Kyosan Electric Manufacturing : Corporate Governance Report (243KB）NEW!

Corporate Governance Report

Last Update: December 13, 2021

Kyosan Electric Manufacturing Co., Ltd.

Tokodai Tsutomu Representative Director, President, CEO Contact: Fukaya Shigeyuki, General Manager of General Affairs Dept. Phone: [phone] Securities Code: 6742 https://www.kyosan.co.jp/english/

The corporate governance of Kyosan Electric Manufacturing Co., Ltd. (the "Company") is described below.

I. Basic Approach to Corporate Governance, Capital Structure, Corporate Profile, and Other Basic Information

1. Basic Approach

The Company believes that excellent governance means operating businesses that enhance the corporate value of the Company for all stakeholders, through fair and open businesses managed from a long-term perspective as a going concern that balances both environmental and social considerations, while aiming to maximize shareholder value. Based on this principle, we strive to establish healthy and functional corporate governance, and to build a corporate ethics system that ensures the transparency and soundness of corporate activities.

We believe that strengthening corporate governance will contribute to the sustainable growth of a company and the improvement of medium- to long-term corporate value. We strive to practice management that improves our corporate value by building a positive relationship with all stakeholders through further enhancing the roles and responsibilities of the Board of Directors, etc., and through the proper disclosure of information and active dialogue with shareholders.

Reasons for Non-compliance with the Principles of the Corporate Governance Code

[Supplementary Principle 1.2.4: Exercise of Shareholder Rights at General Meetings of Shareholders] Updated

The Company equally values foreign shareholders. The Notice of Convocation and Reference Documents for the General Meeting of Shareholders are translated into English and disclosed promptly on the Company's website.

(Notice of Convocation of General Meeting of Shareholders (English version): https://www.kyosan.co.jp/english/ir/stock02.html)

In order to create a favorable environment for the exercise of voting rights, the Company has introduced a system for the electronic exercise of voting rights from the 156th Ordinary General Meeting of Shareholders held on June 18, 2021 (Friday). The Company will introduce a platform for the electronic exercise of voting rights from the 157th Ordinary General Meeting of Shareholders scheduled for late June, 2022.

[Principle 2.4.1: Ensuring Diversity within the Company, Including the Promotion of Women's Social Advancement] Updated

The Company does not base decisions on managerial appointments on factors such as gender, nationality or years of service. It determines managerial appointments through a multifaceted, objective evaluation, with reference to an assessment by a specialist agency of candidates' suitability for promotion to a managerial role, based on recommendations from their supervisors.

In addition to expanding and enhancing its existing policy of recruiting women and foreign nationals through graduate recruitment, which has been its focus until now, the Company will promote measures to ensure diversity through the active mid-career recruitment of experienced personnel. This will also provide the Company with the immediate resources to respond to the rapid technological innovation seen in recent years. The Company has set forth the "promotion of diversity" as part of its approach to CSR. It has established and publicly announced goals for the proportion female managers and the proportion of female graduate

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recruitments, and will engage in supporting career development and maintaining the working environment, in order to ensure the diversity of core human resources.

In terms of personnel development policies to ensure diversity, the Company will promptly establish and implement systems such as global personnel training aimed at securing employees who can succeed on the global stage, and diversity training focusing on women.

[Principle 3.1.3: Full Disclosure] Updated

The Company is currently formulating a new medium-term management plan beginning from April 2022 (hereinafter referred to as the next medium-term management plan). The next medium-term management plan will clearly state policy initiatives and detailed measures that the Company will implement, primarily its approach and initiatives related to its own sustainability, but also regarding issues such as investment in human capital and intellectual property. The Company has also determined to analyze the impact on its business activities from the risks and profit opportunities associated with climate change, clearly identify necessary and effective initiatives as issues to be addressed under the next medium-term management plan, and implement these initiatives. It will provide timely and appropriate disclosure of these efforts.

[Principle 4.2.2: Roles and Responsibilities of the Board of Directors (2)] Updated

The Company's Board of Directors has determined that the establishment of a Basic Policy and Strategy concerning the Company's sustainability is indispensable from the viewpoint of improving medium- to long- term corporate value. Under the next medium-term management plan beginning from April 2022, the Company will identify and engage in these as important management issues for company-wide strategy.

