コーセー（4922） – Corporate Governance Report

Corporate Governance Report KOSÉ Corporation Last Update: March 30, 2022 KOSÉ Corporation Representative: Kazutoshi Kobayashi, President & CEO Contact: IR Department, Tel: +81-(0) 3-3273-1511 Stock Code: 4922 https://www.kose.co.jp/company/en/ The corporate governance of KOSÉ Corporation (“KOSÉ” or the “Company”) is described below. I. Basic Views on Corporate Governance, Capital Structure, Corporate Profile and Other Basic Information 1. Basic Views The nucleus of the KOSÉ Group’s management policy is “consistently managing to heighten corporate value” by pursuing growth and greater efficiency. The Group recognizes corporate governance functions as essential from the standpoint of managing the Company to consistently increase its enterprise value, and positions corporate governance as one of its highest management priorities. Accordingly, the Group is working on establishing the necessary organizational systems and frameworks to ensure sound management and consistently earn the trust of society. KOSÉ believes strongly in managing the Group so as to maintain harmonious relations with all stakeholders, including shareholders, investors, creditors, customers, business partners, employees and communities. Furthermore, KOSÉ is committed to enhancing transparency and fairness to earn the support as a company with value. The Company strives to communicate sincerely with its stakeholders and considers building trust-based relationships to be fundamental. [Reasons for Non-compliance with the Principles of the Corporate Governance Code] Updated As of March 30, 2022, KOSÉ complied with every principle of the Corporate Governance Code except the principles solely for the Tokyo Stock Exchange Prime Market. KOSÉ plans to comply with the Prime Market principles by no later than the end of March 2023, which is the deadline for submitting documents for compliance. [Disclosure Based on the Principles of the Corporate Governance Code] Updated All of the General Principles, Principles, and Supplementary Principles, including items to be disclosed in line with all principles of the Corporate Governance Code, are listed at the end of this report as “KOSÉ Activities Concerning Principles of the Corporate Governance Code.” 2. Capital Structure Foreign Shareholding Ratio From 20% to less than 30% – 1 – [Status of Major Shareholders] Updated Name / Company Name Kazutoshi Kobayashi Takao Kobayashi Masanori Kobayashi The Master Trust Bank of Japan, Ltd. (Trust Account) Kazuo Kobayashi JP Morgan Chase Bank 385632 Custody Bank of Japan, Ltd. (Trust Account) State Street Bank and Trust Company 505223 KOSÉ Cosmetology Research Foundation Yasukiyo Kobayashi Number of Shares Owned 6,485,633 6,428,364 6,302,677 5,261,900 1,926,888 1,747,075 1,574,600 1,310,904 1,279,655 1,253,018 Percentage (%) 11.37 11.27 11.05 9.22 3.38 3.06 2.76 2.30 2.24 2.20 Controlling Shareholder (except for Parent Company) Parent Company – None Supplementary Explanation Updated A Large Shareholding Report that became available for public inspection on October 20, 2021 stated that Massachusetts Financial Services Company and its joint holder, MFS Investment Management K.K. owned the Company’s stock as follows on October 15, 2021. These companies are not included in this list of major shareholders because the Company was unable to confirm the number of shares effectively held by them as of October 15, 2021. The contents of the Large Shareholding Report are as follows. Name/Company Name Number of Share Certificates, etc. Owned (Thousand shares) Percentage (%) Massachusetts Financial Services Company MFS Investment Management K.K. 4,426 140 7.30 0.23 3. Corporate Attributes Listed Stock Market and Market Section Fiscal Year-End Type of Business Number of Employees (consolidated) as of the End of the Previous Fiscal Year Sales (consolidated) as of the End of the Previous Fiscal Year Number of Consolidated Subsidiaries as of the End of the Previous Fiscal Year Tokyo Stock Exchange First Section December Chemistry From 1000 From ¥100 billion to less than ¥1,000 billion From 10 to less than 50 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 – 2 – II. Business Management Organization and Other Corporate Governance Systems regarding Decision-making, Execution of Business, and Oversight in Management Company with the Board of Audit & Supervisory Board Members 1. Organizational Composition and Operation Organization Form [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 Election of External Directors Number of External Directors Number of Independent Directors 20 One year President 10 Yes 3 3 External Directors’ Relationship with the Company (1) Name Attribute Yukino Kikuma Norika Yuasa Yuko Maeda * Categories for “Relationship with the Company” * Attorney Attorney From other company a b Relationship with the Company* i f c g d h e j k “○” when the Director presently falls or has recently fallen under the category; “△” when the Director fell under the category in the past “●” when a close relative of the Director presently falls or has recently fallen under the category; “▲”when a close relative of the Director fell under the category in the past * a. Executive of the Company or its subsidiaries b. Non-executive Director or executive of a parent company of the Company c. Executive of a fellow subsidiary company of the Company d. A party whose major client or supplier is the Company or an executive thereof e. Major client or supplier of the 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/Audit & Supervisory Board Member 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 External Directors/Audit & Supervisory Board Members 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 – 3 – External Directors’ Relationship with the Company (2) Updated Name Designation as Independent Director Supplementary Explanation of the Relationship Yukino Kikuma ○ Norika Yuasa ○ Yuko Maeda ○ Reasons of Appointment Ms. Kikuma has highly specialized knowledge as an attorney and has deep insight particularly in corporate legal affairs. Meanwhile, she appropriately furnishes guidance and advice regarding management of the Company from a broad-based perspective, drawing on her abundance of experience in relation to mass media. Thus, the Company expects her to use her broad knowledge and insight for guidance and advice for management reforms involving sustainability and diversity. Furthermore, the Company believes that there is no concern of Ms. Kikuma having a conflict of interest with general shareholders and has accordingly designated her an Independent Director. Ms. Yuasa is an attorney who is highly knowledgeable about legal matters in Japan as well as Asia, Europe and North America. She has used this knowledge to provide suitable guidance and advice concerning the Company’s management from many perspectives. Although she has never been involved in corporate management other than as an Outside Director or Audit & Supervisory Board Member, for the reasons described above, the Company believes that she will supervise and give comments and advice on our global strategy, mainly from a legal perspective. Furthermore, the Company believes that there is no concern of Ms. Yuasa having a conflict of interest with general shareholders and has accordingly designated her an Independent Director. Ms. Maeda has a high level of expertise in the realm of applications for corporate intellectual property combined with abundant experience and knowledge particularly when it comes to industry-academia partnerships. Moreover, she also has abundant insight from a managerial perspective underpinned by her experience as a corporate Director and