ペプチドリーム（4587） – Corporate Governance Report

Corporate Governance Report Date of last revision: April 25, 2022 PeptiDream Inc. Patrick C. Reid Representative Director, President & CEO Contact: IR & Public Affairs Department Securities Code: 4587 https://www.peptidream.com/ The status of corporate governance of PeptiDeam Inc. (the “Company”) is described below. I. Basic Views on Corporate Governance, Capital Structure, Corporate Profile and Other Basic Information 1. Basic Views The fundamental basis of our corporate governance is to fulfill our social responsibilities as a listed company under the business philosophy of developing therapeutics using non-standard peptides by applying our proprietary Peptide Discovery Platform System (PDPS). The Company strives to support people around the world who are suffering from diseases, as well as to improve the soundness and efficiency of our corporate management and to sustainably enhance our corporate value. [Reasons for Non-compliance with the Principles of the Corporate Governance Code] The Company complies with all principles of the Corporate Governance Code as revised in June 2021, including principles for companies listed on the Prime Market. [Disclosure Based on the Principles of the Corporate Governance Code] (Updated) 【Supplementary Principle 1-2 (4): Use of the Electronic Voting Platform and the Provision of English Translations of the Convening Notices of General Shareholder Meeting】 The Company participates in electronic voting platform and makes the electronic voting platform available. See “1. Measures to Vitalize the General Shareholder Meetings and Smooth Exercise of Voting Rights” of “III. Implementation of Measures for Shareholders and Other Stakeholders” in the corporate governance report. 【Principle 1-4: Cross-Shareholdings】 The Company does not hold shares of other listed companies. The company does not plan to hold shares in any listed companies except in cases where such acquisition or shareholding is considered reasonable from a business strategic perspective, such as strategic alliance. 【Principle 1-7: Related Party Transactions】 – 1 – The Company complies with the procedures specified in the Companies Act for transactions with directors that result in a conflict of interest and these transactions require reporting and approval by the Board of Directors. The Company regularly checks with directors whether there are transactions between related parties and disclose the results in its securities reports. 【Supplementary Principles 2-3 (1): Sustainability Initiatives】 The Company believes that its organization must strive toward achieving sustainability. The Company has identified material issues that are high in priority from its perspective as a company and from the perspective of its shareholders. The Company is committed to promoting ESG (environmental, social and governance) initiatives that lead to enhanced non-financial capital. The Company also believes that proactively disclosing information related to these initiatives and placing importance on communication with its shareholders, investors, and society as a whole is crucial to achieving sustainable growth and enhancing its mid -to long-term corporate value. The Company’s sustainability initiatives are posted on its website. (https://www.peptidream.com/esg/data_en.html) 【Supplementary Principle 2-4 (1): Policies and Goals for Securing Diverse Core Human Resources and Human Resource Development】 1. Policies for ensuring diversity The Company believes as a R&D-driven innovative company that ensuring diversity is important in gaining a competitive advantage and nurturing innovation in order t to fulfill its mission. In particular, the Company values the diversity of expertise and scientific sense of each individual employee, and believes it is important to ensure a framework which allows the managers and senior scientists who play core roles in R&D and management to engage in science-based discussion and decision-making regardless of their age, gender or cultural background. The Company has set four quantitative indicators which it considers to be constituent elements of the diversity of core human resources (*1) on which the foregoing is predicated, namely “ratio of doctorate (Ph.D.) holders,” “female manager ratio,” “ratio of foreign employees or employees with overseas work experience (*2),” and “ratio of young employees (in 20s/30s). ” The current status of these indicators and the Company’s 2030 targets are as follows. *1: Managers and senior-ranking specialists (excludes officers) *2: Employees with overseas research or work experience (excludes periods of less than one year and periods as a student studying abroad) ■ Constituents of “diverse core human resources”: current status (as of the end of December 2021) and 2030 targets ・Ratio of doctorate (Ph.D.) holders: 21/38:55.2％ → At least 50% ・Female manager ratio: 7/38:18.4％ → At least 30％ ・Ratio of foreign employees or employees with overseas work experience: 12/38: 31.5％ → At least 30％ ・Ratio of employees (in 20s/30s): 6/38:15.8％ → At least 30％ 2. Policies for human resource and environmental development to ensure diversity, and current status Policy (i) Promoting expertise and competence-oriented hiring and operating evaluation systems ・Conduct hiring activities focused on matching expertise to clearly defined job position and duties ・Promote employees according to their role and performance within the Company regardless of their age or experience → In FY2021 (as of the end of December), the Company appointed an employee, who was hired as a new graduate and worked for 3 years, to a senior-ranking position – 2 – Policy (ii) Ensuring a working environment to promote flexible work styles to accommodate various life events ・Operate a flexitime system ・Operate a short-time work regular employment system →In FY2021 (as of the end of December), two employees used the short-time work regular employment system ・Operate a child care support and special allowance system ・Encourage employees raising children to take childcare leave →In FY2021 (as of the end of December), two male employees took leave of two weeks or more 【Principle 2-6: Roles of Corporate Pension Funds as Asset Owners】 The Company has not adopted a corporate pension program; therefore, there will not be a case in which corporate pension funds perform the role as asset owners. 【Principle 3-1: Full Disclosure】 (i) Company objectives (e.g., business principles), business strategies and business plans: The Company’s business philosophy is posted on its website. Its business strategies and plans are presented in the summaries of financial results, the presentation materials for financial result briefings, securities reports and other documents.