Moreover, under the next medium-term management plan, the Company will evaluate each business segment to implement the effective allocation of management resources.

[Principle 5.2.1: Formulation and Disclosure of Management Strategy and Management Plans] Updated The Company is currently formulating a new medium-term management plan beginning from April 2022, and will disclose its basic policies as it assesses the future business environment, etc. in terms of factors such as the status of profit, loss, income and expenditure for each business portfolio, as well as the validation of capital productivity.

Disclosure Based on the Principles of the Corporate Governance Code [Principle 1.4: Cross-Shareholdings] Updated

1. Policy on cross-shareholdings of listed companies

With respect to cross-shareholdings deemed necessary for the Company's sustainable growth and increase of corporate value for the medium to long term, through creating business opportunities and maintaining and strengthening business transactions and procurement partnerships, the Board of Directors determines each year if cross-shareholdings are appropriate or not on a case-by-case basis from viewpoints such as benefits and risks associated with cross-shareholdings, and whether the capital cost of such shareholdings is justifiable. In addition to the Company's own decisions on shareholdings, it will also endeavor to reduce cross- shareholdings through dialogue with the companies it invests in.

2. Standards for determining if cross-shareholdings are appropriate or not

The Company calculates the overall yield of each stock based on trading profit and the amount of annual dividends as of the end of each fiscal year, and compares the results with the weighted average capital cost. If the overall yield of a stock is lower than its weighted average capital cost, the Company will determine whether to continue to hold that stock, taking account of the medium- to long-term outlook for the share price and other factors.

3. Standards for exercising voting rights associated with cross-shareholdings

The Company exercises its voting rights associated with cross-shareholdings according to the following standards.

1. Voting rights are to be exercised for all proposals in principle.
2. The Company makes a decision on whether to approve or disapprove each proposal upon consideration of operations and management of each issuing company while paying respect to its management policies.
3. With regard to proposals that may affect the corporate value of the Company or common interests of shareholders, the Company decides whether to approve or disapprove proposals upon confirmation of
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the objective of such proposals and the perspective on the improvement of corporate value through individual dialogues.

The Company addresses issues of cross-shareholdings in accordance with the aforementioned "1. Policy on cross-shareholdings of listed companies," "2. Standards for determining if cross-shareholdings are appropriate or not" and "3. Standards for exercising voting rights associated with cross-shareholdings."

[Principle 1.7: Related Party Transactions]

In principle, the Company carries out a legal review on related party transactions, if any, followed by a consultation at the Board of Directors' meeting with the official involved in such transactions excluded from its quorum as a party with special interest, thereby it examines the appropriateness of such transactions.

[Principle 2.6: Roles of Corporate Pension Funds as Asset Owners]

The Company has a defined benefit corporate pension plan in place, where management of its fund is outsourced to a dedicated asset manager. Meanwhile, the Company, as appropriate, provides the managers of the department in charge of the pension plan with the opportunities to receive an explanation from the asset manager, in order to enhance its function as the asset owner, in an effort to ensure development of internal personnel in this area.

