キトー（6409） – Corporate Governance Report 20220509

Corporate Governance Report Date last modified: May 9, 2022 KITO CORPORATION President & CEO: Yoshio Kito Contact: Legal Affairs Office. TEL: +81-3-6671-9122 TSE Code: 6409 https://kito.com The status of corporate governance of the Company is as follows. I. Basic Concept on Corporate Governance, Capital Structure, Corporate Attributes and Other Basic Information 1. Basic Concept The Company will, with the aim of achieving sustainable growth and improvement of corporate value on a medium to long-term basis, make efforts to enhance corporate governance in accordance with the basic concepts described below based on the belief that the essence of corporate governance lies in increasing the dynamism of management by securing the transparency and fairness thereof and making management decisions in a prompt and decisive manner. (1) To respect the rights of the shareholders and secure equality among them. (2) To consider the interests of the stakeholders including the shareholders and cooperate with them in an appropriate manner. (3) To disclose corporate information in an appropriate manner to secure transparency of management. (4) To have the board of directors, taking into account the fiduciary responsibility and accountability to shareholders, enhance separation of the execution of management from the supervision thereof and the function of management supervision by outside directors to ensure the sustainable growth of the Company, enhancement of corporate value on a medium to long-term basis, and improvement of profitability and capital efficiency. (5) To have constructive dialogue with the shareholders. [Reasons for Non-compliance with the Principles of Corporate Governance Code.] The Company has implemented each principle in the Corporate Governance Code. This report is written based on the revised Corporate Governance Code in June 2021. [Disclosure Based on the Principles of the Corporate Governance Code.] The Company’s Basic policy on Corporate Governance is disclosed on the Company’s website, in addition to this report. (https://kito.com/ir/governance) [Principle 1.4 Cross-Shareholding] (1) Policies for Holding of Shares for Political Purposes The Company will hold listed shares of its business partners for political purposes only in the cases that the holding of the shares including the number of shares to be held is deemed rational when its importance in the Company’s business strategies and business relationship with the trading partners are comprehensively considered. The rationality for holding such shares will be verified on a regular basis. Also, as a result of the verification, the basic policy is to promptly dispose of and reduce the number of shares held for political purpose that it is considered that the significance of its possession is weak. (2) Exercise of Voting Rights The Company will make a decision concerning the exercise of its voting rights in terms of each agendum after confirming, while respecting the management policies of the companies it invests in, the attitude toward returns to its shareholders, corporate governance, contribution to the increase in the Company’s corporate value on a medium to long-term basis as well as the prospect of its business relationship with the Company in the future and its corporate social responsibility. (3) Sale the Company’s Shares by the cross-shareholders – 1 – When cross-shareholders (i.e., shareholders who hold a company’s shares for the purpose of cross- shareholdings) indicate their intention to sell their shares, the Companies will respect their intention. (4) Do not engage in transactions that harm the interests of the shareholders of the Company between the cross-shareholders and the Company Regardless of whether the client is a cross shareholder or not, the Company has sufficiently verified the economic rationality in transactions, and the Company has not made any transactions that would harm the interests of the company or its shareholders. [Principle 1.7 Related party transactions] Conflict-of-interest transactions between the Company and its director, executive manager or controlling shareholder or competing transactions by the Company’s director or executive manager, if any, will be subject to presentation to the board of directors for approval pursuant to the provisions of the Regulations of the Board of Directors [Supplementary Principle 2.4.1 Ensuring Diversity in the Promotion of Core Human Resources] Recognizing the importance of the vitality and challenge of our employees, as well as the diversity of perspectives and values that contribute to the sustainable growth and development of the company, the corporate philosophy of our company is to “aim for an organization with a harmonious mix of diverse members.” We believe that diversity of human resources is an important factor for innovation and new value creation. As well as hiring new graduates with various backgrounds and experiences, we have traditionally focused on career hiring that emphasizes ability, knowledge, and experience. We also take an open stance in hiring and promoting managers and core human resources. Although the number of female managers is currently in the 3% range, we will make comprehensive efforts, including enhancing opportunities such as recruitment and career education, and improving our personnel system, to expand opportunities and aim for 6% of female managers in five years of the next medium-term plan. The Company believes that the Company has established an environment to actively recruit mid-career employees and to receive a wide range of work experience and corporate culture from other industries, and considers them as valuable and diverse human resources who bring new perspectives and ideas to the Company. As more than 40% of our managers are mid-career hires, we believe that we are making full use of their talent, and we have not set any targets. To date, we have focused on various global perspectives and a management system that optimizes overall management. Since 2008, we have hired foreign nationals as executive officers. At present, 6 out of 15 executive officers are foreign nationals, and we believe that sufficient efforts have been made to promote foreign nationals to managerial positions. Although the program has been suspended due to the coronavirus, since 2015 it has been held under the title of “KITO University” for personnel selected mainly from young people and leaders from Japan and overseas subsidiaries, as an opportunity to deepen their understanding of the corporate philosophy and philosophy of management, as well as exchange and cross-cultural understanding among Group companies. Since 2011, we have created a master plan for the employment of people with disabilities, aiming to create a work environment where people with various individuality can work, and to become a company where everyone can work comfortably. Based on the principle of assigning persons with disabilities to and working at in-house workplaces, we have worked together with employees at workplaces where persons with disabilities are assigned. As a result, the number of employees with disabilities now stands at 34, with statutory employment rate of just under 7%. We introduced a selective retirement age (at 65) system in 2013, providing an environment in which veterans continue to work. We believe that the experience and knowledge of the younger and middle generations and their senior generations will be fully