アイカ工業（4206） – Corporate Governance Report

Corporate Governance Report April 8, 2022 AICA Kogyo Co., Ltd. Kenji Ebihara Representative Director and President Contact: General Affairs Department, +81-52-533-3132 Securities Code: 4206 Note: This is a translation of the Japanese language original for convenience purpose only, and in the event of any discrepancy, the Japanese language original shall prevail. The corporate governance of AICA Kogyo Co., Ltd. (“AICA”) is described below. I. Basic Views on Corporate Governance, Capital Structure, Corporate Profile and Other Basic Information 1. Basic Views AICA Group seeks to ensure and improve the value of AICA and the common interests of its shareholders through the enhancement of corporate governance at each of its Group companies, including its subsidiaries in Japan and overseas. In June 2020, AICA transitioned from a Company with Board of Auditors to a Company with Audit and Supervisory Committee. The Audit and Supervisory Committee, more than half of whose members are external directors, is responsible for auditing and supervising the legality and appropriateness of the execution of duties by directors for the realization of more transparent management. In this way, AICA aims to strengthen our corporate governance further and also to build a framework that will more appropriately meet the expectations of our stakeholders in Japan and overseas. AICA has also established a Governance Committee as an advisory committee to the Board of Directors. This committee is chaired by an external director and its members are also primarily external directors. The Governance Committee deliberates on key matters concerning governance, including the appointment and remuneration of management executives, with the aims of sustainable growth, medium to long-term improvement of corporate value, and further enhancement of governance functions. [Reasons for Non-compliance with the Principles of the Corporate Governance Code] Supplementary Principle 1.2.4 Use of the Electronic Voting Platform, an English version of the Convocation Notice AICA is making every effort to prepare infrastructure where our shareholders can exercise their rights at ordinary general meetings by allowing them to cast an electronic vote via the Internet through the Electronic Voting Platform we have adopted. AICA is currently engaging in preparatory work to create an English version of the Convocation Notice of its 122nd Ordinary General Meeting of Shareholders scheduled for June 2022. Supplementary Principle 3.1.3 Addressing Sustainability Initiatives in Disclosing Business Strategies Our initiatives on sustainability issues are disclosed in AICA Reports (integrated reports) as well as on our website. Since the Medium-Term Business Plan includes materiality targets, AICA will disclose the targets and results of sustainability initiatives in IR documents. In May 2020, AICA declared its endorsement of the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), recognizing that identifying risks and opportunities associated with climate – 1 – change and their proper responses would be a priority from the materiality perspective. As a first step to include more information that TCFD says should be disclosed, AICA surveyed our stakeholders to estimate how future climate change would impact our business environment. This survey allowed us to identify risks and opportunities associated with climate change, along with actions to take in preparation for such events, but AICA is still in the progress of living up to the TCFD recommendations and will need to enhance the quality and quantity of disclosure. For more information, refer to the Response to the TCFD Recommendations (Reference) explained at the end of this report. AICA believes that human resources are the most important assets for the management. Under the current Medium-Term Business Plan, AICA aims to enhance training programs, foster leadership skills, encourage career advancement, and develop human resources for global operations. While developing human resources to enhance corporate sustainability, AICA promotes diversity in the workplace allowing the organization to grow with employees. As for investments in intellectual properties, AICA plans to use the R&D budget of 12 billion yen under the current Medium-Term Business Plan by allocating it to the AICA’s strengths in chemistry and design to create value and the development of core products for the next generation. Supplementary Principle 4.1.3 Succession Plan for the CEO and Other Top Executives The Governance Committee gathers input from all directors regarding the presidential candidates ones a year from December 2018. The Governance Committee reports its findings at the Governance Committee meeting at the end of January or March of each year. The Governance Committee deliberates on the requirements for the appointment of a presidential candidate and the presidential candidates. After that, the Governance Committee selects the presidential candidate. Prior to holding Board of Directors meeting to approve the appointment of a new president on the January 27, 2022, the Governance Committee met and discussed the final draft of the appointment proposal with the Governance Committee and obtained the approval of each member of the Governance Committee. Supplementary Principle 4.3.3 Dismissal of a CEO Although AICA has not established a specific process for dismissal of a CEO at this moment, should the CEO be deemed unable to fulfill his or her responsibilities, AICA will appropriately address the issue in a timely manner. – 2 – [Disclosure Based on the Principles of the Corporate Governance Code] Principle 1.4 Cross-Shareholdings AICA will acquire and hold shares of companies such as business partners if AICA determines that it will contribute to the improvement of AICA’s corporate value from the perspectives of building and enhancing relationships with business partners as well as forming business alliances. The Board of Directors considers the medium- to long-term economic rationale twice annually, and shares with little value will be sold. For each stock, AICA evaluates factors such as the details of transactions, the value of transactions, and the plan for continuation of future relationships to verify whether the purpose of holding such shares is appropriate. AICA exercises its voting rights for shares held as cross-shareholdings by comprehensively considering factors such as whether it contributes to the improvement of corporate value of both the issuing company and AICA, as well as whether there is a risk of impairing shareholder value. In addition, in the case of an event that requires attention, such as a long-term slump in business results or a serious violation of compliance, AICA will sufficiently investigate and collect information before carefully determining whether to vote for or against a proposal. Principle 1.7 Related Party Transactions AICA has designated transactions between AICA and its Directors or major shareholders with conflicts of interest as matters requiring resolution and reporting by the Board of Directors based on the importance of the transactions, in accordance with laws and regulations as well as the Rules of the Board of Directors. In addition, AICA has designated transactions between AICA and its Group companies as well as other important matters as matters requiring approval of the Board of Directors of AICA in accordance with the Regulations on Management of Affiliated Companies and the Regulations on Approvals (Ringi). Supplementary Principle 2.4.1 Disclosure of