日本たばこ産業（2914） – Corporate Governance Report

[This is an English translation prepared for reference purpose only. Should there be any inconsistency between the translation and the original Japanese text, the latter shall prevail.] Corporate Governance Report Last update: March 23, 2022 JAPAN TOBACCO INC. Masamichi Terabatake Representative Director and President, Chief Executive Officer Contact: +81-3-6636-2914 Securities Code Number: 2914 https://www.jti.co.jp/ The Company’s status of corporate governance is described below. I. Basic Concept on Corporate Governance, Capital Structure, Corporate Profile and Other Basic Information 1. Basic Concept The Company believes that corporate governance is the system for conducting transparent, fair, timely and decisive decision-making to pursue the 4S model, JT’s management principle, which is, more specifically, “to strive to fulfill our responsibilities to our valued consumers, shareholders, employees and the wider society, carefully considering the respective interests of these four key stakeholder groups, and exceeding their expectations wherever we can.” The Company has set forth the “JT Corporate Governance Policy,” and strives to enhance corporate governance, based on the understanding that it leads to the Group’s sustainable profit growth and increase of corporate value in the mid to long term, which contribute to the development of the Group’s stakeholders and eventually the economy and society as a whole. The Company continues improving corporate governance as one of the key priorities for its management. “JT Corporate Governance Policy” is available on the Company’s website. URL of “JT Corporate Governance Policy”: https://www.jt.com/about/corporate_governance/ [Reasons for Non-compliance with the Principles of the Corporate Governance Code] The Company fully complies with the Principles of the Corporate Governance Code. This report is described according to the Corporate Governance Code revised in June 2021, including the Principles which are applied to the Prime Market. [Disclosure Based on the Principles of the Corporate Governance Code] [updated] The Principles and Supplementary Principles are referenced from the Corporate Governance Code published by Tokyo Stock Exchange, Inc. [Supplementary Principle 1.2.4: Adoption of an electronic voting system] The Company adopted electronic voting, which allows shareholders to exercise their voting rights through a dedicated website that the Company designates and provides English translations of the Japanese Notice of Convocation for Ordinary General Meetings of Shareholders (hereinafter Annual General Meetings) on its 1 website simultaneously, considering the number of institutional and foreign shareholders. The Company also uses the Electronic Voting Platform, which is operated by ICJ, Inc., for institutional shareholders. [Principle 1.4: Strategic shareholdings] The Company manages its strategic shareholdings appropriately. Its ownership policies and voting standards for strategic holdings of listed equities are as described in “Chapter 3. 2. (4) Strategic Shareholding” in the JT Corporate Governance Policy. The Company owns equities as strategic shareholdings only when determined beneficial to the sustainable profit growth and increase of corporate value in the mid to long term. The Board of Directors examines all shareholdings each year to determine whether they are appropriate in terms of their objectives and the risks and benefits are commensurate with the capital cost. The Company appropriately sells equities that are no longer considered beneficial to hold as a result of this examination. The Company exercises its voting rights upon comprehensively determining the purpose of possession and potential detriments to the equity value of the subject company. The number and purpose of each equity that the Company owns, etc. are as described in the Annual Securities Report. [Principle 1.7: Transactions among Associated Interested Parties] The procedures for transactions among associated interested parties are as described in “Chapter 3. 2. (7) Transactions among Associated Interested Parties” in the JT Corporate Governance Policy. [Supplementary Principle 2.4.1: Ensuring diversity including in the promotion to core human resources] The Company’s policies on ensuring diversity and other matters are as described in “III. 3. [Measures to Ensure Due Respect for Stakeholders]” in this report. [Principle 2.6: Roles of corporate pension funds as asset owners] The Company operated both ‘defined benefit corporate pension plans’ and ‘defined contribution pension plans’ as corporate pension plans until the Company abolished the ‘defined benefit corporate pension plans’ and migrated wholly to ‘defined contribution pension plans’ for existing employees as of April 1, 2018. The corporate pension subject to this principle is the defined benefit corporate pension plan assets of retired personnel only. For managing and operating the Company’s defined benefit corporate pension plan assets, the Company has established the Defined Benefit Corporate Pension Plan Asset Operation Committee, chaired by the Chief Financial Officer (CFO), and comprised of committee members including the officers in charge of the finance and human resources divisions, who have appropriate qualifications, responsibilities and authorities. The Defined Benefit Corporate Pension Plan Asset Operation Committee deliberates mainly on basic management policies on defined benefit corporate pension plan assets and asset compositions, and reports to the President. The committee regularly monitors the status of asset management and revises the compositions of managing trustees as necessary. To assist with sound and efficient management of defined benefit corporate pension plan assets, the Company allocates personnel with the appropriate qualifications to relevant organizational units and further enhances their qualifications by having them take external trainings and so forth. [Principle 3.1: Proactive provision of information] (1) The Company’s management principle, etc. are as described in “Chapter 1. 2. Management Principle, etc.” in the JT Corporate Governance Policy. The Company’s Business Plan is available on the Company’s website. “Business Plan”: https://www.jt.com/investors/management_information/business_plan/ (2) The Company’s basic concept and basic policies on corporate governance are as described in “I. 1. Basic Concept” in this report. (3) The Board of Directors appropriately decides on remuneration for Members of the Board (hereinafter Directors) and Executive Officers according to the following policies and procedures, as described in 2 “Chapter 4. 2. (3) Members of the Board and Executive Officers’ Remuneration” in the JT Corporate Governance Policy. In order to ensure objectivity and transparency, the Board of Directors establishes the Advisory Panel on Nomination and Compensation as a voluntary advisory panel towards the Board of Directors. All members of the Panel are Directors who do not serve as Executive Officers in which more than half of its members are independent Outside Directors. The Panel responds to consultation, discusses and recommends policies, systems, etc., concerning remuneration for the Company’s Directors and Executive Officers, as well as monitors the situation of remuneration of Directors at the Company. The Board of Directors adopts a performance-linked remuneration system and a stock remuneration system; adopts remuneration composition corresponding to the nature of each Director and Executive Officer’s services; and determines each Director and Executive Officer’s remuneration based on the following basic principles. – Set the remuneration at an adequate level to retain personnel with superior capabilities. – Link the remuneration to company performance so as to motivate executives to achieve their performance targets. – Link the remuneration to company value in the mid to long term. – Ensure transparency by implementing an objective and quantitative framework. Details for the policies and procedures for deciding on remuneration for Directors and Executive Officers are as described in “II. 1.