ＬＩＸＩＬ（5938） – Corporate Governance Report

Corporate Governance Corporate Governance LIXIL Corporation Last updated: May 27, 2022LIXIL CorporationKinya Seto, Director, Representative Executive Officer, President, and Chief Executive OfficerContact: IR Office 03-6706-7001Securities code: 5938https://www.lixil.com/en/investor/The corporate governance system at LIXIL Corporation is described below. I. Basic Philosophy Regarding Corporate Governance, and Other Basic Information Regarding Corporate Profile and Capital Structure 1. Basic Views Updated LIXIL Corporation (the “Company”) constantly strives to build the best possible corporate governance system needed to realize its belief that publicizing and implementing its management philosophy throughout the Company and all of its subsidiaries and affiliates (the “Group”) will enable it to achieve the maximum sustainable improvement of corporate value. The following is the Company’s Management Philosophy. (1) LIXIL’s Purpose Make better homes a reality for everyone, everywhere (2) LIXIL Behaviors Do the Right Thing Work with Respect Experiment and Learn The Group has adopted the following fundamental framework and has undertaken initiatives to strengthen and enhance corporate governance in order to maintain the Group’s standing as a corporate group that inspires confidence through the creation and provision of attractive value to its stakeholders. (1) Company with Nomination Committee, etc. The Company has adopted the governance format of a “Company with Nomination Committee, etc.” with the aim of clearly separating its executive and supervisory functions, thereby enabling executive officers to make swift and decisive business decisions and ensuring management transparency. (2) Enhancement of Functions by Utilizing Discretionary Organs In addition to the three committees (the Nomination Committee, the Audit Committee and the Compensation Committee) which are legally required of a “Company with Nomination Committee, etc.”, the Company has established the Governance Committee as a voluntary permanent committee to continuously strengthen the Company’s corporate governance. As for the other governance systems, the Company has established the Board of Executive Officers and voluntary committees. (Refer to the Corporate Governance Structure at the end of the document.) (3) Implementation of a Uniform Corporate Governance System Across the Entire Group By setting forth the LIXIL Behaviors and the LIXIL Code of Conduct, and group-wide financial and accounting management policies, having the entire Group comply therewith, and carrying out integrated education and training for directors, executive officers and employees as well as uniform implementation of – 1 – a compliance system, Group, the Company shall strive to cause its corporate governance permeate to the entire globalized corporate group. [Reasons for Non-compliance with Certain Principles of the Corporate Governance Code] The Company has implemented each principle of the Corporate Governance Code. [Disclosure Based on the Principles of the Corporate Governance Code] Updated Because the LIXIL Corporate Governance General Policy (the “General Policy”) contain provisions with regard to many of the disclosure items below, a note has been added referring to the related provision in the General Policy. https://www.lixil.com/en/about/governance/pdf/CorporateGovernanceGuideline20211129.pdf [Principle 1-4 Cross-Shareholdings] The Company holds shares on a cross-shareholding basis only in a case where it has been recognized to be necessary in order to facilitate sales or as part of an alliance necessary for its business activities. Under Article 9 of the General Policy “Cross Shareholdings”, based on the stipulated process, each year, for each share name, the Company will comprehensively evaluate cross-shareholdings from a quantitative and qualitative perspective in respect of whether the purpose of holding is appropriate, whether the capital cost matches the benefits and risks of the holding, whether there is any future risk as a result of sale, etc., and promptly dispose by sale in the case where it is not needed, and strive to reduce cross-shareholdings. Also, in exercising voting rights of such shares, the Company will make a full consideration from the point of view of whether it contributes to improving value over the mid to long-term of the Group and the invested company, etc., and with respect to resolutions that may violate the goal for such holding and resolutions that may harm shareholder value, the Group shall carefully determine whether to support or oppose after discussion with such company as needed and then exercise the voting rights. [Principle 1-7 Related Party Transactions] As for the procedures and framework for related party transactions by the Company’s officers, “Rules of the Board of Directors” stipulates that all related party