utilized together, providing a foundation for our company’s continued growth. < Status of Ensuring Diversity > □ Employees (as of March 31, 2021) 547 men (81%) / 130 women (19%) 376 new graduates (56%) / 301 mid-career employees (44%) – 2 – □ Management (as of March 31, 2021) 79 men (96.3%) / 3 women (3.7%) 43 new graduates (52%) / 39 mid-career employees (48%) □ Foreign nationals 6 out of 15 Executive Officers (40%) (as of December 23, 2021) 13 Employees (1.9%) (8 men / 5 women, 7 new graduates / 6 mid-career employees) (as of March 31, 2021) □ Persons with Disabilities (as of the end of March 2021) 34 persons / 6.8% statutory employment rate □ Seniors (as of March 2021) 36 persons aged 60 or older (34 men / 2 women) [Principle 2.6 Roles of Corporate Pension Funds as Asset Owners] The Company acknowledges the fact that the operation of the reserve fund of corporate pension plans affects the financial condition of the Company in addition to the stable asset formation of employees. Based on the acknowledgement, in order to enhance the expertise in the management of corporate pensions and to demonstrate the functions as the asset owner to be expected, the Company will work on the improvement of the operation of corporate pension by developing planned human resource and planned placement of that human resource. [Principle 3.1 Full Disclosure] (i) We disclose our business philosophy, business strategy and business plan on our website, securities report, etc. (https://kito.com/ir/library) (ii) Basic concept and basic policy on corporate governance The basic concept of corporate governance is described in “1. Basic concept” of “I. Basic concept and capital structure of corporate governance, corporate attributes and other basic information” in this report. Please refer to it. The basic policy is also disclosed on our website. (https://kito.com/ir/governance) (iii) Policies and procedures for the Board of Directors to determine the remuneration of senior executives and directors The policies and procedures for determining executive compensation are disclosed in “II.1. [Director Relationship] and [Director Compensation]” in this report and the securities report. (https://kito.com/ir/library) (iv) Policies and procedures for electing and dismissing executives and nominating director and auditor candidates The Company is convinced that diverse human resources, regardless of gender or nationality, will bring new ideas and ideas to the Group’s businesses and drive innovation. (Election) a) With regard to internal directors, persons with experience in business divisions such as sales and manufacturing, and persons with experience in planning, development and management will be elected. b) With regard to outside directors and outside corporate auditors, they are expected to be appointed based on their knowledge, experience, ability, and personality, as well as those who can proactively make recommendations and raise issues regarding the Company’s decision-making. (Dismissal) If there is an unfair act or a violation of the law or the Articles of Incorporation in relation to the execution of duties, the dismissal of the director and / or the auditor is considered. The board members will be recommended to the Board of Directors after deliberation by the Nomination and Compensation Committee, and will be proposed to the Ordinary General Meeting of Shareholders after resolution by the Board of Directors. After the deliberation of the Nomination and Remuneration Committee, the Board of Directors will get the consent of the Board of Corporate Auditors, and the Board of Directors will make a resolution prior to the Ordinary General Meeting of Shareholders. – 3 – When dismissing a Corporate Auditor, the Company will propose it to the Ordinary General Meeting of Shareholders. (v) Explanation of the appointment and nomination of individual directors and corporate auditors The reasons for the appointment and nomination of Directors and Corporate Auditors are described individually in the Notice of the General Meeting of Shareholders. (https://kito.com/wp/wp-content/uploads/Notice-of-the-77th-Ordinary-General-Meeting-of- Shareholders.pdf) [Supplementary Principle 3.1.3 Initiatives for Sustainability] Our stance and policies on sustainability are as follows. Please refer to our website for its initiatives. (https://kito.com/jp/csr) KITO has been providing products with superior safety, operability, and durability, with the first priority placed on the realization of a safe and efficient work environment for workers, in order to solve the universal problem of gravity. We believe that our products, which have become indispensable to social infrastructure, will continue to contribute to the development of various industries in every region. As the future of society and the economy is difficult to predict and changes drastically, in order to continue providing high added value into the future, we aim to be a “Continuing to be sensitive to changes in society, cultivating business through continuous innovation, developing new markets, and continuing to serve society”. We will work to improve our corporate value over the long term by organizing the framework for realization into the following five. (i) Inexhaustible pursuit and provision of products and services that meet the needs of society We will promote the development of products needed by society and develop business activities that contribute to the creation of added value for customers and the expansion of new businesses and markets. (ii) Coexistence and co-prosperity with environmental, social and business partners We will make effective use of limited resources throughout the supply chain and strive to reduce the impact on the natural environment. In order to solve various social issues, we will strengthen the relationship of trust with our business partners, such as suppliers, sales and service networks, and utilize our mutual strengths to achieve coexistence and co-prosperity. (iii) Management Foundation for Sustainable Future Creation By maintaining a highly profitable business structure that generates stable profits over the long term, we will ensure reinvestment for future business growth and management strategy options. We will increase our tolerance for unexpected events such as sudden changes in the external environment and stay ahead of changes in the natural environment and society. (iv) Environment where diverse human resources can fully demonstrate their abilities We will create an environment in which employees can fully demonstrate their abilities and work in a sound manner both mentally and physically, and we will work together as individuals, teams, and organizations to expand results. (v) Organizational formation based on corporate philosophy The Corporate Philosophy is positioned as the top concept of decision making and action guidelines, and we aim to form an organization with the Corporate Philosophy as the unifying force. We are a team of people with a strong sense of ethics, and a team with the ability to execute to achieve our goals enhances corporate sustainability. We believe that creating a company where employees can feel happiness and pride will lead to increased added value for customers and prosperity for all stakeholders. Aiming to create a bright, dynamic and attractive workplace, we have implemented a variety of software and hardware initiatives, including the promotion of corporate philosophy management and the review of organizations and systems. We