日立金属（5486） – Corporate Governance Report

Note: This document has been translated from the Japanese original for reference purposes only. In the event of any discrepancy between this translated document and the Japanese original, the original shall prevail. The Company assumes no responsibility for this translation or for direct, indirect or any other forms of damages arising from the translation. Corporate Governance Report Last Updated: April 4, 2022 Hitachi Metals, Ltd. Mitsuaki Nishiyama Chairperson and President Securities Code: 5486 https://www.hitachi-metals.co.jp/e/index.html The corporate governance of Hitachi Metals, Ltd. (the “Company”) is described below. I. Basic Views on Corporate Governance, Capital Structure, Corporate Attributes and Other Basic Information 1. Basic Views The underlying basis for corporate governance at the Company is to ensure transparent, sound, and efficient management, meet the needs of our stakeholders, and increase corporate value. We believe increasing corporate value to be one of our most important management challenges. Accordingly, it is imperative that we create an organizational structure in which management supervision and business execution both function effectively and are balanced. We also believe that timely, high-quality information disclosure contributes to the improvement of corporate governance. In pursuit of this philosophy, we go beyond simple financial disclosure, regularly publishing the details of individual businesses and medium-term management plans. We acknowledge that compliance is the linchpin of corporate governance. Because of this, we must go beyond mere compliance with laws and internal regulations, extending to the role we must fulfill as a member of society while staying aware of the corporate activities that we engage in, based on respect for social ethics and morality. (https://www.hitachi- The Company established metals.co.jp/e/corp/corp15.html), which materializes the above details and serves as specific standards to guide its Directors, Executive Officers, and employees on what is the appropriate conduct. Directors and Executive Officers are compensated for executing management that enhances the Company’s corporate value and benefits stakeholders by formulating, determining, and executing management policies from a medium- to long-term perspective, medium-term management plans, and annual business budgets, and the compensation system reflects the Company’s short-term and medium- to long-term business performance. The Company’s corporate governance framework is established in the Corporate Governance Guidelines (“the Guidelines”) and the basic policy on the internal control system determined by the Board of Directors based on Japan’s Companies Act. An overview of this basic policy is provided in “IV. Matters Related to Internal Control System, 1. Basic Views on Internal Control System and Progress of System Development.” Furthermore, the Guidelines are also provided on the Company’s website (https://www.hitachi-metals.co.jp/e/ir/ir-csr.html). the “Hitachi Metals Group Codes of Conduct” [Reasons for Non-compliance with the Principles of Japan’s Corporate Governance Code] The Company implements all the principles of the corporate governance code. – 1 – [Disclosure Based on the Principles of Japan’s Corporate Governance Code] [Updated] [Principle 1-4] Holding Shares of Other Companies as Strategic-Shareholdings In principle, the Company shall not hold the shares of other companies as strategic-shareholdings. The exception is if the Company believes these holdings contribute to the Company’s corporate value. The Company would comprehensively take into consideration objectives of such holdings such as maintenance and strengthening of business relations, capital tie-ups, business alliances and joint development as well as associated returns and risks. The Company has been reducing such holdings through conducting an annual review of holding objectives by the Board of Directors primarily on the significance of holding and the cost of capital of each individual stock from qualitative and quantitative aspects. For other policies on our strategic-shareholdings, please refer to Article 7. Policies Concerning Holding Shares of Other Companies as Strategic-Shareholdings in the Guidelines. As of March 31, 2021, the number of the strategic-shareholdings was 12. The number has decreased from 42 as of March 31, 2015, when the corporate governance code had yet to be implemented. [Principle 1-7] Related Party Transactions For policies and procedures on transactions with the Company’s parent company, please refer to Article 8. Transactions with a Parent Company of the Company in the Guidelines [Supplementary Principle 2-4-1] Ensuring Diversity in the Promotion of Core Human Resources (Views on ensuring diversity) The Company has established the following Hitachi Metals Basic Policy on Diversity Management as its basic views on ensuring diversity. 1. We regard differences in gender, nationality, culture and so forth as unique qualities of the individual, and we ensure diversity through measures such as promoting the career development of women and utilizing global human resources. Such approaches allow us to promote innovation and enhance the flexibility and speed with which we respond to risks and changes. 2. We encourage the growth of the individual, enhance our ability to act as an organization and reinforce the basis for sustained growth by engaging in active communication and the sharing of values. 3. We aim to become one of the world’s top companies in metal materials by designating diversity as a driver of growth, as we transform ourselves into a globally competitive business and challenge ourselves to meet new targets. (Voluntary and measurable goals for ensuring diversity and the current condition) Regarding the career development of women, the Company has established targets for the ratio of women among newly hired graduates (career-track positions) and the ratio of women in management positions. These targets and actual results are provided below. For actual results in the last five years, please refer to page 54 of Integrated Report provided on the Company’s website (https://www.hitachi-metals.co.jp/e/ir/annual/anu_2021.html). 1) Ratio of women among newly hired graduates (career-track positions) Target ratios: 10% or higher for technical positions, 40% or higher for administrative positions Actual results in fiscal 2020: 8% for technical positions, 33% for administrative positions 2) Ratio of women in management positions Target ratio: 2.0% As of September 2021: 1.9% In our annual hiring for career-track positions, the Company focuses on ensuring diversity by setting a target ratio of 50% or higher for our diversity hiring framework, which includes women, foreign nationals, and mid-career hires. The Company has not set a target for promoting foreign nationals and mid-career hires to management positions. For actual results of diversity recruitment ratio in the last five years, please refer to page 54 of Integrated Report provided on the Company’s website (https://www.hitachi-metals.co.jp/e/ir/annual/anu_2021.html). As of September 2021, the number of women, foreign nationals, and mid-career hires in management positions and the ratio of each to the total number of management positions are as follows. Women: 22 (1.9%) Foreign nationals: 6 (0.5%) Mid-career hires: 94 (8.2%) (Policies for human resource development and internal environment development to ensure diversity, as well as the status of their implementation) – 2 – 1) Policies for human resource development and the status of their implementation The Company aims to develop people of action with global perceptions and is striving to enhance and strengthen our integrated human resource development program linking OJT and OFF-JT. The foundation of our development program is to provide the necessary training to the necessary people at the necessary time. In addition to providing management position training, employee level-based training, and technical training, we also send employees based in Japan overseas for business training with the goal of developing global human resources. Furthermore, we are working to improve our development program for the early selection of management candidates who will lead the next generation of management. For our management candidates, we engage in personnel rotations that include tough assignments, provide opportunities for the candidates to exchange opinions with the senior management including the President, and send candidates to management leadership training, including external training. 