JAFCO : Corporate Governance Report（PDF：477KB）

This is an excerpt translation of the Japanese original for convenience only. In the event of any discrepancy between this translated document and the Japanese original, the original shall prevail.

Corporate Governance Report

Last Update: June 19, 2019

JAFCO Co, Ltd.

Shinichi Fuki, President & CEO

Contact: [phone]

Securities Code: 8595

http://www.jafco.co.jp/english/

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

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

1. Basic Views

With an eye to increasing corporate value over the medium to long term, the Company has established the following basic policies on corporate governance and will make continuous efforts for its enhancement:

• Build respectful relationships with stakeholders;
• Maintain transparency and fairness in decision making;
• Establish an appropriate supervising structure;
• Establish a corporate structure that ensures effective and swift business execution.

[Reasons for Not Implementing Each Principle of the Corporate Governance Code] Updated

The Company implements each principle of the Corporate Governance Code.

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

Based on the above basic views, the Company has established the Corporate Governance Policy (the "Policy") which outlines the Companyʼs concrete corporate governance measures. The Policy is posted on the Companyʼs website:

http://www.jafco.co.jp/corporate/governance/ (Japanese) http://www.jafco.co.jp/english/corporate/governance/ (English)

Descriptions of the items disclosed based on the principles of the Corporate Governance Code are as follows:

Principle 1.4 Cross-ShareholdingsChapter II 1(4) of the Policy

• The Company will not acquire additional cross-holding shares in other listed companies, except in the following cases:
• 1. When it determines that the holding would be beneficial in maintaining and strengthening a cooperative business relationship with the counterparty;
  2. When it determines that the value of the shares would be financially beneficial for the Company.
• The Board of Directors regularly examines the appropriateness of existing cross-shareholdings. When it determines that the continuous shareholding lacks rationale after reviewing the risks and returns from a medium- to long-term perspective as well as the objectives given above, the Company will make efforts to sell such stock to the extent possible.
• With regard to cross-shareholdings as of the end of March 2019, the Board of Directors examined the appropriateness of cross-shareholdings from the following perspectives.
• 1. The status of cross-shareholdings;
  2. Compliance with the Companyʼ policy on holding of the relative shares;
  3. Possibility of contributing to the Companyʼs business promotion and higher corporate value over the medium to long term, such as the status of commitments to JAFCO-operated funds, etc.

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• When executing voting rights regarding cross-shareholdings, the Company decides whether to vote for or against the proposal by taking into account the counterpartyʼs situation and after discussing whether or not the proposal would contribute to higher corporate value of the counterparty over the medium to long term.

Principle 1.7 Related Party TransactionsChapter II 1(6) of the Policy

• The Company shall engage in transactions with its officers only with the prior approval of the Board of Directors (and the Board-Audit Committee if applicable) and in accordance with laws and regulations.
• The Company shall engage in transactions with affiliated firms or major shareholders (including their subsidiaries) on fair terms and conditions with due consideration to market quotations, etc. The Board of Directors, representative directors or other applicable corporate bodies will evaluate and approve such transactions based on the detail and amount.

Principle 2.6 Roles of Corporate Pension Funds as Asset Owners

The Company has adopted a defined contribution scheme for its pension system. While explaining the intent and outline of the system to its employees on an as-needed basis, it provides information on the asset management status, alternative financial instruments, and potential changes of allocation on a regular basis.

Principle 3.1(i) Company objectives (e.g., business principles), business strategies and business plansChapter I 1 of the Policy

(1) JAFCOʼs Mission

"Commit to new business creation and jointly shape the future."

Since the establishment, the Company has created various innovative products/ services with entrepreneurs. The Companyʼs mission is to open a new era with its stakeholders by committing to creating new businesses needed in the society.

(2) Policy and Strategy for Achieving JAFCOʼs Mission

The Company aims to achieve its mission by making venture/ buyout investment through funds. To better clarify its commitment to entrepreneurs embarking on new businesses and fund investors mainly consisting of institutional investors, the Company has introduced the individual-oriented partnership model to add to its competitiveness underpinned by its organizational strength accumulated since inception.

In realizing its mission, the following strategies will also be implemented.

i. Highly selective, intensive investment and management involvement

To create new businesses, the Company will narrow down investment targets and make bold investments in companies with high growth potential. It acquires influential stakes in its portfolio companies and accelerate their growth through deep management involvement.

1. Sustain improvement in fund performance
   To secure sufficient investment capital, it is vital to achieve sustainable improvement in fund performance and raise funds from outside investors. The Company also invests its own capital in funds and shares gains with fund investors. It will build high-quality portfolios through highly selective, intensive investment and management involvement to achieve sustainable improvement in fund performance.
2. JAFCO as "Co-Founder"

During the startup phase of a portfolio company, the Company is required to be a "Co-Founder" rather than an investor. It aims to become an organization where each employee and the Company as a whole can play an active role as a "Co-Founder" by passing on and developing its spirit, expertise and experience that it has built up since establishment.

