Daifuku : Corporate Governance Report

Corporate Governance Report

Translated from the original Japanese-language document

Last update: July 7, 2021

Daifuku Co., Ltd.

Representative: Hiroshi Geshiro, President and CEO

Contact: Tetsuya Hibi, Corporate Officer, Finance and Accounting Division Manager

Tel: [phone]

Stock code: 6383

www.daifuku.com

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

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

1. Basic Views Updated

The Daifuku Group (the Group) emphasizes the fulfillment of its corporate social responsibility (CSR) based on the following management philosophy:

1. Provide the best solutions to benefit the global markets and the development of society.
2. Focus on healthy, growth-driven global management under a diverse and positive corporate culture.

The Company is a company with an Audit & Supervisory Board. The Company has enhanced its corporate governance framework by developing a Board of Directors consisting of nine members, including four independent outside directors, and an Audit & Supervisory Board consisting of four members, three of whom are elected from outside the Company. More than a third of the members of the Board of Directors are independent outside directors. The composition indicates that the Company considers diversity. To supplement the functions of the Board of Directors, the Company has an Advisory Committee, which deliberates on the nomination, election and dismissal, and remuneration of the management team members. The Audit & Supervisory Board members strengthen cooperation with the Audit & Supervisory Board Office, Audit Division and accounting auditors and deepen and make more efficient the auditing service.

To encourage rapid decision-making on business execution, the Company has introduced the corporate officer system. The Company has also introduced the audit officer system to strengthen auditing functions.

The President & CEO directs each Global Business and the Corporate Functions and identifies and addresses issues common to the entire Group through the committees under the direct control of the President.

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

The Company implements all the Principles of Japan's Corporate Governance Code revised on June 1, 2018.

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

To develop further as a global corporate entity, the Group believes that it is important to act in accordance with the spirit of Japan's Corporate Governance Code. As an indicator of this commitment, the Group has established and discloses the Daifuku Corporate Governance Guidelines as the guidepost for fulfilling its corporate governance. For the disclosure based on the Principles of the Corporate Governance Code, please refer to the Guidelines on the Company website: www.daifuku.com/ir/policy/governance/guideline

Summaries of the review of cross-shareholdings according to Principle 1.4 and the evaluation of the Board of Directors' effectiveness according to Supplementary Principle 4.11.3 are as follows:

[Principle 1.4 Cross-Shareholdings]

At the meeting of Board of Directors on April 27, 2021, the Company reviewed the appropriateness of its cross-shareholdings held at the end of fiscal 2020. During fiscal 2020, the Company sold six issues. In addition, the Board will decide to sell some of its holdings on a timely basis, checking stock prices, etc.

For details, please see our securities report (Japanese) submitted on June 28, 2021. The full text of the report is also available on the Company website (Japanese): www.daifuku.com/jp/ir/library/statements

[Supplementary Principle 4.11.3 Evaluation of the Board of Directors' effectiveness]

In March 2021, the Company conducted its sixth questionnaire of all directors and Audit & Supervisory Board members concerning the Board of Directors' effectiveness, with responses going directly to an external organization to ensure anonymity. Using the external organization, the Company endeavored to collect more impartial opinions, and the results were analyzed in comparison with other companies. Directors discussed the results of the analysis at the Board meeting on April 27, 2021.

For details, please see our securities report (Japanese) submitted on June 28, 2021. The full text of the report is also available on the Company website (Japanese): www.daifuku.com/jp/ir/library/statements

[Principle 5.2 Establishing and Disclosing Business Strategies and Business Plans]

The Group formulated and announced its new three-year business plan, Value Transformation 2023, which started in April 2021. With a shortfall in the targets for the four-year business plan ended March 2021, the cause was analyzed to evaluate and reflect the analysis in the following business plan, and then the issues are being explained to shareholders and investors. For more information about Value Transformation 2023, please see the Company website: www.daifuku.com/ir/policy/plan

2. Capital Structure

Foreign shareholding ratio	30% or more

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[Status of Major Shareholders] Updated

