Daido Metal : Corporate Governance Report (July 2, 2021)

[NOTICE: This Corporate Governance Report is a translation of the Japanese original for reference purposes only. In the event of any discrepancy, the Japanese original shall prevail.]

Corporate Governance Report

Last Update: July 2, 2021

Daido Metal Co., Ltd.

Chairman & Chief Executive Officer (CEO)

Seigo Hanji

Contact: General Affairs Dept.

Tel: [phone]

Securities Code: 7245

http://www.daidometal.com/

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

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

1. Basic Views

In order for the Company to be trusted by its stakeholders including shareholders, business partners and employees, the Company has structured its Board of Directors to achieve sustainable growth and enhance corporate value from medium- to long-term perspectives. The Company introduced an Executive Officer system to improve management efficiency.

In order to enhance transparency of the management, the Company relies on Outside Directors and Outside Audit & Supervisory board members to supervise other Directors.

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

[Supplementary Principle 4-8-2] Appointment of the lead independent director

The Company appointed two independent outside directors at the 108th Annual Shareholders' Meeting and continues to do so thereafter. This formation works fine with two independent outside directors in close collaboration with each other with proactive communication with the senior management, creating an environment in which independent outside directors fulfill their function of monitoring and supervising. The Company therefore does not appoint the lead independent director at the present moment, but will consider its necessity when, for example, number of independent outside directors increases, in consultation with independent outside directors.

[Supplementary Principle 4-10-1] Involvement of and advice from Independent Directors on remuneration/nomination

The Company has an Advisory Board with two in-house and two external members who will discuss business management including, inter alia, the nomination and remuneration for each Director.

[Mandatory Disclosure items as per the Corporate Governance Code] Updated

[Principle 1-4]Cross-Shareholdings

The Company, being an independent company, is not affiliated with any particular corporate group, and thus it is necessary to maintain long-lasting, good relationships with business partners to continue its business. From this perspective, the Company believes that these holdings provide certain benefits to its business. The Board of Directors will assess every year the situation of each cross-shareholdings, evaluating the financial return during the previous year against our cost of capital, considering our business relationship or our contribution to local communities or to preservation of Japanese traditional culture.

The Company does not think it appropriate to decide on the reduction of holdings with the mere consideration of financial return. On the other hand, even when financial return exceeds our cost of capital, the Company may consider disposing its shareholdings when there is no or limited business relationship.

[Principle 1-4] Standards of exercising voting rights

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The Company exercises its voting rights, with the aim to maintain smooth, stable and continuous relationships with customers.

In principle, the Company agrees on proposals made by the subject companies. However, if the Company considers it necessary to clarify the purpose of the proposal, considers that the proposal impairs significantly the corporate value of the subject company or of Daido Metal, or if the proposal is a proposal made by a shareholder, then the Company will scrutinize such proposals in detail and exercise its voting rights with agreement by a majority of Management Strategy Meeting members.

The Company sets up the rules of its exercise of voting rights for each of the following categories of proposals:

1. Proposals for appropriation of surplus and shareholder return
2. Proposals for appointment of Directors and Audit & Supervisory board members
3. Proposals for remuneration for each Director
4. Other proposals (including proposals made by a shareholder)

[Principle 1-7] Related Party Transactions

Followings are some example of transactions which the Company considers to be conflict-of-interest transactions; Transaction of Director with the Company for his/her own interest or that of third party, the Company providing guarantee for the benefit of the Director, other transactions between the Company and the third party where the interest of the Company conflicts with that of the Director.

The Company examines and approves each conflict-of-interest transaction between Directors and the Company (and its group companies) at the Board of Directors, with the detail of transactions submitted by the Director prior to the conclusion of the transaction, in order to confirm such transactions will not be detrimental to the interests of the Company.

Operating effectiveness of such control is one of the important audit items of Accounting Auditors, and it is also audited from time to time by the Audit & Supervisory Board Members.