(https://www.peptidream.com/esg/data_en.html) (ii) Basic views and guidelines on corporate governance: These are presented in Company’s corporate governance reports and “Our Approach to Sustainability (ESG)” on its website. (iii) Board policies and procedures in determining the remuneration of the senior management and directors: See the “Policy for determining the amount of remuneration or calculation method” section in the “Directors’ remuneration” in the corporate governance report. (iv) Board policies and procedures in the appointment/dismissal of the senior management and the nomination of director and corporate auditor candidates: The Board of Directors comprehensively evaluates and assesses experience, knowledge, specialization and other qualities and determines candidates in accordance with our business philosophy and business strategies. (v) Explanations with respect to the individual appointments/dismissals and nominations based on (iv): The Company discloses the reasons for selecting the candidates for directors, who are members of the Board of Directors and Audit and Supervisory Committee members, in the reference materials for the Ordinary General Meeting of Shareholders. 【Principle 3-1 (2): Providing English Language Disclosures】 The Company actively discloses information such as financial results, presentation materials and sustainability reports, in English, partly because foreign investors own high percentage of the Company’s shares (as of the end of December 2021). 【Supplementary Principle 3-1 (3): Sustainability Initiatives and Climate Change-Related Risks and Opportunities】 ＜Our Efforts on Sustainability＞ – 3 – The Company discloses information about its sustainability initiatives through its sustainability report. （https://www.peptidream.com/esg/ESG_report_English_.pdf） ＜Investment in Human Capital and Intellectual Property＞ The Company believes that investment in human capital and intellectual property is essential for the medium- and long-term improvement of the Company’s corporate value and to further consolidate its position as a “Drug Discovery Powerhouse.” Regarding human capital, the Company is actively recruiting talent with high levels of expertise as stated in its new Mid-Term Management Targets formulated in March 2021. In terms of intellectual property, the Company continues to implement a robust IP strategy for its proprietary PDPS and is also planning to expand its laboratory to strengthen its R&D capabilities in anticipation of further business expansion in the future, to accelerate the creation of new intellectual property. ＜Climate Change-Related Risks and Opportunities＞ The Company newly adopted the RCP8.5 scenario (IPCC) *1, which is the highest scenario for future climate change, with reference to the recommendations made by the Task Force on Climate-related Financial Disclosures (TCFD) recommendation and conducted an analysis on the impact of climate change from a medium-term perspective until 2026. The Company conducted an analysis of climate change-related risks posed to business activities and R&D activities at its head office and laboratory from typhoons, floods and other natural disasters, an analysis of climate change related-opportunities from collaborative research and development of new drugs utilizing the Company’s PDPS, arising from an increase in infectious diseases, and a scenario analysis taking the financial impact of such risks and opportunities into consideration. Furthermore, in June 2021, the Company strengthened its framework for deliberating and monitoring issues related to sustainability and governance from a medium-to-long-term perspective by establishing the Sustainability and Governance Committee, to put ESG initiatives at the center of management and implement them more consistently. In light of the Company’s unique characteristics, i.e. its R&D-focused business model and the fact that most of its GHG emissions are related to energy consumption, in 2021, the Company decided to strive to achieve carbon neutrality in its operations (Scope 1＋2) by 2026. To further take this initiative, the Company has decided to introduce CO2 (carbon dioxide)-free power from its supplier for use at its head office and laboratory from January 2022. As a result of a proactively shift to renewable energy, the Company achieved its medium-term goal of the realization of “carbon-neutral” business operations 4 years earlier than originally planned. The Company will continue working on the formulation of management strategies which take the results of scenario analysis into consideration, the implementation of business activities which show consideration for the environment, and the enhancement of information disclosure. *1: Scenarios predicted by the Intergovernmental Panel on Climate Change (IPCC). RCP8.5 is the scenario corresponding to the maximum emissions. 【Supplementary Principles 4-1 (1) Roles and Responsibilities of the Board】 Detailed standards for proposals are established according to the level of importance and these decisions are to be made by the Board of Directors or “Ringi”, a system to make a request for decision making. The Company entrusts CEO with decision-making through the Ringi system concerning matters other than decisions to be made by the Board of Directors. Job authority and division of duties for persons responsible for operations and the heads of departments are defined in internal rules, and the Company has constructed a system that is being constantly revised according to reorganization, etc. 【Supplementary Principle 4-2 (2): Basic Policy for Sustainability Initiatives 】 The Company’s basic policy for sustainability is formulated by its Board of Directors and disclosed in its sustainability report. （https://www.peptidream.com/esg/ESG_report_English_.pdf） – 4 – Furthermore, in June 2021, the Company established the Sustainability and Governance Committee as an advisory body to the Board of Directors in order to implement sustainability measures more consistently. The committee deliberates and monitors issues related to sustainability and governance from a medium-and long-term perspective. 【Supplementary Principle 4-3 (4): Establishment of Risk Management System on an Enterprise Basis】 The Company’s Board of Directors has passed a resolution on a “Basic Policy on the Development of an Internal Control System”. The Company strives to create a system for ensuring appropriate group-wide business operations and to further enhance its management system. 【Principle 4-8: Effective Use of Independent Outside Directors】 More than half of the Company’s Directors are independent outside directors to ensure the independence and objectivity of the Board of Directors. 【Principle 4-9: Independence Standards and Qualification for Independent Directors】 The Company selects candidates for independent external directors based on the standards for independency established by the Tokyo Stock Exchange. 