Azbil : Corporate Governance Report

CORPORATE GOVERNANCE

CORPORATE GOVERNANCE	Azbil Corporation
	Last update: June 24, 2021
	Azbil Corporation
	President and Group Chief Executive Officer
	Kiyohiro Yamamoto
	Contact: General Affairs Department
	Tel: [phone]
	Securities Code: 6845
	https://www.azbil.com/jp/

The corporate governance of Azbil Corporation ("the Company") is described below.

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

1. Basic Approach and Policy

Basic Approach

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In order to respond to the trust of all stakeholders, including shareholders, the Company not only complies with laws and regulations and Articles of Incorporation, but also fulfills its social responsibilities and social-contribution responsibilities based on corporate ethics. The Company's basic approach to corporate governance is to continuously improve corporate value through efficient and transparent management; this is positioned as the most important management issue.

Basic Policy

(1) Ensuring the rights and equality of shareholders

In order to ensure that shareholders' rights are substantially secured, the Company takes appropriate measures in accordance with laws and regulations, and, giving due consideration to foreign shareholders and minority shareholders, is promoting the development of an environment in which shareholders can exercise their rights equally and appropriately.

(2) Appropriate cooperation with stakeholders who are not shareholders

In order to achieve sustainable growth and increase corporate value over the medium to long term, we believe that the Company must be strongly aware of its corporate social responsibility and conduct management that is appropriate for our various stakeholders. In order to achieve this, we have adopted the corporate philosophy of "human-centered automation" to realize safety, comfort and fulfillment in people's lives and contribute to the global environment. To this end, we have instituted a Business Conduct Policy and established a Code of Conduct to provide specific guidelines for all officers and employees of the Company and the azbil Group. Also, we set our SDGs (basic goals and targets) toward achieving the UN's SDGs. With the SDGs as our new guidepost, we aim to connect the philosophy, Guiding Principles, code of conduct, and management strategy "in series" leading to a sustainable society and to realize a balance between resolving social issues and sustainable growth. As regards achieving diversity in human resources, we are actively working to promote the advancement of female employees based on the recognition that having diverse values within a company is essential when it comes to achieving sustainable growth.

With regard to the internal reporting system, we believe it is important to (a) encourage employees to use this system by dispelling any concerns that in so doing they might be put at a disadvantage, and (b) ensure that the information thus conveyed is used appropriately. We have therefore established a user-friendly reporting & consultation system-the CSR Hotline-which ensures that the information received is reported to the president & CEO, Audit & Supervisory Board members, and outside directors.

(3) Ensuring appropriate information disclosure and transparency

The Company strives to disseminate information so as to ensure transparency and fairness in decision-making, thus realizing effective corporate governance. Specifically, in order to ensure that all stakeholders have a proper understanding of financial information, such as the Company's financial position and business results, as well as non-financial information, such as management strategy, management planning, management issues, and information relating to risk and governance, we actively disclose information on a voluntary basis in addition to the information stipulated by law. The Company also discloses policies and procedures regarding the appointment of directors and Audit & Supervisory Board members, as well as the selection and dismissal of senior executives including the CEO, and policies for deciding on the remuneration for directors. We will continue to

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strive to increase the information covered by these disclosures and ensure transparency.

In addition, we are taking appropriate measures to ensure proper audits by the independent accounting auditor: the Company provides sufficient time for audits to be conducted, arranges for the accounting auditor to interview the president & CEO and the director in charge of finance on a regular basis, and conducts quarterly report meetings between the accounting auditor, the Audit

• Supervisory Board members, and the Internal Audit Department.
  (4) Responsibilities of the Board of Directors, etc.

The basic mission of the Company's Board of Directors is to achieve sustainable growth and increase corporate value over the medium to long term. As set forth in the Board Rules, important items for deliberation include basic management strategy and plans. Appropriate decisions are reached through free and constructive discussion. In addition, in order to ensure transparency and fairness in management, systems have been established for timely disclosure, internal control, and risk management.

Additionally, the Audit & Supervisory Board and its members are responsible for conducting appropriate audits of management and expressing their sentiments while regularly exchanging opinions with the Internal Audit Department.

The Company recognizes the important role played by independent outside directors in ensuring that the Board of Directors fulfills its role and responsibilities appropriately, and has thus appointed five (5) independent outside directors with extensive experience in corporate management and supervision, as well as exceptional expertise and professional knowledge. These independent outside directors, with their diverse backgrounds, fulfill their responsibilities-such as supervising management and advising on how to enhance corporate value-employing a wide range of perspectives.