[Remuneration for Directors]” in this report. (4) The Company conducts the nomination of candidates for Directors and Audit & Supervisory Board members as well as the dismissal of designated Directors and Directors also serving as Executive Officers, under the appropriate supervision of the Board of Directors, according to the following policies and procedures as described in “Chapter 4. 2. (2) Nomination of Candidates for Member of the Board” in the JT Corporate Governance Policy. The Company works on expanding, in terms of quality and quantity, the group of executive candidates with qualities for assuming sustainable profit growth and increase of corporate value in the mid to long term by pursuing the 4S model. Specifically, the Company intends to enhance the development of a group of executive candidates and improve the substance of succession plans, along with the process for formulating such plans, while referring to opinions from outside at the Advisory Panel on Nomination and Compensation comprised entirely of Directors who do not serve as Executive Officers, in which more than half of whose members being independent Outside Directors. Candidates for Directors are nominated by resolution of the Board of Directors. The resolution is made after securing opportunities to receive appropriate advice from independent Outside Directors by having the Advisory Panel on Nomination and Compensation deliberate on a candidate proposal formed by the President and report the content and results of its deliberations to the Board of Directors. Candidates for the Audit & Supervisory Board members are nominated by resolution of the Board of Directors as persons who are expected to perform their duties appropriately from a position independent of the Board of Directors. The resolution is made after securing opportunities to receive appropriate advice from independent Outside Directors by having the Advisory Panel on Nomination and Compensation deliberate on a candidate proposal formed by the President and report the content and results of its deliberations to the Board of Directors, upon receiving prior consent from the Audit & Supervisory Board. Dismissal of designated Directors and Directors also serving as Executive Officers in the cases where they do not meet the required qualifications or have become unable to perform their duties is made by resolution of the Board of Directors after securing opportunities to receive appropriate advice from independent Outside Directors by having those Directors who are not subject to dismissal request the Advisory Panel on Nomination and Compensation to deliberate on the proposal for dismissal and then having the Panel report the content and results of its deliberations to the Board of Directors. Further, when bringing up the agenda item on the appointment of candidates for Directors and Audit & Supervisory Board members at shareholders’ meetings, and when the Board of Directors has resolved to dismiss a designated Director or a Director also serving as an Executive Officer, the Company discloses the reasons for the appointment of individual candidates and for the dismissal. (5) The individual reasons for the nomination of candidates for Directors and Audit & Supervisory Board members are described in the Notice of Convocation for Annual General Meetings when this matter to be discussed. 3 [Supplementary Principle 3.1.2: Disclosure and provision of information in English] The Company discloses and provides information in English including the Annual Securities Reports, the Notice of Convocation for Annual General Meetings, and the Corporate Governance Reports, considering the number of foreign shareholders. [Supplementary Principle 3.1.3: Initiatives on sustainability and other matters] The Company’s initiatives on sustainability and other matters are as described in “III. 3. [Measures to Ensure Due Respect for Stakeholders]” in this report. [Supplementary Principle 4.1.1: Scope of matters delegated from the Board of Directors and management] A summary of the scope of delegation to the Company’s management is as described in “Chapter 4. 2. (9) Delegation of Authority” in the JT Corporate Governance Policy. The Board of Directors sets forth in the Board of Directors Regulations matters to be discussed at the Board of Directors meetings. In addition, for the purpose of realizing timely decision-making and high-quality execution of business, the Board of Directors sets forth a clear decision-making process based on Responsibility and Authority Regulations concerning essential business matters as well as appropriately delegates authority as necessary to Executive Officers based on the Group management strategies, under the Executive Officer system. [Principle 4.8: Effective use of independent directors] The Company’s policy on effective use of independent directors is as described in “Chapter 4. 2. (1) Composition of the Board of Directors” in the JT Corporate Governance Policy. The Board of Directors includes at least one-third of independent Outside Directors with qualifications conducive to the Company’s sustainable profit growth and increase of corporate value in the mid to long term in order to strengthen the supervisory functions and make management transparent. [Principle 4.9: Independence criteria for independent directors] The independence criteria for the Company’s independent executives is as described in “II. 1. [Independent Directors/Audit & Supervisory Board Members]” in this report. [Supplementary Principle 4.10.1: Appropriate involvement and advice from independent outside directors by establishing an independent nomination committee and remuneration committee] The Company’s concept on independence of an independent nomination committee and remuneration committee as well as its authority and roles are as described in “II. 1. [Voluntary Establishment of Committee(s) Corresponding to Nomination Committee or Compensation Committee]” in this report. [Supplementary Principle 4.11.1: Concept on the appropriate balance of knowledge, experience and skills, as well as diversity and size of the Board] The concept concerning the composition of the Board of Directors, including the balance of knowledge, experience and skills inside the Board as well as its diversity and number of members, is set forth as described in “Chapter 4. 