No single shareholder holds more than 10% of the Company for the moment. When the Company has such shareholder (Major Shareholders as prescribed in Article 163(1) of the Financial Instruments and Exchange Act) in the future, the Company will examine its transaction with such shareholder at the Board of Directors in advance, to confirm it will not damage the interests of the Company or the common interests of shareholders.

[Principle 2-6] Roles of Corporate Pension Funds as Asset Owners

The Company manages a corporate pension fund, based on its strategic asset allocation, to fund the future pension benefits and lump-sum payment for its employees. On important matters regarding asset management, Asset Management Committee will receive professional advice from financial institutions, and ultimately the decisions are made by the Board of Representatives. The Company assigns personnel suitable for the Board of Representatives and Asset Management Committee, from Human Resources Planning department, Finance Department, etc., and as a representative of beneficiaries, a top official of labor union is appointed.

Our corporate pension fund secretariat has persons with financial expertise and knowledge to sufficiently monitor performance and activities of each appointed fund management companies.

[Principle 3-1 (1)] Corporate Philosophy, Management Strategies, and Management Plans For Corporate Philosophy, please refer to the details provided on our website.

For Management Strategies and Management Plans, please refer to the following documents.

1. Securities Report
2. Business Report
3. Other Disclosure

The Company announces Management Strategies and Management Plans on various IR events for institutional and individual investors.

• Corporate Philosophy (https://www.daidometal.com/company/the-code/)
• Management Strategies and Management Plans (https://www.daidometal.com/investors/business-plan/)

[Principle 3-1 (2)] Basic Views and Guidelines on Corporate Governance Please refer to I-1 "Basic Views" of this report.

[Principle 3-1 (3)] Policies and Procedures in Determining the Remuneration of Senior Management, Directors The Company considers Executive Officers as part of senior management.

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1. The Remuneration of Executive Officers
   The Remuneration of Executive Officers as employees is determined based on the Company's rules approved by the Board of Directors.
2. The Remuneration of Directors
   Please refer to "II. Business Management Organization and Other Corporate Governance Systems regarding Decision-making, Execution of Business, and Oversight in Management 1. Organizational Composition and Operation [Director Remuneration]" in this report.

[Principle 3-1 (4)] Policies on and Procedures for the Appointment/Dismissal of Senior Management and the Nomination of candidates for Directors and for Audit & Supervisory Board Members

The appointment of Executive Officers and nomination of candidates for Directors and for Audit & Supervisory Board is determined at the Board of Directors, in accordance with the Company's selection rules, considering each individual's experience, leadership, personality, a sense of ethics, health, etc. Candidates for Audit & Supervisory Board Members are nominated with the prior consent of the Audit & Supervisory Board.

The dismissal of Directors, Audit & Supervisory Board Members and Senior Management is also resolved at the Board of Directors, as prescribed in the Company's rules on dismissal, considering how much the behavior of the person in question damage the Company's credit and corporate value, or whether the person in question is still fit and proper vis-à-vis Company's selection criteria.

[Principle 3-1 (5)] Explanations of the rationale for the Appointment/Dismissal of Senior Management, and the Nomination of candidates for Directors, and for Audit & Supervisory Board Members

1. The Appointment/Dismissal of Executive Officers
2. 
   Rationale for Appointment/Dismissal of each Executive Officer is provided to the Board of Directors in accordance with the Company's rules on selection/dismissal.
3. The Nomination and appointment of candidates for Director and for Audit & Supervisory Board Please refer to "Notice of Convocation of the 113th Annual Shareholders' Meeting" on the Company's website.
4. • Notice of Convocation of the 113th Annual Shareholders' Meeting (https://www.daidometal.com/wp- content/uploads/2021/06/E_2021_Convocation_Full_Document_113.pdf#page=56)

[Supplementary Principle 4-1-1] The Scope of Matters to Be Resolved at the Board of Directors and Matters Delegated to the Management

The Company has "Rules on the Board of Directors" which stipulates the matters to be resolved at the Board of Directors, and also matters to be delegated to the Directors, to enable an appropriate supervision of each department and a prompt decision-making.