2) Policies for internal environment development and the status of their implementation The Company believes that it is indispensable to create an environment in which diverse human resources can share different values and ideas, pursue highly productive workstyles and approaches to their jobs, and feel a sense of fulfilment and personal growth in their work. As such, the Group is working to improve operational efficiency and promote and establish work with no restrictions on time or location by pursuing ICT measures, and is engaged in activities to realize fundamental workstyle reforms so that each individual employee can have real job satisfaction and feel truly comfortable at work. [Principle 2-6] Roles of Corporate Pension Funds as Asset Owners The Company adopts a contract-type defined benefit pension plan. To manage the pension plan, the Company has established the Retirement Benefits Committee consisting of the officer in charge of Human Resources & General Administration, the officer in charge of Finance and others, and assigned personnel with appropriate qualifications required in the Human Resources & General Administration and Finance Division as the secretariat. In addition, the Company has established a basic policy on pension asset management to ensure pension benefits to beneficiaries in the future and secure the total returns necessary for payment over the long term. According to the policy, the Company sets a medium- to long-term strategic asset mix as well as selects and evaluates asset managing trustees, and monitors the status of pension asset management on a regular basis. The trustees manage conflicts of interest between such trustees and beneficiaries by complying with the defined criteria for the exercise of voting rights, taking into account that they exercise their voting rights solely for the purpose of increasing performance of asset management as defined in the basic policy. Furthermore, to help employees ensure stable asset building, the Company adopts defined contribution pension plans in addition to the contract-type defined benefit pension plan, carries out the review of asset managing trustees and asset management products, and provides employees with educational sessions on asset management. [Principle 3-1] Full Disclosure i) Company objectives (e.g., business principles), business strategies and business plans For the Company’s business principles, please refer to Article 1. Business Principles in the Guidelines. For the Company’s business strategies and business plans, the Company has developed the Fiscal 2021 Medium-term Management Plan, setting 2021 (ending March 31, 2022) as the final fiscal year, and the details are posted on the Company’s website: https://www.hitachi-metals.co.jp/e/ir/ir-prsen.html. ii) Basic views and policies on corporate governance For the Company’s basic views and policies on corporate governance, please refer to 1. Basic Views above and the Guidelines. iii) The Compensation Committee’s policies and procedures in determining the compensation of the senior management and Directors As the Company is a company with nominating and other committees (“company with Nominating Committee, etc.”), it sets forth the policy on the determination of compensation, etc. for each Director and Executive Officer in the Compensation Committee, with a majority of the members being independent Outside Directors, and determines the amount of individual compensation based on the policy. For the policy on the determination of compensation, etc. for each Director and Executive Officer, please refer to “II. Business Management Organization and Other Corporate Governance Systems regarding Decision-making, Execution of Business, and Supervision in Management,” “1. Organizational Composition and Operation,” “Compensation for Directors and Executive Officers,” “Disclosure of Policy for Determining Compensation Amounts or Calculation Methods Thereof” provided later in this document. – 3 – iv) The Board of Directors’ policies and procedures in appointing and dismissing the senior management and the Nominating Committee’s policies and procedures in nominating candidates for Director As the Company is a company with Nominating Committee, etc., it determines candidates for Director in the Nominating Committee, with a majority of the members being independent Outside Directors. The Nominating Committee determines candidates for Director based on Article 12. Size of the Board, Article 13. Composition of the Board, Article 14. Qualifications of Directors, and Article 15. Criteria for Independence of Outside Directors in the Guidelines. The Board of Directors ensures that the appointment and dismissal of an Executive Officer are conducted in a fair manner based on Article 20. Policy on Appointment and Dismissal of Executive Officers in the Guidelines. v) Reasons for appointing and nominating the senior management and candidates for Director For the reasons for nominating candidates for Director at the 84th Ordinary General Meeting of Shareholders, please refer to Reference Document for the General Meeting of Shareholders on pages 5 to 11 in Notice of the 84th Ordinary General Meeting of Shareholders on our website: https://www.hitachi-metals.co.jp/e/ir/ir- stock.html. For the reasons for appointing Executive Officers, please refer to “Reasons for appointment as Executive Officer” provided later in this document. [Supplementary Principle 3-1-3] Initiatives on Sustainability (Initiatives on sustainability) For details on our sustainability initiatives, please refer to pages 20 to 25 and 45 to 51 of Integrated Report provided on the Company’s website (https://www.hitachi-metals.co.jp/e/ir/annual/anu_2021.html). (Investments in human capital) Recognizing that human resources are the source of our competitiveness, the Company has worked to enhance and strengthen our human resource development program, believing it is important to develop people of action with global perceptions at Hitachi Metals. For details, please refer to pages 48 to 49 of Integrated Report provided on the Company’s website (https://www.hitachi-metals.co.jp/e/ir/annual/anu_2021.html). (Investments in intellectual property) The Company creates assets to support the sustainable growth of the Group through the thorough management of our intellectual property knowhow and the acquisition and maintenance of intellectual property rights both in Japan and overseas for the appropriate protection and efficient use of our intellectual property. In our research and development to generate such intellectual property, the Company continues to invest