Views on Ensuring Diversity in Core Human Resources, Such as the Promotion of Women, Foreign Nationals and Mid-career Hires to Managerial Positions 1. Views on ensuring diversity AICA’s Corporate Policy says, “Human resources are the most valuable resource to the company” and “We build vibrant human resources as well as organizations through mutual understanding and growth.” AICA also recognizes diversity as an essential element of its sustainable growth and promotes diversity in human resources (including foreign nationals, women, seniors, and people with disabilities) as defined in the Sustainability Policy aligned with the Corporate Policy. In order to accommodate diverse market needs and respond to the global expansion of businesses, AICA launched the Women’s Participation Promotion Project in June 2013 to promote diversity and improve the environment that will encourage the company to leverage women’s strengths in its business operations and corporate management. In recognition of these activities, AICA received the Excellence Award from the City of Nagoya for being certified as a Company Promoting Women’s Participation in 2016. AICA renamed the activities Diversity Promotion Project in the fiscal year 2018 and has been working to improve the workplace that will encourage the participation of diverse talent. Activity Targets for Promoting Diversity (available in Japanese only) http://www.aica.co.jp/recruit/diversity/index.html 2. Voluntary and measurable goals for ensuring diversity (1) Promotion of women to managerial positions Since 2014, nine female employees have been promoted to managers, covering broader business segments, including sales, administration, and production divisions. AICA will continue to increase the ratio of female managers and expand the scope of participation by providing equal opportunities through promotion and hiring, helping them network and be independent, aiming to optimize the management. (2) Inviting foreign nationals to managerial positions Three foreign nationals were appointed executive officers at the Board of Directors meeting held on April 1, 2021. AICA continuously practices equal opportunity hiring regardless of nationality and currently has seven foreign nationals joined as new graduates or mid-career hires. They play active roles in a wide range of fields, including overseas locations, sales, R&D, and administrative divisions. AICA is actively recruiting foreign nationals as it expands its business globally. In the mid to long term, AICA aims to grow into a corporation with culturally diverse teams ready to meet various needs in the organization. – 3 – (3) Inviting mid-career hires to managerial positions AICA recruits a certain number of mid-career professionals every year to have experienced personnel with minimum training. AICA hired 19 people (including two managers) in fiscal year 2021, five people in fiscal year 2020, and 21 people (including three managers) in fiscal year 2019 as mid-career hires, for a wider range of positions, including sales, R&D, administrative divisions and production technology. AICA currently has 284 mid-career hires, and 60 of them are serving as director, executive officer, or holding other managerial positions. The ratio of mid-career hires in the executive positions (director and executive officer) is 45% to the total number of executive officers. The ratio is 21% for managerial positions. AICA will continue to encourage mid-career hiring and their recruitment to managerial positions as part of our management strategy. 3. Policy for developing personnel and internal environment to ensure diversity, and other circumstances Under the Corporate Policy and the Sustainability Policy, related departments, committees, and project teams (the Diversity Promotion Project, the Sustainability Promotion Committee, the Career Support Project, and the Work Style Reform Promotion Project) formulate specific action plans and implement the policies. Human resources are the most valuable resource for AICA. AICA strives to grow with employees by creating a workplace where diverse individuals respect and encourage each other. Our work environment is undergoing a transition, such as a workforce shortage, facing diversified needs and changes in work styles, but AICA will be prepared to adapt to such changes flexibly and promptly following our Corporate Principle “Challenge and Creation.” Principle 2.6 Roles of Corporate Pension Funds as Asset Owners AICA has adopted both a defined benefit pension plan and a defined contribution pension plan. The Human Resources Department, which is the division in charge of managing the defined benefit pension fund, appropriately manages it such as by obtaining information on the status of management from asset managers including life insurance companies and trust banks. Principle 3.1 Full Disclosure (1) AICA objectives (e.g., corporate philosophy), management strategies, and business plans AICA objectives (corporate philosophy), management strategies and business plans are disclosed on AICA’s website. Challenge and Creation The AICA Group creates new value and contributes to society through continuous innovation in the spirit of our philosophy of Kyosei*. ＊Japanese word Kyosei stands for active engagement with the AICA Group’s stakeholders (customers, employees, shareholders, suppliers, business partners, and local communities etc.) and the global environment. Kyosei represents our approach to minimize the adverse effects of the AICA Group’s business activities and products, and to contribute to society through the value we create and build better relationships with surroundings , with aiming for a sustainable existence together with the stakeholders mentioned above. AICA has formulated and announced a new Medium-Term Business Plan “Change & Grow 2400” for the period of three years ending in fiscal year 2023 (April 2021 through March 2024). 240.0 billion yen Consolidated ordinary profit: 24.0 billion yen ROE: [Financial targets] Consolidated net sales: Approximately 10% Please refer to AICA’s website for details. (available in Japanese only) (URL: http://www.aica.co.jp/news/ir/210430ChangeAndGrow2400.pdf) (2) Basic views and guidelines on corporate governance Basic views on corporate governance are disclosed on AICA’s website and in this report. (3) Board policies and procedures in determining the remuneration of the senior management and directors – 4 – The details of decision-making policies regarding the contents of individual remuneration for directors are as follows. 