are also working to develop human resources for the new stage of our global strategy, including strengthening diversity and fostering the next generation of business leaders. We are continuing discussions on our next medium-term management plan toward the new fiscal year of April 2022, and will actively implement personnel measures to achieve its management goals. We promote research and development by constantly imagining future customer use environments and needs, as well as new industries and markets. The results of research and development are properly managed and utilized as intellectual property, whether tangible or intangible, to maximize profits. In addition, by establishing – 4 – in-house systems such as the “Commendation for Employee Inventions, etc.” and “Technology Research Report”, we build a culture in which all engineers create new business and new technology ideas and new design and manufacturing know-how. The results of new inventions and research activities not only activate existing technologies, but also play a major role in the adoption, accumulation, and transmission of new technologies and in improving the knowledge and motivation of engineers. KITO products are broadly divided into standard products and specialty products that are customized according to the customer’s work environment. Based on the philosophy of “value both standard and specialty products” which has not changed since its foundation, a large number of new technologies have been born from manufacturing at KITO. Our intellectual property activities will continue to evolve so that we can continue to be a company that benefits society. The Kito Group has endorsed the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) as established by the Financial Stability Board, has disclosed climate-related information based on the TCFD framework on our website, and will continue to enhance its disclosure. For our approach toward the four TCFD-designated thematic areas of governance, strategy, risk management, and metrics and targets, please refer to our website at; https://kito.com/csr/tcfd . [Supplementary Principle 4.1.1 Scope and content of the matters delegated to the management] The Board of Directors, as a decision-making body for the management of the Company, resolves legal matters, determines and approves basic management policies and important matters in business execution and supervises directors’ execution of duties. In addition, it is positioned as the highest decision-making body of the Group, and makes important decisions regarding group companies and controls the entire group. The Company has introduced a division system and delegated the execution of operations within the scope of division of duties of each director. [Principle 4.9 Independence standards and qualification for independent directors] In order to objectively judge the independence of outside directors and outside corporate auditors, the Company independently defines and determines the independence criteria based on the independence criteria established by the Financial Instruments Exchange. In addition, we will judge based on not only independence, but also from the perspective of knowledge, experience, ability, personality, and from the perspective on whether candidates for directors and corporate auditors can expect to make proactive proposals and issues for the Company’s decision-making. [Supplementary Principle 4.11.1 A view on the appropriate balance between knowledge, experience and skills of the board as a whole, and also on diversity and appropriate board size] In terms of the composition of our board of directors, we believe that it is desirable for directors to have a good balance of knowledge, experience, and ability, and to have diversity in genders and nationality, and to have the board of directors in a proper size. The policies and procedures for the election of Directors of the Company are as described in “Disclosure based on the principles of the Corporate Governance Code” of “I. Basic Policy and Capital Structure for Corporate Governance, Corporate Attributes and Other Basic Information” section of this report,. Please refer to 3-1: Full Disclosure (iv). The skill matrices of each Director and Corporate Auditors, which indicate the skills, careers and expertise held by and expected of them, are shown in the attached sheet. [Supplementary Principle 4.11.2 Major concurrent positions in other organizations of directors/corporate auditors] The important concurrent positions of the Company’s directors and corporate auditors are described in the Notice of the General Meeting of Shareholders. (https://kito.com/wp/wp-content/uploads/Notice-of-the-77th-Ordinary-General-Meeting-of-Shareholders.pdf) [Supplementary Principle 4.11.3 Analysis and evaluation on effectiveness of Board of Directors] Below are the results of the most recent (fiscal 2020, the fiscal year ended March 31, 2021)evaluation of the effectiveness of the Company’s Board of Directors. (1) Evaluation method A questionnaire was sent to all seven Directors and three Corporate Auditors to obtain their opinions on the following items, with a five-point scale for each item and a column for free entry of opinions. The evaluation items for fiscal 2020 year are the same as the evaluation items for fiscal 2019 (based on the TSE Corporate Governance Code revised in June 2018). – 5 – Questionnaire items (5 categories, 35 questions) (i) Structure of the Board of Directors (composition, number and ratio of outside officers, diversity, term of office, etc.) (ii) Operations of the Board of Directors (roles of the Board of Directors, contents of materials, delegation (iii) Agenda items of the Board of Directors (discussions on remuneration, election, dismissal, compliance, of authority, degree of active discussion, etc.) etc., status of response to previous issues, etc.) (iv) System to support the Board of Directors (opportunity and frequency of information exchange, cooperation with departments, information access, etc.) (v) The Nomination and Compensation Committee (composition, status of discussions on remuneration, dismissal, succession planning, etc.) (2) Evaluation results (summary) As a result of the evaluation, the effectiveness of the Board of Directors as a whole was assessed to be adequately ensured. In particular, at the Board of Directors meeting where the evaluation results were reported, it was reconfirmed that each Director and Corporate Auditor can freely and openly engage in constructive discussions and opinions, and that any meeting has become a forum for transparent, fair, prompt and decisive decision-making. On the other hand, positive evaluations of “(iii) Selection of agenda items” and “(iv) System to support the Board of Directors” remained at around 70% this year. This is because the three issues recognized as a result of the effectiveness evaluation in fiscal 2018 and 2019 have not yet been resolved in fiscal 2020, although it was unavoidable due to the Covid-19 outbreak, and we have reached a common understanding that they will continue to be addressed in fiscal 2021. (3) Issues to be addressed As explained in “(2) Evaluation Results (Summary)” above, based on the results of this evaluation, the Board of Directors has come to the conclusion that the three issues identified as a result of the effectiveness evaluation for fiscal 2018 and fiscal 2019 need to be continued to be addressed. In fiscal 2021, the Company will continue to address and improve the issues