in research and development on advanced materials that foster sustainable growth and contribute to society. The Company also focuses on the development of environmentally conscious products amid global initiatives being promoted to reduce environmental burden. For details on our research and development initiatives, please refer to pages 20 to 23 of Integrated Report provided on the Company’s website (https://www.hitachi- metals.co.jp/e/ir/annual/anu_2021.html). [Supplementary Principle 4-1-1] Summary of Scope of Matters Delegated to the Management by the Board of Directors The Company specifies items resolved by the Board of Directors in the Board of Directors Rules. They include items such as dividend of surplus; issuance of new shares and subscription rights to shares; acquisition, lending, borrowing and disposal of assets, debt guarantee, and organizational restructuring with value exceeding a certain threshold as well as items subject to approval by the board of directors under the Companies Act of Japan (including determination of basic management policy and basic policies for establishing internal control systems, appointment and dismissal of Executive Officers, and appointment and removal of Representative Executive Officer). Determination of items other than the above is delegated to the Chairperson. [Principle 4-9] Criteria for Independence of Outside Directors For the criteria for independence of Outside Directors, please refer to Article 15. Criteria for Independence of Outside Directors in the Guidelines. [Supplementary Principle 4-11-1] Views on Appropriate Balance between Knowledge, Experience and Skills of the Board of Directors as a Whole, on Diversity and Appropriate Size of the Board of Directors The Articles of Incorporation provides that the Company shall have not more than ten directors. For other matters on views on appropriate balance between knowledge, experience and skills of the Board of Directors as a whole, as well as on diversity and appropriate size of the Board of Directors, please refer to Article 12. Size of the Board, Article 13. Composition of the Board, and Article 14. Qualifications of Directors in the Guidelines. Furthermore, for details on the skill sets of the Company’s Directors, please refer to page 34 of Integrated Report provided on – 4 – the Company’s website (https://www.hitachi-metals.co.jp/e/ir/annual/anu_2021.html). [Supplementary Principle 4-11-2] Concurrent Positions Assumed by Directors For principal concurrent positions assumed by Directors, please refer to Reference Document for the General Meeting of Shareholders on pages 5 to 11 in Notice of the 84th Ordinary General Meeting of Shareholders on our website: https://www.hitachi-metals.co.jp/e/ir/ir-stock.html. [Supplementary Principle 4-11-3] Analysis and Evaluation of Effectiveness of the Board of Directors The Company conducted a questionnaire survey and an individual interview with the Directors on effectiveness of the Board of Directors as a whole for fiscal 2020. The major categories of the questionnaire survey consist of composition, decision-making process and contribution, operation and support systems, and others. At the Board of Directors meeting held in May 2021, the effectiveness of the Board of Directors was evaluated based on each Director’s evaluations and opinions obtained from the survey and interviews. As a result, the Board of Directors has verified that effectiveness of the Board of Directors as a whole is ensured, as agendas are appropriately set, discussions regarding the strategic direction are deepened, and important agendas are reviewed in advance. On the other hand, the Company has recognized room for further improvement on the following matters: 1) Establishment of a systematic risk management system, and supervision of its operation 2) Deliberation on corporate direction and management strategy amid fluctuations of the market environment and business environment, and processes for the supervision of their implementation 3) Diversity in the Directors’ skills 4) Management and support system (timely provision of necessary information) We will use the above findings for operation of the Board of Directors to further enhance its effectiveness looking forward. In addition, the executive part is improving and strengthening the quality assurance system, which includes its organization, operation and audits, and we will closely monitor its progress and effectiveness. – 5 – The Company also conducted a questionnaire survey and an individual interview with the members of the Audit Committee on effectiveness of the Audit Committee for fiscal 2020. At the Audit Committee meeting held in May 2021, the effectiveness of the Audit Committee was evaluated based on each Committee member’s evaluations and opinions obtained from the survey and interviews. As a result, the Audit Committee had lively important discussions on quality assurance issues, structural reforms, etc., and verified that the tripartite audit function related to accounting is basically operating smoothly, including improving the method for discussing with the executive parts, which indicated by internal audit, and that the effectiveness of the Audit Committee as a whole is ensured. On the other hand, due to the occurrence of quality assurance issues, the Company has identified areas that need to be strengthened among the audit functions related to quality and overseas operations and cooperation with those functions, and the Company has recognized room for further improvement on the following matters. 1) Vision for auditing functions, including the Audit Committee Discussion of the Company’s issues, including the Internal Audit division’s audit cycle, clarification of key divisions and the key auditing viewpoints regarding the Audit Committee’s audit plan. Improvement of information sharing on overseas subsidiaries statuses and of cooperation with the Accounting Auditor, etc. so that the Accounting Auditor and the Company have an understanding of those statuses. 2) Audit system and follow-up Regarding the audit system for quality assurance, discussion about the ideal forms of multiple lines of defense as the original purposes of governance, etc. We will use the findings for operation of the Audit Committee to further enhance its effectiveness in the future. [Supplementary Principle 4-14-2] Policy on Training of Directors According to Article 23. Education of Directors and Executive Officers in the Guidelines, the Company provides Directors and Executive Officers with an orientation when they assume office as well as on other opportunities, when necessary, for them to acquire the knowledge necessary for discharging their duties as Directors and Executive Officers of the Company. [Principle 5-1] Policy on Constructive Dialogue with Shareholders According to Article 5. Information Disclosure and Dialogue in the Guidelines, the Company discloses information to its shareholders and other stakeholders and has dialogue with them based on the IR Policy. For details of the IR Policy, please refer to Appendices of the Guidelines. – 6 – 2. Capital Structure Foreign Shareholding Ratio From 20% to less than 30% [Status of Major Shareholders] [Updated] Name Number of Shares Owned (Shares) Shareholding Percentage (%) Hitachi, Ltd. The Master Trust Bank of Japan, Ltd. (Trust account) Custody Bank of Japan, Ltd. (Trust account) JPMBL RE CITIGROUP GLOBAL MARKETS LIMITED COLL EQUITY JAPAN SECURITIES FINANCE CO., LTD. JPMorgan Chase Bank 385632 State Street Bank and Trust Company 505103 J.P. MORGAN SECURITIES PLC Custody Bank of Japan, Ltd. (Trust account 7) JPMorgan Chase Bank 380072 Controlling Shareholder (except for Parent Company) — Parent Company (Listed Stock Market) Supplementary Explanations [Updated] 228,221,199 16,019,000 8,710,900 7,610,839 6,416,700 4,894,549 4,699,005 4,420,555 4,374,200 3,551,400 53.38 3.75 2.04 1.78 1.50 1.14 1.10 1.03 1.02 0.83 Hitachi, Ltd. (Shares are listed on Tokyo Stock Exchange and Nagoya Stock Exchange) Securities Code: 6501 Shareholding percentages in the table above are calculated excluding treasury stock (1,340,710 shares as of March 31, 2021). 