【Supplementary Principle 4-10 (1): Composition of Nomination/Remuneration Committee】 Independent Outside Directors compose a majority of the committee and an independent Outside Director serves as chair to ensure an even higher level of independence. The committee is chaired by an independent Outside Director (Michio Sasaoka) and composed of two internal Directors (Patrick C. Reid, President & CEO, and Kiyofumi Kaneshiro, CFO), and two independent Outside Directors (Michio Sasaoka, Independent Outside Director, and Toshio Nagae, Independent Outside Director), making a total of four members. The committee was convened five times (with 100% attendance rate) in the fiscal year ended December 31, 2021. 【Principle 4-11: Diversity and Appropriate Size of Board of Directors】 The Company’s Board of Directors is composed in a way that strikes a balance between diversity in terms of gender, international character, career background, age, etc. and appropriate size, within the maximum number of Directors stipulated in the Articles of Incorporation. 【Principle 4-11 (1): Preconditions for Effectiveness of Board of Directors and Audit and Supervisory Board】 The Company’s basic policy is that its Board of Directors shall consist of individuals who are deemed appropriate, taking knowledge and experience of the Company’s drug discovery R&D business and a balance of abilities into consideration, within the limits stipulated in the Articles of Incorporation, which state that the Company shall have no more than seven (7) Directors, and four (4) Outside Directors (Audit and Supervisory Committee Members). One of the independent Outside Directors has management experience at other companies, and one of the Audit and Supervisory Committee Members is certified public accountant and tax accountant with extensive knowledge of finance and accounting. As for international character, the President is American and two Executive Directors have experience working overseas at foreign companies for extended periods, thus realizing high degree of diversity and a healthy balance in terms of ideas and ways of thinking. The Company also recognizes that diversity in terms of gender is an important issue, and has elected Junko Utsunomiya, who, as a lawyer, has extensive knowledge of corporate legal affairs, as an Outside Director (Audit and Supervisory Board Member). The Company discloses a skills matrix showing the knowledge, experience, abilities, and other skills of Directors in its annual securities report. 【Principle 4-11 (2): Preconditions for the Effectiveness of the Board of Directors and Board of Corporate Auditors】 – 5 – External directors, directors and directors who are Audit and Supervisory Committee members dedicate their time and labor to the duties of directors and Audit and Supervisory Committee members to appropriately perform their roles and fulfill responsibilities while limiting concurrent positions outside of the Company to a reasonable range. The status of concurrently held jobs is disclosed in the business reports and securities reports. 【 Supplementary Principle 4-11 (3): Summary of Evaluation of Effectiveness of the Board of Directors】 With the support from an outside third-party agency, the Company conducted a survey based on a questionnaire asking all seven (7) Directors and Audit and Supervisory Board Members who make up the Board of Directors for an evaluation of the effectiveness of the Board of Directors, with the aim to improve the functions of the Board of Directors. The Company ensured the anonymity of respondents by having them respond directly to the third-party agency. A summary of the results of analysis and evaluation conducted via deliberations of the Board of Directors considering this analysis of the questionnaire results is disclosed below. The Company’s understanding based on the results of the questionnaire is that evaluations were largely positive, and the effectiveness of the Board of Directors is sufficiently ensured. In particular, the Company rated highly compared with other companies used in the benchmarking process, particularly in areas related to methods for running the Board of Directors, remuneration of the senior management team, and reflection of ESG and SDG initiatives in management policies. In the evaluation of effectiveness of the Board of Directors conducted previously, respondents shared concerns such as challenges in the discussion and development of a succession plan as well as in the reinforcement of risk management system to deal with unanticipated emergencies such as major earthquakes, typhoons, and floods. In FY2020, the Board of Directors focused on the analysis of climate change-related risks and opportunities in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and improvements were made. However, the evaluation confirmed that there were still concerns over the discussion and development of a succession plan, which will continue to be considered. Meanwhile, there was a shared understanding of the need to expand opportunities for Outside Directors to engage in direct dialogue with shareholders. Taking these results into consideration, the Company will continue efforts to improve the effectiveness of the Board of Directors on an ongoing basis going forward. 【Supplementary principle 4-13 (3): System for Providing Information and Support】 The Company has established a system in which the internal audit department reports audit results directly to the Board of Directors to increase the effectiveness of coordination between the internal audit department and Directors and to ensure that the Board of Directors can function effectively. 【Supplementary Principles 4-14 (2): Training of Directors and Corporate Auditors】 The Company provides its directors, including the Audit and Supervisory Committee members, with opportunities to acquire knowledge such as external training when they assume the position of director. Even during their term of office, the Company encourages them to participate in study sessions and external seminars provided by outside experts corresponding to revisions of laws. 【Principle 5-1: Policy for Constructive Dialogues with Shareholders】 The Company places importance on constructive dialogue with its shareholders and other parties as the Company believes that this contributes to the company’s sustainable growth and medium to long-term increase in corporate value. In particular, the corporate management and the IR & Public Affairs Dept. work to hold dialogues with shareholders and investors at a variety of opportunities. The Company holds two financial result briefings presented by corporate management each year and holds meetings with institutional investors in and outside Japan as necessary. The Company also conducts telephone interviews, briefings for individual investors, and carry out overseas IR activities. – 6 – The results are reported to the Board of Directors as appropriate. In the dialogues with shareholders, the Company ensures that leakage of insider information is prevented. 