* About business plans

Due to the nature of the venture/ buyout investment business, the Company is greatly impacted by volatility in stock markets and the IPO environment in Japan and overseas. Moreover, as the Company invests its own capital alongside its partners in funds, its earnings may fluctuate sharply over the short term. With the aim of enhancing its corporate value over the medium to long term, the Company strives to achieve long-term targets set for its fund performance.

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*To realize the Companyʼs mission

In March 2018, the Company introduced the partnership model business structure and appointed six

1. partners with solid track record, regardless of age and background. It has since focused on building a flat organizational structure under the partners and a more performance-based assessment system. The partners make critical decisions on investment management, and for the new fund scheduled for launch in the fiscal year ending March 31, 2020, they will invest their own funds along with JAFCO and receive carried interest distributions, while taking management risk as an individual. The Company will strive to further improve fund performance and corporate value of portfolio companies by enhancing our organization strength that it has built up over the years.

Principle 3.1(ii) Basic views and guidelines on corporate governanceChapter I 2 of the Policy

The Companyʼs basic views on corporate governance are as shown in the section "1. Basic Views". The Company has established the Corporate Governance Policy, which is posted on the Companyʼs website:

http://www.jafco.co.jp/english/corporate/governance/

Principle 3.1(iii) Board policies and procedures in determining the remuneration of the executive members and directorsChapter IV 2(3) of the Policy

- The Board of Directors decides the remuneration of directors (excluding directors serving as Board- Audit Committee members), corporate officers and partners after deliberations by the Nomination and Remuneration Committee composed of all Board-Audit Committee members and the President. The decision on remuneration adequately reflects evaluation of the Companyʼs business results, fund performance, and the degree of individual contribution.

• The remuneration of directors (excluding directors serving as Board-Audit Committee members) and corporate officers comprises a basic salary and an extraordinary compensation. Part of the basic salary corresponds to the Companyʼs ordinary income and other business results, while the extraordinary compensation additionally takes into account fund performance.
• The Board-Audit Committee expresses its opinion on directorsʼ remuneration at the General Meeting of Shareholders when it deems it necessary.
• Partners invest individually in JAFCO-managed funds and receive a return pro rata to their respective interests. They are also entitled to an allocation of success fees based on the fundsʼ investment performance.
• The Company considers, as necessary, stock-related compensations in relation to medium- to long- term interests of shareholders.

Principle 3.1(iv) Board policies and procedures in the appointment/ dismissal of the executive members

and the nomination of director candidates	Chapter IV 2(4) of the Policy
Principle 4.11.1 Views on Board Composition	Chapter IV 2(4) of the Policy

• Directors, including CEO, and corporate officers are appointed by the Board of Directors after deliberations by the Nomination and Remuneration Committee.
• All directors (excluding directors serving as Board-Audit Committee members) are subject to election/re-election every year at the General Meeting of Shareholders. The Board-Audit Committee expresses its opinion on directorsʼ election/ dismissal at the General Meeting of Shareholders when it deems it necessary.
• The Company shall select director candidates who have business skills, insight, experience, and expertise to serve as a director to allow the Board of Directors to fully exercise its operational and supervisory functions. The Company proactively selects suitable candidates from diverse background regardless of gender and nationality.
• The Company shall select independent director candidates who have abundant experience and deep insight into corporate management or specialist fields, and can be expected to fulfill the roles and responsibilities of an independent director. The selection is in accordance with the Companyʼs "Standards for Independence of Independent Directors."
• In a case where a director has caused the Company to incur a tremendous loss or operational problems by committing a wrongful act, or violating laws, regulations, the Articles of Incorporation or the Companyʼs internal rules, or has become difficult to execute duties by other reasons, such director shall be subject to dismissal proposal.
• A Partner is nominated with consensus of all partners and appointed upon the approval of the Board of Directors after deliberations by the Nomination and Remuneration Committee.

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• The composition and size of the Board of Directors ensure a high level of effectiveness in light of the Companyʼs scale and business.

Principle 3.1(v) Explanations with respect to the individual appointments/ dismissals and nominations based on (iv) above

Reasons for the appointment of three (3) directors and four (4) directors serving as Board-Audit Committee members elected at the 47th Annual General Meeting of Shareholders on June 18, 2019 are explained in the Notice of Convocation of the 47th Annual General Meeting of Shareholders.

The above convocation notice is posted on the Companyʼs website: http://www.jafco.co.jp/english/ir/shareholder/meeting/

Principle 4.1.1 Matters Delegated to the ManagementChapter IV 2(1) of the Policy

• With due attention to its responsibilities to shareholders, the Board of Directors makes important management decisions and supervises the execution of business with the aim of achieving sustainable growth and enhancing corporate value.
• The Board of Directors holds a regular monthly meeting, in principle, and an extraordinary meeting as necessary.
• Matters to be discussed at the Board of Directors meetings are set out in the Regulations on the Board of Directors. The Companyʼs basic policy is that the Board of Directors, including independent directors, makes decisions on important operational issues based on thorough discussions. Therefore, the Company has no provision in the Articles of Incorporation that delegates decisions on important operational matters to directors.
• The Investment Committee composed of the President and partners has an authority to make investment decisions to allow quick decision-making. In the situation where a conflict of interest with JAFCO-managed funds may arise, such as in the case of investing its own capital, not only the Investment Committee but also the Board of Directors examine the case and make decisions.
• The decision-making authority on certain matters is delegated to representative director or executive member/ partner in charge, depending on the content and degree of importance, based on the Rules on Document Approval.

