Avant : Report on Corporate Governance 2021

Report on Corporate Governance

AVANT CORPORATION

September 28, 2021

AVANT Corporation

Tetsuji Morikawa, President and Group CEO

Contact: Group General Affairs 813-6864-0100

The following is an overview of corporate governance at AVANT Corporation

• Fundamental policy covering corporate governance and basic information about capital structure, corporate attributes

1. Fundamental Policy

(1) Corporate Philosophy

Our corporate philosophy since our founding has been to respect the Japanese view of management as a public entity of society and to develop as an organization that exists for society. We believe that the fundamental idea of management based on Japanese culture lies in viewing the company as a public entity of society. Even in a globalized society, we respect this management philosophy as a cultural asset and aim to develop as an organization that exists for society.

Based on this Japanese management philosophy, we call our corporate activities "the creation of a 100-year company," which we have positioned as our corporate philosophy since our founding. It is not simply a continuation of the company or the brand. As a 100-year company, we have passed on our management philosophy as a public entity beyond generations, and all members are able to aim beyond his or her capacity in providing value to society in a free and creative manner. To this end, we practice group management that fosters independent organization and group synergies.

We emphasize advanced corporate governance for group management that contributes to the growth of people and organizations. By engaging in dialogue with various stakeholders and continuing to learn from them, we aim to develop our business from an open perspective so that we can provide value to society without being biased toward specific stakeholders.

(2) Policy on Corporate Governance

Based on this corporate philosophy, we have formulated the "Avant Group Fundamental Policy on Corporate Governance" and are striving to enhance corporate governance by enhancing the transparency and soundness of management, carrying out business operations promptly based on accurate decision-making, and building a management system that enables appropriate monitoring of these operations.

Reference document:https://www.avantcorp.com/en/ir/governance/pdf/AVANTCorpCorporateGovernanceRule_en.pdf

[Reasons for non-compliance with the principals of the Corporate Governance Code]

[Supplementary Principle 2-4 (1) Ensuring diversity in appointing core personnel, etc.]

In order to realize our management philosophy, all of our employees share the following values: (1) customer-oriented,

1. high-profit-oriented,and (3) unique talent-oriented. These values lead to a virtuous cycle that supports continuous growth: putting the customer first, growing as a person through creative conversations with various stakeholders in order to meet the needs and expectations of customers in a changing environment, creating new value that is second to none, and earning a high reputation. In order to share such values, it is important to form an organization that transcends differences in age, gender, race, religion, and hobbies and preferences, and diversity is an important issue for us. As we place importance on the right person for the right job, we do not set targets for specific human resources, such as women and foreign nationals, but in the fiscal year ended June 30, 2021, 6.5% of our managers were women, 2.7% were foreign nationals, and 89.7% were mid-career hires, so people from a variety of backgrounds are active at the leadership level.
   We believe that the advancement of diversity will lead to improved job satisfaction for our employees through the following effects: (1) employees will be able to exchange opinions from a broader perspective, (2) we will be able to make high-quality proposals to our customers, and (3) we will be more highly evaluated by our customers. For this reason, the entire group participates in the Great Place to Work (GPTW) survey and has set a goal of achieving a job satisfaction score of 70 points.

[Supplementary Principle 3-1 (3) Initiatives for Sustainability, etc.]

Although we have not signed the TCFD, as pointed out by the United Nations Intergovernmental Panel on Climate Change, global warming is progressing at a pace faster than expected, and we recognize that the impact of climate change on economic activities can no longer be ignored. We believe that we must identify risks and opportunities as management

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issues and link them to the enhancement of corporate value.

The management philosophy that we have upheld since our founding, "Creating a 100-year company," reflects our sustainability philosophy of achieving continuous business growth through an independent organization that is highly adaptable to a rapidly changing market environment. It is not enough for a company to simply pursue profits, but it is also important for us to always consider how we can create sustainable corporate value in balance with society and the environment. We signed the United Nations Global Compact on August 25, 2020, and we will take this opportunity to consider and implement what we can do as a group while conducting risk assessment to achieve sustainability.

Our approach to the environment is to purchase "Green Power Certificates" issued by Japan Natural Energy Company Limited from July 1, 2021 for all the electricity used in the offices of our group companies, with reference to the amount of electricity used in the fiscal year ending June 2020 (approximately 1,500 MWh). The company thus reduces carbon dioxide emissions by approximately 660 tons per year and will work toward the efficient use of electricity and the spread of power generation using natural energy in order to prevent global warming.