1. Composition of remuneration Remuneration of directors (excluding directors who are members of the Audit and Supervisory Committee and external directors) consists of fixed monthly basic remuneration, variable performance-based remuneration, and stock remuneration. The stock remuneration was approved and passed at the 121st Ordinary General Meeting of Shareholders held on June 24, 2021, under Proposal 4: Determination of Remuneration for Granting Restricted Shares to Directors (Excluding Directors Who Are Members of the Audit and Supervisory Committee and External Directors). Meanwhile, remuneration of directors who are members of the Audit and Supervisory Committee and external directors consists solely of monthly basic remuneration from the perspectives of their roles and independence. (i) Basic remuneration Basic remuneration of directors is fixed remuneration, paid monthly. Its amount is determined by considering factors such as levels at other companies that have been publicly disclosed and AICA’s business results, based on a standard amount set for each position. (ii) Performance-based remuneration Performance-based remuneration to directors (excluding directors who are members of the Audit and Supervisory Committee and external directors) is provided once a year. When the business results for each fiscal year have been finalized, each director is individually evaluated on a five-tier scale of S, A, B, C and D to determine the amount of individual remuneration based on a standard amount set for each position. Individual evaluation is determined by considering factors such as the growth rates of consolidated and non-consolidated net sales and profits (e.g., operating profit), the attainment of budgets formulated at the beginning of the fiscal year, evaluation on duties each director is in charge of, and the progress of the Medium-Term Business Plan. The ratio of performance-based remuneration to the total amount of remuneration is determined according to each director’s role, targeting a range from 15% to 20%. Upon comprehensively taking into account the attainment of the above indicators, the ratio of performance-based remuneration to total amount of remuneration was 15.9%. (iii) Stock remuneration Stock remuneration to directors (excluding directors who are members of the Audit and Supervisory Committee and external directors) is planned to be granted once a year for the purpose of providing an incentive to aim for sustainable improvement of AICA’s corporate value and facilitating further sharing of value with shareholders. Stock remuneration is granted in the form of restricted stock, and the amount is determined by considering factors such as AICA’s business results based on a standard amount set for each position. 2. Evaluation of directors (i) Individual evaluation of directors (excluding directors who are members of the Audit and Supervisory Committee and external directors) is conducted by the Representative Director and President, and the Governance Committee reviews the appropriateness of the level of remuneration amounts, including individual evaluation. (ii) Evaluation of the Representative Director and President is reported to the Governance Committee, which reviews the evaluation process and the views on evaluation to ensure objectivity and fairness. 3. Method of determining directors’ remuneration Remuneration of directors is determined in accordance with the above calculation method by Representative Director and President Kenji Ebihara, who has been authorized by the Board of Directors, within the maximum amount of total remuneration determined by a resolution of the General Meeting of Shareholders. 4. Activities conducted during the process of determining the amount of directors’ remuneration During the process of determining directors’ remuneration, members of the Governance Committee, mainly comprised of external directors, exchange their opinions on matters such as the ratio between AICA’s business results and the business results of the duties each director is in charge of, as well as the relationship between the evaluation grade and the rate of change, in order to enhance results and responsibilities, objectivity, and transparency. – 5 – (4) Policies and procedures for the appointment/dismissal and the nomination of candidates From the perspectives of medium- to long-term improvement of AICA’s corporate value and sustainable growth, the Board of Directors nominates persons who are suited to become AICA’s directors upon comprehensively considering their experience, capabilities and achievements, regardless of their nationality or gender, and candidates are elected by a resolution of the General Meeting of Shareholders. During the process of nominating candidates for director, the Governance Committee, mainly comprised of external directors, conducts deliberation. Although AICA has not established a specific process for the dismissal of senior management at this moment, AICA will consider a specific process including criteria for dismissal in the future. (5) Explanations with respect to individual appointments/dismissals and nominations With respect to all candidates for director, AICA provides individual reasons for their nominations in its Shareholders Meeting Convocation Notice. AICA has had no record of dismissing a member of senior management so far. Supplementary Principle 4.1.1 Scope and Content of the Matters Delegated to the Management The Board of Directors makes decisions on important managerial matters and supervises business execution in accordance with laws and regulations, the Articles of Incorporation, and the Rules of the Board of Directors. Other decisions on business execution are made at meetings such as the Management Meeting and the Group Representatives Meeting. Furthermore, since the transition to a Company with Audit and Supervisory Committee, it has become possible to delegate the decision-making authority of the Board of Directors on business execution to directors. Under the appropriate supervision of the Board of Directors, AICA is striving to further expedite managerial decision-making and execution. Principle 4.9 Independence Standards and Qualification for Independent Directors The Board of Directors has established its own independence standards in order to select candidates for independent external director who can contribute to the Board of Directors, and the details of the standards are disclosed in the Reference Materials for the General Meeting of Shareholders. Supplementary Principle 4.10.1 Disclosure of Independence, Authorities and Roles of the Nomination/Remuneration Committee AICA has established the Governance Committee, a voluntary body chaired by an external director, which is composed of seven members, including external directors (some of them are members of the Audit and Supervisory Committee), Representative Director, and a full-time member of the Audit and Supervisory Committee. As of March 31, 2022, independent external directors accounted for 57% of the members of the Governance Committee. The Governance Committee discusses key matters concerning governance, including the nomination and remuneration of management executives and directors, and reports them to the Board of Directors. Supplementary Principle 4.11.1 Balance, Diversity, and Number of the Members of the Board of Directors From the perspectives of medium- to long-term improvement of AICA’s corporate value and sustainable growth, AICA believes that its Board of Directors should be comprised of members, including external directors, who as a whole can attain an appropriate balance between knowledge, experience and skills, and who can think from a managerial perspective, regardless of their nationality, age or gender. AICA has also set the size of the Board of Directors so that it can manage and supervise executive duties in light of AICA’s organizational makeup. The policy regarding the appointment of directors is as stipulated in Principle 3.1.4. For the skill matrix of directors, refer to Skill Matrix (Reference) at the end of this report. Supplementary Principle 4.11.2 Concurrent Positions of Directors Concurrent positions of directors, including external directors, as officer of other listed companies are disclosed annually in the Shareholders Meeting Convocation Notice and the Annual Securities Report. Supplementary Principle 4.11.3 Analysis and Evaluation on the Effectiveness of the Board of Directors – 6 – In order to verify the effectiveness of the Board of Directors, AICA conducts an annual survey of all directors and members of the Audit and Supervisory Committee regarding the structure, operation, and