transactions are required to be approved by the Board of Directors. In addition, “Rules of the Board of Directors” provides that criteria to follow for each transaction explicitly and systems to prevent related transactions executed to benefit himself or herself or the third party, impairing shareholders common interests (Article 11 of the General Policy “Related-Party Transactions”). [Supplementary Principle 2-3① Sustainability Issues, Including Social and Environmental Matters]The Company’s Board of Directors proactively works with execution departments to understand important issues and efforts regarding sustainability, such as environmental, social and governance problems, and to consider countermeasures. and set forth its strategy and policy (Corporate Responsibility (CR) Strategy (CR Policy)) in terms of raising medium- to long-term corporate value. The Company’s corporate purpose is to make better homes a reality for everyone, everywhere. To fulfill that aim, the Company pursues responsible and sustainable innovation and develops safe and comfortable products and services based on the Group’s CR Strategy. The CR Strategy forms an essential part of the Group’s ambition to achieve sustainable growth and corporate value creation in that it is deeply linked to the Group’s core business strategy, material issues, and the Value Creation Process (VCP), through which the Group creates value for all of its stakeholders. The CR Strategy outlines three core pillars of activity where the Group will use its unique expertise and business operations to drive positive change on global issues that require urgent action: Global Sanitation & Hygiene, Water Conservation & Environmental Sustainability, and Diversity & Inclusion. In pursuing the CR Strategy, the Group ensures that its business activities are built on a fundamental commitment to ethical business practices in the areas of governance, fair business practices, human rights, labor practices, quality and customer satisfaction, supply chain, and stakeholder engagement. – 2 – The departments in charge regularly report to the Board of Directors on the status of promoting the CR Strategy, and the Board of Directors supervises the implementation of these activities through discussions on the understanding of material issues and consideration of countermeasures. [Supplementary Principle 2-4① Ensuring Diversity, Including Active Participation of Women] The Company is going through a transformation to become a more agile and entrepreneurial organization. Under the belief that diversity and inclusion (D&I) enhances the Company’s long-term performance and competitiveness, D&I is set forth as one of the three strategic pillars of Corporate Responsibility. The Company updated its D&I Strategy and targets in 2021 to ensure that D&I is embedded across the organization. The following are the D&I strategy targets for 2030. • 50:50 gender ratio for Directors and Executive Officers (female ratio: 26.7% as of March 2022) • 30% female leaders across the organization (female ratio: 15.6% as of March 2022) • Maintaining equal gender ratio for all new graduate hires in Japan of the Company (female ratio: 53.8% as of March 2022) The Company considers the gender gap in management-level as an issue and therefore has set gender ratio targets as described above. On the other hand, the Company does not set or disclose management-level targets based on nationality or hiring period at this time, as there has not been a significant gap relative to the gender gap. That said, the Company’s D&I Strategy focuses on Inclusion as the Goal with the hypothesis that if the Company becomes a more inclusive workplace, it will strengthen diversity including for other under-represented groups. The Global People Organization (GPO) is enabling the Company’s transformation, and achieving the 2030 D&I targets is one of the main pillars of its strategy. Key initiatives include improving the hiring and promotion processes by designing policy and processes to remove bias and rolling out education programs for employees, managers and executives to help them understand and embed in their actions D&I concepts and behaviors. In addition, the Company launched global Employee Resource Groups (ERGs) in the fiscal year ended March 2021 to support diverse community groups within the Company. The Company’s inclusiveness will be monitored by employee surveys conducted two times a year. The whole D&I transformation process is supervised by D&I Committee, chaired by CEO Kinya Seto, to ensure top-level business commitment. [Principle 2-6 Roles of Corporate Pension Funds as Asset Owners] Under the LIXIL Pension Fund in which the Company participates, the goal is to ensure long-term overall profits within the scope of allowable risks, in order to undertake properly payments of pension and bonusesin the future under management of the pension assets. The management