3. Corporate Attributes Fiscal Year-End Type of Business Listed Stock Market and Market Section Tokyo Stock Exchange First Section March Iron & Steel 1,000 or more Number of Employees (Consolidated) at End of the Previous Fiscal Year Net Sales (Consolidated) for the Previous Fiscal Year From ¥100 billion to less than ¥1 trillion Number of Consolidated Subsidiaries at End of the Previous Fiscal Year From 50 to less than 100 – 7 – 4. Policy for Measures to Protect Minority Shareholders in Conducting Transactions with Controlling Shareholder In regard to transactions regarding the sale of products and the procurement of materials, etc., the Company has established rules that provide the internal procedures relating to decisions, etc. in transaction conditions with the aim of ensuring appropriateness of operations related to not only transactions with the parent company but also to trading in general. Also, in case of the need of transactions, etc. between the Company and its parent company that may be accompanied by the risk of a material conflict of interest between the parent company and minority shareholders, the matter shall be determined after review and careful deliberation by the Board of Directors. 5. Special Circumstances Which May Have Material Impact on Corporate Governance [Updated] The Company is a member of the Hitachi Group, centered around Hitachi, Ltd., the parent company. Within the Hitachi Group, the parent company and the listed subsidiaries all share the common objective of improving the Group’s overall value through strengthening the competitiveness of each company, and the listed subsidiaries are able to reap the benefits derived through participating in measures contributing to the strengthening of the business base. Moreover, with respect to management relating to listed subsidiaries, so that each company’s autonomy and originality is fully respected and the parent company’s involvement in such management is limited except in cases where matters are required to be put before each company’s general meeting of shareholders, the management decisions of those subsidiaries are carried out pursuant to the respective company’s decision making processes. Accordingly, the Company aims to maintain close cooperation with the group companies through R&D collaboration while remaining independent in its business operations and transactions with Hitachi, Ltd. and by using the Company’s management resources effectively, the Company seeks to provide high-quality products and services. With regard to personal relationship with Hitachi, Ltd., one Executive Officer of Hitachi, Ltd. concurrently serves as Director of the Company. The Company may encounter circumstances where, through the participation in statements of opinion and resolutions at the Company’s Board of Directors, Hitachi, Ltd. could influence the determination of management policies, etc. of the Company. However, two Outside Directors, who have been designated as Independent Directors in accordance with the regulations of the stock exchange on which the Company is listed, assumed office, and a more diverse range of opinions can be reflected when carrying out deliberations at the Board of Directors; therefore, it is recognized that the Company is in a position where independent management judgments can be made. Executive Officers who execute business of the Company have not concurrently served as Director and Executive Officer of Hitachi, Ltd. With regard to the business relationship with Hitachi, Ltd., the Company does have loan agreements, etc. with Hitachi, Ltd. under the Hitachi Group Pooling Scheme, but the business activities of the Company are not heavily dependent on transactions with Hitachi, Ltd. The Company adopted the policy that regulates transactions with Hitachi, Ltd. to be fairly carried out, based on market prices. As announced on April 28, 2021, a tender offer, etc. for the common stock of the Company by K.K. BCJ-52 (hereinafter referred to as the “Tender Offer”) is scheduled in the future, and the Company expressed its opinion, as of the same date, in favor of the Tender Offer, if it is initiated. K.K. BCJ-52 intends to make the Company its wholly-owned subsidiary through the Tender Offer and a series of transactions to be conducted thereafter. As a result, the Company will be separated from the Hitachi Group and its common stock will be delisted. (Note) K.K. BCJ-52 is a wholly owned subsidiary of G.K. BCJ-51 (the “Parent Company of Tender Offeror”), which was established on April 23, 2021 for the primary purpose of holding all of the shares of the Company as well as controlling and managing the business activities of the Company. As of April 28, 2021, the investment funds advised by Bain Capital Private Equity, LP and its group (hereinafter collectively referred to as “Bain Capital”) indirectly owns all of the equity of the Parent Company of Tender Offeror; however, the Parent Company of Tender Offeror will accept investments from the funds managed, operated, and provided with information by Japan Industrial Partners, Inc. (hereinafter referred to as “JIP”), an investment fund for which Bain Capital provides investment advice, as well as the funds operated by Japan Industrial Solutions Co., Ltd. (hereinafter referred to as “JIS,” the investments by those funds collectively referred to as “Investments”) after the expiration date of the period for the purchase, etc. of the Tender Offer and before the commencement date of settlement for the Tender Offer. After such Investments, the funds provided with investment advice by Bain Capital, the funds managed, operated, and provided with information by JIP, and the funds operated by JIS will indirectly own the entire outstanding shares of the Parent Company of Tender Offeror. – 8 – II. Business Management Organization and Other Corporate Governance Systems regarding Decision-making, Execution of Business, and Supervision in Management 1. Organizational Composition and Operation Organization Form Company with Nominating Committee, etc. [Directors] Maximum Number of Directors Stipulated in Articles of Incorporation Term of Office Stipulated in Articles of Incorporation 10 1 year Chairperson of the Board Other Director Number of Directors [Updated] [Matters Related to Outside Directors] Number of Outside Directors [Updated] Number of Independent Directors Designated from among Outside Directors [Updated] 5 2 2 Outside Directors’ Relationship with the Company (1) [Updated] Name Attribute Relationship with the Company* a b c d e f g i j k Makoto Uenoyama From another company Koichi Fukuo From another company h △ △ * 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; and “▲” when a close relative of the director fell under the category in the past a. Executing person (a person who executes business; hereinafter the same) of the Company or its subsidiary b. Non-executive director or executing person of the parent company of the Company c. Executing person of a sister company of the Company d. Party whose major client or supplier is the Company or an executing person thereof e. Major client