【Principle 5-1 (1): Policy for Constructive Dialogue with Shareholders】 The Company established the position of lead independent Outside Director to respond to various matters of interest raised by shareholders and investors, and Independent Outside Director Michio Sasaoka was elected to the position by the Board of Directors. 【Principle 5-2 (1): Policy regarding the Business Portfolio and the Status of the Review of Such Portfolio】 The Company is implementing three business strategies employing its proprietary PDPS: (i) joint pharmaceutical R&D collaborations, (ii)PDPS technology licensing collaborations, and (iii) through strategic alliances. With the acquisition of the expansion of radiopharmaceutical business from Fujifilm Toyama Chemical Co., Ltd. on March 28, 2022, the company has obtained its fourth business strategy, which is an integrated Japan radiopharm platform（reserch, development, manufacturing and sales）. In March 2021, the Company’s Board of Directors established new Mid-Term Management Targets for the period from FY2021 to FY2026, taking into consideration various factors including the advancement of various R&D programs in the business environment going forward and further expansion of business operations based on PDPS. The Board of Directors also reports on and monitors the status of the business portfolio and progress made towards achievement of the Mid-Term Management Targets. its pipeline 2. Capital Structure Foreign Shareholding Ratio More than 30% [Status of Major Shareholders] (Updated) Name / Company Name Percentage (%) The Master Trust Bank of Japan, Ltd. (as a trustee) Kiichi Kubota Hiroaki Suga Custody Bank of Japan, Ltd. (as a trustee) Patrick C. Reid Hiroshi Murakami SSBTC Client Omnibus Account TAIYO FUND, L. P. Kiichiro Nakajima THE BANK OF NEY YORK MELLON SA／NV 10 Number of Shares Owned 16,066,000 13,612,900 12,442,804 8,008,900 6,490,000 4,377,000 3,698,351 2,844,600 2,050,900 1,970,000 Controlling Shareholder (except for Parent Company) Parent Company ― None Supplementary Explanation (Updated) – 7 – 12.36 10.47 9.57 6.16 4.99 3.37 2.84 2.19 1.58 1.52 * Foreign Shareholding Ratio and Status of Major Shareholders set forth above are as of 31 December 2021. * The shareholding ratio is calculated by subtracting 164 treasury shares. The number of treasury shares does not include the 182,800 shares of the company held by Custody Bank of Japan, Ltd. (Trust Account E) as trust property for Board Benefit Trust. 3. Corporate Attributes (Updated) Listed Stock Market and Market Section Prime, Tokyo Stock Exchange Fiscal Year-End Type of Business December Pharmaceutical Number of Employees (consolidated) as of the End of the Previous Fiscal Year Sales (consolidated) as of the End of the Previous Fiscal Year From 100 to less than 500 From ¥10 billion to less than ¥ 100 billion Number of Consolidated Subsidiaries as of the End of the Previous Fiscal Year Less than 10 4. Policy on Measures to Protect Minority Shareholders in Conducting Transactions with Controlling Shareholder 5. Other Special Circumstances which may have Material Impact on Corporate Governance II. Business Management Organization and Other Corporate Governance Systems regarding Decision-making, Execution of Business, and Oversight in Management 1. Organizational Composition and Operation Organization Form Company with an Auditing Committee [Directors] (Updated) Maximum Number of Directors Stipulated in Articles of Incorporation Term of Office Stipulated in Articles of 11 1 Year Incorporation Chairperson of the Board Independent Outside Director – 8 – ― ― Number of Directors Status of Appointment of Outside Directors Appointed Number of Outside Directors Number of Independent Directors 7 4 4 Outside Directors’ Relationship with the Company (1) Name Attribute Relationship with the Company* a b c d e f g h i j k Michio Sasaoka Toshio Nagae From company From company another another Yukinori Hanafusa CPA Junko Utsunomiya Lawyer * Categories for “Relationship with the Company” * “○” when the director presently falls or has recently fallen under the category; “△” when the director fell under the category in the past “●” when a close relative of the director presently falls or has recently fallen under the category; “▲” when a close relative of the director fell under the category in the past * a. Executive of the Company or its subsidiaries b. Non-executive director or executive of a parent company of the Company c. Executive of a fellow subsidiary company of the Company d. A party whose major client or supplier is the Company or an executive thereof e. Major client or supplier of the listed company or an executive thereof f. Consultant, accountant or legal professional who receives a large amount of monetary consideration or other property from the Company besides compensation as a director g. Major shareholder of the Company (or an executive of the said major shareholder if the h. Executive of a client or supplier company of the Company (which does not correspond to any of i. Executive of a company, between which and the Company outside directors/ are mutually j. Executive of a company or organization that receives a donation from the Company (the director shareholder is a legal entity) d, e, or f) (the director himself/herself only) appointed (the director himself/herself only) himself/herself only) k. Others Outside Directors’ Relationship with the Company (2) Name Michio Sasaoka Membership of Supervisory Committee 〇 Designation as Independent Director 〇 Supplementary Explanation of the Relationship Reasons of Appointment Dr. Sasaoka was appointed as an External Director for his and experience knowledge of extensive corporate management as well as his broad global – 9 – Toshio Nagae 〇 〇 Yukinori Hanafusa 〇 〇 Junko Utsunomiya 〇 〇 and and insight. He is deemed to have no conflict of interest General with our Shareholders is qualified as an independent officer. Mr. Nagae was appointed as an External Director for his experience and extensive knowledge of corporate management as well as his broad global insight. He is deemed to have no conflict of interest with our General Shareholders is qualified as an independent officer. Mr. Hanafusa was appointed as an External Director because, as a certified public accountant, he is well-finance and versed accounting. He is deemed to have no conflict of interest with General our is Shareholders qualified as an independent officer. Ms. was Utsunomiya appointed as an External Director because, as a lawyer, she is well-versed in corporate legal matters. She is deemed to have no conflict of interest with our General