identified in order to further enhance the effectiveness of the Board of Directors as it formulates the next medium-term management plan. The three issues identified as a result of the effectiveness assessment and the policy for addressing them are as follows: (i) Deepen discussions on medium- and long-term strategies, product strategies, and regional strategies Response Policy: Discussions started in FY2020, but still halfway through due to the Covid-19 outbreak; quality of discussions will be improved in FY2021 and discussions will be deepened in conjunction with the formulation of the next medium-term management plan (scheduled to start in FY2022). (ii) Increase the frequency of risk discussions and conduct regular reviews Response Policy: Based on what we experienced in the Covid-19 outbreak, we will share the risks of our business and conduct sufficient analysis and consideration. (iii) Specifically discuss management’s succession plan Response Policy: While progress has been made in the development of management succession, we will continue to discuss and advance a succession plan for the President and Representative Director. [Supplementary Principle 4.14.2 Training policy for directors and corporate auditors] In order to achieve sustainable growth and medium- to long-term improvement of corporate value, the Company needs directors and corporate auditors from the perspective of securing human resources who can ensure management transparency and fairness and make quick and decisive decisions. When he/she takes office, he\she has an opportunity to explain the company law, management issues, corporate governance, and finance. In addition, when outside directors and outside corporate auditors take office, in addition to explaining our corporate philosophy, history, and business content, we set up opportunities for plant inspections and overseas subsidiary inspections. [Principle 5.1 Policy for Constructive dialogue with shareholders] In order to achieve sustainable growth and medium- and long-term corporate value improvement, we aim for shareholders, institutional investors, analysts, the media, and all other stakeholders, including IR executives and other management executives, and through dialogues and exchanges involving employees, we will promptly and accurately disclose company information. (1) The director in charge of IR and the IR department will deal with dialogues and interviews with shareholders and investors. Depending on the purpose of the dialogue, the department in charge of IR works organically with each department in the company to enhance the dialogue. – 6 – (2) We have prepared briefing sessions for institutional investors, analysts, media and factory tours, and held briefings on business strategies and business content as appropriate. In addition, we hold shareholder exchange meetings and factory tours for individual shareholders and provide opportunities for dialogue. In addition, a dedicated page has been established on the website to make it easy to understand business results, business content, and business strategies. (3) The contents of dialogues with shareholders and investors are shared on a regular basis by utilizing the Board of Directors, Board of Directors meetings, internal intranet, etc. (4) In the dialogue, we will not communicate insider information (important undisclosed facts). The four weeks before the announcement of financial results is considered as the “silent period”. [Supplementary Principle 5.2.1Formulation and Announcing of Business Strategy and Management Plan] Toward the new fiscal year that begins in April 2022, the Company has been discussing the formulation of its next medium-term management plan and the establishment of profitability through the streamlining of operations. In the next medium-term management plan, we will strengthen our product and regional strategies. In our product strategy, we will maximize the added value we provide customers by developing new products, acquiring new businesses, and expanding our customization business by enhancing our engineering capabilities, with a focus on the hoist crane business. As part of our regional strategy, we will strengthen the production functions at each of our global bases, optimize our group’s supply chain, promote PMI at our overseas subsidiaries, and strengthen organic coordination among subsidiaries. In addition, we are considering incorporating capital efficiency indicators in the next medium-term plan and will improve the process for evaluating our business portfolio. – 7 – 2. Capital Structure Ratio of Shares Held by Foreign Shareholders 30% or more [Status of Major Shareholders] Name / Company Name Number of shares Owned Percentage (%) The Master Trust Bank of Japan, Ltd. (Trust account) MISAKI ENGAGEMENT MASTER FUND THE BANK OF NEW YORK-JASDEC NON-TREATY ACCOUNT Custody Bank of Japan, Ltd. (Trust account) GOVERNMENT OF NORWAY YK CAPITAL Custody Bank of Japan, Ltd. (Trust account 9) Sumitomo Mitsui Banking Corporation THE BANK OF NEWYORK MELLON 140042 KITO Business Partner Stock Ownership Association 2,698,400 2,045,000 993,900 958,500 896,010 740,000 693,800 670,400 425,600 382,000 13.11 9.94 4.83 4.66 4.35 3.59 3.37 3.25 2.06 1.85 Controlling Shareholders(except for parent company) Parent Company Supplementary Information N/A N/A 1. The status of major shareholders is as of September 30, 2021. In addition to the above, there are 480,181 treasury shares owned by the Company. 2. Percentage (%) is rounded down to two decimal places. 3. The amendment to the large shareholding report filed by Asset Management One Co., Ltd. on April 7, 2021, which is available for public inspection, stating that it owns the following shares as of March 31, 2021. However, as the Company can not confirm the actual number of shares held by Asset Management One Co., Ltd. as of September 30, 2021, it has not been included in the above Status of Major Shareholders. The contents of the amendment report are as follows. Name / Company Name Number of shares Owned Percentage (%) 1,494,100 7.10 Asset Management One Co., Ltd. – 8 – 3. Corporate Attributes Listed Stock Market and Market Section Fiscal Year-End Type of Business Number of Employees (consolidated) as of at the End of the Previous fiscal year Sales (consolidated) as of the End of the Previous Fiscal Year Number of Consolidated Subsidiaries as of the End of the Previous Fiscal Year Tokyo Stock Exchange (First Section) March Machinery More than 1000 More than10 billion yen and less than 100 billion yen From 10 to less than 50 4. Policy on Measures to Protect Minority Shareholders in Conducting Transactions with Controlling Shareholder 5. Other Special Circumstances which may have Material Impact on Corporate Governance 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 the Board of Corporate Auditors [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 Outside Director Number of Outside Directors Number of Independent Directors 10 1 year President 7 Appointed 3 3 Outside Directors’ Relationship with the Company (1) Name Properties Katsumi Nakamura Takashi Hirai Koji Osawa From another company From another company From another company Relationship with the Company (*) f e i a b c d g h j k * Categories for “Relationship with the Company” * ”○” when the director presently falls or has recently fallen under the category; “” when the director fell under the category in the past * “●” when a close relative of the director presently falls or has recently fallen under the category; △“▲”when a close relative of the director fell under the category in the past a. 