Outside Audit & Supervisory Board Member, combined with her experience serving as an Executive Vice President of national university and an auditor of an incorporated administrative agency. For the reasons described above, the Company expects her to provide advice on management strategy, intellectual property strategy, and research and development. Important concurrent positions Managing Partner, Matsuo & Kosugi Outside Director and Audit & Supervisory Committee Member, Takihyo Co., Ltd. Outside Director, ALCONIX CORPORATION Outside Director, KITZ CORPORATION Important concurrent positions Partner, Miura & Partners Outside Audit & Supervisory Board Member, TOKYO ELECTRON DEVICE LIMITED Outside Director, SAINT-CARE HOLDING CORPORATION Important concurrent positions Auditor, Japan Agency for Marine-Earth Science and Technology Director, CellBank Co., Ltd. Outside Audit & Supervisory Board Member, Chugai Pharmaceutical Co., Ltd. Executive Vice President, Kyushu University Outside Director, Asahi Kasei Corporation – 4 – Furthermore, the Company believes that there is no concern of Ms. Maeda having a conflict of interest with general shareholders and has accordingly designated her an Independent Director. Voluntary Establishment of Committee(s) Corresponding to Nomination Committee or Remuneration Committee Established Committee’s Name, Composition, and Attributes of Chairperson Committee Corresponding to Nomination Committee Committee Corresponding to Remuneration Committee Committee’s Name All Committee Members Full-time Members Inside Directors External Directors External Experts Other Chairperson Nomination & Remuneration Committee 7 0 2 3 0 2 External Director Supplementary Explanations Nomination & Remuneration Committee 7 0 2 3 0 2 External Director The Nomination & Remuneration Committee examines proposals concerning nominations, remuneration and other matters that are submitted by the President to the Board of Directors. This committee exists for the purposes of reinforcing the independence, objectivity and accountability of activities by the Board of Directors concerning nominations, remuneration and other matters involving the Directors, Audit & Supervisory Board Members and executive officers. Committee members classified as “Other” are External Audit & Supervisory Board Members. [Audit & Supervisory Board Members] Establishment of Board of Audit & Supervisory Board Members Established Maximum Number of Audit & Supervisory Board Members Stipulated in Articles of Incorporation Number of Audit & Supervisory Board Members 4 5 Cooperation among Audit & Supervisory Board Members, Accounting Auditors and Internal Audit Departments For coordination between the Company’s Audit & Supervisory Board Members and accounting auditor, the Company provides for the appropriate exchange of information and opinions through reporting regarding the annual account auditing plan, the auditing conduct report following the settlement of accounts, reports on the results of a review of quarterly financial statements, and the internal control auditing report. For coordination with internal audit departments, the Audit Office submits and explains the content of the annual internal audit plan to full-time Audit & Supervisory Board Members. The Audit Office submits copies of and reports to the full-time Audit & Supervisory Board Members on the internal audit results report and – 5 – internal control report, which the office also submits and reports on to the President. The External Audit & Supervisory Board Members receive content reports and explanations from the full-time Audit & Supervisory Board Members at meetings of the Audit & Supervisory Board. In addition, members of internal audit departments and the Audit & Supervisory Board hold meetings on a regular basis to share information and exchange opinions. Election of External Audit & Supervisory Board Members Number of External Audit & Supervisory Board Members Number of Independent Audit & Supervisory Board Members Yes 2 2 External Audit & Supervisory Board Members’ Relationship with the Company (1) Name Attribute a Toru Miyama Attorney Kumi Kobayashi Certified public accountant * Categories for “Relationship with the Company” * Relationship with the Company* g d h e f i j k c b l m “○” when the Audit & Supervisory Board Member presently falls or has recently fallen under the category; “△” when the Audit & Supervisory Board Member fell under the category in the past “●” when a close relative of the Audit & Supervisory Board Member presently falls or has recently fallen under the category; “▲”when a close relative of the Audit & Supervisory Board Member fell under the category in the past * a. Executive of the Company or its subsidiary b. Non-executive Director or accounting advisor of the Company or its subsidiaries c. Non-executive Director or executive of a parent company of the Company d. Audit & Supervisory Board Member of a parent company of the Company e. Executive of a fellow subsidiary company of the Company f. A party whose major client or supplier is the Company or an executive thereof g. Major client or supplier of the Company or an executive thereof h. Consultant, accountant or legal professional who receives a large amount of monetary consideration or other property from the Company besides compensation as an Audit & Supervisory Board Member i. Major shareholder of the Company (or an executive of the said major shareholder if the shareholder is a legal entity) j. Executive of a client or supplier company of the Company (which does not correspond to any of f, g, or h) (the Audit & Supervisory Board Member himself/herself only) k. Executive of a company, between which and the Company External Directors/Audit & Supervisory Board Members are mutually appointed (the Audit & Supervisory Board Member himself/herself only) l. Executive of a company or organization that receives a donation from the Company (the Audit & Supervisory Board Member himself/herself only) m. Others External Audit & Supervisory Board Members’ Relationship with the Company (2) Updated Name Designation as Independent Audit Supplementary Explanation of the Relationship Reasons of Appointment – 6 – & Supervisory Board Member Toru Miyama ○ Kumi Kobayashi ○ Important concurrent positions Managing Partner, Miyama Law Office Outside Auditor, Ozu Corporation Important concurrent positions Partner, Sakurai & Co. Representative Director, Tokyo Athletes Office, Inc. Director, SPOKACHI, Inc. Mr. Miyama has highly specialized knowledge as an attorney and has deep insight particularly in corporate legal affairs. He also has considerable knowledge concerning corporate compliance and risk management. He will provide guidance and advice to management properly using an independent and objective standpoint. Furthermore, the Company believes that there is no concern of Mr. Miyama having a conflict of interest with general shareholders and has accordingly designated him an Independent Audit & Supervisory Board Member. Ms. Kobayashi has advanced expertise in accounting and finance as a certified public accountant and has amassed extensive professional experience both in Japan and abroad. Also, she has advanced knowledge of the operation of M&A and corporate finance, and the Company judges that she will provide appropriate guidance and advice to increase the effectiveness of audits based on this broad experience and abundant knowledge. Furthermore, the Company believes that there is no concern of Ms. Kobayashi having a conflict of interest with general shareholders and has accordingly designated her an Independent Audit & Supervisory Board Member. [Independent Directors/ Audit & Supervisory Board