[Supplementary Principle 4-1 (3): Establishment of a succession plan]

The successor to the CEO is recognized as an important management issue for the Company, and discussions began at the Board of Directors from the fiscal year ended June 2018. In the fiscal year ended June 2019, we have contracted a third- party consultant and continued discussion of a comprehensive succession plan.

[Disclosure based on the individual principle of the Corporate Governance Code]

[Principle 1-4: Strategic shareholding] (Comply)

The Company does not have so-called strategic shareholding. In case the Company acquires strategic shares, it should do so for the purpose of maintaining and strengthening business-to-business transactions. To that end, the director in charge of finance shall report the risk and return on such holding of shares regularly and seek approval by the Board of Directors as stipulated in "Rule on management of funds" and others. The basic criteria for exercising voting rights for strategic shares is whether or not the Company and the investee company are mutually increasing each other's corporate value.

[Principle 1-7: Related party transactions] (Comply)

The Company consults with the Board of Directors on discussions and resolutions regarding directors' transactions which could be competitive against or conflict with the interest of the Company. At the end of the fiscal year, each director, corporate auditor, and corporate officer will be questioned regarding transactions with related parties to confirm that there are no harms to the common interests of the Company or shareholders. There are no transactions between related parties.

[Principle 2-6: Role of corporate pension funds as asset owners] (Comply)

Although we do not have a corporate pension scheme, we will make sure a corporate pension scheme should perform its role as an asset owner when introducing a scheme.

[Principle 3-1: Full disclosure] (Comply)

1. We have formulated a philosophy system that includes the corporate philosophy of the Avant Group and announced management strategies and medium-term management plans for realizing our philosophy. Our corporate philosophy is also included in this report. Details of this philosophy, as well as our management strategies and medium-term management plans, are available on our website.
2. Based on the principles of each of these codes, the Company's basic stance on corporate governance is described in "I.1 Basic Concept" in this report.
3. In determining the compensation for directors, the basic policy is to make them function effectively as compensation for the director's contribution to improve corporate value. Within the limits of the amount of compensation which shall be resolved at the General Meeting of Shareholders, the allocation is determined in consideration of the position, performance and results during his tenure.
4. When appointing and nominating candidates for directors and corporate auditors, the Board of Directors shall select the most suitable person by resolution considering whether they have the personality, experience, capabilities, broad insights and other factors to improve corporate value, and have a various experience and broad expertise in our business. In addition, outside directors also consider whether they can perform management oversight functions for the Company's management team from a neutral and fair objective perspective.
5. The reasons for the appointment of candidates for outside directors and candidates for outside auditors are disclosed in the convocation notice of the general meeting of shareholders.

[Supplementary Principle 4-1-1: Scope of delegation to management] (Comply)

The Company has established the distinction between management decision-making/supervision and business execution through the Board of Directors as a decision-making/supervisory body and the Executive Officer System as a business

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execution system based on the decisions made by the Board of Directors. The outline of the system is disclosed on our website and in the report on corporate governance. The Board of Directors makes decisions on matters stipulated in laws and regulations and the Articles of Incorporation, as well as important matters concerning the Company and its subsidiaries in the Group. In addition, the directors or key members of Avant attend the meetings of the Board of Directors of the Company's subsidiaries and are aware of the management situation. The Company has entered into a management guidance and business management agreement with the Company's subsidiaries, and there is a system under which the Company receives reports on important matters related to the execution of duties by directors, and the results are reported to the Board of Directors of Avant. Avant's Group General Affairs Office confirms that the Board of Directors of our subsidiary meets monthly. The Board of Directors of the Company's subsidiaries makes decisions on important matters, but the regulations and operations for (a) investment including office contracts, (b) human resources, and (c) finance including capital policy are subject to approval from Avant, the holding company.

[Principle 4-2: Role and responsibilities of the board] (Comply)

The Board of Directors accepts proposals from directors and corporate officers who are responsible for business execution at any time, and makes a multifaceted and thorough examination that the proposals are in line with the management philosophy, fiscal year business plan, medium-term management plan, etc. At the same time, proposals approved by the Board of Directors are executed mainly by directors and corporate officers in each business field. The Board of Directors will provide personnel, finance, and other necessary support for smooth execution.