Principle 4.9 Independence Standards and Qualification for Independent DirectorsChapter IV 5(3) of the Policy

The Board of Directors has established the "Standards for Independence of Independent Directors" in reference to the independence criteria set out by the Tokyo Stock Exchange. The Standards has been disclosed in the section "Matters relating to Independent Directors" below, the notice of convocation of the Annual General Meeting of Shareholders, and Independent Directors/Auditors Notification.

Principle 4.11.2 Concurrent Positions of DirectorsChapter IV 2(4) of the Policy

The Company discloses major concurrent positions of directors in the notice of convocation of Annual General Meeting of Shareholders every year.

Principle 4.11.3 Analysis, Evaluation and Disclosure of Board EffectivenessChapter IV 8 of the Policy The Board of Directors analyzes and evaluates its effectiveness every year and discloses the summary of the result on the Companyʼs website:

http://www.jafco.co.jp/english/corporate/governance/

Principle 4.14.2 Training Policy for DirectorsChapter IV 11 of the Policy

• The Company provides and arranges training for directors necessary to fulfill their responsibilities.
• A newly-appointed director will be given training on director responsibilities and corporate governance requirements, and will be provided continuous training on legal revisions, etc..
• An independent director will receive an explanation about the Companyʼs business when assuming office, and will be provided information on management issues etc., as necessary.

Principle 5.1 Policy for Constructive Dialogue with ShareholdersChapter II 1(7) of the Policy The Company has set the policy for constructive dialogue with shareholders as shown below:

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- The Company holds constructive dialogue with shareholders and other investors through investor relations to enhance its corporate value over the medium to long term.

- The executive member in charge of administration manages investor relations, and the IR team of the administration division carries out investor relation activities based on close cooperation with relevant internal departments.

- The Company holds an information meeting for institutional investors every six months, in which the President gives an explanation of the financial results. The summary and presentation materials of the meeting are disclosed on the Companyʼs website.

- In principle, the director/ executive member in charge of administration shall, to the extent reasonable, attend individual meetings with institutional investors.

- The Company arranges opportunities for the President, etc. to have dialogue with foreign investors during their regular overseas visits for IR purposes.

- The Company will hold meetings with its domestic and foreign institutional shareholders on an ongoing basis to help them deepen their understanding of its management policy and business strategy, and also to better grasp their views on exercising voting rights.

- The Company makes efforts to enhance information disclosure about the Companyʼs management policy, investment activity and financial conditions, as well as investor relations materials, through its website. The Company will work to enhance the content of the convocation notice of the General Meeting of Shareholders to provide accurate information to shareholders. Such information will also be provided in English to the extent possible depending on importance.

- The opinions or suggestions obtained through dialogue with investors will be given as feedback to executive members as necessary, and be reported at the Board of Directors meeting to be utilized for the Companyʼs future management.

- The Company appropriately controls the insider information in accordance with the internal rules to prevent external leaks.

2. Capital Structure

Foreign Shareholding Ratio

More than 30%

[Status of Major Shareholders] Updated

Name / Company Name		Number of Shares Owned	Percentage (%)
Japan Trustee Services Bank, Ltd. (Trust Account)	3,748,400	12.12
The Master Trust Bank of Japan, Ltd. (Trust Account)	2,090,500	6.76
STATE STREET LONDON CARE OF STATE STREET BANK
AND TRUST, BOSTON SSBTC A/C UK LONDON BRANCH	742,000	2.40
CLIENT- UNITED KINGDOM (Standing proxy: The
Hongkong and Shanghai Banking Corporation Limited,
Tokyo Branch)
STATE STREET BANK AND TRUST COMPANY 505103
(Standing proxy: Mizuho Bank, Ltd., Settlement &	665,516	2.15
Clearing Services Division)
Japan Trustee Services Bank, Ltd. (Trust Account 5)	633,000	2.05
STATE STREET BANK AND TRUST COMPANY 505001
(Standing proxy: Mizuho Bank, Ltd., Settlement &	614,553	1.99
Clearing Services Division)
DFA INTL SMALL CAP VALUE PORTFOLIO	(Standing	560,300	1.81
proxy: Citibank, N.A., Tokyo Branch)
THE BANK OF NEW YORK MELLON 140044	(Standing
proxy: Mizuho Bank, Ltd., Settlement & Clearing	537,500	1.74
Services Division)
STATE STREET BANK AND TRUST CLIENT OMNIBUS
ACCOUNT OM02 505002 (Standing proxy: Mizuho	510,064	1.65
Bank, Ltd., Settlement & Clearing Services Division)

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