Members] Number of Independent Directors/Audit & Supervisory Board Members 5 Matters relating to Independent Directors/Audit & Supervisory Board Members All External Directors/Audit & Supervisory Board Members who qualify as Independent Directors/Audit & Supervisory Board Members are designated as such. [Incentives] Incentive Policies for Directors Performance-linked remuneration Supplementary Explanation The incentive policies for Directors are disclosed in this report in “Business Management Organization and Other Corporate Governance Systems regarding Decision-making, Execution of Business, and Oversight in Management, 1. Organizational Composition and Operation, Director Remuneration, Disclosure of Policy on Determining Remuneration Amounts and Calculation Methods.” Recipients of Stock Options – 7 – – Supplementary Explanation [Director Remuneration] Disclosure of Individual Directors’ Remuneration Selected Directors Supplementary Explanation The Company discloses total remuneration in its securities reports and convocation notices of General Meetings of Shareholders. Remuneration of individual Directors is disclosed in securities reports only for Directors who receive total remuneration on a consolidated basis of at least ¥100 million. Policy on Determining Remuneration Amounts and Calculation Methods Updated Established Disclosure of Policy on Determining Remuneration Amounts and Calculation Methods 1. Basic policy for officer remuneration For the remuneration of the Company’s Directors and Audit & Supervisory Board Members (officer remuneration), the basic policy is designed and implemented based on the following goals in order to achieve medium to long-term growth of corporate value. A remuneration framework that enables the KOSÉ Group to achieve global and borderless growth An appropriately competitive level of remuneration for attracting and retaining highly talented individuals A highly independent, objective and transparent remuneration framework that is able to fulfill the responsibility of providing explanations to business partners, customers, shareholders, employees and all other stakeholders 2. Remuneration level A suitable level of remuneration is determined by taking into account KOSÉ’s business climate as well as a survey and analysis using external databases and other sources of remuneration at companies in the same industry and of the same size. At the 65th General Meeting of Shareholders that was held on June 28, 2007, shareholders approved a resolution that limits the annual compensation of Directors to ¥1,800 million (excluding employee salaries and bonuses paid to Directors who serve concurrently as employees). 3. Composition of remuneration a. Directors (excluding External Directors) The remuneration of KOSÉ Directors (excluding External Directors) consists of basic remuneration and performance-based remuneration linked to results of operations, the stock price or other items. The purpose is to increase the motivation of these Directors to achieve short, medium and long-term performance targets and the sustained growth of corporate value. The performance-linked remuneration consists of bonuses and stock remuneration. Stock remuneration, in which eligible Directors receive KOSÉ common stock, uses a new specified restricted stock scheme that started in the fiscal year ended in March 2021. Every year, eligible Directors receive KOSÉ common stock that cannot be sold for a designated period and has other restrictions. These Directors are allowed to sell the stock after they are no longer KOSÉ Directors. Remuneration for Directors does not include employee salaries and bonuses paid to Directors who are also employees of KOSÉ. – 8 – 1) Remuneration categories [Basic Remuneration] Basic remuneration is fixed monthly remuneration that is paid every month and based on the executive position and roles of each Director. [Bonuses] Bonuses are paid as an incentive to improve results of operations in a specific fiscal year. As a rule, bonuses are paid within three months of the end of the fiscal year. Consolidated sales and operating profit and sales, operating profit and other performance indicators for a specific business sector are used to evaluate a Director’s performance. These performance indicators are key indicators used in medium and long-term plans. The bonus can be between 0% and 200% of the standard amount depending on the difference between actual performance and the performance indicator targets for the fiscal year. In general, the evaluation weighting for the indicators for sales and operating profit are as follows. 50% Indicator for sales: Indicator for operating profit: 50% The evaluation weighting is higher for the performance of the business sectors supervised by a Director in order to reward Directors who fulfill their obligations in the businesses they oversee. [Stock remuneration] Every year, eligible Directors receive KOSÉ common stock that cannot be sold for a designated period. These Directors are allowed to sell the stock after they are no longer KOSÉ Directors. The price of KOSÉ common stock is used for evaluations for the purposes of further motivating Directors to achieve medium to long-term growth of corporate value and to further align the interests of Directors with those of shareholders. There is no target for this indicator because it is the stock price 2) Composition of remuneration The composition of remuneration for the representative director is as follows. 65% 25% 10% Basic remuneration: Bonuses: Stock remuneration: For Directors other than the President, the policy is to reduce the percentage of the basic remuneration as the executive position of the Director becomes higher and to increase the weightings of bonuses and stock remuneration. To achieve medium to long-term and sustained growth, KOSÉ plans to periodically reexamine the weighting of remuneration with emphasis on a review of stock remuneration. b. External Directors External Directors receive only fixed basic remuneration because these Directors are responsible for overseeing management from an independent standpoint. External Directors do not receive bonuses or stock remuneration linked to results of operations. c. Audit & Supervisory Board Members Audit & Supervisory Board Members receive only fixed basic remuneration given their duties and do not receive bonuses or stock remuneration. The amount of basic remuneration for each Audit & Supervisory – 9 – Board Member is determined by the mutual agreement of these members and comprehensively taking into consideration the details, amount and degree of difficulty and responsibility of these members’ duties. 