agenda of the Board of Directors and the Board of Directors’ support structure. The effectiveness of the Board of Directors is evaluated on the basis of the results of this survey. In the survey conducted in January and February 2021, responses of “appropriate or reasonably appropriate” were obtained for all except two of the matters surveyed. Based on this positive feedback, AICA confirmed that our Board of Directors is generally functioning appropriately and that its effectiveness is being ensured. On the other hand, matters raised as issues were 1) insufficient explanations on terms used in materials for meetings of the Board of Directors, insufficient explanations on prior background and past agenda items discussed, and insufficient advance explanations on important items; and 2) insufficient discussions at meetings of the Board of Directors on the appointment and dismissal of senior management. To address these issues, with respect to 1), AICA provided explanations on terms, explanations on prior background and past agenda items, and advance explanations on important items starting with the meeting of the Board of Directors and the Management Meeting in May 2021. With respect to 2), AICA plans to conduct discussions at meetings of the Board of Directors upon explaining the reasons for the appointment and dismissal of senior management, including details discussed at the Governance Committee. Concerning issues from the previous fiscal year, 1) Diversity of the Board of Directors was addressed by appointing a female external director at the Ordinary General Meeting of Shareholders held on June 23, 2020. With respect to 2) the issue of insufficient discussions on the establishment and operation of risk management frameworks, various issues have been discussed by the Overseas Governance Committee, the details of activities have been reported to the Board of Directors, and the status of internal controls on financial reporting and audit results have been reported to the Audit and Supervisory Committee. With respect to 3) The enhancement of the reporting to the Board of Directors of significant risks that impact AICA’s business, reports were made at the meeting of the Board of Directors held in June 2021. Supplementary Principle 4.14.2 Training Policy for Directors For newly appointed external directors, AICA provides explanations on its Corporate Policy and arranges site visits to branches and plants at the time of their appointment, enabling them to deepen their understanding of AICA and its business. Additional opportunities to deepen the understanding of the business are provided after appointment as necessary. For newly appointed directors, AICA provides opportunities for them to fully understand the roles and responsibilities required of a director. In addition, after their appointment, AICA strives to update their required knowledge such as by regularly holding seminars with external lecturers. The details of training that have been conducted are reported to the Governance Committee, which verifies whether these measures have been appropriately taken by referring to advice from its members. Principle 5.1 Policy for Constructive Dialogue with Shareholders The Basic Policy for constructive dialogue with Shareholders and Investors is available on our corporate website. Visit the following URL for more information (available in Japanese only). http://www.aica.co.jp/company/ir/disclosure/ Principle 5.2 Establishing Business Plans Including Investments in Human Capital While ensuring that AICA has sufficient operating cash flow essential for generating funds necessary for investing in growth areas and allocating some of them to shareholder returns, AICA will accumulate internal reserves and reinvest capital in the growth areas by using an appropriate degree of financial leverage. AICA will strive to maintain the ROE around 10% and achieve a sustainable profit increase through reinvestment at capital efficiency exceeding the cost of capital. Under the current Medium-Term Business Plan “Change & Grow 2400,” AICA will pursue investments in new businesses through M&A and other means while expanding and upgrading the existing businesses to achieve sustainable growth. In addition, AICA plans to increase investment in equipment and IT to promote automation, prepare for climate change, and strengthen BCP. The total investment in equipment and businesses is expected to be 40 billion yen for the three years. Through the M&A activities of new businesses, AICA aims to achieve synergy to expand sales channels and enhance technical and production capabilities by seeking to acquire chemical products and construction material businesses overseas, companies producing functional materials in Japan and abroad, material repair/reinforcing services in Japan, and the segments related to the existing businesses in Japan. In addition, AICA plans to spend up to 12 billion yen over the three years to develop core products in the next generation and boost the – 7 – development capabilities by reinforcing the strength in chemistry and design to create new value. AICA believes that human resources are the most important assets for AICA and is committed to enhancing training programs, fostering leadership skills, encouraging career advancement, and developing human resources for global operations. While developing human resources to enhance corporate sustainability, AICA promotes diversity in the workplace allowing the organization to grow with the employees. Supplementary Principle 5.2.1 Presenting the Basic Policy regarding the Business Portfolio and its Review Status in Formulating and Disclosing Business Strategies AICA’s business model stems from its strength in chemistry and design and consists of the two segments: Chemical Products and Construction Materials. AICA has distinguished itself from the competitors in the housing, non-housing, and non-construction markets by creating unique products through mutual inspiration and collaboration of these segments. AICA has demonstrated steady growth by leveraging its strength and putting more effort into overseas expansion in recent years. In the new Medium-Term Business Plan launched in fiscal year2021, one of the basic policies is to create and expand growth businesses consisting of the following three domains: (1) Products designed to resolve social issues of Japan (AS Products), (2) Overseas business, and (3) Business for non-construction sectors. AICA aims to grow these businesses 1.4 times more during the three-year period and plans to expand the market and business domains through M&A, creating synergy, facility reinforcement, sales channel expansion, and brand enhancement. 