The Company has had no transactions with Toyota Tsusho Corporation in the past three years. He owns a very small number of shares in the Company, and there are no human, capital, business or other interests between him and the Company. The Company has registered Mr. Shirai as an Independent Director with the Tokyo Stock Exchange. If he is reappointed as proposed, he will continue to serve as an Independent Director. Reason for nominating Susumu Murakoshi as an Outside Director Mr. Murakoshi possesses a high level of professional knowledge and insight as an attorney. Given his extensive experience in the legal community, which has included stints as the Chairman of the Japan Federation of Bar Associations and the Chairman of the Political Federation of Japan Patent Attorneys, the Company believes that Mr. Murakoshi can Michiko Ohtsuka ○ ○ Important concurrent positions held at other companies Certified Public Accountant – 12 – be expected to contribute to the effective supervision and soundness of management so as to help ensure sustained growth and enhance long-term corporate value. Mr. Murakoshi has been appointed as an Outside Director who is an Audit & Supervisory Committee member. He has never been involved in corporate management except as an Outside Officer. However, for the reasons given above, Epson believes that he can appropriately perform his duties as an Outside Director and Audit & Supervisory Committee member. Independence of duties The Company has not entered into a consulting agreement, and has not conducted any consignment of business activities under any individual agreement, with Mr. Murakoshi, who is an attorney-at-law, and the law office to which he belongs. He owns a very small number of shares in the Company, and there are no human, capital, business or other interests between him and the Company. The Company has registered Mr. Murakoshi as an Independent Director with the Tokyo Stock Exchange. Reason for nominating Michiko Ohtsuka as an Outside Director Ms. Ohtsuka possesses a high level of professional knowledge and insight as a certified public accountant. Given that she has experience and considerable insight as an Outside Officer in a public company, the Company believes that Ms. Ohtsuka can be expected to contribute to the effective supervision and soundness of management so as to help ensure sustained growth and enhance long-term corporate value. Ms. Ohtsuka has been appointed as an Outside Director who is an Audit & Supervisory Committee member. She has never been involved in corporate management except as an Outside Officer. However, for the reasons given above, Epson believes that she can appropriately perform her duties as an Outside Director and Audit & Supervisory Committee member. Independence of duties The Company has not entered into a consulting agreement, and has not conducted any consignment of business activities under any individual agreement, with Ms. Ohtsuka who is a certified public accountant, and there is no transactional relationship. She owns a very small number of shares in the Company, and there are no human, capital, business or other interests between her and the Company. The Company has registered Ms. Ohtsuka as an Independent Director with the Tokyo Stock Exchange. Supervisory Committee Committee’s Composition and Attributes of Chairperson All Committee Members Full-time Members Supervisory Committee 4 1 Inside Directors 1 Outside Directors Chairperson 3 Inside Director Appointment of Directors and/or Staff to Support the Supervisory Committee Appointed Matters Related to the Independence of Such Directors and/or Staff from Executive Directors The Company has set up an Audit & Supervisory Committee Office to assist the Audit & Supervisory Committee in performing its duties. The head of the Audit & Supervisory Committee Office serves as a Special Audit & Supervisory Officer and assigns full-time personnel to the Audit & Supervisory Committee Office. The head and personnel of the Audit & Supervisory Committee Office discharge their duties to assist the Audit & Supervisory Committee, obeying the orders of the Audit & Supervisory Committee alone and not orders from Directors who are not Audit & Supervisory Committee members. Matters relating to the personnel of the Office must be approved in advance by the Audit & Supervisory Committee. – 13 – Cooperation among Supervisory Committee, Accounting Auditors and Internal Audit Departments To ensure that audits by the Audit & Supervisory Committee are systematic and effective, a framework has been created to secure close cooperation between the internal audit department and others and the Audit & Supervisory Committee. Matters relating to the appointment and dismissal of the head of the internal audit administrative department must be approved in advance by the Audit & Supervisory Committee. The Audit & Supervisory Committee can ask the Representative Director or the Board of Directors to take corrective action if the Audit & Supervisory Committee recognizes that the structure of the Audit & Supervisory Committee Office and the system of cooperation between the Audit & Supervisory Committee and the internal audit departments and others interfere with the efficacy of audits. The Company’s internal audit department regularly reports audit plans and audit results to the Audit & Supervisory Committee directly. After receiving these reports, the Audit & Supervisory Committee can, when it deems it necessary, call upon the internal audit department to conduct an inquiry and can give specific instructions regarding the execution of those duties. In this way, we ensure the effectiveness of systematic audits by the Audit & Supervisory Committee. The internal audit department is designated as the cornerstone of the internal control functions that the President