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/corporate auditors – 9 – N/A N/A g. Major shareholder of the Company (or an executive of the said major shareholder if the shareholder is a h. Executive of a client or supplier company of the Company (which does not correspond to any of d, e, or legal entity) f) (the director himself/herself only) i. Executive of a company, between which and the Company outside directors/corporate auditors are mutually appointed (the director himself/herself only) j. Executive of a company or organization that receives a donation from the Company (the director himself/herself only) k. Others Outside Directors’ Relationship with the Company (2) Name Katsumi Nakamura Independent director 〇 Reason for assignment Supplementary Explanation of the Relationship N/A Reasons of Appointment Takashi Hirai 〇 Supplementary Explanation of the Relationship N/A Reasons of Appointment Koji Osawa 〇 Supplementary Explanation of the Relationship N/A Reasons of Appointment Mr. Katsumi Nakamura has many years of experience as an executive and technician in the automobile industry, which is one of Japan’s core industries. The Company expects him to leverage his abundant business management knowledge and manufacturing experience in order to provide the Company with appropriate advice and recommendations from a global management perspective, and to oversee management from an independent and objective perspective. There are no special interests between the Company and him. In addition, it meets the “standard on the independence of outside directors and outside corporate auditors” defined by the Company, and does not conflict with any of the independence standards defined by the Tokyo Stock Exchange, and we have judged that there is no risk of conflicts of interest with general shareholders. Mr. Takashi Hirai has many years of experience working as a consultant in a consulting firm operating internationally and experience as an executive in business companies in Japan and the United States, in addition to experience in development of global human resources at a graduate school of corporate management. The Company expects him to provide appropriate advice and recommendations regarding the formulation of corporate strategies, and to oversee management from an independent and objective perspective. There are no special interests between the Company and him. In addition, it meets the “standard on the independence of outside directors and outside corporate auditors” defined by the Company, and does not conflict with any of the independence standards defined by the Tokyo Stock Exchange, and we have judged that there is no risk of conflicts of interest with general shareholders. Mr. Koji Osawa, after working at a general trading company, was engaged in venture capital fund management for many years in Silicon Valley. As a fund manager, he has experience with discovering and developing new businesses, as well as with objectively evaluating and overseeing businesses. Furthermore, he is deeply knowledgeable with regard to cutting-edge technologies such as IoT. The Company expects him to provide appropriate advice and recommendations that contribute to the development of the Company’s business and the acquisition of cutting-edge technologies, and to oversee management from an independent and objective perspective. There are no special interests between the Company and him. In addition, it meets the “standard on the independence of outside directors and outside corporate auditors” defined by the Company, and does not conflict with any of the independence standards defined by the Tokyo Stock Exchange, and we have judged that there is no risk of conflicts of interest with general – 10 – shareholders. State of establishment of an optional committee corresponding to Nominating Committee or Compensation Committee Established Committee’s Name, Composition, and Attributes of Chairperson Committee’s Name All Committee Members Full-time Members Internal Directors Outside Directors Outside Experts Other Chairperson Supplementary Information Committee Corresponding to Nomination Committee Nomination Committee 5 0 2 3 0 0 Inside Director Committee Corresponding to Remuneration Committee Remuneration Committee 5 0 2 3 0 0 Inside Director The Company has established a committee composed of five directors (Yoshio Kito, Shigeki Osozawa, Katsumi Nakamura, Takashi Hirai and Koji Osawa) as an advisory body to the Board of Directors and an optional committee on the nomination and compensation of directors and corporate auditors. The Committee secures independence and neutrality by appointing three outside directors out of five members. The committee deliberates on matters relating to the election, dismissal and dismissal of candidates for directors, corporate auditors, executive officers and officers of subsidiaries, as well as the content of remuneration, etc. of directors, executive officers and officers of subsidiaries. In addition, the Committee evaluates the results of business execution of directors, executive officers and executives of subsidiaries, and makes recommendations to the Board of Directors. The main items discussed and decided in the fiscal 2020 are as follows. • Fiscal 2019 executive performance evaluation • Fiscal 2020 target setting for performance-based compensation • Formulation of the Company’s policy governing decision-making regarding the contents of compensation, etc., for individual directors • Decline to receive partial amounts of compensation by director’s [Corporate Auditors] Establishment of the Board of Corporate Auditors Maximum Number of Corporate Auditors Stipulated in Articles of Incorporation Number of Corporate Auditors Established 4 3 Cooperation among Corporate Auditors, Accounting Auditors and Internal Audit Departments • The corporate auditors, internal audit organization and accounting auditors exchange opinions, listen to information, etc. at least every quarter, and collaborate as they attend audits as necessary. • Auditors exchange opinions and information on a monthly basis, receiving reports from the accounting auditor on audit plans, important audit items, and audit status. • The corporate auditors exchange opinions and information each time they receive reports from the internal audit organization on the status of internal control, overall business management, and confirmation of the status of efforts in response to improvement requests. • The Company’s accounting auditor is PricewaterhouseCoopers Arata LLC . Please refer to “II.2.3 Content of audit fee, etc.” for details of the fee, etc. to the accounting auditor. Appointment of Outside Corporate Auditors Number of Outside Corporate Auditors Number of Independent Corporate Auditors Appointed 2 2 UPDATED – 11 – Outside Corporate Auditor’s Relationship with the Company (1) Name Properties Kiyohito Hamada Eiko Hakoda Certified public accountant Attorney at law Relationship with the Company (*) f e i a b c d g h j k * Categories for “Relationship with the Company” * ”○” when the director presently falls or has recently fallen under the category; “” when the director fell under the category in the past * “●” when a close relative of the director presently falls or has recently fallen under the category; △“▲”when a close relative of the director fell under the category in the past a. 