[Supplementary Principle 4-2 (1): Healthy management compensation based on sustainable growth] (Comply) The Company's compensation for directors and corporate auditors is divided into "basic compensation in accordance with

the functions of directors and corporate auditors" and "compensation system to achieve sustainable growth through a combination of bonuses linked to short-term and medium- to long-term business performance", which is determined within the scope of the compensation quota resolved at the General Meeting of Shareholders. In order to reflect medium -term corporate performance and risks and to encourage incentivization that contributes to the exercise of sound entrepreneurial spirit, the "Decision on Remuneration for Performance-Linked Stock Compensation for Directors" was submitted as Proposal 4 at the 22nd Ordinary General Meeting of Shareholders held on September 19, 2018, and was approved, and as a result, the Company has introduced this system.

For the remuneration system for directors, please refer to "II. Status of the management control organization and other corporate governance systems related to management decision-making, execution and supervision," 1. Matters related to organizational structure and organizational management, etc. [Directors' remuneration] "Disclosure details of the policy for determining the amount of remuneration or its calculation method.

[Supplementary Principle 4-8 (2): Effective use of independent directors] (Comply)

Mr. Naohisa Fukutani was appointed as the lead independent outside director at the regular board meeting on May 23, 2018.

[Principle 4-9: Criteria for Determining Independence and Qualifications of Independent Outside Directors] (Comply)

The Company has established the following independence standards for independent outside directors, which are based on the independence standards set forth in the Companies Act and the Financial Instruments and Exchange Law and focus on ensuring the independence of the persons who become independent outside directors in terms of substance. At the Board of Directors meetings, outside directors actively provide opinions and advice from an objective and neutral standpoint, and fully contribute to constructive discussions.

1. A person who is currently, and during the last 10 years have been, an officer (executive officer, corporate officer, employee or contractor) of the Company or its subsidiaries, affiliates (collectively, the "Group");
2. An organization or its officer who directly or indirectly holds 10% or more of the total number of voting rights of the Company
3. An organization or its officer who conducts major transaction (Note1) to the Group, or to who the Group conduct major transaction (Note1)
4. An organization or its officer who has earned a large (Note2) amount of money or other financial benefits other than executive compensation, or an executive officer, in exchange for providing professional services to our group through consultants, lawyers, certified public accountants, tax accountants, etc.
5. An organization or its officer who receive donations or grants from our group exceeding 15 million yen per year
6. A person who belongs to the auditing firm, which is the accounting auditor of the Group
7. An officer of companies that appoint executives of the Group as officers
8. A person who falls under the category of 2 to 7 above in the past three years

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(9) Spouse or relative within the second degree of kinship of a person who falls under 1 to 8 above

(Note1) Major transactions are transactions involving the transfer of money in excess of 2% of annual consolidated net sales or financing of money in excess of 2% of consolidated total assets

(Note2) A large amount means that, in the case of an individual providing professional services, such profit, excluding executive compensation received from our group, exceeds 15 million yen per year for the most recent fiscal year, and in the case of an organization such as a corporation or union, the person providing professional services exceeds the higher of 2% of the group's annual gross income or 15 million yen in the most recent fiscal year.

[Supplementary Principle 4-10 (1) Use of voluntary mechanisms] (Comply)

The Board of Directors and the Audit & Supervisory Board of the Company consist of five directors (including three external and independent directors and two foreign nationals) and three audit & supervisory board members (including two external and one independent director and one woman), and we believe that the independence and objectivity of the decision-making process and the enhancement of accountability are secured. However, in order to strengthen the policy on how to determine the content of remuneration, etc. and the content of the determined remuneration, etc., the Board of Directors, at its meeting held on March 17, 2021, resolved to establish the Compensation Advisory Committee as a voluntary advisory body. The Remuneration Advisory Committee will consist of three members, two independent directors and the Group CEO, and the chairperson will be selected from independent outside directors. The committee strives to ensure objectivity by receiving advice from outside experts and taking into consideration the level of the market as a whole and the industry as a whole. The Compensation Advisory Committee deliberates on the following matters

1. The policy for determining the remuneration, etc., of Directors and Executive Officers
2. Drafts of proposals on remuneration, etc. of Directors, Corporate Auditors and Executive Officers to be submitted to the General Meeting of Shareholders; and
3. Draft policy regarding decisions on the details of compensation, etc. for individual Directors and Executive Officers to be submitted to the Board of Directors; and
4. Proposed contents of individual remuneration, etc. of Directors and Executive Officers to be submitted to the Board of Directors; and
5. Any other matters deemed necessary by the Board of Directors in relation to the preceding items.