Shareholders is qualified as an independent officer. and and in [Significant concurrent positions]: Representative Director, ACCOUTING WORKS Co., Ltd [Significant concurrent positions]: Partner, Utsunomiya, Shimizu Haruki. & [Supervisory Committee] Committee’s Composition and Attributes of Chairperson Supervisory Committee All Committee Members Full-time Members Inside Directors Outside Directors 4 1 0 4 Chairperson Outside Director Appointment of Directors and/or Staff to Support the Supervisory Committee Appointed Matters Related to the Independence of Such Directors and/or Staff from Executive Directors Although there are no dedicated employees who assist the Audit and Supervisory Committee, the person in charge of internal audits assists with the duties of the Committee as needed. To ensure – 10 – independence, the personnel changes, evaluations and other matters of these employees are determined with the consent of the Committee. Cooperation among Supervisory Committee, Accounting Auditors and Internal Audit Departments The Audit and Supervisory Committee receives audit reports from the accounting auditor and works with them to exchange information and opinions appropriately. In addition, the Committee works closely with the person in charge of internal audits by requiring them to attend the Committee meetings to exchange information as needed, and by asking them to report to the Committee as needed. [Voluntary Establishment of Nomination/Remuneration Committee] Voluntary Establishment of Committee(s) Corresponding to Nomination Committee or Remuneration Committee Established Committee’s Name, Composition, and Attributes of Chairperson Committee’s Name All Committee Members Full-time Members Inside Directors Outside Directors Outside Experts Other Chairperson 0 2 2 0 0 Supplementary Explanation (Updated) to Committee Corresponding Nomination Committee Nomination and Compensation Committee 4 to Committee Corresponding Remuneration Committee Nomination and Compensation Committee 4 0 2 2 0 0 Outside Director Outside Director At the Board of Directors meeting held on July 18, 2019, the Nomination and Compensation Committee was established as a voluntary advisory body to the Board of Directors. In order to ensure the independence and objectivity of the procedures concerning the nomination and compensation of directors and to further enhance corporate governance, the chairman of this committee is the independent outside director (Michio Sasaoka), and members consist of 4 people in total- 2 internal directors (Patrick C. Reid, President & CEO and Kiyofumi Kaneshiro, CFO) and 2 independent outside directors (Michio Sasaoka, Independent Outside Director and Toshio Nagae, Independent Outside Director). The committee was held 5 times in total in the fiscal year ended December 31, 2021. [Independent Directors] Number of Independent Directors 4 Matters relating to Independent Directors [Incentives] – 11 – The Company designates all qualified independent officers as independent officers. Incentive Policies for Directors Performance-linked Remuneration / Stock Options / Supplementary Explanation The Company employs a stock option system, with the aim of increasing motivation and morale of its employees as well as to improve its business performance and enhance its corporate value by securing talented human resources. In addition, the Company employs a performance-linked stock compensation scheme called the Board Benefit Trust (BBT). By promoting BBT, the Company strives to raise awareness of shareholders towards contributing to the medium to long-term improvement of business performance and increasing corporate value, as well as sharing not only the benefits of rising stock prices but also the risk of falling stock prices and further strengthening the link between the directors’ remuneration, its company’s performances and stock value. Recipients of Stock Options Directors / Employees Supplementary Explanation The Company offers stock options to its directors and employees, with the aim of increasing motivation and morale of employees to improve its business performance as well as to help enhance its corporate value by securing talented human resources. [Director Remuneration] Disclosure of Individual Directors’ Remuneration Supplementary Explanation (Updated) Individual disclosure made for certain directors only The total remuneration of the four directors is 301,000 thousand yen and the total remuneration of the three members of the Audit and Supervisory Committee is 20,865 thousand yen for the fiscal year ended December 31, 2021. Not stated because there are no executives whose total amount of remuneration is 100 million yen or more in the fiscal year ended December 31, 2021. Policy on Determining Remuneration Amounts and Calculation Methods Established Disclosure of Policy on Determining Remuneration Amounts and Calculation Methods (Updated) The remuneration of directors (excluding those who are members of the Audit and Supervisory Committee) includes fixed pay in consideration of their day-to-day performance of duties, taking into account their expected roles and tasks, and performance-linked pay based on the achievement of performance targets. Performance-linked remuneration is determined in a range from 0% to 100% of their fixed pay, with performance-linked remuneration making up 0% to 50% of their total remuneration. The remuneration of directors serving as Audit and Supervisory Committee members does not include performance-linked pay in light of their responsibilities, and only consists of fixed compensation. The performance-linked remuneration is, specifically, comprised of The Board Benefit Trust (BBT) and Bonuses. The BBT is a performance-linked equity compensation scheme that provides directors (excluding outside directors and directors serving as Audit and Supervisory Committee members) with shares of the Company’s stock and cash at the time of their retirement based on – 12 – points earned during their term of office. The goals of the BBT are to visualize the link between the directors’ remuneration and the Company’s performance and stock value and to motivate directors to contribute to the medium to long-term improvement of business performance and the increase of corporate value. Bonuses, however, are payments linked to short-term performance with the goal of motivating directors to contribute to the achievement of financial targets in the current business year. The director remuneration is determined at the discretion of the President, after approval by Board of Directors. In order to ensure independence and objectivity, the Nomination and Compensation Committee, consisting of independent outside directors and other directors, is consulted in advance regarding the amount of directors’ remuneration, and the amount is determined respecting