[Principle 3.1: Full Disclosure] Updated

1. The Company has disclosed in "KYOSAN VISION" that its corporate philosophy is "Based on the themes of 'Safety and Reliability' and 'Global Environment Conservation,' we will contribute to 'the development of society and a better quality of life' with our advanced technologies and high-quality assurance," the details of which have been made public through the Company's website. Please refer to the following.
   (Philosophy: https://www.kyosan.co.jp/english/company/vision.html)
   The Company has also formulated its medium-term management plan and outlook for the current fiscal year, and the details of which have been made public through the Company's website. Please refer to the following.
   (Medium-term management plan: http://contents.xj- storage.jp/xcontents/67420/13974b03/dc24/4be6/a83f/14f4b84ac10c/140120180511435564.pdf)
2. The Company's basic approach to corporate governance is disclosed in its Corporate Governance Report. For details, please refer to "I. 1. Basic Approach" in the Report.
3. Policies and procedures in determining Directors' remuneration by the Board of Directors are disclosed in the Company's Corporate Governance Report. For details, please refer to "Remuneration for Directors" in "II. 1. Organizational Composition and Operation" in the Report.
4. On the appointment and dismissal of senior management and nomination of candidates for Director, the Board of Directors resolves such issues based on the judgement by Directors on the basis of their skills and qualifications deemed suitable to fulfill their respective roles, with reference to reports by the Nomination and Remuneration Committee.
   The basic qualifications, skills, and other qualities required in the selection of candidates for Director are as follows.
5. • Is fit in mind and body to fulfill duties as Director
   • Possesses integrity, high ethical values, and a strong sense of responsibility
   • Possesses a high degree of compliance awareness, in terms of the sound management of a listed company and the establishment of substantial corporate governance
   • Aims for the sustainable growth of the Company and the improvement of corporate value by contributing to local communities, clients, suppliers, shareholders, and other stakeholders
   • Has no special interests that may influence the Company's management decisions
   • Is able to actively express his/her own opinion from a company-wide perspective
   • Is subject to none of the reasons for disqualification from serving as a director prescribed under Article 331, Paragraph 1 of the Companies Act
   • For internal Directors, possesses the experience and ability to contribute to the Company's management and businesses
   • For Outside Directors, possesses useful career experience to contribute to improving medium- to long- term corporate value; specifically, possesses expert knowledge and experience in fields such as management, finance, accounting, law, government administration, and technical development
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Regarding the dismissal of Directors, if either the Board of Directors or the Nomination and Remuneration Committee determines that a Director may not fulfill the criteria for the appointment listed above, the Nomination and Remuneration Committee, either on request from the Board of Directors or of its own initiation, will deliberate on whether or not the Director should serve to the end of his/her present term of office, and report to the Board of Directors on the results of this deliberation. Should the Board of Directors determine, with reference to the report of the Nomination and Remuneration Committee, that the aforementioned Director should not continue to serve in the office of director, then it will dismiss the Director.

The nomination of candidates for Audit & Supervisory Board Member, who are endorsed by Representative Directors, is subject to resolutions of the Board of Directors upon obtaining the consent of the Audit & Supervisory Board.

1. The agenda relating to the appointment and dismissal of senior management is determined by the Board of Directors after deliberation at the Nomination and Remuneration Committee, which is an advisory body of the Board of Directors, and an explanation of reasons for the nomination of each candidate is contained in Reference Documents for the Ordinary General Meeting of Shareholders.

[Supplementary Principle 4.1.1: Roles and Responsibilities of the Board of Directors (1)]

In addition to matters stipulated by laws and regulations and the Articles of Incorporation, the Board of Directors of the Company deliberates, approves and makes decisions on matters stipulated by the Board of Directors' Regulations.

Furthermore, the Board of Directors of the Company delegates matters related to business execution other than matters to be deliberated that are stipulated by the Board of Directors' Regulations to each Director and Executive Officer within the scope of administrative authority of Directors and Executive Officers.

[Supplementary Principle 4.3.2: Roles and Responsibilities of the Board of Directors (3)] Updated

In addition to the basic qualifications, skills, and other qualities required in the selection of candidates for Director, listed above, the Company has established the following policy on the appointment of the President, CEO.

Qualifications, abilities, leadership, and other qualities:

• Understands the Company's corporate philosophy and management objectives, and will lead in their implementation to achieve the Company's corporate vision
• Is deeply familiar with the Company's businesses, and can contribute to creating a rich society where people can live in safety and security
• Constantly strives to undertake new challenges and engage in innovation, and aims to make the Company a truly global corporation
• Prioritizes quality-first manufacturing above all else
• Is constantly risk-aware, and is able to take appropriate decisions and responsible actions against actual and potential risks
• Has an open mind, and personally takes the lead in consensus-forming within the Company
• Possesses the charisma, intelligence, and integrity to make an impression on the organization

The Company has also established a successor development plan with future nomination as President, CEO in mind. The operational status and results of this plan are discussed and assessed each fiscal year by the Board of Directors. The Board of Directors then compares the details of the plan with the criteria for the appointment of a President, CEO listed above, and decides on the President, CEO with reference to information such as the opinion of the Nomination and Remuneration Committee.