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/corporate auditors g. Major shareholder of the Company (or an executive of the said major shareholder if the shareholder is a h. Executive of a client or supplier company of the Company (which does not correspond to any of d, e, or legal entity) f) (the director himself/herself only) i. Executive of a company, between which and the Company outside directors/corporate auditors are mutually appointed (the director himself/herself only) j. Executive of a company or organization that receives a donation from the Company (the director himself/herself only) k. Others Outside Corporate Auditor’s Relationship with the Company (2) UPDATED Name Kiyohito Hamada Designation as Independent Corporate Auditors 〇 Reason for assignment Supplementary Explanation of the Relationship N/A Reasons of Appointment Mr. Kiyohito Hamada is a certified public accountant, is familiar with finance, M & A, accounting and taxation, has sufficient insight to govern corporate management, and we believe that he can conduct management monitoring from an independent objective point of view. There are no special interests between the Company and him. In addition, it has been determined that the company has met the standards for independence set forth by the Company, and has not violated any of the standards for independence set forth by the Tokyo Stock Exchange, and we judge that there is no risk of conflicts of interest with general shareholders. Reasons of Appointment Ms. Eiko Hakoda is a partner lawyer of Mori Hamada & Matsumoto, and we believe that she can conduct management monitoring from an independent and objective perspective familiar with corporate legal affairs. There are no special interests between the Company and her. In addition, it has been determined that the company has met the standards for independence set forth by the Company, and has not violated any of the standards for independence set forth by the Tokyo Stock Exchange, and we judge that there is no risk of conflicts of interest with general shareholders. – 12 – Eiko Hakoda 〇 Supplementary Explanation of the Relationship N/A [Independent Directors/Corporate Auditors] Number of Independent Directors/Corporate Auditors UPDATED 5 Matters relating to Independent Directors/Corporate Auditors The Company will judge the independence of its outside directors and outside corporate auditors from the viewpoints of whether they can be expected to make positive suggestions and raise questions concerning the Company’s business development, in addition to their satisfaction of the standards of independence prescribed by the Tokyo Stock Exchange, Inc. Specifically, independence of the outside directors and outside corporate auditors will be evaluated based on the viewpoints mentioned above to the extent they do not fall under any of the following categories. 1. A person for whom the Company’s group are principal trading partners or a business executive thereof, 2. A principal trading partner of the Company’s group or a business executive thereof, 3. A major shareholder of the Company or a business executive thereof, 4. A business executive of a person for whom the Company’s group are major investors, 5. A person receiving a large donation from the Company’s group or a business executive thereof, 6. A consultant, certified public accountant, other professional accountant, lawyer, or other legal specialist that receives a large amount of money or other assets other than the compensation for a director from the Company’s group (assets in excess of the amount equivalent to 2% of its total sales turnover or gross income or 10 million yen whichever is larger on average in the preceding 3 years, other than the compensation for a director) (In the case that the person receiving the assets is a corporation, association or other group, a person belonging to such group), 7. A person belonging to the auditing firm who performs a statutory audit of the Company’s group, 8. A person from a corporation for which a business executive of the Company’s group assumed the post of its outside director on a reciprocal basis within the preceding 3 years, 9. A person falling under the category of Items 1 through 8 hereof within the preceding 3 years, 10. A close relative (within the 2nd degree of relationship) of a person (limited to a person in an important position) listed below : a) A person who falls under the category of Items 1 through 9 hereof (with respect to Item 7, limited to a person who is actually involved in the audit services for the Company’s group (Supporting involvement is excluded)), b) A director, corporate auditor, executive officer or principal employee of the Company or the Company’s group. (Note) ・ “Person for whom the Company’s group are principal trading partners” refers to a person who received from the Company’s group a payment of the amount in excess of 2% of its annual consolidated sales turnover or gross income or 100 million yen whichever is larger in the immediately preceding business year. ・ “Principal trading partner of the Company’s group” refers to a person who made to the Company’s group a payment of the amount in excess of 2% of the Company’s annual consolidated sales turnover or gross revenue or 100 million yen whichever is larger in the immediately preceding business year. ・ “Major shareholder of the Company’s group” refers to a person directly or indirectly holding 10% or more of the voting rights of the Company’s group’s entire shareholders. ・ “Person for whom the Company’s group is a major investor” refers to a person the Company’s group invests in to hold directly or indirectly 10% or more of its total voting rights. ・ “Person receiving a large donation from the Company’s group” refers to a person who received from the Company’s group a donation in excess of 10 million yen or 2% of its annual sales turnover or gross income whichever is larger on average in the preceding 3 years. ・ “Person in an important position” refers to a person at the position of director or at least equivalent to division manager, public accountant belonging to each auditing firm and lawyers belonging to each law firm. [Incentives] Incentive Policies for Directors Supplementary Explanation Performance-linked Remuneration From July 2019, the Company has provided fixed compensation, performance-linked compensation and stock- based compensation (shares with restricted transfer) to the Internal Directors of the Company. – 13 – 55 – – Details are described in “II.1. [Director Relationship] and [Director Compensation]” in this report. Recipients of Stock Options Supplementary Explanation [Director Remuneration] Disclosure of Individual Directors’ Remuneration Supplementary Explanation Not individually disclosed. The compensation paid to directors and corporate auditors (collectively “Officers”) of the Company in fiscal 2020 is as follows. Officer classification Total fixed compensation 156 14 36 Directors (excluding outside directors) Corporate Auditor (excluding outside corporate auditor) Outside Officers 83 14 36 performance- linked compensation stock-based compensation (shares with restricted transfer) (Million yen) Number of Officers (Persons) stock option compensation 16 – – 1 – – 3 1 5 1 The number of Directors and Corporate Auditors as of March 31, 2021 is seven Directors and three Corporate Auditors. The abovementioned payment recipients among Directors and Corporate Auditors exclude one Director without compensation. 