the opinions of this committee. The amount of remuneration of the directors who serve as Audit and Supervisory Committee members is determined through consultation with the directors serving as Audit and Supervisory Committee members. The performance-linked remuneration of directors (excluding directors who serve as Audit and Supervisory Committee members) is calculated based on the following formula: Performance-linked remuneration = fixed remuneration x (quantitative assessment coefficient※1 x weight※2 + qualitative assessment coefficient※1 x weight※2) ※1 Quantitative assessment coefficient and qualitative assessment coefficient are results of the assessment of the achievement of the Company’s performance targets. The Company has established two performance indicators, its quantitative assessment indicator and its qualitative assessment indicator, to measure the short-term and medium- to long-term performance of directors. The assessment coefficients are determined based on the table below. (developed by the Company) Quantitative assessment index Qualitative assessment index coefficient Quantitative assessment coefficient Qualitative assessment Achievement of quantitative indicator Achievement of qualitative indicator The level of achievement of the quantitative assessment indicator (out of five levels) is determined based on achievement criteria set in advance for A. sales growth ratio (year-on-year comparison), B. achievement of sales target, and C. achievement of operating income target. For the fiscal year ended December 31, 2021, the sales growth target (year-on-year comparison) was sales growth of – 13 – more than 10%, the sales target was 11,000,000 thousand yen and more, and the operating income target was operating income of 5,000,000 thousand yen and more. The following eight criteria were set in advance for the qualitative assessment indicator. Based on these criteria, the Nomination and Compensation Committee members respectively assess the level of achievement (out of seven levels) prior to comprehensive deliberation and evaluation. Efforts to develop intangible assets of the Company a. Increasing the value of R&D pipelines b. Expanding new alliance partners c. Developing new platform technologies and intellectual property rights d. Efforts in relation to ESG (sustainability) Efforts to avoid asset losses and mitigate risks of the Company e. Managing and mitigating legal risks f. Managing business continuity (business continuity plans) g. Managing corporate reputation h. Optimizing costs and developing lean organization ※ 2 The weighting of the quantitative assessment coefficient and the qualitative assessment coefficient is appropriately determined in advance each fiscal year by the Nomination and Compensation Committee upon comprehensive examination of management and business environment and other factors. For the fiscal year ended December 31, 2021, the weight of the quantitative assessment coefficient was 70% and the weight of the qualitative assessment coefficient was 30% of the total amount. Achievement based on the quantitative assessment indicator was one out of a possible five levels and the quantitative assessment coefficient was 0 for the fiscal year ended December 31, 2021, as a result of sales of 9,365,964 thousand yen and operating income of 4,418,143 thousand yen, which did not met the criteria set in advance. Achievement based on the qualitative assessment indicator as determined by the Nomination and Compensation Committee was five out of a possible seven levels (the total score was 74 of 100 points) and the qualitative assessment coefficient was 0.67 Therefore, performance-linked remuneration for the fiscal year ended December 31, 2021, was determined to be 20% of fixed remuneration. [Supporting System for Outside Directors] Our Business Administration Department or the person in charge of internal audits supports our external directors and provides necessary support such as notification and distribution of materials related to the Board of Directors. [Retired presidents/CEOs holding advisory positions (sodanyaku, komon, etc.)] Others Kiichi Kubota, a former Representative Director and the Chairman, retired as a member of the Board and the Chairman at the expiration of his term at the 15th Ordinary General Meeting of Shareholders held on March 25, 2021. 2. Matters on Functions of Business Execution, Auditing, Oversight, Nomination and Remuneration Decisions (Overview of Current Corporate Governance System) (Updated) – 14 – At the 9th Ordinary General Meeting of Shareholders held on September 18, 2015, the Company resolved to change the Articles of Incorporation to become a company with an Audit and Supervisory Committee. Accordingly, the Company transformed from a company with a Board of Corporate Auditors to one with an Audit and Supervisory Committee. The Audit and Supervisory Committee is composed of four directors (all of whom are external directors) who are members of the Audit and Supervisory Committee. Directors who are members of the Audit and Supervisory Committee regularly hold Audit and Supervisory Committee meetings and attend Board of Directors’ meetings, which creates a prompt and fair audit and monitoring system. The Board of Directors consists of seven members: one representative director and two directors (excluding those who are Audit and Supervisory Committee members) and four directors who are Audit and Supervisory Committee members. The Board of Directors maintains a prompt and efficient management monitoring system by holding a regular board meeting once a month and an extraordinary board meeting as needed. The Audit and Supervisory Committee is composed of four directors who are Audit and Supervisory Committee members. According to their roles, the directors attend the Board of Directors and actively exchange opinions with top management, view documents that require managerial approval and other documents in a timely manner, and audit the execution of operations by directors. In terms of internal audits, one full-time employee in charge of internal audits systematically conducts audits and reports the results to the representative director. The officer conducts highly effective audits by providing feedback on audit results to the audited departments and requiring them to report improvement policies and other matters in response to the matters for improvement and guidance given. In addition, the Audit and Supervisory Committee, the person in charge of internal audits and the accounting auditor collaborate to share information such as issues and matters for improvement under a three-pronged audit system, in order to conduct efficient and effective audits. Regarding accounting audits, the Company is audited by KPMG AZSA LLC under its contract with the audit corporation. At the Board of Directors meeting held on July 18, 2019, the Nomination and Compensation Committee was established as a voluntary advisory body to the Board of Directors. In order to ensure the independence and objectivity of the procedures concerning the nomination and compensation of directors and to further enhance corporate governance, the chairman of this committee shall be the independent outside director (Michio Sasaoka), and members shall consist of 4 people in total- 2 internal directors (Patrick C. Reid, President & CEO and Kiyofumi Kaneshiro, CFO) and 2 independent outside directors (Michio Sasaoka, Independent Outside Director and Toshio Nagae, Independent Outside Director). 