4. Processes for determining remuneration The policy for determining the remuneration of individual Directors is determined by a resolution of the Board of Directors. Officer remuneration is divided between Directors and Audit & Supervisory Board Members for voting at the General Meeting of Shareholders and allocated to each officer within the total allowed for each officer classification. To ensure the objectivity and transparency of the officer remuneration system, the validity and suitability of the allocation to each Director are first discussed by the Nomination & Remuneration Committee, which is composed primarily of External Directors and External Audit & Supervisory Board Members. Using the results of these discussions as the premise for remuneration, the final decisions about individual remuneration are entrusted by a resolution of the Board of Directors to the President and Representative Director. The Representative Director has the authority to determine for each Director the basic remuneration and the bonus and stock remuneration based on results of operations of the business overseen by each Director. The Representative Director is given this authority because, as the executive who oversees all business operations, the Representative Director is best suited for evaluating the business units managed by each Director. Remuneration of Audit & Supervisory Board Members is determined by the mutual agreement of these members. Remuneration for Directors does not include employee salaries and bonuses paid to Directors who are also employees of KOSÉ. The limit for total annual remuneration for Directors is ¥1,800 million in accordance with a resolution approved at the 65th General Meeting of Shareholders held on June 28, 2007. There were 10 Directors at the close of this shareholders meeting. At the same shareholders meeting, a resolution was approved that limits total annual remuneration for Audit & Supervisory Board Members to ¥120 million. There were four Audit & Supervisory Board Members at the close of this shareholders meeting. For remuneration linked to results of operations in the fiscal year that ended in December 2021, consolidated sales were ¥224,983 million, 94.5% of the target of ¥238,000 million, and consolidated operating profit was ¥18,852 million, 94.3% of the target of ¥20,000 million. Officer remuneration is divided between Directors and Audit & Supervisory Board members (“officers”) for voting at the General Meeting of Shareholders and allocated to each officer within the total allowed for each officer classification. To ensure the objectivity and transparency of the allocation of remuneration to individual officers, the suitability of individual remuneration was discussed on May 10, 2021 by the Nomination & Remuneration Committee, which consists primarily of External Directors and External Audit & Supervisory Board Members. On June 29, 2021, the Board of Directors approved a resolution authorizing the President and Representative Director to determine individual remuneration. Remuneration of Audit & Supervisory Board Members is determined by the mutual agreement of these members. As of the date that the Securities Report for the fiscal year that ended in December 2021 was submitted, there were 10 Directors and four Audit & Supervisory Board Members who were eligible to receive this remuneration. On May 25, 2020, the KOSÉ Board of Directors approved a resolution to terminate the retirement benefit system for Directors and other officers. [Supporting System for External Directors and/or Audit & Supervisory Board Members] The General Administration Department serves as the secretariat for calling meetings of the Board of Directors, the Board of Audit & Supervisory Board Members and other meetings. – 10 – These activities also include, as a rule, the distribution of materials for Board of Directors meetings to all participating Directors and Audit & Supervisory Board Members prior to meetings and the provision of explanations about these materials to External Directors and External Audit & Supervisory Board Members. [Retired Representative Directors, Presidents, Etc.] Profile of Senior Advisors, Etc. Who Are Former Representative Directors/Presidents, Etc. Name Position Job responsibilities Employment terms (Full time or not, remuneration or not) Date of resignation as president, etc. Yasukiyo Kobayashi Honorary Chairman Advice and other assistance for current management by using his knowledge Full-time, with remuneration June 27, 2014 Term Two years (may be renewed) Number of senior advisors, etc. who are former representative directors/presidents, etc. 1 Other Matters As a former representative director of the Company, Mr. Kobayashi has many years of management experience and extensive knowledge of the cosmetics industry. He is Honorary Chairman for the purpose of using his insight to provide a variety of advice to the current management. Mr. Kobayashi’s remuneration is determined upon consultation by taking into consideration his duties and other factors. 2. Matters on Functions of Business Execution, Auditing, Oversight, Nomination and Remuneration Decisions (Overview of Current Corporate Governance System) Updated (1) Business Execution To clarify the scope of management by Directors in the execution of business, the Company employs a small number of Directors to enable swift decision-making. The Company has introduced an executive officer system, under which executive officers appointed by the Board of Directors execute business appropriately for their assigned departments in accordance with the basic management policy determined by the Board of Directors. This structure currently comprises 10 Directors (seven men and three women) and 12 executive officers (10 men and two women), who work proactively on initiatives to enhance management efficiency. The Company’s Board of Directors meets once each month, in principle, to decide on matters provided in laws and regulations and the Articles of Incorporations and important management-related matters, as well as to supervise the execution of duties by Directors. To deliberate important management-related matters and provide overall control over the execution of business, the Company has established a Management Committee, which is chaired by the President and composed mainly of Directors with specific titles. Furthermore, the Executive Committee meets as necessary to share information about the everyday execution of business, and meetings of the Management Policy Review Committee are held to consider more specific and detailed matters, thereby facilitating management speed and efficiency. (2) Auditing The auditing function is fulfilled by the Board of Audit & Supervisory Board Members. Audit & Supervisory Board Members participate in meetings of the Board of Directors and other important meetings related to management execution to audit the Board of Directors and the execution function. The current system comprises four Audit & Supervisory Board Members (three men and one woman). – 11 – The Audit Office (12 people) exists as an organization independent of departments that execute business and audits overall business activities based on the interim and the annual audit plans. The Audit Office reports the results of internal audits to the President and Audit & Supervisory Board Members, notifies the heads of audited departments and checks the status of improvement. (3) Selection of Director and Other Candidates For appointments and dismissals of senior management and nominations of candidates for Directors and Audit & Supervisory Board Members, the Board of Directors makes decisions that take into consideration each individual’s character, background, capabilities, knowledge and all other applicable items. For the Board of Directors, the goal is to maintain the balance of knowledge, experience and skills, degree of diversity, including gender and nationality, and size that is optimal for the Company. As for the procedures in appointments and dismissals of senior executives and nominations of candidates for Directors and Audit & Supervisory Board Members, senior management determines proposals and submits these proposals to the Nomination & Remuneration Committee, which is chaired by an independent External Director and the majority of members are independent External Directors and external Audit & Supervisory Board Members. The committee submits the results of its discussions to the Board of Directors, which then makes final decisions. (4) Overview of Liability Limitation Agreements Based on Article 427, Paragraph 1, of the Companies Act, the Company enters into agreements with its External Directors and External Audit & Supervisory