and departments responsible for executing business affairs put in place. On the other hand, to ensure the effectiveness and independence of audits conducted by the Audit & Supervisory Committee and internal audit department, when the instructions of the Audit & Supervisory Committee and the President conflict, the President has the internal audit department respect the requests or instructions of the Audit & Supervisory Committee. The Audit & Supervisory Committee and internal audit department thus strive to actively cooperate, but the Company has set up an Audit & Supervisory Committee Office, which is headed up by a Special Audit & Supervisory Officer, as an organization dedicated to supporting the Audit & Supervisory Committee. The Audit & Supervisory Committee Office is independent from the executive side. It operates under the direct instructions and chain of command of the Audit & Supervisory Committee to provide support to the Audit & Supervisory Committee. At the beginning of the fiscal year, the Audit & Supervisory Committee and the financial auditor share risk assessments, confirm the audit plan of the financial auditor, and hold periodic discussions during the period to enhance the effectiveness of the audit. Financial Auditors and the head of the internal audit administrative department can attend Compliance Committee meetings as observers, the Compliance Committee being composed of Outside Directors and Directors who are Audit & Supervisory Committee members. Voluntary Establishment of Nomination/Compensation Committee Voluntary Establishment of Committee(s) Corresponding to Nomination Committee or Compensation Committee Established Committee’s Name, Composition, and Attributes of Chairperson Committee Corresponding to Nomination Committee Director Nomination Committee Committee Corresponding to Compensation Committee Director Compensation Committee Committee’s Name All Committee Members Full-time Members Inside Directors 6 0 1 6 0 1 – 14 – Outside Directors Outside Experts Other Chairperson 5 0 0 Supplementary Explanation 5 0 0 Outside Director Outside Director The Company has established a Director Nomination Committee and a Director Compensation Committee as discretionary deliberative bodies. The Committees, the majority of whose members are Outside Directors, were established to ensure transparency and objectivity regarding selections for and compensation of Directors, Executive Officers and Special Audit & Supervisory Officers. The human resources department is the secretariat. The outline of each Committee is as follows: Composition and the Policy regarding Independence As stated in Article 23 of the Corporate Governance Policy, Outside Directors make up a majority of the members of the Director Nomination Committee and Director Compensation Committee and a Chairperson is elected by the Board from among the Outside Directors, to ensure transparency, objectivity, and independence. The committees shall be composed of all the Outside Directors and the President/Representative Director. Directors who are full-time members of the Audit & Supervisory Committee can attend either meeting as observers. The current members are as follows: Chairman: Outside Director Hideaki Omiya Members: Outside Directors, Mari Matsunaga, Yoshio Shirai, Susumu Murakoshi,Michiko Ohtsuka Yasunori Ogawa, President The Mandates, Roles, and Activities of the Director Nomination Committee As stated in Article 23 of the Corporate Governance Policy, the Company has established a Director Nomination Committee to impartially examine through a transparent and objective process the selection of Director candidates and the dismissal of Directors as well as to evaluate and supervise the status of Director successor development plans created by the President and Representative Director, the issues therein, and Director succession plans created by the President and Representative Director. The Committee met eight times during the period from April 2020 to the June 2021 Ordinary General Meeting of Shareholders. The Committee deliberated on matters including policies for selecting Officers (Directors, Executive Officers and Special Audit & Supervisory Officers) and candidate proposals, skill matrix, and chairpersons of the Director Nomination Committee and the Director Compensation Committee. The Mandates, Roles, and Activities of the Director Compensation Committee As stated in Article 23 of the Corporate Governance Policy, the Company has established a Director Compensation Committee to impartially examine through a transparent and objective process proposals and discussions concerning matters such as the compensation system and bylaws for Directors of the Company as well as Directors’ individual compensation. The Director Compensation Committee, with a mandate from the Board of Directors, decides the individual compensation of Directors who are not Audit & Supervisory Committee members. – 15 – The Committee met nine times during the period from April 2020 to the June 2021 Ordinary General Meeting of Shareholders. The Committee deliberated on matters including the amount of base compensation and bonuses for each Director, as well as granting of basic points under the performance- linked compensation system. Independent Directors Number of Independent Directors 5 Matters relating to Independent Directors The Company has designated all Outside Directors who qualify as independent directors or auditors as independent directors or auditors. Criteria for Independence of Outside Directors The Company has established the criteria below to objectively determine whether potential Outside Directors are independent. 