3. Reasons for Adoption of Current Corporate Governance System The Company has an Audit and Supervisory Committee, Board of Directors, Audit and Supervisory Committee, Nomination and Compensation Committee and an accounting auditor organization. Under the current system, four members of the Audit and Supervisory Committee with voting rights at the Board of Directors are engaged in decision making for management, which enables the Company to strengthen the audit and supervisory functions of its Board of Directors and further enhance its corporate governance and improve efficiency of management. III. Implementation of Measures for Shareholders and Other Stakeholders – 15 – 1. Measures to Vitalize the General Shareholder Meetings and Smooth Exercise of Voting Rights Early Notification of General Shareholder Meeting Scheduling AGMs Avoiding the Peak Day Allowing Electronic Exercise of Voting Rights Participation Voting Platform in Electronic Convocation Providing Notice in English Other Supplementary Explanations The notice is sent three weeks before the Ordinary General Meeting of Shareholders. The Company convenes the Ordinary General Meeting of Shareholders avoiding the Peak Day so that as many shareholders as possible may attend the meeting. From the exercise of voting rights pertaining to the 13th Ordinary General Meeting of Shareholders held in September 2019, shareholders may exercise voting rights by an electromagnetic method. The Company has participated in an electronic voting platform and enabled its use since the voting at the 13th general meeting of shareholders held in September 2019. The notice and reference materials for the Ordinary General Meeting of Shareholders are provided in English. In order to facilitate a smooth exercise of voting rights, the Company will disclose the notice of convocation on its website before its shipment. 2. IR Activities Supplementary Explanations Preparation and Publication of Disclosure Policy 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 They are posted on our website. twice a year after Briefings are held the announcement of financial results for the six months and the full fiscal year. Also, individual meetings are held with analysts and institutional investors in Japan and overseas as needed. The Company attends domestic conferences, respond to individual meeting requests from overseas, and holds meetings with overseas institutional investors in the U.S., the U.K. and Hong Kong and such as needed. Financial results information, timely disclosure information other than financial results information and related press releases, materials for company briefings and other documents are posted in Japanese and English. There is a person in charge of IR in the IR & Public Affairs Department. Head of Investor Relations runs a blog dedicated to PeptiDream’s IR and other corporate activities. Explanation by Representative Yes Yes 3. Measures to Ensure Due Respect for Stakeholders Supplementary Explanations – 16 – Stipulation of Internal Rules for Respecting the Position of Stakeholders Implementation Environmental CSR Activities etc. of Activities, Development of Policies on Information Provision to Stakeholders The Company will advance efforts to assist our stakeholders in deepening their understanding of our business by actively disseminating information through measures such as holding financial results briefings and posting materials on its website. The Company is committed to promoting ESG (environmental, social and governance) initiatives and proactively disclosing its policies and information related to these initiatives. The Company’s ESG initiatives are disclosed in its ESG website. (https://www.peptidream.com/esg/index_en.html) As for environmental activities, the Company conducted an analysis of the impact of climate change from a medium-term perspective in the years up to 2026, based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). In its analysis, the Company adopted the IPCC scenario called RCP 8.5, which is the worst-case climate change scenario. The Company has established the Disclosure Policy to disclose appropriate information at the appropriate timing. IV. Matters Related to the Internal Control System 1. Basic Views on Internal Control System and the Progress of System Development(Updated) At the Board of Directors, the Company resolved the System for Ensuring the Properness of Operations stipulated in the Companies Act and the Ordinance for Enforcement of the Companies Act. The outline is as follows. (1) System for ensuring that the execution of duties of directors and employees conforms to laws and regulations and the Articles of Incorporation i. The Board of Directors shall establish a Corporate Code of Conduct and familiarize all employees with it. ii. The Board of Directors shall formulate rules on compliance and establish a system for directors and employees to promote compliance. iii. Directors who are members of the Audit and Supervisory Committee (hereinafter referred to as “Audit and Supervisory Committee members”) shall attend meetings of the Board of Directors and audit the execution of duties by directors through surveys on their business execution status and so forth, based on the audit and other standards of the Audit and Supervisory Committee. iv. The internal auditor shall regularly audit whether employees carry out operations in accordance with the laws and regulations, the Articles of Incorporation and company rules, provide feedback to the employees on the results of the audit, and report the results to the representative director and president and the Board of Directors. . (2) System for storing and managing information related to the execution of duties by directors For legal documents, such as the minutes of the General Meeting of Shareholders and the Board of Directors, and documents and information related to the execution of important duties by directors, we shall establish the necessary rules including document management rules. We shall store and manage information appropriately in accordance with these rules and allow the necessary parties to view these documents and information. – 17 – (3) Rules