policy for such purpose is based on analysis of the risk/return for each managed asset and plan for diverse investments considering synergies among each of the managed assets. In detail, while setting up a strategic asset composition ratio that matches the efficiencies of each shares, bonds, and other managed assets, select appropriate management operators in line with that, and conduct investments and evaluations in a flexible manner. Also, in considering the selection, evaluation, etc., of management operators and decisions of investment policy for these pension assets, LIXIL Pension Fund shall consult an asset management committee whose committee members are Management Execution Directors from the LIXIL Pension Fund with expert ability and opinions. For the LIXIL Pension Fund, a report is submitted by the management operator every month regarding the asset management and investment status, and at least once every quarter a report of management results is received directly from the person in charge. [Principle 3-1 Full Disclosure] Article 38 “Basic Policy Regarding Information Disclosure” and Article 39 “Methods of Disclosure” of the General Policy stipulate disclosure methods and the Company’s fundamental policy regarding information disclosure. For the Company’s Disclosure Policy, please refer to the following page on the Company’s website: https://www.lixil.com/en/investor/strategy/policy.html – 3 – (i) Company Philosophy, Management Strategy, and Management Plan The Company’s philosophy is set forth in Article 3 of the General Policy. As for the management strategy, the Group is steadily promoting major policies based on the four pillars of the medium-term plan. [The Four Pillars of the Medium-Term Plan] 1. Establish a purpose-driven entrepreneurial company for sustainable growth In order to build an environment that enables us to respond quickly to changes, the Group is transforming its organizational culture. We will foster a more agile and empowered organizational culture that encourages employees to exercise their entrepreneurial spirit, to actively exchange opinions and to engage in experimental initiatives. We also aim to create an environment in which employees can respect each other, be stimulated by greater collaboration, and work with enthusiasm, and to become a company in which employees can be united through the achievement of ambitious goals which are Purpose-driven and socially meaningful. 2. Develop attractive and differentiated products The Group has strong brands that correspond to diverse lifestyles, needs and preferences. By investing in these brands and strengthening the DNA that is the essence of these brands, the Group seeks to achieve profitable growth. In addition, we will further pursue innovation, design and quality improvements to meet changes in consumers’ needs and preferences. In addition, we will shift to the “Asset-Light” business model so that we will be able to have a strong intellectual property base for product development and bring differentiated products to market in a short cycle, and review our domestic organizational structure to improve the speed of the product development cycle by integrating product development, production and sales functions into one organization. 3. Achieve competitive costing The Group will use new technologies and infrastructure to create an efficient and flexible supply chain management system, and improve cost control, for the improvement of its balance sheet and profit margins. In addition, the Group will improve cost efficiency through measures such as improving productivity in back-office departments and redeploying personnel to departments that need them. 4. Strategic marketing to drive growth The Group will expand its interactions with end users and influencers such as contractors, designers and builders’ offices. In addition, through the promotion of various services such as online showrooms, we will create new demand for remodeling in Japan by eliminating end users’ concerns about the barriers to reform. (ii) Basic Philosophy and Policy with Respect to Corporate Governance This is set forth in Article 1 “Purpose”, Article 3 “Corporate Management Philosophy” and Article 4 “Basic Corporate Governance Framework” of the General Policy, and in the section entitled “I -1. Basic Views” of this report. (iii) Procedures and Policies Regarding Determination of Compensation for Directors and Executive OfficersAs a “Company with Nomination Committee, etc.”, the Compensation Committee follows the policies set forth below in “Disclosure of Policy on Determining Remuneration Amounts and Calculation Methods” in deciding the compensation of executive officers and directors (Article 28 of the General Policy“Compensation Policy”). (iv) Procedures and Policies Regarding Determination of Director Candidates and the Removal of Directors, and the Election and the Removal of Executive