Denka : Corporate Governance Report

Corporate Governance Report

Last Update: June 22 ,2021

Denka Company Limited Toshio Imai, President & CEO Contact: Administrative Section, Administrative Department [phone] Securities Code: 4061 https://www.denka.co.jp

The corporate governance of Denka Company Limited (the "Company") is described below.

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

Other Basic Information

1. Basic Views

In order to fulfill the expectations and trust of its many stakeholders, including shareholders, customers, local society, and employees, based on "The Denka Value" (corporate philosophy), which forms the basis for the activities of the Denka Group, the Company strives to strengthen its business foundation by improving its earnings power and expanding the scope of operations, while also working to improve corporate value by making every effort to continue being a company that can win the trust and sympathy of society.

The Company considers corporate governance as the foundation for the above, and so we have striven to strengthen governance, in order to fulfill the responsibilities we owe to all our stakeholders, and ensure the transparency and soundness of our management.

Specifically, it has introduced an Executive Officer System to speed up its decision-making, and by delegating powers and roles in the execution of business to the Executive Officers, clearly separates the execution of business by Executive Officers and the overseeing and supervision of such execution by the Directors.

Furthermore, it has endeavored to strengthen corporate governance by abolishing special titles for Directors (Senior Managing Director, Managing Director etc.) in principle, thus establishing a system where all Directors can engage in the monitoring and supervision of business execution from an equal standing.

With regard to its outside officers system, the Company appoints Outside Directors who are sufficiently independent and have extensive knowledge in their respective areas. In addition to carrying out supervision of management from an external perspective, they have established places for regular exchanges of opinions with top management. This enables them to provide sufficient advice through exchanges outside the Board of Directors meetings and enables the Company to monitor its management from an external perspective.

In terms of the design of its corporate governance system, the Company has chosen to transition to a Company with Audit & Supervisory Committee. This step is aimed at further strengthening the supervisory function of the Board of Directors, through measures such as placing the Board of Directors' decision rights with Directors who are Audit & Supervisory Committee Members.

The Company has also established the Nomination & Remuneration Advisory Committee composed of a majority of Outside Directors, as an advisory body to the Board of Directors. This has been done to promote transparent and objective management decisions, as the Board of Directors receives diverse opinions and advice from Outside Directors on important management issues such as those concerning governance, including nominations and remuneration.

These changes will enable the Company to bolster its management structure possessing both proactiveness and prevention.

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

[Principle 3.1 Full Disclosure]

1. Explanations with respect to the individual appointments, dismissals and nominations of the senior Management and Directors
   The reasons for the appointment of internal and outside directors are included in the Reference Documents for General Meetings of Shareholders. As to reasons for the appointment or dismissal of Executive Officers, the Company will consider disclosing the respective career records of new Executive Officers and the reasons for the dismissal of Executive Officers on the Company's website at the time the appointment or dismissal is resolved by the Board of Directors.
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[Disclosure Based on the Principles of the Corporate Governance Code] Updated

[Principle 1.4 Strategic Shareholdings]

• Policy concerning strategic shareholdings

The Company holds shares in cases where it judges that doing so is in accordance with the creation of stable business relationships and will maintain and strengthen business alliances in line with growth strategies and contribute to increased corporate value over the medium- to long-term, and it will sell any shares that do not conform to this policy.

• Examination on strategic shareholdings at the Board of Directors

The Company comprehensively reviews the shares at the Board of Directors meeting in compliance with the above policies from a variety of perspectives, including the financial condition of the issuer of said shares, the value of transactions with the Company and its economic rationality and a comparison with the Company's capital cost. The purpose of holding said shares are stated in the securities report. The Company will continue to review them annually.

As a result of this ongoing review, the Company reduced the number of its strategic shareholding (listed shares) as of March 31, 2021 to approximately two-thirds of that as of March 31, 2016.