In order for the Board of Directors to effectively fulfill its role, we believe that it is important both to appoint directors and Audit & Supervisory Board members with sufficient diversity to provide a good overall balance of knowledge and experience, and to ensure transparency and objectivity in making these appointments. At a Board of Directors meeting held on May 14, 2021, we established the skills expected of the directors with respect to the realization of the Company's medium-term plan and other management strategies, and confirmed the independence, diversity, and expected skills of the current Board of Directors. For details, please refer to Principle 3-1(4) and Supplementary Principle 4-11-1 in the "Disclosure based on the Principles of the Corporate Governance Code" section of this report.

With regard to succession planning for the Company's senior management, the Nomination and Remuneration Committee-which serves as an advisory body to the Board of Directors-deliberates on the status of training and selection of candidates, and records the results of these deliberations as well as the discussion process itself. This ensures that succession planning is implemented appropriately and objectively. More than half of the Nomination and Remuneration Committee is comprised of independent outside directors, and it is also chaired by an independent outside director, who reports on the Committee's deliberations to the Board of Directors when appropriate. The Board of Directors is thus actively involved in succession planning, a process that is undertaken systematically, ensuring that sufficient time and resources are allocated for the training of candidates.

As of June 24, 2021, the total number of directors is eleven (11), with outside directors accounting for more than one third of the Board of Directors. The Board composition demonstrates ample diversity, including that of nationality and gender.

(5) Dialogue with shareholders

In order to meet requirements for corporate accountability while contributing to sustainable growth and the enhancement of corporate value over the medium to long term, the Company is working to develop and implement a system for promoting constructive dialogue with shareholders and investors. For more information, please refer to Principle 5-1 in the "Disclosure based on the Principles of the Corporate Governance Code" section of this report.

Regarding the publication of management strategies and plans, as well as presenting basic policies such as earnings plans, the Company strives to provide straightforward explanations of the qualitative and quantitative targets (sales, operating income, ROE, etc.) in our new medium-term plan, as well as outlining strategies for achieving those targets.

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

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The Company complies with all principles of the Corporate Governance Code. (This is based on the Corporate Governance Code prior to the revision of June 2021.)

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

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Note that [Supplementary Principle 2-3-1], [Supplementary Principle 2-4-1], [Supplementary Principle 3-1-3], [Supplementary Principle 4-2-2], [Supplementary Principle 4-10-1], and [Supplementary Principle 4-11-1] below are based on the revised Code of June 2021 and are provided here voluntarily.

[Principle 1-4] [Strategic shareholdings]

Taking into account our business strategies, business relationships, and cooperative business affiliations, the Company holds listed shares if they are judged to contribute to the enhancement of the Company's corporate value from a medium- to long-term perspective, and to be instrumental in maintaining and strengthening our long-term business relationships. The Company's Board of Directors regularly verifies the significance of individual stocks to our business, including financial returns, to determine whether these holdings are sufficiently advantageous from the viewpoint of economic rationality and capital costs. The results of this verification are reported along with any risks involved in holding a stock. Should it be determined, as a result of this verification, that holding an individual stock is not sufficiently advantageous, and that it cannot be judged to contribute to the improvement of the Company's corporate value from a medium- to long-term perspective, our policy is to reduce our holdings of that stock by selling shares when deemed appropriate in light of stock prices and market trends. The Company's strategic shareholdings are disclosed in the Securities Report, with the current number of shares of each stock, the purpose of holding the stock, and whether reductions have been made, etc.

When it comes to exercising voting rights, an issuer's financial position and governance status are regularly monitored, and the details of each proposal are reviewed to determine comprehensively whether or not medium- to long-term shareholder value will be enhanced and whether there will be any impact on the Company's corporate value or on the significance of holding the stock.

In dealings with companies that hold the Company's stock as strategic shareholdings, the economic rationale of each transaction is given appropriate consideration. In addition, even if such a company indicates its intention to sell these shares, the Company will not engage in any conduct intended to prevent the sale, such as suggesting a scaling-back of business.

[Principle 1-7] [Related Party Transactions]

The Board Rules stipulate that self-trading and competitive transactions by the Company's directors, Audit & Supervisory Board members and executive officers require both prior approval and post-transaction reporting. Furthermore, to establish whether or not there have been any transactions involving corporate officers and their close relatives, a questionnaire-based survey is conducted each year, in accordance with the separately established Corporate Governance Guidelines. In addition, based on the Code of Audit & Supervisory Board Auditing Standards, the Audit & Supervisory Board members monitor and verify whether any directors are in violation of their obligations. As for shareholder transactions, there are no major shareholders as defined by the Financial Instruments and Exchange Act, and thus no such transactions have taken place.