Delegation is made to two Chief Officers in a comprehensive way, and to each Director individually. The Company monitors the balance between a scope of supervision of each Director and the speed of decision-making. If the delegated area becomes too large for the expansion of the business, or for the revision of delegated area, the Company revises the scope of matters to be resolved at the Board of Directors and the matters to be delegated to the Directors and Executive Officers as necessary.

[Principle 4-9] Standards for Independence of Outside Officers

The Company has established independence standards of Outside Officers, based on those established by the Tokyo Stock Exchange, but stricter standards. An outside director or an outside Audit & Supervisory board member who is deemed to have independence from the Company as required by this standards is registered as an independent outside director or as an independent outside Audit & Supervisory board member. For more details, please refer to [Standards for Independence of Outside Officers of DAIDO METAL CO., LTD.] on the Company's website.

• Standards for Independence of Outside Officers of DAIDO METAL CO., LTD. (https://www.daidometal.com/wp-content/uploads/2019/01/Standards-for-Independence-of-Outside- Officers.pdf)

[Supplementary Principle 4-11-1] Views on the Balance between Knowledge, Experience, and Skills of the Board of Directors as a Whole, and on Diversity and Board Size

The Company maintains its Board size is appropriate with four inside directors and two outside directors for strategic and flexible decision-making.

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The Board of Directors is comprised of those who are familiar with management, production, sales, technology, finance, etc., including members with rich international experience and a female member of Audit & Supervisory Board. The Company's Board will continue its discussion for the possibility of further introduction of diversity among Board members.

[Supplementary Principle 4-11-2] Concurrent positions held by Directors and Audit and Supervisory Board Members at other listed companies

Directors and Audit and Supervisory Board Members concurrently serving as officers at other listed companies are disclosed in Business Report (attached to Notice of Convocation of the Annual Shareholders' Meeting) and in Securities Reports. Judging from status of their concurrent assignment, our Directors and Audit & Supervisory Board members are considered to be in a position to perform their duty properly.

[Supplementary Principle 4-11-3] Analysis and evaluation of effectiveness of the Board of Directors

The Company assesses the effectiveness of the Board of Directors, and use the result of the assessment to further improve the Board.

In December 2020, improvements based on the comments of earlier the same year were reported to the Board. In April 2021, the Company conducted the assessment of its Board of Directors' role and management during fiscal year 2020, using questionnaire sent out to 11 Directors and Audit & Supervisory Board Members, including external Directors and Members, and the result was reported to the Board in May 2021.

The result confirmed that the running of the Board Meeting provides enough time for discussion to enable swift decision making. There is still room for further improvement in the quantity of materials for discussion by the Board of Directors and the use of management indicators, etc. We will further refine the assessment, and make use of the result to make our Board of Directors more effective.

We will further refine the assessment, and make use of the result to make our Board of Directors more effective.

[Supplementary Principle 4-14-2] Training policy for Directors and Audit and Supervisory Board Members The Company provides training to newly appointed Directors and Audit and Supervisory Board Members, and seminars are held from time to time. On top of that, when new laws or regulations are introduced, internal seminars are organized with external specialist lecturers.

In fiscal year 2020, all Directors and Audit and Supervisory Board Members underwent training, including taking external courses on the SDGs and the sustainable improvement of corporate value.

[Principle 5-1] Policy for Constructive Dialogue with Shareholders

In order to achieve sustainable growth and mid-/long-term realization of corporate value, the Company considers it important to have constructive dialogue with shareholders.

Our structure for promoting constructive dialogue with shareholders is as follows.