2 With regard to the abovementioned basic compensation for fiscal 2020, given the harsh business environment resulting from the impact of the COVID-19 pandemic, Officers have requested to decline acceptance of some of their compensation for the three month period from May to July of 2020. The abovementioned amounts of basic compensation reflect these reductions. – President & CEO: 20% reduction in basic compensation – Directors (excluding Outside Directors): 15% reduction in basic compensation – Corporate Auditors (excluding Outside Corporate Auditors): 10% reduction in basic compensation Performance-based compensation is determined after the fiscal year-end and the settlement of accounts, by calculating the achievement level of targets (performance achievement rate) and conducting evaluations on an individual basis. The amounts of performance-based compensation for the fiscal year under review have not yet been finalized, and the abovementioned performance-based compensation amounts are scheduled payment amounts. 3 4 The amount of performance-based compensation for fiscal 2019 was finalized in June 2020. This amount is not included in the abovementioned performance-based compensation amounts. The finalized amount was based on the performance achievement rate for the fiscal year (67.6%) and reflects evaluations of each individual. The finalized amount was 54 million yen, which is a reduction of just over 10 million yen from the performance-based compensation amount (65 million yen) disclosed in the fiscal 2019 corporate governance report. 5 Due to the impact of COVID-19, low performance-based compensation target values have been set for fiscal 2020, since both revenue and profit were forecast to be significantly lower than in the previous fiscal year. Therefore, even if the targets for the current fiscal year are met, the performance-based compensation amount paid will be less than the usual standard amount. Since there are no officers whose total amount of remuneration, etc. is 100 million yen or more, individual remuneration is not disclosed. 6 Policy on Determining Remuneration Amounts and Calculation Methods Established The Company’s policy governing decision-making regarding the contents of compensation, etc., for individual Directors is determined by the Board of Directors. In making these decisions, the Nomination & Compensation – 14 – Committee deliberates and reports its findings to the Board of Directors. The details of Officer compensation, etc., of the Company, determined in accordance with this policy, are as follows. Director compensation of the Company consists of compensation linked to shareholder returns to ensure that the compensation functions effectively as an incentive for achieving sustainable growth and improvement of medium- and long-term corporate value of the Group. The Group’s basic policy is to decide on compensation for individual Directors that is commensurate with their respective duties. Specifically, Director compensation comprises basic compensation (fixed compensation), performance-based compensation, and stock-based compensation. Outside Directors and Corporate Auditors, who are responsible for overseeing functions, are paid only basic compensation in consideration of the nature of their duties. Basic compensation Fixed compensation is paid on a monthly basis. The amount of fixed compensation is decided through comprehensive consideration of positions and duties, taking into account factors such as compensation standards at other companies, the Company’s business performance, and employee salary standards. Performance-based compensation (cash bonuses) Bonuses as cash remuneration reflecting business performance indicators are paid at a given period each year, with the aim of promoting a greater focus on improving business results each fiscal year. The amounts of cash bonuses are calculated based on the level of achievement of consolidated net sales and EBITDA targets for each fiscal year, as well as evaluations performed using the targets set for each individual each year. The consolidated net sales and EBITDA targets are determined from business plans formulated each year, which are based on medium-term management plans, and on publicly announced figures. These targets are revised as necessary upon consultation with the Nomination & Compensation Committee to reflect changes in the business environment. Stock-based compensation (transfer-restricted stock) A standard annual amount is determined by the Board of Directors for each position, and the Company’s common stock equivalent to that amount is granted annually at a given period each year. Transfer restrictions are lifted on the date on which the grantee resigns from the post of both Director and Executive Officer of the Company or the Company’s subsidiary. Compensation composition (the percentages of each type of compensation) is based on compensation standards which use as their benchmark the compensation offered in companies equivalent in scale to the Company and companies in the same business fields or with the same business formats. Performance-based compensation is weighed more heavily for upper level positions and duties. Compensation composition is deliberated by the Nomination & Compensation Committee and their findings are reported to the Board of Directors. The Board of Directors delegates decision-making regarding the details of compensation for individuals (amounts for basic compensation and performance-based compensation) to the President & CEO, within the scope indicated in the report from the Nomination & Compensation Committee. The standard for ratio of compensation by type is as follows: basic compensation : performance-based compensation : stock- based compensation = 6 : 3 : 1 (when performance indicator targets have been met 100%). Position Basic compensation President & CEO Managing Director 58% 62% Performance-based compensation Stock-based compensation 29% 28% 13% 10% To ensure that this decision-making authority is exercised appropriately by the President & CEO, the Board of Directors consults with the Nomination & Compensation Committee regarding the draft proposal for compensation and receives their report. The President & CEO, to whom the aforementioned authority is delegated, then makes decisions on compensation in accordance with the content of this report. With regard to stock-based compensation, the Board of Directors passes resolutions regarding the number of shares to be allocated to individual Directors, based on the report from the Nomination & Compensation Committee. The Board of Directors deems the compensation for individual Directors observe the determination policy, as the amounts of compensation for individual Directors are determined through the above process. [Supporting System for Outside Directors and/or Corporate Auditors] Although there is no dedicated support staff, the outside directors and corporate auditors may coordinate with each division, or request the Corporate Planning Department for assistance. Additionally, the agenda of the Board of Directors’ meetings are submitted in advance and at the Board of Corporate Auditors’ meetings, the status of activities of the standing corporate auditors is reported and information is exchanged. – 15 – 【Status of those who retired from the Top Management, such as President and Representative Director】 Names, etc., of advisors (“sodanyaku,” “komon,” etc.) who have formerly served as Representative Director and President, etc. Name Title/ Position Role/Activity Role/Activity Working Conditions – – – – Date of Retirement from President, etc. – Term – Total number of advisors (“sodanyaku”, “komon”. etc.) who have formerly served as Representative Director and President, etc. – Other items Under the Articles of Incorporation, the Company may be able to entrust its advisors, etc. by a resolution of the Board of Directors, but there is no applicable person at present. 