Board Members to limit their liability for damages to the amounts specified in Article 423, Paragraph 1, of the same Act. The minimum liability amounts stipulated in these agreements are those provided under laws and regulations. (5) Accounting Audit The accounting auditors hold regular discussions with managers, and exchange applicable information and opinions with the Audit & Supervisory Board Members when auditing reports are submitted. In addition, information concerning summaries of internal audit reports is shared with the accounting auditors. Through this mutual collaboration, the Company is working on executing effective audits. The certified public accountants who performed these services and payments to these certified public accountants in the fiscal year ended March 31, 2021 were as follows. ・ Compensation based on audit certification work: ¥88 million (of which portion of consolidated ・ Compensation based on non-audit work: ・ Name of certified public accountant: subsidiaries: ¥13 million) – Mr. Hirofumi Harashina and Mr. Keiji Tanaka, designated limited liability and engagement partners ・ Auditing firm to which above individuals belong: Ernst & Young ShinNihon LLC ・ Individuals who assisted with the audit: 10 certified public accountants, 15 successful applicants who have passed the Certified Public Accountants examination, etc. and 18 others In addition, the Company has a Risk Management and Compliance Committee to ensure that business activities comply with laws and regulations and are fair and ethical. A Compliance Desk is also in place to field consultations and internal reports from the Company’s employees. Through organizations such as these, the Company endeavors to preserve a sound operating framework. 3. Reasons for Adoption of Current Corporate Governance System – 12 – The Company’s Board of Directors operates so that individual Directors and Audit & Supervisory Board Members can voice their opinions unreservedly and serves an effective mutual supervisory function, thereby enhancing the governance function. The Company has appointed three External Directors and two External Audit & Supervisory Board Members whose interests are not biased toward the interests of certain shareholders and stakeholders. The External Directors provide advice on the execution of business by Directors and monitor and supervise individual Directors. The External Audit & Supervisory Board Members monitor and supervise the execution of business by Directors from the specialized perspectives of certified public accountants and attorneys. In addition to a system of mutual supervision by business-savvy executives, the Company judges that this system of employing Independent External Directors/Audit & Supervisory Board Members to fulfill auditing and supervisory functions is appropriate, given the content and scale of the Company’s business. – 13 – III. Implementation of Measures for Shareholders and Other Stakeholders 1. Measures to Vitalize the General Shareholder Meetings and Smooth Exercise of Voting Rights Updated Early Notification of General Shareholder Meeting Allowing Electronic Exercise of Voting Rights Participation in Electronic Voting Platform and Other Measures for Greater Ease of Voting by Institutional Investors Providing Convocation Notice (summary) in English 2. IR Activities Updated Supplementary Explanations The Company is committed to sending its convocation notices well before meetings. The convocation notice for the 80th General Meeting of Shareholders (the fiscal year ended December 31, 2021) was sent on March 14, 2022, one day ahead of the statutory deadline. The Company also posted this convocation notice on its website prior to the date on which it was sent (March 8). Shareholders can submit their votes electronically. The Electronic Voting Platform operated by ICJ, Inc. is used. The Company provides convocation notices and reference materials in English on its website. Supplementary Explanations Presentation by President Preparation and Announcement of Disclosure Policy 1. Basic Policy KOSÉ discloses information in a fair and transparent manner in accordance with the Financial Instruments and Exchange Act, the timely disclosure rules of securities exchanges and other guidelines. The objective is to maintain long-term relationships rooted in trust with shareholders and investors in Japan and other countries, and all other stakeholders. KOSÉ also discloses information that is not covered by the timely disclosure rules by using the KOSÉ website and other methods in order to ensure the greatest possible fairness. 2. Disclosure Methods Methods used to handle and disclose material information about the KOSÉ Group comply with the Rules on the Prevention of Insider Trading established by KOSÉ. (1) Information subject to timely disclosure rules Material information (information about decisions, events, performance and other activities of KOSÉ and its subsidiaries) that must comply with the timely disclosure rules is defined as information about business operations, results of operations and other subjects that has a significant effect on decisions concerning securities investments. KOSÉ discloses this – 14 – information by using the TDnet (Timely Disclosure Network) of the Tokyo Stock Exchange and, as needed, the KOSÉ website. (2) Material information subject to fair disclosure rules When providing KOSÉ’s material business and financial information that has not been disclosed but has a significant effect on investment decisions, KOSÉ discloses this information on its website in accordance with the fair disclosure rules (Article 27-36 of the Financial Instruments and Exchange Act and the Cabinet Office Order on Disclosure of Material Information). However, if information has been released unintentionally, the information will, as a rule, be disclosed to the public immediately. 3. Quiet Period KOSÉ designates the period beginning on the day after the end of each quarter and ending on the scheduled earnings announcement date as a quiet period. The purpose is to prevent leaks of information about results of operations and ensure that this information is disclosed fairly. During the quiet period, KOSÉ will not provide any comments or responses to inquiries concerning results of operations. However, information will be disclosed in accordance with the timely disclosure rules if there is an event during the quiet period that requires timely disclosure. 4. Forward-looking Statements Information disclosed by KOSÉ may include plans, outlooks, strategies and other forward-looking statements. These statements are based on certain assumptions that were believed to be reasonable at the time the information was disclosed. As these statements incorporate risks and uncertainties, actual results of operations may differ from these plans, outlooks, strategies and other information. Japanese website: https://www.kose.co.jp/company/ja/ir/about/disclosure/ English website: https://www.kose.co.jp/company/en/ir/management-policy/disclosure-policy/ IR seminars for individual investors are held between two and four times each year (irregularly). The officer in charge of investor relations holds earnings presentations for first and third quarter results of operations and the President and this officer hold earnings presentations for first half and fiscal year results of operations. The Company participates around two to four times each year in conferences held in Japan for overseas investors. – 15 – No Yes No Regular Investor Briefings for Individual Investors Regular Investor Briefings for Analysts and Institutional Investors Regular Investor Briefings for Overseas Investors The Company provides quarterly financial reports and other timely disclosure materials, financial information, shareholder newsletters, securities reports, KOSÉ REPORT (integrated report) and earnings presentation materials. Japanese website: https://www.kose.co.jp/company/ja/ir/ English website: https://www.kose.co.jp/company/en/ir/ The Company has the IR Department in place. 