2. Capital Structure Foreign Shareholding Ratio From 20% to less than 30% Number of Shares Owned Percentage (%) 9,837,700 3,880,900 2,327,533 1,810,600 1,571,623 1,494,100 1,362,600 1,318,000 1,300,016 1,293,743 15.05 5.94 3.56 2.77 2.41 2.29 2.09 2.02 1.99 1.98 [Status of Major Shareholders] Name / Company Name The Master Trust Bank of Japan, Ltd. (trust account) Custody Bank of Japan, Ltd. (trust account) AICA Kogyo Business Partners’ Shareholding Association The Bank of New York Mellon (International) Limited 131800 AICA Kogyo Employees Shareholding Association Custody Bank of Japan, Ltd. (trust account 9) Custody Bank of Japan, Ltd. (trust account 4) SUMITOMO LIFE INSURANCE COMPANY MUFG Bank, Ltd. Dai Nippon Printing Co., Ltd. Controlling Shareholder (except for Parent Company) – Parent Company None Listed Stock Market of Parent Company Supplementary Explanation ― 3. Corporate Attributes Listed Stock Market and Market Section Tokyo Stock Exchange, First Section – 8 – Nagoya Stock Exchange, First Section March 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 Chemicals 1000 or more Number of Consolidated Subsidiaries as of the End of the Previous Fiscal Year From 10 to less than 50 From ¥100.0 billion to less than ¥1 trillion 4. Policy on Measures to Protect Minority Shareholders in Conducting Transactions with Controlling 5. Other Special Circumstances which may have Material Impact on Corporate Governance [Status of Major Shareholders] AICA holds 2,244,569 shares of treasury stock. Shareholder – – 9 – II. Business Management Organization and Other Corporate Governance Systems regarding Decision-making, Execution of Business, and Oversight in Management 1. Organizational Composition and Operation Organization Form Company with Audit and Supervisory Committee [Directors] Maximum Number of Directors Stipulated in Articles of Incorporation Term of Office Stipulated in Articles of Incorporation Chairperson of the Board Number of Directors Appointment of External Directors Number of External Directors Number of Independent Directors External Directors’ Relationship with AICA (1) Name Attribute Kenji Ogura Ayako Shimizu Kiyoshi Katagiri Masashi Miyamoto CPA From another company Lawyer From another company * Categories for “Relationship with AICA” Directors who are not members of the Audit and Supervisory Committee: 12 Directors who are members of the Audit and Supervisory Committee: 5 Directors who are not members of the Audit and Supervisory Committee: 1 year Directors who are members of the Audit and Supervisory Committee: 2 years Chairman Directors who are not members of the Audit and Supervisory Committee: 6 Directors who are members of the Audit and Supervisory Committee: 3 Appointed Directors who are not members of the Audit and Supervisory Committee: 2 Directors who are members of the Audit and Supervisory Committee: 2 Directors who are not members of the Audit and Supervisory Committee: 2 Directors who are members of the Audit and Supervisory Committee: 2 Relationship with AICA* a b c d e f g h i j k a. Executive of the company or its subsidiaries b. Non-executive director or executive of a parent company of AICA c. Executive of a fellow subsidiary company of AICA d. A party whose major client or supplier is AICA or an executive thereof e. Major client or supplier of AICA or an executive thereof f. Consultant, accountant or legal professional who receives a large amount of monetary consideration or other property from AICA besides compensation as a director g. Major shareholder of AICA (or an executive of the said major shareholder if the shareholder is a legal entity) h. Executive of a client or supplier company of AICA (which does not correspond to any of d, e, or f) (the director himself/herself only) – 10 – i. Executive of a company, between which and AICA external directors are mutually appointed (the director j. Executive of a company or organization that receives a donation from AICA (the director himself/herself himself/herself only) only) k. Others External Directors’ Relationship with AICA (2) Name Reason for Appointment Designation as Independent Director ○ Supplementary Explanation of the Relationship Designated as Independent Director. Kenji Ogura Ayako Shimizu Kiyoshi Katagiri [Reason for appointment as external director] Mr. Kenji Ogura has extensive experience and knowledge as a corporate executive, which AICA believes he will be able to leverage in enhancing AICA’s management structures. [Reason for designation as Independent Director] Because he has no background at any of AICA’s subsidiaries, major shareholders, or major trading partners, he has no particular stake in AICA, and AICA believes that no conflict of interest with general shareholders would arise. For these reasons, he has been designated as an Independent Director. [Reason for appointment as external director] Ms. Ayako Shimizu will be able to leverage her extensive expert knowledge and experience as an attorney in the supervision of AICA’s management. AICA also believes that, as an external director, she will be able to offer advice based on diversity perspectives. [Reason for designation as Independent Director] Because she has no background at any of AICA’s subsidiaries, major shareholders, or major trading partners, she has no particular stake in AICA, and AICA believes that no conflict of interest with general shareholders would arise. For these reasons, she has been designated as an Independent Director. [Reason for appointment as external director who is a member of the Audit and Supervisory Committee] Mr. Kiyoshi Katagiri has been involved in corporate management and has extensive experience and knowledge as a business owner. AICA believes that he will be able to offer advice and oversight to AICA’s management overall as an external director and member of the Audit and Supervisory Committee. [Reason for designation as Independent Director] Because he has no background at any of AICA’s subsidiaries, major ○ Designated as Independent Director. ○ Designated as Independent Director. – 11 – ○ Designated as Independent Director. Masashi Miyamoto shareholders, or major trading partners, he has no particular stake in AICA, and AICA believes that no conflict of interest with general shareholders would arise. For these reasons, he has been designated as an Independent Director. [Reason for appointment as external director who is a member of the Audit and Supervisory Committee] Mr. Masashi Miyamoto has extensive expert knowledge and experience as a certified public accountant. AICA believes that he will be able to offer advice and oversight as an external director and member of the Audit and Supervisory Committee. [Reason for designation as Independent Director] Because he has no background at any of AICA’s subsidiaries, major shareholders, or major trading partners, he has no particular stake in AICA, and AICA believes that no conflict of interest with general shareholders would arise. For these reasons, he has been designated as an Independent Director. [Audit and Supervisory Committee] Committee’s Composition and Attributes of Chairperson Audit and Supervisory Committee All Committee Members Full-time Members Internal Directors External Directors Chairperson 3 1 1 2 Internal Director Appointment of Directors and/or Staff to Support the Audit and Supervisory Committee Appointed Matters Related to the Independence of Such Directors and/or Staff from Executive Directors AICA has assigned dedicated staff to the Audit and Supervisory Committee Secretariat for supporting the Audit and Supervisory Committee and assisting the execution of its duties. In selecting, transferring, or changing the treatment of such dedicated staff, prior consent of the Audit and Supervisory Committee is required and the Audit and Supervisory Committee has the authority to give instructions. Cooperation among Audit and Supervisory Committee, Accounting Auditor, and Internal Audit Unit The Accounting Auditor regularly reports on its audits, and meetings to exchange opinions are held regularly. The Internal Audit Unit, an organization dedicated to internal audits, audits business execution divisions. The four staff members in the Internal Audit Unit report on the details of audits and the status of their execution on an ongoing basis, working closely with Audit and Supervisory Committee. – 12 – [Voluntary Establishment of Committee(s)] 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 Governance Committee Governance Committee Committee’s