Officers As a Company with Nomination Committee, etc., in deciding upon the candidates for director seats, the Nomination Committee will apply the Company’s own criteria (Article 25 of the General Policy “Policy for Nomination of Director Candidates and Removal of Directors”) while considering not only the individual qualities of director candidates but also the appropriate composition of the Board of Directors. Criteria regarding the election, appointment, removal, and dismissal of executive officers and Representative Executive Officer are set forth in Article 26 of the General Policy “Policy for Appointment, Election, Removal and Dismissal of Executive Officers and Representative Executive Officer”, and criteria regarding the appointment and dismissal of CEO are set force in Article 27 of the General Policy “CEO Succession Plan and Basic Policy on Selection and Dismissal of CEO”. When independent outside director candidates are – 4 – decided, the Company’s own independence criteria will be used, as set forth in Article 31 of the General Policy“Independence Criteria”. (v) Explanation of Each Election and Removal The reasons for the election of independent outside directors are as set forth below, and the reasons for the nomination and expected roles of other directors are also disclosed on the Company’s website. https://www.lixil.com/en/about/board/reason.html The Company also discloses the reasons for election of executive officers on its website. https://www.lixil.com/en/about/board/reason_exec.html In case of the removal and dismissal of executive officers and Representative Executive Officer, the reasons for that removal and dismissal shall be clearly specified on the Company’s website. Those disclosures are carried out in accordance with paragraphs 6 and 7 of Article 26 “Policy for Appointment, Election, Removal and Dismissal of Executive Officers and Representative Executive Officer” of the General Policy. [Supplementary Principle 3-1③ Disclosure of Sustainability Efforts When Disclosing Management Strategies] The Group aims to contribute to society through ESG (Environment, Social, Governance) initiatives, and has continuously engaged in global issues by utilizing the technology and knowledge cultivated in the Group. The Group identifies the most urgent social issues relevant to the regions in which the Group operates and to which it can contribute through its expertise and business operations, and promotes priority measures based on the CR Strategy to resolve these issues. Contributing to society through business activities is firmly in line with the Company’s purpose and CR strategy, and is extremely important not only to bring benefits to society, but also to enhance the long-term sustainability of the Group. The Group focuses on the three pillars of its CR Strategy: Global Sanitation & Hygiene, Water Conservation & Environmental Sustainability, and Diversity & Inclusion, and in addition, aims to realize the Company’scorporate purpose through “A Strong Governance Foundation”. 1. Global Sanitation & Hygiene Two billion people, or about one-quarter of the global population, live without access to safe and sanitary toilets. Among them, 670 million people regularly defecate in the open. Unsanitary living conditions threaten the health and wellbeing of people, and diarrheal diseases caused by issues related to hygiene account for the deaths of approximately 700 children under the age of five every day. The Group is tackling the sanitation crisis by tailoring solutions to local needs. SATO sanitation and hygiene products have been developed for rural and peri-urban areas in developing economies. To date, over 5.1 million SATO toilet units have been shipped to more than 38 countries, improving access to basic sanitation for more than 25 million people. Our initiatives in sanitation and hygiene have been widely recognized, such as with the Deputy Chief Award by the Foreign Minister at the 2nd Japan SDGs Award. The Group aims to improve sanitation and hygiene of 100 million people by 2025. 2. Water Conservation & Environmental Sustainability Based on LIXIL Environmental Vision 2050, through business processes, products, and services, the Group aims to reduce CO2 emissions from its business processes, products, and services to net zero and to be a leader in the field of preserving water and limited resources for future generations. The Group has joined RE100, a global initiative for corporations adopting 100% renewable energy in its operations by 2050, and eight international fittings plants achieved net zero emissions by October 2020. The Group plans to renew all window product series in Japan with high performance window which has strong thermal insulation performance by the fiscal year ending March 2026. On the other hand, with the aim for realizing a circular economy, the Company introduced its first Gold level certified “Cradle to Cradle