1. A person is not independent if: (1) The person considers the Company to be a major business partner1, or has served as an executive2 within the past five years in an entity for which the Company is a major business partner; (2) The person is a major business partner3 of the Company or has served as an executive within the past five years in an entity that is a major business partner of the Company. (3) The person is a business consultant, certified public accountant, or lawyer who has received a large sum of money or other forms of compensation4 (other than compensation as an Officer) from the Company or has, within the past three years, performed duties equivalent to those of an executive as an employee of a corporation or group, such as a union, that has received a large sum of money or other forms of compensation from the Company; (4) The person is a major shareholder5 of the Company or has, within the past five years, been an executive or Audit & Supervisory Board member of an entity that is a major shareholder of the Company; (5) The person is an executive or Audit & Supervisory Board member of an entity in which the Company is currently a major shareholder; (6) The person is a major lender6 to the Company or has been an executive of a major lender to the (7) The person has been employed by an auditing firm that has conducted a legal accounting audit Company within the past five years; of the Company within the past five years; past five years; (8) The person has been employed by a leading managing underwriter of the Company within the (9) The person has received a large donation7 from the Company or, within the past three years, has performed duties equivalent to those of an executive as an employee of a corporation or a group, such as a union, that has received a large donation from the Company; (10) The person came from an entity that employs someone from the Company as an Outside (11) A spouse or relative within the second degree of kinship of a person having the interests listed Director; or in (1) through (9) above. 2. Even if any of the foregoing criteria apply to a potential Outside Director, the Company can elect that person as an Outside Director if that person satisfies the requirements for Outside Directors set forth in the Companies Act, and the Company deems the person suitable as an Outside Director of – 16 – the Company in light of his or her personality, knowledge, experience, or other qualifications upon explaining and announcing the reasons thereof. Notes 1: A person (usually a supplier) considers the Company to be a major business partner if 2% or more of its consolidated net sales (consolidated revenue) has come from the Company in any fiscal year within the past three years. 2: “Executive” means an Executive Officer, Executive Director or Operating Officer, or an employee occupying a senior management position of department manager or higher. 3: A person (usually a buyer) is a major business partner if 2% or more of the Company’s consolidated revenue has come from that partner in any fiscal year within the past three years. 4: “A large sum of money or other forms of compensation” means an average annual amount for the past three years that is: i) no less than 10 million yen for an individual; or ii) no less than 2% of the annual revenues in any fiscal year for a group. 5: “Major shareholder” means a shareholder who directly or indirectly holds 10% or more of the voting rights. 6: “A major lender” means a financial institution or other major creditor that is indispensable for the Company’s financing and on which the Company depends to the extent that it is irreplaceable in any fiscal year within the past three years. 7: “Large donation” means a donation whose annual average amount for the past three years exceeds either: i) 10 million yen or ii) 30% of the annual expense of the group, whichever is higher. Incentive Policies for Directors Performance-Linked Compensation, Other Incentives Supplementary Explanation For details, please see “Policy on Determining and Calculating Compensation” under II 1. “Director Compensation” in this Report. Recipients of Stock Options Supplementary Explanation ――― Director Compensation Disclosure of Individual Directors’ Compensation Supplementary Explanation Compensation of Directors in the fiscal year ending March 31, 2021 is as follows. No Individual Disclosure – 17 – – The eight Directors who are not Audit & Supervisory Committee members received compensation totaling ¥400 million, including ¥299 million in base compensation (including ¥290 million in fixed compensation and ¥9 million in variable compensation), ¥76 million in bonuses, and ¥24 million in stock compensation. (This includes two Outside Directors who received compensation totaling ¥28 million, consisting of ¥28 million in base compensation.) – The six Directors who are Audit & Supervisory Committee members received compensation totaling ¥81 million, consisting of ¥81 million in base compensation. (This includes five Outside Directors who received compensation totaling ¥48 million, consisting of ¥48 million in base compensation.) Notes 1. The Company has introduced an officers’ shareholding association system to link compensation more closely to shareholder value. A portion of the base compensation is discretionally allotted for the acquisition of the Company’s shares. The Company has established the criteria for shareholding by its officers based on internal regulations defined by the Board of Directors to demonstrate its commitment to and responsibilities for the management to all shareholders. 2. The amount above includes bonuses to be paid to Directors in the amount of 76 million yen (amount to be paid to five Directors, excluding the Chairman and Director without the right of representation, Outside Directors, and Directors who are Audit & Supervisory Committee members), subject to the approval of the proposal concerning the payment of bonuses to Directors to be proposed at the Ordinary General Meeting of Shareholders scheduled for June 25, 2021. 