Name All Committee Members Full-time Members Internal Directors External Directors Internal Experts Other Chairperson Supplementary Explanation 7 0 3 4 0 0 7 0 3 4 0 0 External director External director The Governance Committee, chaired by an external director and whose members are external directors, Representative Director and a full-time member of the Audit and Supervisory Committee, was established in April 2016 as an advisory committee to the Board of Directors. [Independent Directors] Number of Independent Directors 4 Matters relating to Independent Directors ― [Incentives] Supplementary Explanation Incentive Policies for Directors Performance-linked Remuneration and Other Although AICA had granted stock options until May 2013, AICA has not granted them since 2014. Beginning in the current fiscal year, AICA has introduced a restricted stock remuneration system for the purpose of sustainable enhancement of AICA’s corporate value and facilitating further sharing of value with shareholders. Policies on the remuneration of directors are as stated in I-1. “Basic Views,” “Disclosure Based on the Principles of the Corporate Governance Code,” “Principle 3.1 Full Disclosure,” (3) “Board policies and procedures in determining the remuneration of the senior management and directors” of this report. Recipients of Stock Options Internal Directors Supplementary Explanation – 13 – Recipients are those who have unexpired rights to exercise the stock options granted by May 2013. [Director Remuneration] Disclosure of Individual Directors’ Remuneration Supplementary Explanation No Individual Disclosure The total annual amount of remuneration paid to directors (excluding directors who are members of the Audit and Supervisory Committee) was 277 million yen. The maximum amount of remuneration is 370 million yen per year, which does not include the employee salary portion of remuneration for directors who concurrently serve as employees. Policy on Determining Remuneration Amounts Established and Calculation Methods Disclosure of Policy on Determining Remuneration Amounts and Calculation Methods AICA determines directors’ remuneration amounts by taking into account factors such as their position, responsibilities, and tenure upon considering AICA Group’s business results, within the scope approved by the General Meeting of Shareholders. [Supporting System for External Directors] For external directors, the secretariat provides agenda items for meetings of the Board of Directors and sends materials in advance prior to the date of a meeting. In addition, upon request from an external director, advance explanations on agenda items for a meeting of the Board of Directors are provided. [Status of Former Representative Director and President, etc.] Name of Advisor/Senior Advisor, etc. who previously served as Representative Director and President, etc. Name Position Duties part-time, Retirement date Term of office Total number of Advisors/Senior Advisors, etc. who are former Representative Director and President, etc. ― Other Working pattern (full-time/ paid/unpaid, etc.) – 14 – 2. Matters on Functions of Business Execution, Auditing, Oversight, Nomination and Remuneration Decisions (Overview of Current Corporate Governance System) [Directors and the Board of Directors] The Board of Directors strives to enhance corporate governance by determining management policies, matters prescribed by laws and regulations, and other important managerial matters and supervising the status of business execution in accordance with the Rules of the Board of Directors. The Board of Directors is comprised of nine directors, including four external directors appointed to enhance the oversight function of the Board of Directors. In addition to holding one ordinary meeting of the Board of Directors every month in principle, extraordinary meetings of the Board of Directors are held as needed. [Governance Committee] In April 2016, AICA established a Governance Committee, whose members are primarily external directors (including two directors who are members of the Audit and Supervisory Committee), as a voluntary advisory committee to the Board of Directors. The Governance Committee deliberates on important matters regarding governance, including the nomination and remuneration of senior management, in an effort to achieve sustainable growth of AICA and further enhance its governance functions. During the 122nd fiscal year (April 2021 to March 2022), the Governance Committee held six meetings. Following the transition to a Company with Audit and Supervisory Committee, roles are divided between the Audit and Supervisory Committee and the Governance Committee by sharing the details of deliberations at the Governance Committee with the Audit and Supervisory Committee in order for the Audit and Supervisory Committee to exercise its right to state its opinions and ensuring that the activities of the Audit and Supervisory Committee and the Governance Committee do not overlap. [Members of the Audit and Supervisory Committee and the Audit and Supervisory Committee] AICA is a Company with Audit and Supervisory Committee, and its Audit and Supervisory Committee is comprised of three directors who are members of the Audit and Supervisory Committee, including two external directors. AICA has appointed one full-time director who is a member of the Audit and Supervisory Committee. The Audit and Supervisory Committee meeting is held once a month in principle. The full-time directors who are members of the Audit and Supervisory Committee attended Management Meetings, Management Promotion Meetings, and other important meetings, and reviewed approval documents and other important documents. In addition, AICA has established a framework to maintain close coordination with the Internal Audit Unit and other departments in charge of the monitoring functions on the internal control system. In order to prepare for an event that the number of directors who are members of the Audit and Supervisory Committee falls below the number stipulated in laws and regulations, AICA has appointed one substitute director who is a member of the Audit and Supervisory Committee. [Executive officer system] While AICA introduced an executive officer system in April 2002 in an effort to separate the oversight functions and executive functions of directors, AICA has had internal directors serve concurrently as executive officers since June 2018, in light of the actual conditions in which internal directors are responsible for important executive functions. Through this structure, AICA is working to further expedite business execution by clarifying the division of duties within executive functions. [Management Meeting] AICA has established a Management Meeting, whose participants are comprised of directors and managers in charge of business execution. Management Meetings are held once a month. It has a decision-making function based on agenda items submitted to the Board of Directors and AICA’s regulations, and swiftly facilitates matters decided by the Board of Directors and deliberates and reports on business execution. [Management Promotion Meeting] Participants at Management Promotion Meetings are directors, executive officers, and heads of business execution divisions. With participants reporting on business execution and considering issues at Management Promotion Meetings held every six months in principle, AICA has established a framework that enables oversight of business activities and execution status. – 15 – 3. Reasons for Adoption of Current Corporate Governance System Based on a