[Principle 4.3.3: Roles and Responsibilities of the Board of Directors (3)] Updated

If either the Board of Directors or the Nomination and Remuneration Committee determines that the President, CEO may not fulfill the criteria for the appointment listed above, or if the President, CEO is deemed not to be fulfilling his/her function, or if serious doubts have arisen over corporate governance due to a social scandal or other cause, or if the Company's business performance has markedly deteriorated, then the Nomination and Remuneration Committee, either on request from the Board of Directors or of its own initiation, will deliberate on whether or not the President, CEO should continue to serve in that office, and report to the Board of Directors on the results of this deliberation. Should the Board of Directors determine, with reference to the

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report of the Nomination and Remuneration Committee, that the President, CEO should not continue to serve in that office, then it will dismiss the President, CEO.

[Principle 4.9: Independence Standards and Qualifications for Independent Outside Directors]

In the selection of candidates for Outside Directors, the Company has its own standards, namely, whether they meet the requirements for Outside Directors stipulated by the Companies Act and the independence criteria prescribed by the Tokyo Stock Exchange, and whether they are qualified as a specialist with professional knowledge required for corporate management, have experience in corporate management, or have equivalent skills. In addition, the Company selects individuals, who are deemed to have the potential to fulfill duties as Outside Director of the Company by leveraging their broad and professional insight, as independent Outside Director candidates.

[Principle 4.10.1: Use of Voluntary Structures] Updated

The Company has established the Nomination and Remuneration Committee, comprising a majority of Independent Outside Directors, as an advisory body of the Board of Directors. The Nomination and Remuneration Committee considers especially important matters concerning issues such as nomination and remuneration, and receives appropriate involvement and advice from Independent Outside Directors.

The Company has disclosed that its Nomination and Remuneration Committee is composed of a total of four members: three Independent Outside Directors and one internal Director. This composition, with the Chairperson appointed from among the Independent Outside Directors, ensures that independence is fully assured. The Board of Directors considers reports and advice received from the Nomination and Remuneration Committee as an important input in its deliberation and resolutions.

[Supplementary Principle 4.11.1: Preconditions for the Board of Directors and Audit & Supervisory Board Effectiveness] Updated

The Board of Directors of the Company consists of Directors who are familiar with respective operating and administrative divisions, and independent Outside Directors who satisfy independence criteria stipulated by the Companies Act and prescribed by the Tokyo Stock Exchange as well as the Company's own standards. When appointing Directors, in addition to using a skills matrix to determine candidates, the Company also discloses a skills matrix as a reference document for proposals for the appointment of Directors at the General Meeting of Shareholders. Please refer to the Company's website for details.

(Notice of Convocation of the General Meeting of Shareholders: https://www.kyosan.co.jp/english/ir/stock02.html)

[Supplementary Principle 4.11.2: Preconditions for the Board of Directors and Audit & Supervisory Board Effectiveness]

Directors and Audit & Supervisory Board Members may concurrently serve other significant positions to the extent reasonable, and the status of concurrent positions is included in the disclosure documents, such as Reference Documents for the General Meeting of Shareholders and Business Reports.

(Notice of Convocation of the General Meeting of Shareholders: https://www.kyosan.co.jp/english/ir/stock02.html)

[Supplementary Principle 4.11.3: Preconditions for the Board of Directors and the Audit & Supervisory Board Effectiveness]

Based on the opinions from Directors and Audit & Supervisory Board Members, the Company strives to improve the method of operation and agenda items of the Board of Directors' meetings in order to enhance the effectiveness of the Board. The Company also conducts an anonymous survey of the Directors and Audit

• Supervisory Board Members in relation to the Board of Directors aimed at further securing and improving the effectiveness of the Board.
  By conducting an evaluation by the Board of Directors based on aggregation and analysis of the results of the survey, a certain degree of positive evaluation has been given to the effectiveness of the Board. Efforts to secure and improve the effectiveness of the Board of Directors will be continuously implemented.

[Supplementary Principle 4.14.2: Director and Audit & Supervisory Board Member Training]

The Company encourages Directors and Audit & Supervisory Board Members to participate in classes hosted by the Company's departments in charge or external specialists, external seminars and other programs, as

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