		Name		Number of shares held	Percentage (%)
	The Master Trust Bank of Japan,		9,565,400	7.58
	Ltd. (trust account)
	Custody Bank of Japan, Ltd. (trust		7,987,600	6.33
	account)
	Mizuho Bank, Ltd.		4,117,803	3.26
	Sumitomo Mitsui Banking		4,080,454	3.24
	Corporation
	MUFG Bank, Ltd.		3,833,906	3.04
	Nippon Tochi-Tatemono Co., Ltd.		3,207,500	2.54
	Daifuku Supplier Shareholder		3,195,322	2.53
	Association
	Nippon Life Insurance Company		2,745,767	2.18
	PICTET AND CIE (EUROPE) SA,		2,484,700	1.97
	LUXEMBOURG REF: UCITS
	Custody Bank of Japan, Ltd. (trust		2,406,200	1.91
	account 7)
		Controlling shareholder (except for		―――
		parent company)
		Parent company		None
		Supplementary Explanation
	―――
3. Corporate Attributes
		Listed stock market and market section		First Section, Tokyo Stock Exchange
		Fiscal year-end		March
		Type of business		Machinery
		Number of employees (consolidated) as		1,000 or more
		of the end of the previous fiscal year
		Sales (consolidated) as of the end of the		From JPY100 billion to less than JPY1 trillion
		previous fiscal year
		Number of consolidated subsidiaries as		From 50 to less than 100
		of the end of the previous fiscal year

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1. Policy on Measures to Protect Minority Shareholders in Conducting Transactions with the Controlling Shareholder
   ―――
2. Other Special Circumstances That May Have a Material Impact on Corporate Governance

1. Basic views and policies on Group management

The Company owns Contec Co., Ltd. ("Contec") as a listed subsidiary as of July 7, 2021. Basic policies on owning listed subsidiaries are the following:

• To respect the subsidiary's independence as a listed company
• Not to perform acts contrary to the principle of shareholder equality

Based on these policies, the Company gives its full attention to the interests of general shareholders of listed subsidiaries. At the same time, to further enhance its corporate value, the Company recognizes that it is required to build a more efficient Group management system, taking into account the growing interest of shareholders and investors in the listing of the parent company and the subsidiary.

2. Significance of owning listed subsidiaries based on the policies above

1) Reasons for owning Contec as a subsidiary

The major business of the Group is manufacturing, installation and servicing for plant projects. In recent years, given the growing scale of projects, a reasonable amount of time has become necessary to proceed from determining specifications to recording orders. In addition, because cases in which the period until the completion of work exceeds one year are increasing, a large amount of working capital has come to be required.

On the other hand, because Contec sells device products through agents in many cases, it requires less labor, time and working capital than the plant business.

The Group believes that dealing with device products at the same time as focusing on the plant business will lead to management stability and has therefore decided that maintaining the current business portfolio will contribute to the maximization of the corporate value of the Group.

2) Rational reasons for maintaining Contec as a listed subsidiary

While Contec engages in the external sales business above, it supplies the Company with electronics products essential for material handling systems. Given that these products need to be developed based on long-standing,cutting-edgeknow-how while keeping industrial secrets, the Company has decided that it will lead to the maintenance and enhancement of the corporate value of the Group if Contec is required as a listed company to practice strict discipline in areas such as governance and security.

The Group discusses on the rationality of maintaining Contec as a listed subsidiary at meetings of the Board of Directors and other occasions to objectively confirm whether it remains rational. There is no contract, etc. governing what is to be described as views and policies on Group management with listed subsidiaries.

3. Measures to ensure the effectiveness of the governance system of listed subsidiaries

Given that there is a risk of conflicts of interest arising between general shareholders of the Company and listed subsidiaries, the Company shall encourage Contec to build and operate an effective

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governance system, for instance by appointing several independent outside directors among the directors of Contec, to secure independent decision-making as a listed subsidiary.

The Company shall also ask for prior consultation on matters necessary for risk management.

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