3. The Company introduced a performance-linked stock compensation plan (stock compensation) by employing a framework referred to as the officer compensation BIP (Board Incentive Plan) trust, for the purpose of showing its commitment to promoting sustainable growth and increasing its medium to long-term corporate value, in addition to strengthening the sense of sharing common interests with its shareholders. The stock compensation stated above represents the amount recorded based on Japanese Generally Accepted Accounting Principles (JGAAP) concerning the stock delivery points granted in the current fiscal year. 4. The number of individuals above includes two Directors who are Audit & Supervisory Committee members who retired at the conclusion of the Ordinary General Meeting of Shareholders held on June 25, 2020. 5. Stock options are not granted. Policy on Determining and Calculating Compensation Established Disclosure of Policy on Determining and Calculating Compensation Compensation for Directors who are not Audit & Supervisory Committee members is decided by resolution of the General Meeting of Shareholders and the Board of Directors, and compensation for Directors who are Audit & Supervisory Committee members is decided by resolution of the General Meeting of Shareholders and by the discussion of the Audit & Supervisory Committee members after a fair, transparent, and rigorous review by the Director Compensation Committee, a majority of whose members are Outside Directors and which presents its opinion, to ensure transparency and objectivity. With regard to the compensation of Directors who are not Audit & Supervisory Committee members, the Audit & Supervisory Committee will share and discuss the matters confirmed by the Director Compensation – 18 – Committee and confirm whether there are matters that should be stated at the Ordinary General Meeting of Shareholders. The compensation of Directors who are not Audit & Supervisory Committee members was formerly decided by the President and Representative Director, who was vested with full discretionary authority by the Board of Directors and who based the decision on information that was deliberated and approved by the Director Compensation Committee. However, the Corporate Governance Policy was amended by resolution of the Board of Directors on February 25, 2022 to enhance and strengthen corporate governance, and it currently gives full discretionary authority for deciding compensation of Directors who are not Audit & Supervisory Committee members to the Director Compensation Committee. An overview of the Director Compensation Committee is as follows. For details, such as the mandates and roles of the Director Compensation Committee, see “Supplementary Explanation” under “II. 1. Organizational Composition and Operation, Voluntary Establishment of Committee(s) Corresponding to Nomination Committee or Compensation Committee.” Policies (1) Decision-making policies, etc. on compensation for individual Directors who are not Audit & Supervisory Committee members The Company has established its decision-making policies on compensation for individual Directors who are not Audit & Supervisory Committee members. Method of determining the decision-making policies Decision-making policies are deliberated by the Director Compensation Committee, a majority of whose members are Outside Directors, and decided by the Board of Directors. Outline of contents of the decision-making policies (1) Basic stance The Company’s officer compensation shall consist of base compensation, which is comprised of fixed compensation and a variable portion, bonuses, which are performance-linked compensation, and stock compensation, which is performance-linked, non-monetary compensation. Given their role of monitoring management as a whole from a position that is independent from the execution of business affairs, Officers who do not have executive duties receive only fixed compensation component of base compensation and do not receive bonuses or stock compensation, which are linked to performance and stock price. Compensation for Officers who have executive duties – Compensation shall be an incentive to improve business performance in order to increase corporate – Compensation shall be sufficient to secure qualified persons both from within the Company and value in both the near and long terms. from outside. – Compensation shall be commensurate with business performance so that they can demonstrate their management capabilities to the fullest during their terms of office. Compensation for Officers who do not have executive duties – The composition of compensation shall guarantee independence so that these Officers can suitably demonstrate their general management supervisory function, etc. – Compensation shall be sufficient to secure qualified persons both from within the Company and from outside. (2) Decision-making policies on base compensation for individual Directors who are not Audit & Supervisory Committee members Base compensation Base compensation is monthly-paid monetary compensation which is determined comprehensively – 19 – based on factors such as responsibilities and position of each officer. The variable portion of base compensation for officers with executive duties reflects the annual performance results based on the evaluation criteria set for each role. (Variable range: ±20%) (3) Decision-making policies on performance-linked compensation for Directors who are not Audit & Supervisory Committee members Bonuses Bonuses are monetary compensation paid annually to Officers with executive duties, the amounts being determined in accordance with the level of achievement with respect to annual operating performance targets. If a certain level