2. (1) Composition of the Board of Directors” in the JT Corporate Governance Policy in order for the Board of Directors to determine the Group management strategies and important matters and to fulfill its roles and responsibilities effectively as the body exercising supervision over all business activities. The Board of Directors has as many members as necessary and appropriate, up to a maximum of fifteen (15). It is comprised of diverse professionals with a high sense of ethics and integrity as well as knowledge, experience and skills, taking into consideration such factors as gender, nationality, country of origin, work experience, race, ethnicity, cultural background, along with necessary skills for the Members of the Board. The Board of Directors includes at least one-third of independent Outside Directors with qualifications conducive to the Company’s sustainable profit growth and increase of corporate value in the mid to long term in order to strengthen the supervisory functions and make management transparent. The skills matrix of the Directors and Members of Audit & Supervisory Board is as described in the latest Notice of website General Meeting ( https://www.jt.com/about/officer/index.html ). Convocation Company’s Annual and the for 4 [Supplementary Principle 4.11.2: Concurrent posts assumed by Directors and Audit & Supervisory Board members] The significant concurrent positions of Directors and Audit & Supervisory Board members are as described in the Annual Securities Report. [Supplementary Principle 4.11.3: The Board’s effectiveness] The Company annually evaluates its Board of Directors’ effectiveness through a multi-step process. First, all Directors and Audit & Supervisory Board members complete a self-assessment questionnaire with regards to factors including the Board’s operations, oversight function and dialogues with shareholders and investors. Second, the Board’s administrative staff interview the Directors and Audit & Supervisory Board members individually as necessary to delve deeper into their questionnaire responses and compile the evaluation results. Lastly, the Board reviews and analyzes the self-assessment results in the aim of further improving its effectiveness. The Company takes advice from external consultants for drafting the questionnaire and analyzing the results in order to ensure objectivity and further improve the evaluation process. The evaluation items are as follows. The Board’s operations Composition (ratio between inside and outside members; diversity), performance (frequency; stringency of agendas; pre-meeting briefing), support & coordination (coordination among Directors, Audit & Supervisory Board members and internal auditing department; utilization of committees; information-sharing outside the Board), discussion (fair and swift decision-making in line with the Company’s management principle; unrestricted discussion), etc. Oversight function Reporting methods on business operations, risk management system, increase of the awareness of compliance, process of determining the executives’ remuneration, succession planning, etc. Dialogues with shareholders and investors Sharing opinions from shareholders and investors, optimization of dialogue methods, etc. The Board effectiveness evaluation for 2020 yielded generally positive results across all evaluation items as continuing from 2019. It confirmed that the Board is functioning not only effectively but increasingly so. On the other hand, the evaluation identified areas where further improvement is warranted. The areas of improvement include ones related to the Board’s operations to further enhance discussions, and ones to further increase information-sharing that could contribute to in-depth discussions on corporate governance and further enhancements of the quality of the Board’s decision-making. In addition, the Board has incorporated the continuous impacts of the COVID-19 pandemic on the Company’s business and worked on making the following improvements throughout 2021. Effective and efficient operations of the Board of Directors aimed to further enhance discussions – Continued to hold detailed pre-meeting briefings regarding material matters – Secured sufficient deliberation time by allocating appropriate time for each agenda – Continued online Board meetings and improved the meeting operations Further enhancement in discussions and information sharing for better-quality decision-making by the Board – Shared enriched information on the following matters: ・ Updates on material measures concerning mid- to long-term strategies ・ Updates on material measures and verification of their effectiveness ・ Updates on corporate governance and its future policies ・ Updates on dialogues with shareholders and investors ・ The COVID-19 pandemic’s impact, countermeasures, and updates on the Group’s employees and each of its businesses 5 Similarly to those of the previous year, the results of the Board’s evaluation on its effectiveness in 2021 provided generally positive feedback and exhibited improvements in the categories mentioned above. Even after 2022, the Board pursues improvements required for the issues listed below, in order to continuously enhance the Board’s effectiveness. Key issues The Company’s action plans going forward Continued improvements in the Board of Directors operations Further expansion of opportunities to discuss mid- to long-term strategies, etc. Further expansion of progress reporting and information sharing on key measures, etc. Initiatives to further improve the quality of deliberations and discussions Enhancement of discussions from the long-term perspective [Supplementary Principle 4.14.2: Training policies for Directors and Audit & Supervisory Board members] The Company’s training policies for Directors and Audit & Supervisory Board members are as described in “Chapter 4. 1. (3) Support for Members of the Board and Audit & Supervisory Board Members” in the JT Corporate Governance Policy. [Principle 5.1: Policy for constructive dialogue with shareholders] The Company’s policies concerning the maintenance of a system and measures to promote constructive dialogue with shareholders are as described in “Chapter 3. 2. (3) Dialogue with Shareholders” in the JT Corporate Governance Policy. The Directors, Executive Officers and Audit & Supervisory Board members respond, as necessary, to shareholders’ requests for dialogue, depending on the purport and intention of such dialogue. 2. Capital Structure Foreign Shareholding Ratio 10% to 20% [Status of Major Shareholders] [updated] Name Minister of Finance The Master Trust Bank of Japan, Ltd. (Trust Account) SMBC Nikko Securities Inc. Custody Bank of Japan, Ltd. (Trust Account) State Street Bank West Client – Treaty 505234 Barclays Securities Japan Limited JAPAN SECURITIES FINANCE CO., LTD. Custody Bank of Japan, Ltd. as trustee for Mizuho Bank, Ltd. Retirement Benefit Trust Account re-entrusted by Mizuho Trust & Banking Co., Ltd. JPMorgan Chase Bank 385771 Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. Controlling Shareholders (except for Parent Company) N/A 6 Number of Shares Owned Ratio (%) 666,925,200 37.58 161,020,700 42,916,800 41,665,100 21,441,841 18,443,300 17,641,100 17,428,100 12,397,794 12,056,526 9.07 2.42 2.35 1.21 1.04 0.99 0.98 0.70 0.68 Parent Company Supplementary Explanation [updated] None The Japan Tobacco Inc. Act (hereinafter JT Act) obligates the Japanese Government to hold the Company’s shares. As of the end of December 2021, the government holds 33.35% of all issued shares of the Company. The ratio presented in “Status of Major Shareholders” above is 37.58% as it is calculated by deducting treasury shares (225,475,301 shares as of the end of December 2021) from the number of shares issued. 