resolution at the Ordinary General Meeting of Shareholders held on June 23, 2020 on amendments to the Articles of Incorporation for a transition to a Company with Audit and Supervisory Committee, AICA transitioned from a Company with Board of Auditors to a Company with Audit and Supervisory Committee effective on the same date. Since this transition, the Audit and Supervisory Committee, more than half of whose members are external directors, has been responsible for auditing and supervising the legality and appropriateness of the execution of duties by directors for the realization of more transparent management. In this way, AICA aims to strengthen our corporate governance further and also to build a framework that will more appropriately meet the expectations of our stakeholders in Japan and overseas. Furthermore, it has become possible to delegate the decision-making authority of the Board of Directors on business execution to directors. Under the appropriate supervision of the Board of Directors, AICA has been striving to further expedite managerial decision-making and execution. – 16 – III. Implementation of Measures for Shareholders and Other Stakeholders 1. Measures to Vitalize the General Shareholder Meetings and Smooth Exercise of Voting Rights Supplementary Explanations The Convocation Notice was sent on June 3 for the fiscal year under review. The Meeting was held on June 24 for the fiscal year under review. Voting rights may be exercised via the Internet by accessing the website for exercise of voting rights designated by AICA using a computer, a smartphone, or a mobile phone. AICA participates in an electronic voting platform. AICA is currently engaging in preparatory work to create an English version of the Convocation Notice of its 122nd Ordinary General Meeting of Shareholders scheduled for June 2022. Supplementary Explanations In accordance with its basic policy on information disclosure, AICA has stipulated a Disclosure Policy on standards for information disclosure, establishment of internal systems, methods of information disclosure, a quiet period and notes regarding business results forecasts and the future outlook. Details are provided on AICA’s website. AICA holds investor briefings irregularly. AICA publishes questions and answers from investor briefings for analysts and institutional investors on its website so that individual investors can review the proceedings of the investor briefings as well. AICA holds Financial Results Briefings at the fiscal year ended and the end of second quarter. Explanations by Representatives Not available Available Not available AICA has an IR section on its website, where materials such as Summary of Consolidated Financial Results, IR briefing materials, Securities Reports and business reports are provided. Corporate Planning Department, Public Relations and IR Group Early Notification of General Shareholder Meeting Scheduling AGMs Avoiding the Peak Day Allowing Electronic Exercise of Voting Rights Participation in Electronic Voting Platform Providing Convocation Notice (Summary) in English Other Not Applicable 2. IR Activities Preparation and Publication of Disclosure Policy Regular Investor Briefings for Individual Investors Regular Investor Briefings for Analysts and Institutional Investors Regular Investor Briefings for Overseas Investors Posting of IR Materials on Website Establishment of Department and/or Manager in Charge of IR Other Not Applicable – 17 – 3. Measures to Ensure Due Respect for Stakeholders Implementation of Environmental Activities, CSR Activities etc. Supplementary Explanations AICA conducts its corporate activities to achieve the business objectives under the AICA Policies consisting of the Corporate Principle, the Corporate Philosophy, the Corporate Policy, the Sustainability Policy, and the AICA Group Code of Conduct. The Sustainability Policy defines the principles concerning environmental conservation and CSR activities as follows: We address social issues through our business activities to contribute to the creation of a better society.2. We have established “Compliance with laws and regulations,” “Respect for human rights,” “Harmony with society,” “Fair business practice,” “Customer’s security and trust,” “Proper information disclosure,” “Protection of company information and property,” and “Environment and safety” as the basic principles of the Code of Conduct, and we base our actions on these principles as shared values for all employees. 3. We emphasize dialogue with stakeholders, employees, governments, and respond promptly to social needs and changes. 4. We identify material issues from the perspectives of both corporate management and stakeholders, address those issues alongside our business activities, and disclose our progress in addressing them. including customers, local local communities, and shareholders, suppliers, AICA is committed to resolving various social issues through corporate activities to fulfill our mission defined as the corporate philosophy, “The AICA Group creates new value and contributes to society through continuous innovation in the spirit of our philosophy of Kyosei*.” AICA has identified the materiality (material issues) to be prioritized in terms of the degree of impact based on the risks and opportunities and included them in the Medium-Term Business Plan “Change & Grow 2400, ” which began in April 2021, to pursue corporate activities harmonized with sustainability. AICA has the Sustainability established a cross-divisional organization called Development Committee chaired by the President and is working toward fulfilling the materiality targets by having the committee lead the sustainability initiatives. These initiatives are designed to enhance the earth and society’s sustainability and help us achieve sustainable growth as a business entity. ＊Japanese word Kyosei stands for active engagement with the AICA Group’s stakeholders (customers, employees, shareholders, suppliers, business partners, and local communities etc.) and the global environment. Kyosei represents our approach to minimize the adverse effects of the AICA Group’s business activities and products, and to contribute to society through the value we create and build better relationships with surroundings , with aiming for a sustainable existence together with the stakeholders mentioned above. As stated above, AICA has established in its Sustainability Policy that “ We identify material issues from the perspectives of both corporate management and stakeholders, address those issues alongside our business activities, and disclose our progress in addressing them,” making efforts to disclose corporate information in a timely and appropriate manner. Our initiatives on sustainability issues are available in AICA Reports (integrated reports) as well as on our website. Since the Medium-Term Business Plan includes materiality (material issues), AICA plans to disclose its activity targets and results in IR documents. Development of Policies on Information Provision to Stakeholders – 18 – IV. Matters Related to the Internal Control System 1. Basic Views on Internal Control System and the Progress of System Development (1) Systems to ensure that the execution of duties by directors and employees is in compliance with the laws and regulations as well as the Articles of Incorporation 1) AICA is a Company with Audit and Supervisory Committee. Through appointment of multiple external directors, AICA enhances the oversight function of the Board of Directors on management, ensuring the transparency and fairness of management judgements. 