and other systems for the management of risk of loss To prepare for risks that have a significant impact on management, the Board of Directors shall establish rules on risk management, identify possible risks, formulate preventive measures and develop a crisis management system to respond to risks when they occur. (4) System for ensuring efficient execution of duties by directors i. The Board of Directors shall formulate a medium-term business plan and an annual business plan, and each department shall implement appropriate operation activities to achieve these plans. ii. The Board of Directors shall establish rules on the division of duties, job authority and requests for managerial decisions, among others, and transfer its authority to employees based on these rules, and clarify the decision-making authority to facilitate the execution of duties. iii. To manage and supervise business execution, a regular Board of Directors’ meeting shall be held monthly, and an Extraordinary Board of Directors’ meeting shall be held as needed. iv. At the regular Board of Directors’ meetings, directors analyze and evaluate monthly performance and take necessary measures. (5) System for ensuring the appropriateness of operations in the corporate group consisting of the company concerned, its parent company and subsidiaries While respecting the independence of our subsidiaries, the Company shall work closely with them by dispatching directors and corporate auditors to ensure the appropriate exercise of shareholder rights. At the same time, the Company will establish a system that enables subsidiaries to discuss important management issues at subsidiaries to our Board of Directors and to efficiently communicate and share information on internal controls. (6) Matters concerning directors and employees who should assist with the duties of the Audit and Supervisory Committee The Company shall assign employees who will assist with the duties of the Audit and Supervisory Committee. We shall consult with the Committee on the specifics (including organization and number of employees) for the assignment and give due consideration to its opinions before assigning them. (7) Matters concerning the independence of directors and employees who should assist with the duties of the Audit and Supervisory Committee from directors (excluding those who are Audit and Supervisory Committee members) i. To ensure the independence of directors and employees who should assist with the duties of the Audit and Supervisory Committee, employees who have received an order necessary for an audit from the Committee shall not receive any instructions from directors (excluding those who are Audit and Supervisory Committee members) and department and other managers regarding the order. ii. Personnel changes, evaluations and other matters of the employees shall be decided with prior consent of the Audit and Supervisory Committee. (8) System for directors and employees to report to the Audit and Supervisory Committee, and other systems for them to report to the Audit and Supervisory Committee i. Directors and employees shall report the status of business execution at the request of the Audit and Supervisory Committee. ii. Directors and employees shall immediately report to the Audit and Supervisory Committee if they discover a fact that could cause significant damage to the company. – 18 – iii. The Company shall not unfavorably treat directors and employees who reported a fact that could cause significant damage to the company, on the grounds of reporting based on our whistleblower system or reporting on the status of execution of duties and other matters to the Audit and Supervisory Committee. (9) Other systems for ensuring that audits by the Audit and Supervisory Committee are conducted effectively i. The Audit and Supervisory Committee shall attend the Board of Directors’ meetings based on the audit and other standards of the Audit and Supervisory Committee, and view important documents related to operations such as minutes and requests for managerial decisions, and may request explanations of these documents to directors or employees as necessary. ii. The representative director shall meet with the Audit and Supervisory Committee as needed. iii. The Audit and Supervisory Committee shall meet with the accounting auditor as needed, receive explanations on the details of accounting audits and work together by exchanging information. iv. The Audit and Supervisory Committee shall continue working closely with internal auditors and exchange information as needed. v. The Company shall respond to the Audit and Supervisory Board members if they request the payment of reasonable expenses for the execution of their duties. (10) System for ensuring the credibility of financial reports To ensure the credibility of financial reports, we shall formulate a basic policy on internal control over financial reporting. We shall organizationally promote the development and operation of the systems and schemes necessary to create appropriate financial information, evaluate the effectiveness of control activities on a continual basis, and review control activities as needed. (11) Basic policy for eliminating antisocial forces and its development status i. The Company believes that having a relationship with antisocial forces, which threatens the order and security of civil life and hinders the development of a sound economic and social life, has a significant impact on the business continuity of a company. Therefore, we shall take a firm stance against antisocial forces and declare in our Charter of Corporate Behavior that we have no relationship with antisocial forces at all. ii. To prevent antisocial forces from becoming involved in our management activities and any damage they may cause, we shall establish rules for the elimination of antisocial forces and promote the development of an internal system to eliminate them. 2. Basic Views on Eliminating Anti-Social Forces The Company’s policy concerning the elimination of antisocial forces is stipulated in its Charter of Corporate Behavior and Basic Policy on the Development of an Internal Control System. In accordance with these standards, the Company has established Rules for the Elimination of Antisocial Forces and are promoting the development of an internal system for eliminating them. As measures based on these, the Company carries out prior examinations, assigns persons responsible for preventing unreasonable demands, collaborates with external specialized organizations for the purpose of eliminating antisocial forces, and collects information related to antisocial forces. – 19 – V. Other 1. Adoption of Anti-Takeover Measures Adoption of Anti-Takeover Measures Not Adopted Supplementary Explanation 2. Other Matters Concerning to Corporate Governance System – 20 –