3. Corporate Attributes Listed Stock Exchange and Market Segment Tokyo Stock Exchange First Section Fiscal Year-End Business Sector December Foods Number of Employees (Consolidated basis) as of the End of the Previous Fiscal Year More than 1,000 employees Net Sales (Consolidated basis) for the Previous Fiscal Year Number of Consolidated Subsidiaries as of the End of the Previous Fiscal Year More than 1 trillion yen More than 100 and less than 300 companies 4. Policies on Measures to Protect Minority Shareholders in Conducting Transactions with Controlling Shareholder N/A shares. Business Act. 5. Other Significant Circumstances Which May Have Material Impact on Corporate Governance The JT Act obligates the Japanese Government to hold more than one third of the Company’s issued The Minister of Finance has the authority to supervise the Company under the JT Act and the Tobacco The Company has a publicly listed subsidiary, namely Torii Pharmaceutical Co., Ltd. (hereinafter Torii.) The Company’s policies on governance at listed subsidiary is as follows. Policies on the Group management The Company aims for the Group’s sustainable profit growth and increase of corporate value over the mid to long term in pursuit of the 4S model, its management principle, by sharing and practicing the Group mission on a group-wide basis. Based on its belief that better corporate governance contributes to achieving aforementioned goals, the Company strives to optimize the Group structure by defining functions and regulations shared in the Group and managing the Group as a whole. In addition, the Company coordinates compliance (including internal reporting system), internal auditing, assurance of reliability of financial reporting and more with its subsidiaries and maintains these activities. The Company strives to give the best consideration to assure independence of listed subsidiary and to respect the rights of minor shareholders. Purposes of having listed subsidiary 7 The Company has a publicly listed subsidiary, namely Torii, in light of the management benefits of owing a subsidiary, including capital market discipline. Another motivation is for Torii to acquire increased competitive advantage in its business through factors, such as credibility building and recruitment of excellent human resources, both of which are important in the pharmaceutical business. Together with Torii, the Company built an integrated value chain to collaborate efficiently with each other. Specifically, the Company conducts R&D while Torii handles manufacturing, sales and promotional activities. From a Group-wide perspective, they continue to optimize their pharmaceutical business model and deepen collaboration between the Company and Torii by, for instance, having consolidated all R&D and clinical development functions into the Company. Measures to ensure effective governance at listed subsidiary In regard to owning a listed subsidiary, the Company believes it is an indispensable prerequisite for the subsidiary to maintain independence in terms of management and to duly protect its minority shareholders’ interests in order for, not only the subsidiary, but also for the Group to grow in value. Therefore, the Company is striving to build an appropriate governance regime for Torii as a listed subsidiary. The Company has instituted the Group’s Responsibility and Authority Regulations as an internal decision-making regulation. Torii has opted to adopt these regulations, thereby gaining autonomy in terms of decision-making authority. Such autonomy ensures its independence as a listed subsidiary. Additionally, Torii is upgrading its governance regime’s effectiveness by transiting to a majority-independent Board of Directors, which was approved at its ordinary general meeting of shareholders on March 26, 2020. 8 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 an Audit & Supervisory Board structure [Directors] [updated] Maximum Number of Directors Stipulated in Articles of Incorporation Fifteen members Term of Office Stipulated in Articles of Incorporation Chairperson of the Board Number of Directors Appointment of Outside Directors Number of Outside Directors Number of Independent Outside Directors One year Chairperson Ten members Appointed Four members Four members Outside Directors’ Relationship with the Company (1) [updated] Name Attribute Main Kohda From another company Yukiko Nagashima From another company Masato Kitera From another company Tetsuya Shoji From another company Relationship with the Company* a b c d e f g h i j k ∆ ∆ ∆ * Categories for “Relationship with the Company” * “○” when the director presently falls or has recently fallen under the category; “∆” when the director fell under the category in the past. * “●” when a close relative of the director presently falls or has recently fallen under the category; “▲”when a close relative of the director fell under the category in the past. a. A person who executes business in a listed company or a subsidiary of a listed company b. A person who executes business or a non-executive director in the parent company of a listed company c. A person who executes business in a sister company of a listed company d. A supplier of which a listed company is a major customer, or, if the supplier is a corporation, a person who executes e. A major customer of a listed company, or, if the customer is a corporation, a person who executes business in the f. A consultant, professional accountant or lawyer who receives a large amount of money and other economic benefits other than officers’ compensation from a listed company g. A major shareholder of a listed company (if the major shareholder is a corporation, a person who executes business in h. A person who executes business (limited to the principal) in a corporation that is a customer of a listed company other than customers falling in either category of d, e and f above i. A person who executes business (limited to the principal) in a corporation at which an outside officer of the company concurrently has a position of outside officer j. A person who executes business (limited to the principal) in a corporation to which a listed company offers donation k. Others business in the corporation corporation the corporation) 9 Outside Directors’ Relationship with the Company (2) [updated] Name Supplementary Explanation Reasons for Appointment Inde-pendent Executive Main Kohda ○ The Company has appointed her as independent executive as it believes she is qualified to serve as an Outside Director, considering her in-depth knowledge of international finance; her broad experience gained from serving on government committees and similar positions; and her deep insight and objective point of view that she has demonstrated through her activities as a novelist. Her appointment is also based on the Company’s assessment that there is no risk of conflict of interests with ordinary shareholders. No items to report, however, she previously served as a member of the Board of Governors of Japan Broadcasting Corporation (NHK), and now concurrently serves as an outside director of Japan Exchange Group, Inc. Although the Company has business relationships with both organizations including payments, these positions of hers are not indicated in “Relationship with the Company” in the table above as she was/is a non-executive director in these positions. The payments to both organizations accounted for less than 0.001% of NHK’s ordinary business income in FY2020, and for less than 0.005% of Japan Exchange Group, Inc.’s consolidated operating revenue in FY2020, respectively. The payments also accounted for less than 0.001% of the Company’s consolidated revenue in FY2021. Therefore, the Company considers these