of business profit is not attained, bonuses may not be paid at all. Bonuses reflect the annual performance based on the evaluation criteria set for each role. (Variable range of months for bonuses: ±1.2 months) Details of performance indicators and reasons for selection thereof In consideration of the nature of bonuses as a short-term incentive, annual business profit is used as a performance indicator, with factors such as non-recurring losses taken into account. Calculation method The amount of bonuses payable is calculated in accordance with the calculation standards predetermined by the Board of Directors, by multiplying the monthly base compensation by a certain number of months determined according to the level of achievement with respect to the performance indicators. The final amount payable is determined by the General Meeting of Shareholders to ensure transparency. Results of performance indicators Details are as stated in the convocation notice of the 79th Ordinary General Meeting of Shareholders.(https://global.epson.com/IR/information/meeting.html) “1.9 Status of assets and income (loss)” (please refer to page 25). Performance-linked stock compensation (officer compensation BIP trust) Details are as stated in “(4) Decision-making policies on non-monetary compensation for Directors who are not Audit & Supervisory Committee members.” (4) Decision-making policies on non-monetary compensation for Directors who are not Audit & Supervisory Committee members Performance-linked stock compensation (officer compensation BIP trust) This is a stock compensation system for officers with executive duties wherein Company shares are delivered using a trust scheme. Under this system, the Company contributes up to 500 million yen in total for each target period, which covers a period of three consecutive fiscal years, to the trust as compensation for officers eligible for this system. During each target period, the trust uses the entrusted money to acquire up to 300,000 shares (in the event of a share split, share consolidation, etc., the said maximum number of shares will fluctuate in proportion to the ratio of split or consolidation) of the Company’s ordinary shares from the stock market or the Company (disposal of treasury shares). Every July during the trust period, basic points are granted based on positions and other factors. The number of points will fluctuate by multiplying the basic points by a performance-based coefficient determined based on the level of achievement with respect to the Company’s medium- to long-term performance targets. (The maximum number of total points per year is 100,000 points, and one point is equivalent to one share.) In principle, after the elapse of three years from the date basic points are granted, approximately 50% of the Company’s ordinary shares equivalent to the number of points after multiplying the performance-based coefficient determined based on the level of achievement with – 20 – respect to the Company’s medium-term performance targets, which include business profit, ROS, and ROE, are delivered from the trust, and the remainder is paid as money equivalent to the cash value of the Company’s ordinary shares for the purpose of appropriating it as funds to pay withholding taxes and other taxes. The plan is designed such that the ratio of stock compensation to base compensation ranges between 10% and 22% depending on position, while the number of shares issued depends on the level of achievement with respect to financial indicators during a target period (three years). Under the stock compensation system, mechanisms (malus and clawback clauses) have been established with which the Company may cause officers to forfeit the right to receive delivery of shares and demand a refund of the amount equivalent to the shares already delivered by the Company in the event of violations of laws and regulations, internal regulations, etc. by officers. Details of performance indicators and reasons for selection thereof The Company has selected quantitative evaluations (business profit, ROS, ROE, cash flows from operating activities) as well as qualitative evaluations as indicators so that performance-linked compensation based on performance indicators can provide appropriate incentives to Directors and to show a commitment to promoting sustainable growth and increasing medium to long-term corporate value. Calculation method Details are as stated in the convocation notice of the 79th Ordinary General Meeting of Shareholders (https://global.epson.com/IR/information/meeting.html) in Business Report “4.4 Compensation to Directors (2) Decision-making policies on base compensation for individual Directors who are not Audit & Supervisory Committee members (4) Decision-making policies on non-monetary compensation for Directors who are not Audit & Supervisory Committee members [Calculation method]” (please refer to page 38-39). (5) Decision-making policies on the ratio of compensation for individual Directors who are not Audit & Supervisory Committee members With regard to the policies on deciding the ratio of compensation by category for Directors who are not Audit & Supervisory Committee members (excluding the Outside Directors and Chairman without the right of representation), the monthly base compensation is used as the basis for calculating bonuses, which are calculated by multiplying a certain number of months determined based on the level of achievement with respect to performance indicators. Stock compensation is designed to range between 10% and 22% of the monthly base compensation depending on position, with the ratio of stock compensation increasing commensurate with position. For FY2020, the composition of the total compensation for Directors who are not Audit & Supervisory Committee members (excluding the Outside