3. Measures to Ensure Due Respect for Stakeholders Updated Supplementary Explanations Posting of IR Materials on Website Establishment of Department and/or Manager in Charge of IR Implementation of Environmental Activities, CSR Activities etc. Formulation of Policies on Information provided to Stakeholders Other More information about sustainability and other activities is provided in the KOSÉ website and the KOSÉ REPORT. KOSÉ Sustainability website: https://www.kose.co.jp/company/en/sustainability/ KOSÉ REPORT: https://www.kose.co.jp/company/en/sustainability/report/report2021/ The Group has established the Group Code of Conduct, which defines its responsibility as a company for enhancing the transparency of management and business activities to stakeholders and disclosing corporate information accurately and swiftly. 1. Promote diversity and inclusion KOSÉ launched cross-functional “Create a Great place to Work” project that is responsible for activities for developing the skills of people and providing a workplace environment where people can realize their full potential. “Promote diversity and inclusion” is one of the three business foundations of VISION2026. The objective is to establish a foundation (remuneration and education systems) that enables everyone at the KOSÉ Group to utilize skills as much as possible regardless of gender, age, nationality, life style and other personal characteristics. Creating this infrastructure as well as a corporate culture (mindset) in which people respect each other’s individuality will play a key role in the achievement of VISION2026. https://www.kose.co.jp/company/en/sustainability/newnormal/ Specific measures to accomplish this goal include offering a larger selection of flexible working styles that match ongoing changes in society and upgrading every employee benefit program. (Recent actions) ・ Started a dual-pathway compensation system that gives beauty consultants more options for their future advancement (since the fiscal year ended March 2020) ・ Using digital technologies to increase the flexibility of working styles in order to reflect new lifestyles (since the fiscal year ended March 2020) – 16 – ・ A new support program for fathers (since the fiscal year ended March 2021) ・ Introduced KOSÉ’s proprietary online customer service platform “WEB-BC SYSTEM” to expand work opportunities for beauty consultants (since the fiscal year ended December 2021) 2. Health and Productivity Management KOSÉ is constantly using a broad range of activities for health management. https://www.kose.co.jp/company/en/sustainability/employee/ 3. A place where people with disabilities can work with others KOSÉ is dedicated to creating workplaces where people with disabilities can work alongside others as each individual fulfills his or her own role. ADVANCE Co., Ltd., a KOSÉ manufacturing subsidiary, was the first special company for employing people with disabilities in Japan’s cosmetics industry and only the 25th company of this type in Japan upon its inception. Today, individuals with a disability account for about one-third of the workforce of ADVANCE. These people work side-by-side with other ADVANCE employees in accordance with the normalization principle. https://www.kose.co.jp/company/en/sustainability/employee/normalization/ – 17 – IV. Matters Related to the Internal Control System 1. Basic Views on Internal Control System and the Progress of System Development Updated The Company has the following internal control structure to ensure that business operations are conducted properly. The Company strives to enhance its internal control structure covering all Group executives and employees and ensure its effectiveness [System for ensuring that Directors and employees perform their duties in compliance with laws and regulations and the Articles of Incorporation] Meetings of the Board of Directors are held on a regular basis and additionally as needed in accordance with laws and regulations, the Articles of Incorporation, the Board of Directors Regulations, Regulations for Making Decisions and other guidelines. The Directors supervise each other regarding the performance of their duties. The Directors perform their respective duties in accordance with resolutions approved by the Board of Directors and internal regulations. Audit & Supervisory Board Members perform audits in accordance with the Audit & Supervisory Board Regulations and Audit & Supervisory Board Member Audit Standards to confirm that Directors are performing their duties properly. The Audit Office performs internal audits of all business operations based on the Internal Audit Regulations. Audits are performed on a regular basis to verify compliance with laws and regulations, the Articles of Incorporation and internal regulations and the suitability of procedures and other activities for conducting business operations. Results of internal audits are reported to the Audit & Supervisory Board Members. At the Company, compliance encompasses laws and regulations as well as always behaving in a manner that is consistent with social ethics based on the “Mind to follow the right path.” The compliance structure and compliance activities are based on Risk Management and Compliance Regulations. The Risk Management and Compliance Committee submits a report about these activities on a regular basis to the Board of Directors. The Compliance Promotion Committee holds seminars and other training programs for Directors and employees. The Company has internal and external channels for reporting problems. This structure provides a framework for responding to reports from Directors and employees and performing consultations. [System for the storage and management of information about the performance of Directors’ duties] Minutes of shareholders meetings and Board of Directors meetings, and important documents and information involving decisions made about business operations are stored and managed properly as stipulated in laws and regulations and internal regulations. Directors and Audit & Supervisory Board Members can see these materials at any time. The Company has a department that is responsible for the timely disclosure of important information and other disclosure activities. In addition, Directors collect information that should be disclosed in a rapid and comprehensive manner and then, in accordance with laws, regulations and other guidelines, this information is disclosed in an appropriate and timely manner. [Regulations and systems for the risk management of losses for the Company] In order to respond to sources of risk, including a broad range of risk factors that pose a threat to the sustainability of the Company’s business operations, particularly problems involving compliance, quality, information security, markets, natural disasters, and other potential risks, the Company has established Risk Management and Compliance Regulations for properly recognizing and managing the risks. Based on these regulations, the Company designates individuals who are responsible for the oversight of individual risk factors and maintains a risk management system. – 18 – The Risk Management and Compliance Committee supervises risk management. Discussions and activities of this committee are reported to the Board of Directors on a regular basis. In addition, this committee