2) AICA has developed regulations regarding its compliance system, formulated the AICA Group Code of Conduct, which is a code of conduct for directors and employees to comply with laws and regulations, the Articles of Incorporation, and AICA’s Corporate Philosophy, and established the Action Guidelines for AICA Group Employees to set out specific standards for conduct based on the Code of Conduct. AICA disseminates them to directors and employees of AICA and across AICA Group in an aim to ensure they are thoroughly understood. 3) The Corporate Ethics Committee plans and develops legal compliance in corporate activities as well as necessary measures, and works to ensure they are thoroughly understood by directors and employees. 4) AICA operates a management system that incorporates quality (ISO 9001), environment (ISO 14001), and occupational health and safety (ISO 45001) across AICA as integrated activities, and complies with requirements for each management system such as laws and regulations as well as statutory regulations. 5) AICA Group facilitates the self-purifying function of an internal whistleblowing system in an aim to identify and solve issues at an early stage. 6) The Internal Audit Unit, an organization dedicated to internal audits, and the Legal Division, an organization that promotes compliance activities, investigate and consider whether there are any issues with the internal control activities, compliance system, and compliance of AICA Group. 7) AICA takes a resolute stance against antisocial forces and organizations that pose a threat to the order and safety of a civil society, and terminates and eliminates any relationship with them. Furthermore, AICA systematically addresses any concerns in coordination with external expert organizations such as attorneys and the police. (2) Systems regarding the safekeeping and management of information on execution of duties by directors 1) For information and documents on execution of duties by directors, AICA maintains an appropriate system for safekeeping and management of documents in accordance with internal regulations and related document management manuals. 2) The Corporate Planning Department stores and manages minutes of the General Meetings of Shareholders, meetings of the Board of Directors, Management Meetings, Management Promotion Meetings, and Group Representatives Meetings, and approval documents (Ringi-sho) as well as related materials. The Legal Division stores and manages important documents such as contracts and related materials. 3) Directors and executive officers may review or copy these documents at any time. (3) Regulations on the management of risk of loss and other systems 1) Respective departments in charge assess various risks surrounding the business environment, including legal compliance, disasters, products, quality, logistics, health and safety, the environment, information security, foreign exchange, and prices of raw materials, and establish regulations and guidelines. Furthermore, risk assessments are periodically reported to the Board of Directors and the Audit and Supervisory Committee. 2) The Board of Directors and the Audit and Supervisory Committee deliberate on each risk as necessary, and if a legal judgement is required, take measures such as by soliciting opinions of corporate lawyers or other experts. 3) AICA Group has formulated rules on reporting in case of a crisis. AICA Group responds to a crisis swiftly and appropriately such as by establishing a crisis management headquarters in an aim to minimize damages, while communicating information to outside AICA in a timely and appropriate manner. (4) Systems to ensure that the execution of duties by directors will be conducted efficiently – 19 – 1) The Board of Directors strives to enhance corporate governance by determining management policies, matters prescribed by laws and regulations, and other important managerial matters and supervising the status of business execution in accordance with the Rules of the Board of Directors. 2) AICA has adopted an executive officer system, under which internal directors (excluding directors who are members of the Audit and Supervisory Committee) concurrently serve as executive officers. AICA works to expedite business execution by clarifying the division of duties of executive officers within executive functions. 3) AICA formulates annual targets based on a Mid-Term Business Plan. Each division formulates targets and budgets for achieving the companywide targets, and develops and executes specific measures. (5) Systems to ensure proper business conduct in the corporate group comprised of AICA and its subsidiaries 1) AICA establishes corporate action guidelines for its corporate group and comprehensively manages its business upon designating those responsible for each subsidiary from among AICA’s senior management such as directors and executive officers in an aim to unify compliance and philosophy across AICA Group. 2) In order to understand the management conditions of its subsidiaries and to ensure proper business conduct, AICA requires subsidiaries to obtain approval of AICA (the Board of Directors or a Representative Director) or provide reports to AICA with respect to important matters in accordance with the Regulations on Management of Affiliated Companies. 3) AICA holds Group Representatives Meetings, at which reports on the status of business execution in AICA Group and reports on important matters are made, and engages in swift decision-making and proper business execution across AICA Group. (6) Matters regarding employees who assist the duties of the Audit and Supervisory Committee, matters regarding the independence of such employees from directors other than members of the Audit and Supervisory Committee, and matters regarding the effectiveness of instructions to such employees 1) In order to assist the duties of the Audit and Supervisory Committee and support the execution of its duties, AICA assigns dedicated staff in the Audit and Supervisory Committee Secretariat. When selecting, transferring, or changing the treatment of employees who assist the duties of the Audit and Supervisory Committee and support the execution of its duties, AICA obtains prior consent of the Audit and Supervisory Committee. 2) The Audit and Supervisory Committee has the authority to give instructions to employees who assist the duties of the Audit and Supervisory Committee and support the execution of its duties. (7) Systems for directors (excluding directors who are members of the Audit and Supervisory Committee) and employees to provide reports to the Audit and Supervisory Committee and other systems on reporting to the Audit and Supervisory Committee 1) AICA’s directors (excluding directors who are members of the Audit and Supervisory Committee), directors and corporate auditors of subsidiaries of AICA, and employees of AICA and its subsidiaries provide necessary reports and information upon request by the Audit and Supervisory Committee. 2) When they discover facts that may cause significant damages to AICA, AICA’s directors (excluding directors who are members of the Audit and Supervisory Committee), directors and corporate auditors of subsidiaries of AICA, and employees of AICA and its subsidiaries shall immediately report such facts to the Audit and Supervisory Committee within a scope that does not violate laws and regulations. In addition, matters stipulated by laws and regulations as well as the following matters determined by discussions with directors are reported. * Matters concerning the development and operation