or supplier of the Company or an executing person thereof f. Consultant, accounting professional or legal professional who receives a large amount of monetary consideration or other property from the Company besides compensation as a director g. Major shareholder of the Company (or an executing person of the said major shareholder if the shareholder h. Executing person of a client or supplier of the Company (which does not correspond to any of d., e., or f.) i. Executing person of a corporation, with which the Company has mutually appointed outside directors (the j. Executing person of a corporation or organization that receives a donation from the Company (the director is a corporation) (the director himself/herself only) director himself/herself only) himself/herself only) k. Others – 9 – Outside Directors’ Relationship with the Company (2) [Updated] Name Committee to which the Director Belongs Nominating Committee Compensation Committee Audit Committee Designation as Independent Director Supplementary Explanation of the Relationship Makoto Uenoyama ○ ○ ○ ○ The Company has a business relationship related to the sale/purchase of products with Panasonic Corporation, at which Mr. Uenoyama was Managing Executive Officer (retired from the position in March 2013) and Corporate Adviser (retired from the position in March 2015), but the amount of transactions between the Company and Panasonic Corporation for fiscal 2020 was significantly lower than 1% of the consolidated revenues of the Group and the Panasonic Group, respectively. Therefore, the Company determines that Mr. Uenoyama’s past positions do not affect his independence as candidate for Outside Director. Reasons for Appointment The Company determined that Mr. Makoto Uenoyama will contribute to the management of the Company as well as the strengthening of the decision-making and monitoring functions of the Board of Directors and enhancing their effectiveness, by reflecting his abundant experience and in-depth knowledge in finance and accounting areas obtained through his experience in the finance and accounting operations of Panasonic Corporation over the years as well as the experience as Director in charge of accounting and finance, from a more objective standpoint as Outside Director; therefore, the Company appointed him as a candidate for Outside Director. Furthermore, the Company determines that Mr. Uenoyama satisfies both the Independence Criteria for Outside Directors in the Company’s Corporate Governance Guidelines and the requirements for Independent Directors established by the Tokyo Stock Exchange, Inc. and that there is no risk of conflicts of interest with ordinary shareholders; therefore, the Company has designated him as an Independent Director. – 10 – Name Committee to which the Director Belongs Nominating Committee Compensation Committee Audit Committee Designation as Independent Director Supplementary Explanation of the Relationship Koichi Fukuo ○ ○ ○ ○ Mr. Fukuo was Senior Managing Officer and Director of Honda Motor Co., Ltd. (hereafter, “Honda”) (retired from the position in June 2016) and President and Representative Director of Honda R&D Co., Ltd, a subsidiary of the company (retired from the position in March 2016). The Company has a business relationship with Honda and Honda R&D Co., Ltd. related to the sale of products, but the amount of transactions between the Company and Honda and Honda R&D Co., Ltd. for fiscal 2020 was significantly lower than 1% of the consolidated revenues of the Group and Honda Group, respectively. Therefore, the Company determines that Mr. Fukuo’s past positions do not affect his independence as candidate for Outside Director. Reasons for Appointment The Company determined that Mr. Koichi Fukuo will contribute to the management of the Company as well as the strengthening of the decision-making and monitoring functions of the Board of Directors and enhancing their effectiveness, by reflecting his abundant experience and in-depth knowledge in the automobile industry, to which our products are mainly supplied, obtained as the head of quality and certification of Honda Motor Co., Ltd. and as a corporate manager of the company and its group companies, from a more objective standpoint as Outside Director; therefore, the Company appointed him as a candidate for Outside Director. Furthermore, the Company determines that Mr. Fukuo satisfies both the Independence Criteria for Outside Directors in the Company’s Corporate Governance Guidelines and the requirements for Independent Directors established by the Tokyo Stock Exchange, Inc. and that there is no risk of conflicts of interest with ordinary shareholders; therefore, the Company has designated him as an Independent Director. [Committees] Committee’s Composition and Chairperson’s Attributes [Updated] Total Committee Members Full-time Members Internal Directors Outside Directors Chairperson Nominating Committee Compensation Committee Audit Committee 3 3 3 1 1 1 2 Outside director 2 Outside director 2 Outside director 0 0 1 – 11 – Name Representative Authority Concurrent Position Held by Director Nominating Committee Member Compensation Committee Member Concurrent Position as Employee Yes Yes Yes [Executive Officers] Number of Executive Officers Status of Concurrent Position Mitsuaki Nishiyama Naohiko Tamiya Tony I. Cha Kazuya Murakami Ryoichi Aita Yoshie Asaki Yoshihiro Ammo Toru Taniguchi Hisaki Masuda Kenji Minegishi Hajime Murakami Toru Yamamoto [Auditing Structure] Yes Yes No No No No No No No No No No 12 No No No No No No No No No No No No No No No No No No No No No No No No No No No No No No No No No No No No No No No No No No No No No Appointment of Directors and/or Employees to Support Duties of the Audit Committee Appointed Matters Related to the Independence of Such Directors and/or Employees from Executive Officers To assist with the duties of the Audit Committee, the Board of Directors Office has a person in charge of the Audit Committee who does not concurrently serve in any position at any other business operating division. The Audit Committee may, when deemed necessary, have the Internal Audit division under the responsibility of Executive Officers assist with the execution of duties of the Audit Committee. Appointment, dismissal and disciplinary action regarding the person in charge of the Audit Committee are carried out by Executive Officers with the consent either of the Audit Committee or Audit Committee members appointed by the Audit Committee (hereinafter in this article collectively referred to as “the Audit Committee, etc.”), whereas personnel assessment and appraisal regarding the said person are performed by Executive Officers taking into account the opinion of the Audit Committee, etc. Appointment, dismissal, disciplinary action and personnel assessment and appraisal regarding the head of the Internal Audit division are performed by Executive Officers. The reasons for any of these actions shall be explained in advance to the Audit Committee, etc. It is noted that when a person in charge of the Audit Committee and the Internal Audit division assist with the duties of the Audit Committee, they are not subject to orders and instructions of Executive Officers to provide such assistance. Cooperation among Audit Committee, Accounting Auditor and Internal Audit Division [Updated] The Audit Committee (1) receives explanations about audit implementation plans from the Accounting Auditor and carries out a discussion on and adjustments to the detail as needed, (2) receives reports on audit results and engages in an exchange of opinions with the Accounting Auditor, and (3) receives reports from the Accounting Auditor incases where, as for the performance of duties by Executive Officers, they find any significant evidence of wrongful act or violation of related laws and regulations, or the Articles of Incorporation in the course of – 12 – performing their duties. The Audit Committee also receives reports on audit implementation plans and – 13 – periodic reports from the Internal Audit division. In addition, to promote coordination with audits performed by the Audit Committee, the Audit Committee may instruct the Internal Audit division to (1) conduct a special audit for any division that the Audit Committee deems necessary and (2) set key audit items for audits performed by the Internal Audit division. As specified by the Board of Directors, for matters required for the Audit Committee to execute its duties, the Internal Auditing Office of the Internal Audit division shall assist the Audit Committee in executing its duties in accordance with the Committee’s instructions. Furthermore, the Internal Auditing Office is also in charge of assessment of internal control and reports the status to the Audit Committee. Moreover, besides the Internal Audit division, the corporate divisions, etc. in charge of finance, compliance, risks, and other areas also play certain roles in internal control and report the status of performance of their duties to the Audit Committee. The Company regards “promotion of tripartite audit function” as a paramount theme for the audit and supervision functions. The Audit Committee, the Accounting Auditor, and the Internal Audit division mutually share information on issues detected by each of them, and the Company promotes a “mutual check and balance system and mutual evaluation,” taking a step further from a one-way evaluation from the Company to the Accounting Auditor based on the evaluation standards for Accounting Auditors. Notably, the Company considers the function of detecting risks by the Accounting Auditor as an external agency is particularly important in the entire risk detecting process of the Group. To strengthen the said function, the mutual evaluation is implemented between the Accounting Auditor and the Company’s finance division or the Internal Audit division or the Audit Committee, respectively. Specifically, based on the evaluation standards for accounting auditors defined by the Audit Committee, the Audit Committee performs a comprehensive evaluation considering the following major factors evaluated by the Company: the Accounting Auditor’s communications with the Audit Committee, the senior management, the Internal Audit division and others; audit quality control system; audit plans; audit team; audit reports and quarterly review reports; and consistency between audit plans and audit hours as a basis of determining the amount of auditing compensation. The Accounting Auditor, on the other hand, evaluates basic operations of the finance division, the Internal Audit division, and the Audit Committee of the Company, handling of audit requirements, cooperation, risk recognition, activity status, resources and other factors, and reports the results to the relevant counterparties. The Company utilizes the above feedback to strengthen the Company’s functions. In addition, the Company carries out mutual evaluations between the finance divisions of the Company’s facilities or subsidiaries and the Accounting Auditor. [Independent Directors] Number of Independent Directors [Updated] 2 Matters Relating to Independent Directors The Nominating Committee of the Company judges an Outside Director to be independent if he or she does not fall under any of the following items: 4. a person who has received or who serves or has served within the last one year as an executing person (that is, an executive director, executive officer or employee; hereinafter the same) of a corporation that has received from the Company a payment of 2% or more of the entity’s consolidated annual revenues for products or services in the most recent fiscal year; 5. a person who has paid the Company 2% or more of its consolidated annual revenues for products or services in the most recent fiscal year or who serves or has served within the last one year as an executing person of the corporation; 6. an attorney, a certified public accountant, a certified tax accountant or a consultant who has received from the Company an annual payment of ¥10 million or more of monetary or other property benefits other than compensation for Directors and Executive Officers within the last one year, or a person who is or has been within the last one year a member, a partner, an associate or an employee of a law firm, an auditing firm, a tax accountant corporation, a consulting firm or other professional advisory firm that has received from the Company a payment of 2% or more of the firm’s consolidated annual revenues in the most recent fiscal year; 7. a person who serves or has served within the last one year as an officer of a not-for-profit organization that has received from the Company discretionary charitable contributions of monetary or other property benefits of ¥10 million or more, or 2% or more of that organization’s annual gross revenues or ordinary income, whichever amount is higher, during the most recent fiscal year; 8. a person who serves or has served within the last one year as an executing person or a non-executive director of the parent company of the Company; – 14 – 9. a person who serves or has served within the last one year as an executing person of a sister company of the Company; 10. a person who is a spouse or a relative within the second degree of kinship of a person (excluding a person who has or had no important position of the following) who falls under the following items: (1) (2) (3) (4) (5) who falls under the items of the above 1. through 6.; who is, or has been within the last one year, an executing person of a subsidiary of the Company; who is an executing person or non-executive director of the parent company of the Company; who is an executing person of a sister company of the Company; who is, or has been within the last one year, an executing person of the Company; and 11. a person who has a risk of having material conflicts of interests with ordinary shareholders for reasons other than those stated above. All Outside Directors qualifying as Independent Directors are designated by the Company as Independent Directors. [Incentives] Implementation of Measures to Provide Incentives to Directors and/or Executive Officers Performance-linked compensation Supplementary Explanation [Updated] (1) The Policy on the Determination of Proportion of Payments as Performance-linked Compensation and the Other Types of Compensation, etc. Compensation for Directors and Executive Officers of the Company is comprised of a base compensation, which is a fixed compensation, and a term-end bonus, which is a performance-linked compensation. For performance- linked compensation for Executive Officers, the standard amount is set in a way that the percentage of performance-linked compensation to the total amount of compensation falls within a range of the ratios specified below according the ranks of each Executive Officer to strengthen the link between the business performance of the Company, considering the degree of the responsibility of each Executive Officer for business execution. Compensation for Directors is comprised of only a base compensation, which is a fixed compensation, in order to contribute to the full execution of the management-supervision function. In case of Directors who also serve as Executive