Tokai Carbon : Corporate Governance Report (as of March 29, 2017)

Corporate Governance Report ‌‌‌‌‌‌‌‌

Last Update: March 29, 2017

Tokai Carbon Co., Ltd.

Hajime Nagasaka, President and CEO

Contact: [phone]

Securities Code: 5301 http://www.tokaicarbon.co.jp/

The corporate governance of Tokai Carbon Co., Ltd. (the "Company") is described below.

I. Basic Views on Corporate Governance, Capital Structure, Corporate Profile and Other Basic Information‌‌

1. Basic Views‌

   Tokai Carbon recognizes that enhancing the corporate value over the mid-to-long term is the most important management objective and believes that responding to the expectations of all stakeholders, including customers and shareholders, and building favorable relationships with them, is essential in achieving this objective. To this end, the Company sets forth its basic corporate philosophy, "Ties of Reliability." Based on this philosophy and taking into account the views defined in its Guidelines and the TOKAI CARBON Code of Ethics, the Company strives to develop an effective corporate governance structure.

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

   The Company recognizes that it puts into practice all principles of the Corporate Governance Code.

   [Disclosure Based on the Principles of the Corporate Governance Code]‌‌

   [Principle 1-4]

2. The Company's policy is to acquire and own shares of business partners, etc. only when it judges that it can increase its corporate value in the mid-to-long term through creating and maintaining business opportunities and building, maintaining and reinforcing business partnerships and collaborative relationships.‌

   In regard to the appropriateness of major shareholdings, the Company appoints the responsible department, performs analyses on the significance of acquisition/holding, profitability, risks associated with holding, and other factors, and periodically verifies appropriateness from company-wide and strategic standpoints at meetings of the Management Committee and the Board of Directors.

3. In regard to the voting rights of investee companies, judgment on the exercise of voting rights is made from the perspective of increasing corporate value of the Company and the respective companies in the medium-to-long term.

   [Principle 1-7]

   With respect to the competitive transactions and conflict of interest transactions of Directors, the Company's policy is to have the Board of Directors deliberate such transactions in advance in accordance with relevant laws and regulations and the Rules of the Board of Directors. As for the transactions approved, the results are reported to the Board of Directors

   [Principle 3-1]

4. Company objectives (e.g., business principles), business strategies, business plans

   The Company's corporate philosophy is "Ties of Reliability". It believes in the importance of trust between Tokai Carbon and our stakeholders (as represented by customers, shareholders, employees, and society). This idea of mutual reliability, which is based on common values shared with our stakeholders, is

   the foundation of our continued business and existence.

   This concept allows the Company to provide added value to its stakeholders, thus enabling them to achieve their individual goals. Through this cycle of trust, the Company will strive to further enhance its ties of reliability.

   The Company discloses its 3-year Mid-Term Management Plan T-2018 for the period from 2016 to 2018 on its Japanese-language company website: http://www.tokaicarbon.co.jp/ir/news/index.html

5. Basic views and policy on corporate governance

   Basic views on corporate governance are disclosed in "I. 1. Basic Views" and in "II. 2. Matters on Functions of Business Execution, Auditing, Oversight, Nomination and Remuneration Decisions (Overview of Current Corporate Governance System)" of this report.

6. Board policies and procedures in determining remuneration

   Policies and the method of determining remuneration of Directors of the Company are disclosed in "II. 1. Disclosure of Policy on Determining Remuneration Amounts and Calculation Methods" of this report.

7. Board policies and procedures in the appointment of the senior management and the nomination of candidates for Directors and Audit & Supervisory Board Members

   At the Company, the Nomination Committee (composed of one (1) internal Director and two (2) External Directors), which is an advisory organ of the Board of Directors and deliberates and confirms the requirements for senior management and the basic policies on appointment of senior management members. In addition, the election of Executive Officers and their roles, etc. are determined based on deliberation by the Board of Directors. The policy and procedure for nominating candidates for Directors and Audit & Supervisory Board Members as well as each of the individual proposals for nomination are deliberated by the Nomination Committee and resolved by the Board of Directors before they are addressed at the general meeting of shareholders.

8. The Company discloses the reasons for nominating candidates for all Directors and Audit & Supervisory Board Members, including External Directors and External Audit & Supervisory Board Members, in the Reference Document for the Annual Meeting of Shareholders.

9. [Principle 4-1-1]

   The Company defines matters stipulated by laws and regulations and the Articles of Incorporation, formulation, etc. of management policies and plans and other important business management matters as items to be resolved by the Board of Directors and delegates all other business execution decisions to the management team.

   [Principle 4-8] [Principle 4-9]

   The Company appoints External Directors who are independent officers in accordance with the requirements for external directors set forth in the Companies Act and the independence standard defined by the financial instruments exchanges.

   [Principle 4-11-1]

   The Board of Directors of the Company works to make accurate and timely business decisions in order to promote sustainable growth and increase corporate value in the mid-to-long term.

   To achieve this objective, the Board of Directors of the Company takes into account the size, contents, etc. of the Company's business and elects candidates for business-executing Directors who are well versed in the operations of each business division and corporate division so as to optimize the composition of the Board of Directors in terms of diversity and the appropriate balance between knowledge, experience and skills of the Board as a whole.

   External Directors are elected by taking into account the requirements for external directors as set forth in the Companies Act and the independence standard defined by the Tokyo Stock Exchange, and the Company receives advice from External Directors from viewpoints independent from business execution based on their wide-ranging experience and insights not only in their specialized fields but also in a broad range of areas.