relationships do not affect her independence. The payment for NHK is not to be negotiated as is stipulated under the Broadcast Act, that is to say, the Company is not in place to interfere with this contract. Thus, this payment cannot be defined as transactional relationship. this contract 10 Yukiko Nagashima ○ Masato Kitera ○ She previously served in Recruit Holdings Co., Ltd., and now concurrently serves as a Standing Audit and Supervisory Board member of the said company as well as Recruit Co., Ltd. Although the Company has business relationships with both companies, the transaction amount accounted for than 0.01% of Recruit Holdings Co., Ltd.’s in FY2020, and for less than 0.01% of the Company’s consolidated revenue in FY2021, respectively. Therefore, the Company these relationships do not affect her independence. consolidated considers revenue less She also concurrently serves as an outside member of Audit and Supervisory Board in Sumitomo Corporation. Although the Company has business relationships with the said corporation, she is a non-executive director in this position. The transaction amount accounted for less than 0.001% of the said corporation’s consolidated revenue in FY2020, and for less than 0.001% of the Company’s consolidated revenue in FY2021, respectively. Therefore, the Company considers the relationship does not affect her independence. His relationship with the Company is as indicated in “Relationship with the Company” in the table above as he had received the compensation as the Company’s part-time advisor since April 30, 2020 until March 24, 2021. The compensation was paid in return for his services of advisory regarding the Company’s management and business based on his experience and knowledge, and the amount of the compensation was compliant with internal the independence criteria (being less than ten million yen per year). Therefore, the Company considers the relationship does not affect his independence. He concurrently serves as an outside director of Marubeni Corporation. Although the Company has business relationships with said corporation, he is a non-executive this position. The director Company’s the in 11 in The Company has appointed her as independent executive as it believes she is qualified to serve as an Outside Director, considering her experience in business execution and corporate management the areas such as emerging business and staffing services. She also has in-depth knowledge gained both from standpoints management Her and appointment is based on the Company’s assessment that there is no risk of interests with ordinary conflict of shareholders. of audit. the The Company has appointed him as independent executive as it believes he is qualified to serve as an Outside Director, considering his abundant international experience and knowledge concerning international affairs, gained through his long diplomatic career including his important positions as a government officer mostly the Minister of Foreign Affairs. His appointment the Company’s assessment that there is no risk of conflict of interests with ordinary shareholders. is also based on in Tetsuya Shoji ○ achievements The Company has appointed him as independent executive as it believes he is qualified to serve as an Outside Director, considering his abundant and experience, knowledge corporate concerning management. He also has broad experience in fields such as planning, human resource management, global expansion and driving digitalization. His appointment the Company’s assessment that there is no risk of conflict of interests with ordinary shareholders. is based on Voluntary Establishment of Committee(s) Corresponding to Nomination Committee or Compensation Committee Established Committee’s Name, Composition, and Attributes of Chairperson [updated] than 0.001% of transaction amount accounted for the said less corporation’s consolidated revenue in FY2020, and for less than 0.001% of the Company’s consolidated revenue in FY2021, respectively. Therefore, the Company considers the relationship does not affect his independence. the than 0.2% of He previously served in NTT Communications Corporation and now, he concurrently serves as its the corporate advisor. Although Company has business relationships with the the said corporation, transaction amount accounted for said less corporation’s consolidated revenue in FY2020, and for less than 0.05% of the Company’s consolidated revenue in FY2021, respectively. Therefore, the Company considers the relationship does not affect his independence. He also concurrently serves as an outside director of Mitsubishi Logistics Corporation. Although the Company has business relationships with the said corporation, he is a non-executive director in this position. The transaction amount accounted for less than 0.05% of the said corporation’s consolidated revenue in FY2020, and for less than 0.002% of the Company’s consolidated revenue in FY2021, respectively. Therefore, the Company considers the relationship does not affect his independence. 12 Voluntary committee corresponding to nomination committee Number of committee members Name Number of standing committee members Advisory Panel on Nomination and Compensation Number of inside directors Number of outside directors Number of external experts Number of others Committee Chair 6 0 2 4 0 0 Outside director Voluntary committee corresponding to compensation committee Number of committee members Name Number of standing committee members Advisory Panel on Nomination and Compensation Number of inside directors Number of outside directors Number of external experts Number of others Committee Chair 6 0 2 4 0 0 Outside director Supplementary Explanation [updated] The Advisory Panel on Nominations and Compensation was established as a voluntary advisory arm of the Board of Directors. It merges the former Meeting for Talent Development and Compensation Advisory Panel’s respective functions into a single entity. Its purpose is to render the Board’s decision-making more objective and transparent and to upgrade the Board’s oversight functions by having the Board deliberate on executive appointment and remuneration in accordance with the results of the deliberation in the Panel. Its specific roles include supporting the growth, including succession plans, of executive candidates; deliberating on selection of nominees for seats on the Board of Directors and Audit & Supervisory Board and dismissal of designated Directors and Directors also serving as Executive Officers; and reporting the results of the deliberation on remuneration of Directors and Executive Officers. In order to ensure its independence and objectivity, the Panel is comprised entirely of Directors who do not serve as Executive Officers, in which more than half of its members are independent Outside Directors. Chaired by an independent Outside Director, the Panel has six members, and meets at least once a year. In 2021, the Panel met five times with a 100% attendance rate to specify the skills required of the Board of Directors; discuss the development of a skills matrix; review remuneration levels; review executive candidates; deliberate on candidates for the Board of Directors nominations; and review the key performance indicators (KPIs) for the executive bonus and performance share units for FY2022. [Audit & Supervisory Board Members] Establishment of Audit & Supervisory Board Established Maximum Number of Audit & Supervisory Board Members Stipulated in Articles of Incorporation