The Board of Directors has confirmed that the method of determining the details of remuneration, etc. for directors and corporate auditors for the fiscal year ending June 30, 2021 and the details of the remuneration, etc. determined are in line with the said determination policy through the report of the Compensation Advisory Committee.

[Supplementary Principle 4-11 (1): View on the diversity and size of the board as a whole] (Comply)

With the aim of enhancing corporate value, the Company's directors are selected from among candidates who have diverse and specialized knowledge in the areas of management, legal and compliance, finance and accounting, M&A and finance, IT business, global business, governance, human resources and organization, as well as experience and knowledge as managers, while giving due consideration to diversity. The Board of Directors and the Audit & Supervisory Board are composed of five directors (including three outside and independent directors, and two foreign nationals) and three audit

• supervisory board members (including two outside and one independent directors, and one female). The Board of Directors considers the diversity of human resources and the balance of knowledge, experience, and ability to be sufficiently balanced to maintain a high level of decision-making capability. The reasons for the appointment of outside directors and outside corporate auditors are disclosed in the notice of convocation of the General Meeting of Shareholders.

Executive Skills Matrix

				Directors				Auditors
		Tetsuji	Naoyoshi	Naohisa	Georges	Jon Robertson	Tsuyoshi	Kunio Suzuki	Chie Goto
		Morikawa	Kasuga	Fukutani	Ugeux	Noshiro
Management		●		●	●	●		●
Legal and Compliance						●		●
Finance	and	●	●	●	●		●	●	●
Accounting

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M&A and Finance		●	●	●
IT Business	●				●		●
Global		●	●	●	●
Governance	●	●	●	●	●	●	●	●
Human Resources and	●		●	●	●	●	●
Organization

[Supplementary Principle 4-11 (2): Directors and Auditors' concurrent position] (Comply)

The status of concurrent positions of outside directors and outside auditors is disclosed annually in the notice of convocation of the general meeting of shareholders, the annual securities report, and the corporate governance report. Regarding concurrent positions with other companies, they are appointed after confirming that there is no hindrance to the execution of duties as directors and corporate auditors of the Company

[Supplementary Principle 4-11 (3): Analysis, Evaluation, and Disclosure of Results of the Effectiveness of the Board of Directors] (Comply)

With the aim of realizing sustainable enhancement of corporate value, the Company recognizes issues related to the responsibilities, composition, and operation of the Board of Directors, and is working to make continuous improvements. The Board of Directors analyzes and evaluates the effectiveness of the Board of Directors based on the self-evaluation of each director every year.

[Evaluation method]

The Company conducted evaluations by third-party organizations in the fiscal years ending June 30, 2018 and June 30, 2019 from the perspective of enhancing the independence and objectivity of analysis and evaluation. From the fiscal year ending June 2020 onward, we have decided to conduct interviews with directors and corporate auditors by third-party organizations as appropriate, mainly through our own questionnaires.

For the fiscal year ending June 30, 2020, the Company decided to use a questionnaire that asks for a wide range of free comments, and in addition, in order to more clearly understand the issues during the current fiscal year, the Company created a questionnaire form that allows the participants to evaluate the issues and describe their opinions on how to deal with them and conducted a questionnaire for all Directors and Corporate Auditors in May 2021. In May 2021, a questionnaire was sent to all directors and corporate auditors.

[Summary of Evaluation Results]

Summarizing the responses to the questionnaire, the evaluation of the effectiveness of the Board of Directors by the directors was generally high, and the Board of Directors was evaluated to be operating appropriately. On the other hand, some pointed out that discussions on various issues that were previously recognized as problems have not progressed, and that more time should be spent on discussing broader issues such as management strategies and medium-term management plans, and the Company recognizes that specific measures are needed.

(1) Organization of the Board of Directors

As for the organization of the Board of Directors, the Directors pointed out the following issues regarding the separation of execution and supervision.

• Clarification of the positions of the President and Representative Director and the Chairman of the Board, and
• Clarification of the positions of the President and the Chairman, diversity of each director, and expected roles are needed.

(2) Agenda of the board meetings

It was pointed out that there has been no progress in the discussion of the issues (Succession Plan, appointment of female

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