[Supplementary Principle 2-4-1] [Ensuring diversity in the appointment, etc. of core personnel]

For details on ensuring diversity in the appointment, etc. of core personnel, please refer to the Other section (p.26 of this document) of 3. Measures to Ensure Due Respect for Stakeholders in III. Implementation of Measures for Shareholders and Other Stakeholders.

[Principle 2-6] [Functioning as corporate pension asset owner]

In June 2015, the transfer of the Company's corporate pension plan to the defined contribution system was completed. A contractual corporate pension plan was established, however, to manage the assets of those entitled to retirement pensions from the former employees' pension fund under the defined benefit system.

This contractual corporate pension plan is limited to beneficiaries who have already retired, and the pension fund assets will gradually decrease over time. However, in order to ensure the proper operation of the defined benefit corporate pension plan, the Company has established an Asset Management Committee chaired by the officer in charge of finance and comprised of employees who work in such fields as finance, accounting and human resources. Qualified personnel have been assigned to the department in charge of corporate pensions and to the Asset Management Committee office, and also training opportunities are made available to enable the staff to enhance skills relevant to these tasks.

The Company had concluded an investment advisory contract with a neutral, independent external consulting firm to call on additional expertise regarding corporate pensions. However, in view of the fact that the policy assets of the contractual corporate

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pension plan are wholly comprised of life insurance general account and short-term assets, it has been decided that adequate governance of the pension plan can be maintained through regular monitoring of the pension plan's financial status by the Asset Management Committee. Therefore, the investment advisory contract with the consulting firm was not renewed at the expiration of its term on March 31, 2021.

In addition, the management of the reserve funds is entrusted to several investment management organizations. Each of these is able to exercise voting rights appropriately and thus avoid possible conflicts of interest between the beneficiaries of the corporate pension plan and the Company.

[Principle 3-1] [Enhancement of information disclosure]

As outlined below, the Company discloses information in accordance with relevant laws and regulations, but also proactively publishes additional information on a voluntary basis, and will continue to strive to enhance information disclosure and ensure transparency.

1. Management philosophy, management strategy, management plans Please refer to our website (URL below).https://www.azbil.com/corporate/index.html
2. Corporate governance: Basic approach and basic policy

For details, please refer to "Basic Approach" and "Basic Policy" sections in "1. Basic Approach" within "I. Basic Approach to Corporate Governance, Capital Structure, Corporate Attributes and Other Basic Information" in this report.

(3) Policies and procedures for determining remuneration for directors

Please refer to "Remuneration for Directors (p.19)" and "2. Functions of Business Execution, Auditing, Oversight, Nomination, and Remuneration Decisions (p.22)" within "II. Business Management Organization and Other Corporate Governance Systems regarding Decision-Making, Execution of Business, and Oversight in Management" in this report.

1. Policies and procedures regarding the appointment of directors and Audit & Supervisory Board members, as well as the selection/dismissal of senior executives including the CEO

Please refer to "2. Functions of Business Execution, Auditing, Oversight, Nomination, and Remuneration Decisions (p.22)" within "II. Business Management Organization and Other Corporate Governance Systems regarding Decision-Making, Execution of Business, and Oversight in Management" in this report.

(5) Reasons behind the appointment of individual directors and Audit & Supervisory Board members

For the reasons behind the appointment of individual directors and Audit & Supervisory Board members, please refer to the notices of the Ordinary General Meeting of Shareholders.

Notice of the Ordinary General Meeting of Shareholders: https://www.azbil.com/ir/stock/meeting/index.html(Notices for past Ordinary General Meetings of Shareholders are also posted.)

[Supplementary Principle 2-3-1] [Supplementary Principle 3-1-3] [Supplementary Principle 4-2-2] [Sustainability Policy and Initiatives]

The azbil Group's Sustainability Policy

With regard to sustainability, from our initial founding we have inherited the spirit of "freeing people from drudgery" as the timeless value of automation that contributes to society for the sake of human happiness. As the cornerstone of sustainability, we are aiming for continuous improvement of enterprise value through management which not only expands business that creates value at the customer's site but also conducts corporate activities that are supported and trusted by society.