Five members Number of Audit & Supervisory Board Members Five members Cooperation among Audit & Supervisory Board Members, Independent Auditors and Internal Audit Divisions 13 Audit & Supervisory Board members, the Operational Review and Business Assurance Division (the Company’s internal audit division), and the independent auditor (Deloitte Touche Tohmatsu LLC) conduct audits individually and appropriately. They endeavor to enhance their cooperation for ensuring appropriate audits and exchange information and opinions as necessary, largely by sharing information on the results of their respective audits. Appointment of Outside Audit & Supervisory Board Members Appointed Number of Outside Audit & Supervisory Board Members Three members Number of Independent Audit & Supervisory Board Members Three members Outside Audit & Supervisory Board Members’ Relationship with the Company (1) Name Attribute Relationship with the Company* a b c d e f g h i j k l m Toru Mimura From another company Hiroshi Obayashi From another company Koji Yoshikuni From another company △ △ * Categories for “Relationship with the Company” * “○” when the director presently falls or has recently fallen under the category; “∆” when the director fell under the category in the past * “●” when a closer relative of the director presently falls or has fallen under the category; “▲” when a close relative of the director fell under the category in the past a. A person who executes business in a listed company or a subsidiary of a listed company b. A non-executive director or an accounting advisor in a listed company or a subsidiary of a listed company c. A person who executes business or a non-executive director in the parent company of a listed company d. A company auditor of a parent company of a listed company e. A person who executes business in a sister company of a listed company f. A supplier of which a listed company is a major customer, or, if the supplier is a corporation, a person who executes g. A major customer of a listed company, or, if the customer is a corporation, a person who executes business in the h. A consultant, professional accountant or lawyer who receives a large amount of money and other economic benefits other than officers’ compensation from a listed company i. A major shareholder of a listed company (if the major shareholder is a corporation, a person who executes business in j. A person who executes business (limited to the principal) in a corporation that is a customer of a listed company other than customers falling in either category of f, g and h above k. A person who executes business (limited to the principal) in a corporation at which an outside officer of the company concurrently has a position of outside officer l. A person who executes business (limited to the principal) in a corporation to which a listed company offers donation m. Others business in the corporation corporation the corporation) Outside Audit & Supervisory Board Members’ Relationship with the Company (2) [updated] Name Supplementary Explanation Reasons for Appointment Inde-pendent Executive 14 Toru Mimura ○ in the The than served the He previously Ministry of Finance, which is one Company’s major of shareholders. Company believes that he is qualified to serve as an outside Audit & Supervisory Board member as described in Reasons for Appointment on the right, and meets all requirements for being appointed as independent director prescribed by the financial instruments exchange. It has been more ten years since he resigned from an important position in the Ministry of Finance, which complies with the internal criteria that stipulates that five years must pass after leaving the relevant positions in order to be appointed as Outside Director. He also previously served as a director of Eltes Co., Ltd. Although business the Company relationships with said company, the position of his is not indicated in “Relationship with the Company” in the table above as he was a non-executive director. The transaction amount with the said company accounted for less than 1.3% of the said company’s consolidated net sales in FY2020, and for less than 0.005% of the Company’s consolidated revenue in FY2021, respectively. Therefore, the Company the relationship does not affect his independence. considers has the The Company has appointed him as independent executive as it believes he is qualified to serve as an outside Audit & Supervisory Board member, considering his deep knowledge of such fields as finance, global risk management, geopolitics and corporate through his law extensive experience over many years of serving in a wide range of important positions in ministries and bureaus, in addition to his role as research institute chairperson. His appointment is also based on the Company’s assessment that there is no risk of conflict of interests with ordinary shareholders. 15 the No items to report, however, he concurrently serves as an outside Audit & Supervisory Board member of Daiwa Securities Co. Ltd. The said company owns the Company’s issued shares, which accounts for 0.02% of the total Company’s shares. Although the Company business has said relationships with company, this position of his is not indicated in “Relationship with the Company” in the table above as he is a non-executive director in this position. The transaction amount accounted for less than 0.001% of the said company’s consolidated operating revenue in FY2020, and for the Company’s consolidated revenue in FY2021. Therefore, the Company considers this relationship does not affect his independence. than 0.001% of less He previously served in Japan Broadcasting Corporation (NHK). Although the Company pays a certain amount of the subscription fee to NHK, the payment for NHK is not to be negotiated as this contract is stipulated under the Broadcast Act, that is to say, the Company is not in place to interfere with this this contract. Thus, payment cannot be defined as transactional relationship. The amount of this subscription fee accounted for less than 0.001% of NHK’s ordinary business income in FY2020, and for less than 0.001% of the Company’s consolidated revenue in FY2021, respectively. Therefore, the Company considers the relationship does not affect his independence. The Company has appointed him as independent executive as it believes he is qualified to serve as an outside Audit & Supervisory Board member, considering his extensive experience in the legal circles as well as significant experience and in-depth knowledge as an outside director and outside Audit & Supervisory Board member across a wide industries. His appointment is also based on the Company’s assessment that there is no risk of conflict of interests with ordinary shareholders. range of The Company has appointed him as independent executive as it believes he is qualified to serve as an outside Audit & Supervisory Board member, considering his knowledge of politics and economics cultivated over long years of his career in journalism as well as management experience and broad knowledge that make him well-versed with all business operations and internal departments. His appointment is also based on the Company’s assessment that there is no risk of conflict of interests with ordinary shareholders. Hiroshi Obayashi ○ Koji Yoshikuni ○ 16 [Independent Directors/Audit & Supervisory Board Members] [updated] Number of Independent Directors/Audit & Supervisory Board Members Seven members Matters relating to Independent Directors/Audit & Supervisory Board Members [The Criteria for Evaluating the Independence of Outside Directors/Outside Audit & Supervisory Board Members] The Board of Directors establishes a set of independence criteria, based on those set forth by the relevant financial instruments exchange. Independent Outside Directors/Audit & Supervisory Board members are persons who are not: 1. A person who belongs or belonged to the Company, the Company’s affiliate company or the Company’s sister company; shareholder; 2. A person who belongs to an organization such as a company, of which the Company is a major 3. The Company’s major shareholder or a person who belongs to an organization such as a company, which is the Company’s major shareholder; 4. An individual or a person associated to an organization such as a company, which is a major supplier/customer of the Company, or the Company is a major supplier/customer; 5. An individual or a person associated to an organization such as a company, which is the Company’s major lender or other major creditor; 6. The Company’s accounting auditor or a certified public accountant who is the Company’s accounting advisor, or a person who belongs to an auditing firm which is the Company’s accounting advisor; 7. An individual or a person associated to an organization such as a company, which provides the Company with expert services or consulting services concerning legal affairs, financial affairs, tax affairs, etc., and receives a large amount of compensation for the services; 8. An individual or a person associated to an organization such as a company, which receives a large amount of donation from the Company; 9. A person who has recently met any of the criteria 2 to 8 above; 10. A close relative of any one of the following: (i) An individual who meets any of the criteria 2 to 8 above. (a person who implements important duties in an organization such as a company which meets any of the criteria 2 to 8 above); (ii) A Director, Audit & Supervisory Board member, accounting advisor, Executive Officer or employee of the Company, the Company’s affiliate companies or the Company’s sister companies; or (iii) A person who has recently been either (i) or (ii) NOTES: “An organization such as a company of which the Company is a major shareholder” means an organization such as a company, more than 10% of whose issued shares is owned by the Company. “The Company’s major shareholder” means an individual or an organization such as a company, which owns more than 10% of the Company’s issued shares. “A major supplier/customer to the Company, or the Company is a major supplier/customer” means an individual or an organization such as a company, which has business transaction with the Company accounting for more than 2% of the Company’s consolidated revenue or of the their consolidated revenue in a fiscal year. 17 “The Company’s major lender or other major creditor” means a financial institution mentioned as a major lender in Business Report, which is reference documents for General Meeting of Shareholders attached in the Notice of Convocation, or a financial institution mentioned as a lender or a financial advisor, etc., on documents released on the occasions such as major M&A in the past. “An individual who provides the Company with expert services or consulting services concerning legal affairs, financial affairs, tax affairs, etc., and receives a large amount of compensation for the services” means one who receives compensation of more than 10 million yen in return for said services in a fiscal year. “An organization such as a company, which provides the Company with expert services or consulting services concerning legal affairs, financial affairs, tax affairs, etc., and receives a large amount of compensation for the services” means one which receives compensation accounting for more than 2% of annual gross revenue of that organization in a fiscal year. However, in cases where an organization receives compensation accounting for less than 2% of its annual gross revenue and an expert belonging to that organization receives more than 10 million yen in return for their services for the Company, said expert is regarded as one mentioned above. “An individual who receives a large amount of donation from the Company” means one who receives donation of more than 10 million yen in a fiscal year. In cases where the recipient of donation from the Company is an organization such as a company, which receives donation amount exceeding the higher of 10 million yen or donation accounting for more than 2% of annual gross revenue or consolidated revenue of that organization in a fiscal year, a person belonging to such organization is regarded as one mentioned above. “A close relative” means spouse or a relative within the second degree of relationship. “A person who implements important duties” means one who is a member of the Board, executive officer or division head. “Recently”, which is mentioned in 9 and 10 above, means within the last five years. Regardless of the notes above, in cases where a person is regarded as independent of the Company substantially as a result of examination of that person’s past career and current titles, the Company may appoint said person as independent Outside Director/Audit & Supervisory Board member. In which case, the Company explains reasons of its assessment externally. 18 Incentive Policies for Directors Performance-linked remuneration and others [Incentives] Supplementary Explanation [updated] Executive remuneration comprises of (1) monthly “base salary”, (2) “executive bonus” linked to the Company’s business performance in a fiscal year, as well as (3) “restricted stock remuneration plan” and (4) “performance share unit plan”, both of which are linked to the corporate value in the mid to long term. The Company introduced restricted stock remuneration plan and performance share unit (PSU) plan in 2020 for the purpose of strengthening initiatives conducive to the increase of corporate value over the mid to long term and sharing more value with shareholders. The composition and component of executive remuneration are as follows. (1) Composition of executive remuneration Directors who also serve as Executive Officers For the Directors who also serve as Executive Officers, remuneration consists of “base salary,” “executive bonus,” “restricted stock remuneration plan” and “performance share unit plan”. This composition reflects that their role is to achieve performance targets through day-to-day operational execution. Directors who do not serve as Executive Officers (excluding Outside Directors) The Directors who do not serve as Executive Officers (excluding Outside Directors) receive remuneration that consists of the “base salary” alone and excludes performance-linked remuneration, as they are responsible for determining group-wide management strategies to enhance corporate value and for fulfilling their supervisory function – for example – monitoring the execution of mid- to long-term growth strategies, and others. Outside Directors Remuneration for the Outside Directors is composed of “base salary” alone and does not include performance-linked compensation to ensure their independence. A resolution was adopted at the Board meeting held on February 14, 2022, that from the Advisory Panel on Nomination and Compensation meeting on March 23, 2022, the Chairperson of the Panel shall be elected from among independent Outside Directors by themselves, and that an Outside Director who serves as the