establishes risk management policies, inspects responses to risk factors and performs follow-up activities, discusses responses to problems that have occurred, and performs other activities for making further improvements to the risk management system. The Company has established Crisis Management Regulations and has a framework for rapid and appropriate responses in order to minimize the resulting damage in cases where a significant risk occurs. [System for ensuring that Directors perform their duties efficiently] The scope of duties, authority and responsibilities of Directors are clearly defined and the Independent External Directors/Audit & Supervisory Board Members provide supervision and oversight. This results in the proper and efficient management of the Group by the Directors. The Board of Directors Regulations designate important items that should be submitted for decisions or as reports to the Directors for the purpose of operating the Board of Directors efficiently. In addition, the Company has a Management Committee for the purpose of making decisions about business operations efficiently. The Company uses the executive officer system in order to make decisions about business operations quickly. [System for ensuring the suitability of business operations of the corporate group consisting of the Company and its subsidiaries] The Company assigns personnel responsible for the overall management of affiliated companies. Also, as a rule, the Company sends Directors and Audit & Supervisory Board Members to affiliated companies in order to strengthen the Group’s governance and monitor the management of these companies. The personnel responsible for the overall management of affiliated companies requires all subsidiaries to submit reports about their operations, financial condition and other important items in accordance with the Regulations on Management of Affiliated Companies. In addition, internal audits by the Audit Office include all of the activities of affiliated companies. In accordance with Internal Audit Rules, the Audit Office performs periodic internal audits regarding compliance with laws and regulations, the Articles of Incorporation and internal regulations and the suitability of procedures and other activities for conducting business operations. [System for ensuring the reliability of financial information] To ensure the reliability of financial information, the Company establishes and operates internal controls related to financial reporting as prescribed in the Financial Instruments and Exchange Act and other legislation, and evaluates and reports on the effectiveness of these controls on an ongoing basis. Furthermore, the Company quickly takes actions when revisions or improvements are needed for internal controls. [System for reporting from Directors or employees to Audit & Supervisory Board Members and for other reporting to Audit & Supervisory Board Members] Directors and executive officers submit periodic reports about the performance of their duties to Audit & Supervisory Board Members. In addition, executives and employees immediately report to Audit & Supervisory Board Members any serious violation of a law or regulation at the Company or a group company or any other serious matter involving compliance. The Company has a system that allows employees to submit directly to Audit & Supervisory Board Members any information about matters that may cause a significant loss to the Company. [System for ensuring no negative consequences for individuals who submit reports to Audit & Supervisory Board Members] – 19 – The Company has a manual for activities concerning compliance. In accordance with this manual, when a Director or employee of the Group makes a compliance violation report, there will be no negative consequences for that individual because of the submission of the report. In addition, information about the individual who submits the report and the contents of the report are handled in accordance with strict rules. [Other systems for ensuring that audits by the Audit & Supervisory Board Members are performed effectively] The Audit Office and Audit & Supervisory Board Members exchange information periodically and work together in other ways concerning formulation of an internal auditing plan for each fiscal year, internal audit results and other matters. The Audit Office and Audit & Supervisory Board Members monitor and verify the status of implementation and operation of these systems. 2. Basic Views on Eliminating Anti-Social Forces The Company takes a firm stance against anti-social forces, denying any unreasonable requests. The KOSÉ Group Code of Conduct makes a firm declaration in this regard. In addition to companywide initiatives, the Company has a response framework that includes collaboration with the police, attorneys and other specialized outside organizations. The Company and affiliated companies conduct prior examinations of a business partner as necessary and establish clauses for the elimination of anti-social forces in the business contracts with them. – 20 – 1. Adoption of Anti-Takeover Measures Adoption of Anti-Takeover Measures Not Adopted Supplementary Explanation V. Other – 2. Other Matters Concerning Corporate Governance System The Company has in place the following internal structures related to the appropriate disclosure of corporate information. The Company has formulated rules on handling the insider information of the KOSÉ Group (information about decisions, facts, finances and other important matters) and the internal regulation on trading the Company stock “Rules on the Prevention of Insider Trading.” The Company thoroughly manages such information and strives to prevent insider trading that violates laws and regulations. The Company has in place the following structures for information disclosure. 1. Departments and personnel responsible for managing insider information ・ Personnel responsible for handling information: Directors and executive officers in charge of information disclosure IR Department ・ Department in charge of information disclosure: ・ Department in charge of information management: General Administration Department 2. Information management and disclosure processes ・ In the event that insider information on the Company or Group companies materializes, this information is reported to personnel responsible for handling information and the general manager of the General Administration Department. ・ Personnel responsible for handling information discuss with the President and other individuals they deem necessary whether such information corresponds to Corporate Information Required for Timely Disclosure. ・ If determined as corresponding to Corporate Information Required for Timely Disclosure, personnel responsible for handling information coordinate with the general manager of the General Administration Department to prevent information leaks. ・ In principle, the publication of information occurs following Board of Directors approval, and information is disclosed by the IR Department in accordance with Securities Listing Regulations formulated by the Tokyo Stock Exchange. – 21 – – 22 – Corporate Governance OrganizationGeneral Meeting ShareholdersManagementCommitteeDepartments/SubsidiariesManagement Policy Review CommitteeSustainabilityCommitteeAudit & SupervisoryBoardBoard of DirectorsAudit OfficeAccountingAuditorAuditElection/DismissalCooperationRisk Management and Compliance CommitteeResolution/ApprovalsSupervisionReportingGuidance and InstructionsProposalsConsultationsManagement OversightBusiness ExecutionOversightExecutive CommitteeNomination & Remuneration