1. Appointing a member of the management or a director who is responsible for overseeing and ensuring that constructive dialogue takes place.
   In the Company, the director in charge of public relations and investor relations is responsible for all dialogue with shareholders.
   (ⅱ) Measures to ensure positive cooperation between internal departments such as investor relations, corporate planning, general affairs, corporate finance, accounting and legal affairs with the aim of supporting dialogue
   The General Affairs Department (hereinafter referred to as "IR Department") is taking the lead in developing an internal system to further promote constructive dialogue with shareholders, in coordination with other related departments.
   (ⅲ) Measures to promote opportunities for dialogue aside from individual meetings (e.g., general investor meetings and other IR activities)
   We have periodical IR meeting with institutional investors and analysts where our top Management will present Company's mid-/long-term vision and latest financial results. Our IR department also carries out individual session with such investors and analysts. With regard to private investors, the Company is present in various IR events organized by Stock Exchanges or by Securities companies.
   For our current IR related activities, please read III. Implementation of Measures for Shareholders and Other Stakeholders 2. IR Activities.
   (ⅳ) Measures to appropriately and effectively relay shareholder views and concerns learned through dialogue to the senior management and the board
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In addition to management's direct communication with shareholders, IR Department provides feedback to all directors as necessary, on the opinions and other aspects of the dialogue with shareholders by sharing the reports of meetings.

1. Measures to control insider information when engaging in dialogue

IR Department is a contact department regarding dialogue with shareholders and investors, and unify management of insider information (unpublished important facts) to prevent the leakage of the insider information to shareholders and investors.

2. Capital Structure

		Foreign Shareholding Ratio		From 10% to less than 20%
[Status of Major Shareholders]
		Name / Company Name			Number of Shares Owned	Percentage (%)
	The Master Trust Bank of Japan, Ltd. (Trust Account)	2,547,200	5.36
	Custody Bank of Japan, Ltd. (Trust Account)			2,157,100	4.53
	Sumitomo Mitsui Trust Bank, Limited			1,978,000	4.16
	Mizuho Bank, Ltd.			1,977,008	4.16
	MUFG Bank, Ltd.			1,822,218	3.83
	Daido Metal Yueikai Employee Stock-Ownership Plan	1,568,000	3.29
	Daido Metal Employee Stock Purchase Plan			1,299,108	2.73
	Tokio Marine & Nichido Fire Insurance Co., Ltd.	1,107,479	2.33
	The Seri Wathana Industry Co, Ltd. 703000			1,000,000	2.10
	Marubeni-Itochu Steel Inc.			886,000	1.86
		Controlling Shareholder (except for Parent		-
		Company)
		Parent Company		None

Supplementary Explanation

a. "Status of Major Shareholders" is based on shareholder registry as of March 31, 2021.

c. While these companies and their joint holders mentioned below are listed on a Report of Possession of Large Volume (including Change Report), they are not included in "Status of Major Shareholders", because the Company was unable to confirm their effective shareholding as of March 31, 2021.

1. In its Change Report for a Report of Possession of Large Volume, which was provided for inspection on April 16, 2018, Mitsubishi UFJ Financial Group, Inc. and its four joint holders state that they held 2,543,000 shares of the Company (5.66%) as of April 9, 2018.
2. In its Change Report for a Report of Possession of Large Volume, which was provided for inspection on September 23, 2020, Sumitomo Mitsui Trust Bank, Limited and its three joint holders state that they held 3,403,000 shares of the Company (7.16%) as of September 15, 2020.
3. In its Change Report for a Report of Possession of Large Volume, which was provided for inspection on December 22, 2020, Mizuho Bank, Ltd. and its two joint holders state that they held 2,852,000 shares of the Company (6.00%) as of December 15, 2020.

3. Corporate Attributes

	Listed Stock Market and Market Section		The first section of Tokyo Stock Exchange
		The first section of Nagoya Stock Exchange
	Fiscal Year-End		March
	Type of Business		Transportation Equipment
	Number of Employees (consolidated) as of		More than 1000
	the End of the Previous Fiscal Year
	Sales (consolidated) as of the End of the		From JPY10 billion to less than JPY100 billion
	Previous Fiscal Year
	Number of Consolidated Subsidiaries as of		From 10 to less than 50
	the End of the Previous Fiscal Year
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