Officers, compensation as a Director is not paid. Rank Fixed compensation Standard amount of performance- linked compensation Chairperson and President Senior Vice President and Executive Officer, and Vice President and Executive Officer Executive Officer Director 60% 67%–68% 70% 100% 32%–33% 40% 30% — (2) Indicators for Performance-linked Compensation and Reasons for the Selection of the Indicators The indicators for performance-linked compensation are “revenues,” “adjusted operating income,” “return on invested capital (ROIC),” and “cash conversion cycle” on a consolidated basis as we focus on growth, profitability, and management efficiency in the Fiscal 2021 Medium-term Management Plan. Furthermore, non-financial targets are also included in the targets set for each Executive Officer. (3) Method, etc. for Determination of the Amount of Performance-linked Compensation The amount of a term-end bonus, which is a performance-linked compensation, to be paid to each Director and Executive Officer is calculated using the formula specified below based on the standard amount of performance- linked compensation set by rank. The Compensation Committee then discuss the results of calculation and finalize them. – 15 – Amount of term-end bonus to be paid to each Director and Executive Officer = Standard amount of performance- linked compensation × ((Corporate performance factor*1 × Weight assigned for corporate performance factor) + (In-charge business factor*2 × Weight assigned for in-charge business factor) + (Individual target factor*2 × Weight assigned for individual target factor)) *1 The “corporate performance factor” is the sum of the degrees of achievement of corporate performance related indicators multiplied by the weight assigned for each indicator (0.3 for revenues, 0.4 for adjusted operating income, 0.15 for return on invested capital (ROIC) and 0.15 for cash conversion cycle (CCC)), where the degree of achievement of each corporate performance-related indictor is predetermined by the Company with a range from 0 to 2 so that the target for each indictor related to corporate performance is set as 1. The target and actual results of the “corporate performance factor” for the current fiscal year are as follows. However, for fiscal 2020, even if the targets are achieved, the amount to be paid will be 70% of the standard amount. Index (consolidated) Target Actual results Target Actual results Revenues ¥1,000.0 billion ¥881.4 billion ¥756.7 billion ¥761.6 billion ¥54.0 billion ¥14.4 billion ¥4.4 billion ¥(5.0) billion Adjusted operating income Return on Invested Capital (ROIC) Cash Conversion Cycle (CCC) 3.5% (5.0)% 0.5% (0.7)% 89.1 days (Note) [Fiscal 2019] ROIC = Net income attributable to shareholders of the parent company / (average of 84.2 days 86.3 days 87.1 days beginning and end-year interest-bearing debts + average of beginning and end-year equity attributable to shareholders of the parent company) [Fiscal 2020] ROIC = {Adjusted operating income × (1 − tax rate of 25%) + (equity in earnings affiliates} / (average of beginning and end-year interest-bearing debts + average of beginning and end- year capital) *2 Each of the “in-charge business factor” and “individual target factor” is the sum of the degrees of achievement of the targets set for each Director and Executive Officer multiplied by the weight assigned for each target, where the degree of achievement of each target is predetermined by the Company with a range from 0 to 2 so that the target for each Director and Executive Officer is set as 1. Recipients of Share Options — Supplementary Explanation — [Compensation for Directors and Executive Officers] Disclosure of Individual Directors’ Compensation No individual disclosure Disclosure of Individual Executive Officers’ Compensation No individual disclosure Supplementary Explanation [Updated] Total amount of compensation, etc. by each category of position, total amount of compensation, etc. by type and number of recipients disclosed in the annual securities report for the 84th business term (from April 1, 2020 to March 31, 2021) are as follows. – 16 – Category of Position Base Compensation Term-end Bonus Number of Recipients Total Amount of Compensation, etc. Directors (excluding Outside Directors) ¥46 million ¥39 million ¥7 million Executive Officers ¥354 million ¥276 million ¥78 million Outside Directors ¥62 million ¥54 million ¥8 million 5 17 3 (Notes) 1. Directors with concurrent post as Executive Officers are compensated as Executive Officers but not as Directors. 2. The base compensation for full-time Directors and Executive Officers was reduced as an emergency measure to improve business performance from October 2020 to March 2021. It was also reduced in relation to the matter of misconduct regarding the quality of products of the Company and its subsidiaries from January 2021 to March 2021. 3. Compensation received as a member of the Special Committee, which consists of four members: three Independent Outside Directors, Mr. Makoto Uenoyama, Ms. Toshiko Oka (retired from the position of Director of the Company as of June 18, 2021), and Mr. Koichi Fukuo, who are independent of the Tender Offeror, Hitachi, Ltd. and the Company, and one outside expert for the purpose of eliminating arbitrariness in the Company’s decision-making process, examining and determining the pros and cons of the transactions, the appropriateness of the terms of the transactions, and the fairness of the procedures, including the process of selecting the purchaser (partner), etc., in the decision to implement a series of transactions related to the Tender Offer for the Company’s common stock by K.K. BCJ-52, was added to the amount of base compensation for Outside Directors in the chart above. Ms. Toshiko Oka resigned as a member of the Special Committee on March 26, 2021, at her own request, from the perspective of avoiding any suspicion of a conflict of interest and ensuring the fairness of the transactions since there are concerns over conflicts of interest with the company for which she concurrently serves as Director. Policy for Determining Compensation Amounts or Calculation Methods Thereof [Updated] Established Disclosure of Policy on Determining Compensation Amounts and Calculation Methods [Updated] The Basic Policy on the Determination of Compensation, etc., for each Director and Executive Officer set forth by theCompensation Committee is as follows: 1. Directors and Executive Officers assuming the management of the Company are compensated for executing management that enhances the Company’s corporate value and the benefits of stakeholders, such as shareholders, by determining management policies from a long-term perspective, and formulating and executing medium-term management plans and annual business budgets. 2. The compensation system shall be commensurate with roles and responsibilities of each Director and Executive officer. Compensation for Directors shall be such that it enables them to exercise functions of supervision of management effectively. Compensation for Executive Officers shall reflect the Company’s short-term and medium- to long-term business performance and appropriate compensations shall be paid for outstanding achievements in order to motivate Executive Officers to exercise their respective management capabilities, or management know-how and skills to achieve satisfactory results. 