CommitteeElection/DismissalElection/DismissalCooperationAuditCooperationResolution/ApprovalsResolution/ApprovalsResolution/ApprovalsSupervisionReportingReportingAudit – 23 – Insider information Submission Emergency Approval Timely disclosureIR DepartmentTokyo Stock ExchangeTimely Disclosure SystemEach department, each group companyPersonnel responsible for handling information,General Manager of Administration DepartmentExamination of the timely disclosure information(President, Corporation Strategy Department, General Administration Department, etc.)Board of Directors Update: March 30, 2022 KOSÉ Activities Concerning Principles of the Corporate Governance Code Section 1: Securing the Rights and Equal Treatment of Shareholders General Principle 1 Companies should take appropriate measures to fully secure shareholder rights and develop an environment in which shareholders can exercise their rights appropriately and effectively. In addition, companies should secure effective equal treatment of shareholders. Given their particular sensitivities, adequate consideration should be given to the issues and concerns of minority shareholders and foreign shareholders for the effective exercise of shareholder rights and effective equal treatment of shareholders. KOSÉ is dedicated to increasing transparency and fairness in order to receive support as a company with value for the purpose of achieving sustained growth and the medium to long-term growth of corporate value. To accomplish this goal, KOSÉ’s basic stance is to conduct sincere communications with shareholders and all other stakeholders in order to build relationships based on trust. Based on this policy, KOSÉ maintains an environment that ensures effective equal treatment of all shareholders and the effective assurance of shareholder rights and the suitable exercise of these rights. Principle 1.1 Companies should take appropriate measures to fully secure shareholder rights, including voting rights at the general shareholder meeting. KOSÉ is taking suitable actions to ensure that shareholders can exercise their right to vote at shareholders meetings and to effectively ensure all other rights of shareholders. Supplementary Principle 1.1.1 When the board recognizes that a considerable number of votes have been cast against a proposal by the company and the proposal was approved, it should analyze the reasons behind opposing votes and why many shareholders opposed, and should consider the need for shareholder dialogue and other measures. When there is a significant number of votes in opposition of a proposal that was approved at a shareholders meeting, KOSÉ determines the reason for this opposition and the Board of Directors determines if there is a need for any actions. Supplementary Principle 1.1.2 When proposing to shareholders that certain powers of the general shareholder meeting be delegated to the board, companies should consider whether the board is adequately constituted to fulfill its corporate governance roles and responsibilities. If a company determines that the board is indeed adequately constituted, then it should recognize that such delegation may be desirable from the perspectives of agile decision-making and expertise in business judgment. The KOSÉ Articles of Incorporation delegate certain powers of a shareholders meeting, such as resolutions concerning interim dividends and stock repurchases, to the Board of Directors. The corporate governance structure reflects the positioning of corporate governance as one of the highest priorities of management. When a proposal is submitted at a shareholders meeting for the delegation of certain powers of the 1 shareholders meeting to the Board of Directors, the proposal is based on the judgment of the Board of Directors that the approval of the proposal would be beneficial to shareholders from the perspectives of the agility and efficiency of management. Supplementary Principle 1.1.3 Given the importance of shareholder rights, companies should ensure that the exercise of shareholder rights is not impeded. In particular, adequate consideration should be given to the special rights that are recognized for minority shareholders with respect to companies and their officers, including the right to seek an injunction against illegal activities or the right to file a shareholder lawsuit, since the exercise of these rights tend to be prone to issues and concerns. For rights that are also granted to minority shareholders by the Companies Act, the Share Handling Regulations on the KOSÉ website clearly state the rules and procedures for exercising those rights. Principle 1.2 Companies should recognize that general shareholder meetings are an opportunity for constructive dialogue with shareholders, and should therefore take appropriate measures to ensure the exercise of shareholder rights at such meetings. KOSÉ views shareholders meetings as places for constructive dialogues with shareholders. To supply a sufficient amount of information for these dialogues, shareholder meeting notices include diagrams and other methods to provide explanations in format that is easy to understand, and other measures are used to properly supply information that could be useful for enabling shareholders to make decisions. In addition, shareholder meeting notices are sent well before meetings and are posted on the KOSÉ website. Shareholders can submit votes using the internet, an electronic voting platform and other channels. These measures create an environment that allows shareholders to exercise their rights at shareholders meetings. Supplementary Principle 1.2.1 Companies should provide accurate information to shareholders as necessary in order to facilitate appropriate decision-making at general shareholder meetings. To provide information that is useful for shareholders to make decisions, KOSÉ posts on its website materials for shareholders meetings as well as earnings presentation materials, the KOSÉ Report (integrated report) and other information. Supplementary Principle 1.2.2 While ensuring the accuracy of content, companies should strive to send convening notices for general shareholder meetings early enough to give shareholders sufficient time to consider the agenda. During the period between the board approval of convening the general shareholder meeting and sending the convening notice, information included in the convening notice should be disclosed by electronic means such as through TDnet1 or on the company’s website. To give shareholders sufficient time to consider proposals submitted at shareholders meetings, notices of these meetings are sent well before meetings and these notices are disclosed by using securities exchanges and the KOSÉ website before the notices are sent to shareholders. Supplementary Principle 1.2.3 The determination of the date of the general shareholder meeting and any associated dates should be made in consideration of facilitating sufficient constructive dialogue with shareholders and ensuring the accuracy of 2 information necessary for such dialogue. The dates of shareholders meetings are determined by taking into account all applicable factors, such as providing sufficient time for shareholders to reach a decision about proposals and sufficient time for the accounting auditor to perform an audit of the financial statements. Numerous measures are used to facilitate a constructive dialogue with shareholders, such as sending shareholder notices well before meetings and posting these notices on the KOSÉ website before the notices are sent. Supplementary Principle 1.2.4 Bearing in mind the number of institutional and foreign shareholders, companies should take steps for the creation of an infrastructure allowing electronic voti