Our policy is to ensure our own sustainability by practicing the Group philosophy of "human-centered automation," striving to solve social issues, realizing "people's safety, comfort, and fulfillment," and contributing to the global environment while also contributing "in series" to a sustainable society.

Sustainability Initiatives

In accordance with the Group's philosophy, we are contributing to the global environment and addressing various social issues in order to realize a sustainable society. We recognize that tackling sustainability issues is not just about responding to risk, but also

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about seizing important business opportunities to enhance enterprise value, so we will continue to make contributions that lead "in series" to a sustainable society. Specifically, in response to global environmental issues such as climate change, we will aim to make further contributions by providing solutions for reducing environmental impact, curbing energy demand, and integrating renewable energy, while our new automation, life-cycle and other businesses are serving our customers and society as a whole. We will also contribute to a sustainable society by respecting human rights as part of our corporate activities (affirming the UN Global Compact), giving due consideration to the health and working environment of our employees, treating them fairly and appropriately as part of our health and well-being management, and conducting CSR-conscious transactions, etc. throughout our supply chains, while taking comprehensive measures to strengthen our BCP and crisis management. In the new medium-term plan, based on the above policy, we are comprehensively examining profit opportunities and risk reduction, while formulating and implementing business strategies to improve enterprise value by 2030, including the SDGs.

The Company has established a system for examining and promoting sustainability initiatives on a company-wide basis. We have set up a dedicated unit and appointed a corporate officer in charge of all sustainability matters. Chaired by the above officer, the azbil Group CSR Promotion Committee and SDGs Promotion Committee meet regularly. Progress and issues discussed in these meetings are reported to the Board of Directors and the Management Committee.

Sustainability Reporting

The Company discloses its sustainability initiatives in its annual Securities Report and the azbil Report. In the new medium-term plan, we have also formulated management strategies based on the following three basic policies in order to ensure our own medium- to long-term development and to achieve sustainable enhancement of enterprise value.

We are committed to (1) being a long-term partner for the customer and the community by offering solutions based on our technologies and products; (2) taking global operations to the next level, by expansion into new regions and qualitative change of focus; and (3) being a corporate organization that never stops learning, so that it can continuously grow stronger. We are reforming our business and operational structures, strengthening our business profitability, and working to find solutions to the issues facing society. In addition, the Company discloses in its annual report (i.e. azbil Report 2020) a detailed analysis of its efforts to achieve sustainability from the perspective of promoting ESG (Environmental, Social and Governance) initiatives. Also, as regards disclosing how climate-related risks and opportunities affect the Company, we have expressed our support for the TCFD international framework. In line with TCFD guidance, the Company discloses information on governance, strategy, risk management, and metrics and targets in its 99th Annual Securities Report and annual Report (azbil Report 2020), and is progressively enhancing the content of these reports, both qualitatively and quantitatively.

Investing in Human Capital and Intellectual Property

In formulating our new medium-term plan, strategies for each business portfolio were discussed and reviewed. From FY2021, we have introduced return on invested capital (ROIC) to encourage management that is mindful of the cost of capital. The plan also includes strategic consideration of human capital and intellectual property, and going forward we will continue to ensure effective monitoring of the utilization efficiency of these management resources so as to contribute to the sustainable growth of the Company.

[Supplementary Principle 4-1-1] [Scope of matters delegated to management (summary)]

The Board Rules sets out what matters are to be submitted/reported to the Board of Directors, and the scope of matters to be delegated to management. Note, however, that even if a matter properly falls within the latter scope, it may be desirable that it be submitted/reported to the Board of Directors. Thus, if the Board, directors and Audit & Supervisory Board members deem it necessary, the Rules allow for such matters to be deliberated by the Board of Directors. Matters to be submitted/reported to the Board of Directors include those specified in laws and regulations and in the Articles of Incorporation, as well as basic management strategies, management plans, corporate governance policies, risk management, and other important management matters. As regards matters concerning business management, etc., monetary thresholds have been established for determining what needs to be submitted/reported to the Board, varying depending on the relative importance to management. As regards those matters falling within the scope of delegation to management, final decisions are made principally by the president & CEO where set forth in the Management Meeting Rules, while for those matters within certain ranges, the authority is delegated to different tiers of management as laid out in the Administrative Authority Rules.

[Principle 4-8] [Effective Use of Independent Outside Directors]

In order to contribute to sustainable growth and the enhancement of corporate value over the medium to long term, the Company

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