2. Matters on Functions of Business Execution, Auditing, Oversight, Nomination and Remuneration Decisions (Overview of Current Corporate Governance System) (1) Board of Directors ・ The Board of Directors of the Company, as a decision-making body of the company’s management, resolves legal matters and determines and approves the basic policies of management and important matters in business. ・ The Board of Directors is composed of seven directors (four internal directors and three outside directors). ・ The Board of Directors is chaired by the Representative Director and President, and in principle will be held once a month, and extraordinary meetings will be held as necessary. We have a system that can make prompt and accurate management decisions. The Board of Directors has been held 20 times, including written resolutions in fiscal 2020. ・ Also, the Board of Directors is positioned as the highest decision-making body of the Group, and important decisions concerning Group companies are made through the Board of Directors with overall group-wide control. ・ The Representative Director & President reports monthly about the specific job execution status. ・ The Company has entered into a contract to limit liability for damages under Article 423, Paragraph 1 of the Companies Act, with the Outside Directors, based on Article 427, Paragraph 1 of the Companies Act, the liability is limited to the minimum liability amount stipulated in Article 425, Paragraph 1 of the Companies Act. (2) Executive Officers’ meeting ・ We have introduced an executive officer system to achieve flexible business execution by separating the decision-making and supervisory functions from the business execution. ・ The Board of Directors has appointed 15 executive officers (including 4 concurrent directors) and adopted a management form that in which executive officers fulfill their roles and responsibilities as supervisors of business execution. ・ The Executive Officers’ Meeting deliberates on important items in detail in order to comprehensively coordinate and unify the execution of business operations. ・ The Executive Committee is chaired by a representative executive officer and is held monthly before the Board of Directors. The Executive Officers’ Meeting has been held 12 times in fiscal 2020. (3) Board of Corporate Auditors ・ The Board of Corporate Auditors strictly supervises and audits on directors’ execution of duties, conducts direct hearings from directors, browses important documents, etc., and broadly examines the adequacy, efficiency, etc. of directors’ business execution, and the board of directors Also, the Board of Corporate – 16 – Auditors attends important meetings such as the Board of Directors and Executive Officers’ Meetings and expresses their opinions. ・ The Board of Corporate Auditors consists of one standing statutory auditor and two outside corporate auditors. ・ The Board of Corporate Auditors holds meetings of the Board of Corporate Auditors, and examines the audit plan formulated by the Board of Corporate Auditors, the implementation status of audits, and audit results. The Board of Corporate Auditors has been held 11 times in fiscal 2020. ・ The Company has entered into a contract to limit liability for damages under Article 423, Paragraph 1 of the Companies Act, with the Outside Corporate Auditors, based on Article 427, Paragraph 1 of the Companies Act, The liability is limited to the minimum liability amount stipulated in Article 425, Paragraph 1 of the Companies Act. (4) Internal audit ・ ・ In our company, the Internal Audit Office has been established as an organization dedicated to internal audits under the direct control of the Representative Director and President, and has four members. In order to streamline management and improve operations, the Internal Auditing Office conducts audits based on the annual plan and compliance with the Company and the Group’s internal control status regarding financial reporting and various standards of various executive activities regarding the company’s management, overall management of business operations, and requests for improvement. ・ The audit results by the Internal Audit Office are shared with the accounting auditor and the corporate auditor, and the audit results by the accounting auditor are also received quarterly by the Internal Audit Office. The audit results of the corporate auditors and the internal audit results are also fed back to the General Administration Department and Legal Affairs Office, which are the internal control department, and lead to a review of internal control rules by the both departments. (5) Status of accounting audit ・ The certified public accountants who executed accounting audit services in the fiscal year ending March 2020 are Mr. Junji Ichihara and Mr. Mamoru Honda, who belong to PricewaterhouseCoopers Arata LLC. In addition, there are 4 certified public accountants and 17 others involved in audit work. (6) Contents of audit fee etc. ・ The Company’s audit corporation is PricewaterhouseCoopers Arata LLC. ・ Contents of audit fee for audit certified public accountants Compensation based on audit certification work for the Company: Compensation based on non-auditing work for the Company: (The contents of non-auditing work at the Company are mainly advisory work regarding revenue recognition） 59 million yen 8 million yen ・ Contents of audit fee for the same network as PricewaterhouseCoopers Arata LLC. Compensation based on audit certification work: (the Company) 58 million yen / (consolidated subsidiaries) 91 million yen Compensation based on non-auditing work: (the Company) 1 million yen / (consolidated subsidiaries) 13 million yen (The contents of non-auditing work at the Company and consolidated subsidiaries are mainly tax advisory work） ・ Policy for determining audit fees In determining the audit fee, it is determined in consideration of factors such as the number of audit days, the size of the Company, and the characteristics of the business. 3. Reasons for Adoption of Current Corporate Governance System We have selected the framework of a company with a Board of Corporate Auditors as an optimal corporate governance system for practicing management based on our corporate philosophy. The Company judges the framework of a company with a Board of Corporate Auditors is the most suitable form of business governance for the Company at this time. – 17 – III. Implementation of Measures Regarding Shareholders and Other Stakeholders Early Notification of General Shareholder Meeting 1. Measures to Vitalize the General Shareholder Meetings and Smooth Exercise of Voting Rights Supplementary Explanations The Company makes every efforts to dispatch the convocation notice of its General Shareholder Meeting about 3 weeks prior to a meeting and its early disclosure on Website of the Company and the Tokyo Stock Exchange. The Company’s policy is to hold the Ordinary General Meeting of Shareholders, by avoiding the concentration day of the Ordinary General Meeting of Shareholders. The General Meeting of Shareholders in 2021 was held on June 22nd. We have made it possible to exercise