Chairperson of the Panel shall receive the remuneration at a level of the amount corresponding to the duty, in addition to the remuneration level of other Outside Directors. Audit & Supervisory Board members Remuneration for the Audit & Supervisory Board members is composed of “base salary” alone in light of their key responsibility for conducting audits. (2) Components of executive remuneration Base salary Executives are remunerated with monthly base salary as per their responsibilities. They are individually evaluated for achievement of their performance targets through execution of their duties that leads to the Company’s sustainable profit growth. Performance targets are set through interviews with the Group CEO at the beginning of the fiscal year and evaluated at the end of year. The base salary for the following fiscal year is set within certain range reflecting the individual performance evaluations. However, an individual performance evaluation is not applicable for the Group CEO. Executive bonus Executive bonus for the Directors who also serve as Executive Officers (hereinafter eligible directors) is paid as monetary remuneration reflecting the performance of the fiscal year. Adjusted operating profit at constant FX*1 and profit (attributable for the owners of the parent company) are the key performance indicators (KPI), respectively weighted at 75% and 25% in calculating the amounts of executive bonuses. 19 Both KPIs form the foundation of the sustainable profit growth and shared value with the shareholders. Performance-linked payout is based on the KPI achievement in the range of 0% – 200%. In case the Company acknowledges that an act of certain wrongful behavior has been done by a Director who is a recipient of the bonuses, a part of the received bonuses is subject to return to the Company. Starting from FY2022, the Company has decided to introduce core revenue at constant FX*2, adjusted operating profit on a reported basis and an RRP*3-related index as new KPIs on top of its existing KPIs, namely adjusted operating profit at constant FX and profit, for the purpose of setting indices conducive to sustainable profit growth over the mid to long term. In calculating the amounts of executive bonuses, 15% accounts for core revenue at constant FX, 35% for adjusted operating profit at constant FX, 25% for adjusted operating profit on a reported basis and 25% for profit. With this revision, the ratio that performance on a reported basis accounts for on the KPIs used to determine executive bonuses has increased to 50%. Performance-linked payout is based on the KPI achievement in the range of 0% to 190% and either -10%, 0% or +10% is added/deducted to results depending on evaluations of the RRP-related index. *1 Adjusted operating profit at constant FX is a financial measurement that excludes foreign exchange effects by translating and calculating adjusted operating profit for the current period in the international tobacco business using the foreign exchange rates of the same period of the previous year. This measurement also excludes amount of profit that has increased due to hyperinflation in certain markets. *2Core revenue at constant FX is the sum of revenues in the pharmaceutical business, processed food business, and others, as well as the core revenue in the tobacco business at constant FX. *3RRP stands for ‘Reduced-Risk Products’, which are products with the potential to reduce the risks associated with smoking such as heated tobacco sticks (HTS) and E-Vapor. Restricted stock remuneration plan Restricted stock remuneration plan is designed to further enhance the shared value in mid to long term between the eligible directors and the shareholders. Eligible directors receive monetary compensation claims every fiscal year towards restricted shares and the allocation of Company’s common share by paying all of the monetary compensation claims in kind in accordance with the resolution of the Board of Directors (the allotment is made from the treasury shares). The monetary compensation towards the purchase of the Company’s restricted stock is decided based on the closing price of the Company’s share at the Tokyo Stock Exchange as of the previous business day of the resolution by the Board of Directors. However, if the Company share does not trade at the Tokyo Stock Exchange on the day prior to the resolution of the Board of Directors, the closing price of the immediately-preceding trading day is used. This share price is decided by the Board of Directors within a scope that is not particularly advantageous to the eligible directors who receive the restricted stock. In addition, the Company enters into an agreement with the eligible directors with regards to the allotment of the shares. Although the restriction period is thirty years, in cases where any eligible director retires due to expiration of the term or resigns due to reasons deemed reasonable by the Board of Directors, from a position as Director or any other positions separately specified by the Board of Directors during the restriction period, the transfer restrictions are removed on all of the allotted shares that the eligible director owns. In case the Company acknowledges certain wrongful behavior that the Board of Directors sets and any other illegal acts have been done by a Director who was allotted restricted stock remuneration during the restriction period, all or a part of the allotted shares are acquired by the Company without any compensation. Performance share unit plan is a performance-linked stock compensation system that aims to strengthen the shared value with shareholders, to enhance the company value over the mid to long term and to commit to achieving business results over the mid-term. Performance share unit plan offers monetary remuneration claims and cash to the Directors who also serve as Executive Officers during the first year of the performance evaluation period*, as a performance-linked stock compensation. After a three-year performance evaluation period ends, attainment rates of numeric targets including earnings are determined following a review by the Advisory Panel on Nomination and Compensation. As a general rule, eligible directors receive the cash and monetary claims after the end of each performance evaluation period. Eligible directors receive monetary remuneration claims towards the purchase of Company shares and receive the Company’s common shares (the allotment is made from the treasury shares). Performance share unit plan 20 The monetary compensation towards the purchase of the Company’s shares is decided based on the closing price of the Company’s share at the Tokyo Stock Exchange as of the previous day of the resolution by the Board of Directors. However, if the Company share does not trade at the Tokyo Stock Exchange on the day prior to the resolution of the Board of Directors, the closing price of the immediately-preceding trading day is used. This share price is decided by the Board of Directors within a scope that is not particularly advantageous to the eligible directors who receive the performance share units. Eligible directors receive cash and monetary claims towards the purchase of the Company’s shares depending on attainment rates of aforementioned targets. Therefore, the eligibility nor the amount of remuneration, including the number of shares, for the Directors to receive the cash and monetary claims are undecided until the performance evaluation period has ended. The Company determines necessary i