   [Principle 4-11-2]

   Concurrent positions held by Directors and Audit & Supervisory Board Members and by candidates for Directors and Audit & Supervisory Members are indicated individually in II.1. Organizational Composition and Operation of this report and also in other disclosure documents, including the Reference Document for the Notice of Annual Meeting of Shareholders, Business Report, and Securities Report each year.

   [Principle 4-11-3]

   In order to strengthen the effectiveness of the Board of Directors, the Company decided to distribute a questionnaire on the composition/operation of the Board of Directors, information provision to External Directors, and other relevant matters to all Directors and Audit & Supervisory Board Members. Given the results of the questionnaire survey, the Board of Directors analyzes and evaluates the effectiveness of the Board of Directors. The results of the evaluation for FY2016 are summarized below, and the Company will continue to make efforts to increase the effectiveness of its Board of Directors by taking into account the results of the evaluation.

   The Company newly established the Nomination Committee, the Remuneration Committee, the Management Committee, and the Risk Management & Compliance Committee in order to strengthen its corporate governance system centered on the Board of Directors, and 2016 was the initial year of the new system. The results of the evaluation indicate that improvements have been made in various aspects, including selection of agenda proposals, contents of materials/explanations, contents of deliberations, and meeting minutes.

   [Principle 4-14-2]

   In order to ensure that the management supervision and auditing functions of Directors and Audit & Supervisory Board Members are adequately demonstrated, a secretariat for the Board of Directors is put in place to provide information required for executing duties in an appropriate and timely manner. Further, from the perspective of promoting contribution to sustainable growth into the future, training opportunities are set.

   [Principle 5-1]

   It is provided in "III. 2. IR Activities" of this report.

10. Capital Structure

11. Foreign Shareholding Ratio

    From 20% to less than 30%

    [Status of Major Shareholders]

    Name / Company Name	Number of Shares Owned	Percentage (%)
    The Master Trust Bank of Japan, Ltd. (Trust Account)	21,526,000	9.56
    Japan Trustee Services Bank, Ltd. (Trust Account)	13,882,000	6.17
    The Bank of Tokyo-Mitsubishi UFJ, Ltd.	7,958,779	3.53
    Mitsubishi Corporation	6,748,990	3.00
    Mitsubishi UFJ Trust and Banking Corporation (standing proxy: The Master Trust Bank of Japan, Ltd.)	6,290,000	2.79
    The Master Trust Bank of Japan, Ltd. (Mitsubishi Chemical Corp. Retirement Benefit Trust Account)	5,900,000	2.62
    CBNY DFA INTL SMALL CAP VALUE PORTFOLIO (standing proxy: Citibank Japan Limited)	5,078,000	2.25
    Japan Trustee Services Bank, Ltd. (Trust Account 9)	4,540,000	2.01
    DEUTSCHE BANK AG, FRANKFURT	4,500,000	2.00

    (standing proxy: Settlement & Clearing Services Department of Mizuho Bank, Ltd.)
    Tokio Marine & Nichido Fire Insurance Co., Ltd.	4,044,936	1.79

    Controlling Shareholder (except for Parent Company)
    Parent Company	None

    (Name)	(Address)	(Number of shares held)	(Shareholding %)
    BNP Paribas Securities (Japan) Limited	9-1, Nihonbashi 1-chome, Chiyoda-ku, Tokyo	60,000	0.03
    BNP Paribas Arbitrage Snc	160/162 Boulevard MacDonald, 75019 Paris, France	2,939,000	1.31

    (Name)	(Address)	(Number of shares held)	(Shareholding %)
    Sumitomo Mitsui Trust Bank, Limited	4-1, Marunouchi 1-chome, Chiyoda-ku, Tokyo	4,077,000	1.81
    Sumitomo Mitsui Trust Asset Management Co., Ltd.	33-1, Shiba 3-chome, Minato-ku, Tokyo	398,000	0.18
    Nikko Asset Management Co., Ltd.	7-1, Akasaka 9-chome, Minato-ku, Tokyo	15,425,000	6.86

    (Name)	(Address)	(Number of shares held)	(Shareholding %)
    Nomura Securities Co., Ltd.	9-1, Nihonbashi 1-chome, Chuo-ku, Tokyo	48,000	0.02
    NOMURA INTERNATIONAL PLC	1 Angel Lane, London EC4R 3AB, United Kingdom	2,490,429	1.11
    Nomura Asset Management Co., Ltd.	12-1, Nihonbashi 1-chome, Chuo-ku, Tokyo	12,299,000	5.47

    Supplementary Explanation

    The above is based on the shareholder register as of December 31, 2016. The Company holds 11,782,847 shares of treasury stock. In the Change Report made available for public disclosure as of July 21, 2016, shares owned by BNP Paribas Securities (Japan) Limited and its joint holders as of July 15, 2016 are indicated below. However, since the Company cannot confirm the numbers for substantial shareholdings as of the end of the year ended December 31, 2016, they are not included in the above Status of Major Shareholders. The contents of the Change Report are as follows. In the Change Report made available for public disclosure as of September 23, 2016, shares owned by Sumitomo Mitsui Trust Bank and its joint holders as of September 15, 2016 are indicated below. However, since the Company cannot confirm the numbers for substantial shareholdings as of the end of the year ended December 31, 2016, they are not included in the above Status of Major Shareholders. The contents of the Change Report are as follows. In the Change Report made available for public disclosure as of October 6, 2016, shares owned by Nomura Securities Co., Ltd. and its joint holders as of September 30, 2016 are indicated below. However, since the Company cannot confirm the numbers for substantial shareholdings as of the end of the year ended December 31, 2016, they are not included in the above Status of Major Shareholders. The contents of the Change Report are as follows.