3. In order to secure appropriate human resources for the positions of Director and Executive Officer, compensation levels should be comparable to those of other companies. The Compensation Committee utilizes outside experts to gain expert advice and an objective viewpoint, if necessary, for deciding the details and amounts of compensation. – 17 – The “Basic Policy on the Determination of Compensation, etc., for each Director and Executive Officer” was revised at the meeting of the Compensation Committee held on May 13, 2021. As a result, the amount of compensation presented in “Compensation for Directors and Executive Officers” in “Supplementary Explanation” above was paid based on the policy prior to revision. The details of the policy prior to revision are as follows: 1. Directors and Executive Officers assuming the management of the Company are compensated for executing management that enhances the Company’s corporate value and benefits stakeholders such as shareholders by determining management policies from a long-term perspective, and formulating and executing medium-term management plans and annual business budgets. 2. In order to motivate Directors and Executive Officers to exercise their respective management capabilities, know-how and skills to achieve satisfactory results, the compensation system shall reflect the Company’s short-term and medium- to long-term business performance and appropriate compensations shall be paid for outstanding achievements. 3. Compensation paid by the Company consists of a base compensation and a term-end bonus. (1) Base compensation: Determined individually as consideration for the degree of responsibility for Company management as Director and/or Executive Officer and for the performance of duties utilizing their extensive experience, knowledge, insight, specialized management skills, etc., acquired from past experience. In order to secure appropriate human resources for the positions of Director and Executive Officer, compensation levels should be comparable to those of other companies. Linked to the business performance of the Company. (2) Term-end bonus: If it is found that an executive officer has been engaged in misconduct during his/her term of office, the Company demands, as necessary, return of paid compensation from the executive officer. [Supporting System for Outside Directors] Although there is no dedicated supporting system for Outside Directors, the Company has established the Board of Directors Office to assist with the execution of duties of the Board of Directors, Nominating Committee, Audit Committee and Compensation Committee. The Board of Directors Office shall have persons in charge of the Board of Directors and Committees to support them. When holding meetings of the Board of Directors, Nominating Committee, Audit Committee and Compensation Committee, as a general rule, the Board of Directors Office shall distribute meeting materials beforehand and provides explanations. In addition, through activities such as establishing opportunities for Outside Directors to have status briefings onsite at offices in Japan and overseas, the Company provides assistance to Outside Directors’ information collection. [Status of Persons Retired from Representative Director and President] Information on persons holding advisory positions (sodanyaku, komon, etc.) after retiring as Representative Director and President, etc. Title/ Position Name Description of Duties Working Form/Conditions (Full-time/Part-time, Paid/Unpaid, etc.) Date of Retirement from Position Such as President Term of Office — — — — — — Total Number of Persons Holding Advisory Positions (sodanyaku, komon, etc.) after retiring as Representative Director and President, etc. 0 Other Matters Although the Company has established a system that may appoint a Counselors (sodanyaku) by resolution of the Board of Directors, the Company currently has no Counselors (sodanyaku). – 18 – 2. Matters on Functions of Business Execution, Audit and Supervision, Nomination and Compensation Decisions (Overview of Current Corporate Governance System) [Updated] (Status of Supervisory System) The Company adopts the statutory organizational structure of a company with Nominating Committee, etc. This is because we concluded that this structure would contribute to the bold and speedy execution of measures relating to the Group-wide management, such as business restructuring and strategic investments, and also that the transparency, soundness and efficiency of management would be effectively improved through strengthening the decision-making and supervisory functions by Outside Directors, who are well versed in social norms and have a broader perspective, abundant experience and in-depth knowledge, in each of the Nominating Committee, the Audit Committee and the Compensation Committee, and the Board of Directors. Under this system, five Directors (of which two are Outside Directors) have been appointed, and the Company has established the Board of Directors, Nominating Committee, Audit Committee and Compensation Committee pursuant to the provisions of the Companies Act of Japan. Furthermore, the Company has established the Board of Directors Office to assist with the execution of duties by the Board of Directors and each Committee. The Board of Directors Office has persons in charge of the Board of Directors and each Committee. The purpose, authority, names of constituent members and other details of each organ are as follows. (1) The Board of Directors is an organ with purposes to make decisions on the Company’s business execution and supervise the execution of duties by Directors and Executive Officers, and is authorized to decide matters provided in the Articles of Incorporation of the Company and the Board of Directors Rules as well as in laws and regulations. In fiscal 2020, the Board of Directors held a total of 16 meetings, and Directors, who had been in service during fiscal 2020, attended all the meetings held during terms of their office, received reports from Executive Officers and each Committee about the status of their execution of duties and made decisions on matters that cannot be delegated to Executive Officers pursuant to the provisions of laws and regulations and the Articles of Incorporation as well as on important matters provided in the Board of Directors Rules, and so forth. As of the filing date of this document, the Board of Directors consists of the following five Directors (of which two are Outside Directors): Director Kenichi Nishiie Director Makoto Uenoyama (Outside Director) (Outside Director) Director Koichi Fukuo Director Mitsuaki Nishiyama Director Mamoru Morita (Chairperson of the Board) (2) The purpose of the Nominating Committee is to make decisions on matters relating to items concerning election and dismissal of Directors to be submitted at a General Meeting of Shareholders. The Committee is authorized to decide such matters as well as to designate persons to be entitled to convene a Board of Directors meeting and persons to report about the status of the Committee’s execution of duties to the Board of Directors from among its Committee members, and others. In fiscal 2020, the Nominating Committee held a total of six meetings, and Directors, who had been in service during fiscal 2020, attended all the meetings held during terms of their office, determined candidates for Directors and reviewed the executive officer system, and discussed the succession plan for corporate managers, and so forth. As of the filing date of this document, the Nominating Committee consists of the following three Directors (of which two are Outside Directors): Director Director Makoto Uenoyama (Outside Director) Director Mitsuaki Nishiyama For policies and procedures of the Nominating Committee in determining candidates for Directors, please refer to “I. Basic Views on Corpora