Directors and Chairman without the right of representation) was approximately 67% in base compensation, 25% in bonuses, and approximately 8% in stock compensation. (6) Matters regarding delegation of decisions on compensation for individual Directors who are not Audit & Supervisory Committee members President and Representative Director Yasunori Ogawa was formerly vested with full discretionary authority by the Board of Directors for decisions on compensation for Directors who are not Audit & Supervisory Committee members because he is in a position that gives him a full view of the performance of the entire Company. To ensure the proper exercise of this authority, Mr. Ogawa decided the amount of individual compensation for Directors who are not Audit and Supervisory Committee members on the basis of information that was deliberated and approved by the Director Compensation Committee, the majority of whose members are Outside Directors. However, to enhance and strengthen corporate governance, Seiko Epson amended the Corporate – 21 – Governance Policy by resolution of the Board of Directors on February 25, 2022, and it currently gives full discretionary authority for deciding the individual compensation of Directors who are not Audit & Supervisory Committee members to the Director Compensation Committee. To ensure the proper exercise of this authority, the majority of the members of the Director Compensation Committee are to be Outside Directors, and the members of the committee are to choose the Chairperson from among the Outside Directors. (7) Other important matters regarding decisions on the details of compensation for individual Directors who are not Audit & Supervisory Committee members Under the stock compensation system, mechanisms (malus and clawback clauses) have been established with which the Company may cause officers to forfeit the right to receive delivery of shares and demand a refund of the amount equivalent to the shares already delivered by the Company in the event of violations of laws and regulations, internal regulations, etc. by officers. Reasons the Board of Directors has determined that the details of compensation for individual Directors who are not Audit & Supervisory Committee members for the fiscal year under review comply with the decision-making policies The Board of Directors has confirmed the following points and determined that the compensation for Directors who are not Audit & Supervisory Committee members for the fiscal year under review complies with the policies. – A fair, transparent, and rigorous reporting by the Director Compensation Committee, a majority of whose members are Outside Directors, has been conducted. – The Audit & Supervisory Committee shared and discussed the details that were discussed by the Director Compensation Committee and reported that there were no items to be stated at the General Meeting of Shareholders. (2) Decision-making policies, etc. on compensation for individual Directors who are Audit & Supervisory Committee members The Company has established its decision-making policies on compensation for individual Directors who are Audit & Supervisory Committee members. Method of determining the decision-making policies Decision-making policies are determined by the Audit & Supervisory Committee. Outline of contents of the decision-making policies The Company’s compensation for individual Directors who are Audit & Supervisory Committee members shall be decided by taking into consideration factors such as whether he or she is Full-Time, how the audit work has been divided, and the details and levels of compensation for Directors who are not Audit & Supervisory Committee members. Given their role in monitoring management as a whole from a position that is independent from the execution of business affairs, the Company pays only fixed compensation to Directors who are Audit & Supervisory Committee members. The basic stance for such fixed compensation is as stated in “Compensation for Officers who do not have executive duties” (please refer to page 37), and it is determined by the Board of Directors upon deliberation by the Director Compensation Committee, a majority of whose members are Outside Directors, has been conducted. (3) Resolutions by the General Meeting of Shareholders on compensation for Directors Base compensation Upon the resolution at the Ordinary General Meeting of Shareholders of June 28, 2016, the maximum base compensation was set at 62 million yen per month for Directors who are not Audit & Supervisory Committee members (including 10 million yen per month for Outside Directors). At the conclusion of – 22 – the Ordinary General Meeting of Shareholders, the number of Directors who are not Audit & Supervisory Committee members was eight (including two Outside Directors). In addition, upon the resolution at the Ordinary General Meeting of Shareholders, the maximum base compensation was set at 20 million yen per month for Directors who are Audit & Supervisory Committee members. At the conclusion of the Ordinary General Meeting of Shareholders, the number of Directors who are Audit & Supervisory Committee members was four. Performance-linked stock compensation (officer compensation BIP trust) Upon the resolution at the Ordinary General Meeting of Shareholders of June 28, 2016, the maximum amount of performance-linked stock compensation for Directors who are not Audit & Supervisory Committee members (excluding those who are independent from business execution, such as Outside Directors, as well as those residing overseas) was set at 500 million yen in total over a period of three fiscal years, with the maximum number of total points to be granted per year set at 100,000 points (one point is equivalent to one share in the Company). Upon the resolution at the Board of Directo