• Standards for exercise of voting rights as to strategic shareholdings

Regarding the exercising of voting rights in relation to shares held as strategic shareholdings, in principle, the Company respects the business policies and strategies of the issuing company. After consideration of the issuing company's management situation by the department in charge of the management of those shares, the Company carefully examines proposals individually from the perspective of whether they will ultimately contribute to increased shareholder value before making its decision for or against the proposals. In the following cases in particular, the Company will enter into dialog with the issuing company as necessary and make a careful decision as to whether or not it will vote for the proposals:

1. in the event that a marked deterioration in the business performance continues for a set period of time;
2. in the event of a serious scandal;
3. in the event of any other proposal that could cause damage to shareholder value.

[Principle 1.7 Related Party Transactions]

The Company requires, in the Board of Directors Regulations, that the prior consent of the Board of Directors must be obtained for any competing transactions and dealing with the company by Directors and the results must be reported afterwards. In the case of continuing transactions, the results of competing transactions and dealing with the company in the previous fiscal year are reported to the Board of Directors once a year, and prior approval for the current fiscal year is sought. Also, related party transactions are determined in the same way as general transaction terms, and are disclosed in the notes to financial statements and securities reports in accordance with laws and regulations.

[Principle 2.6 Roles of Corporate Pension Funds as Asset Owners]

The Company has adopted a defined benefit corporate pension plan, and management of the reserve for the corporate pension fund is based on the regulations.

Specifically, the Company determines the asset composition ratio in order to achieve the necessary management objectives in accordance with the basic policy for management, and also decides the most appropriate management trustee institution.

The department in charge of managing the corporate pension fund appropriately monitors the management trustee institution with regard to management performance, conflicts of interest and exercise of voting rights.

[Principle 3.1 Full Disclosure]

1. Company objectives (e.g. business principles), business strategies and management plans (Corporate Philosophy)

Upon the Company's centenary in 2015, we strove to further promote its corporate culture that encourages taking up challenges within the Group.We also worked to show, internally and externally, our will to rebuild a new Denka by changing the Company's name, updating the corporate logo, as well as establishing a new slogan "Possibility of Chemistry." and the Denka Principles.

In 2016, which marks the Company's 101st anniversary, looking upon the next centennial, we renewed "The Denka Value" corporate philosophy that serves as the basis for the Group's corporate activities. "The Denka Value" consists of the Denka Mission, which represents our uppermost mission statement, and the Denka Principles, a set of precepts guiding actions taken by every Group employee.

"The Denka Value" (Corporate Philosophy) ・The Denka Mission

Taking on the challenge of expanding the possibilities of chemistry to create new value and contribute to sound social development.

Note:Based on the corporate slogan "Possibility of chemistry"

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・Denka Principles

We:

• Boldly confront challenges with determination and sincerity.
• Think and take action today with the future in mind.
• Deliver new values, and inspire customers through innovative monozukuri*.
• Respect the environment and create a cheerful workplace that prioritizes safety.

-Contribute to a better society, whilst taking pride in being a trusted corporate citizen.*Japanese-style craftsmanship

(Management Plan)

In November 2017, Denka formulated the new "Denka Value-Up" management plan for the five years from fiscal 2018 to fiscal 2022.

The "Denka Value-Up" management plan is rooted in the basic concepts of safety as No. 1 priority, environmental awareness, fostering and tapping human capital and contributing to the community, all of which are indispensable for continued growth of the Company. We will aim to realize sustainable and sound growth as a "Specialty-Fusion Company," through new strategies to achieve dramatic growth globally. Following the previous management plan, we will exercise a balance between returns to shareholders that continue commitment to 50% standard for total payout ratio and an investment plan that includes strategic investment, without any excessive accumulation of internal reserves.

Overview of the "Denka Value-Up" management Plan 1. Growth vision

1. Become a "Specialty-Fusion Company," with a strong profile on global markets
2. Maintain sustained growth by significantly enhancing productivity through innovative processes
3. Secure sound growth through work-style reforms

2. Numerical targets
Fiscal 2017(Results)	Ratio of operating income:8.5%
Operating income: ¥33.7billion
Ratio of specialty business* 49%
Fiscal 2020(Results)	Ratio of operating income:9.8%
Operating income: ¥34.7billion
Ratio of specialty business* 97%
Fiscal 2022 *Definition
Operating income :¥50.0billion	Ratio of operating income:13%
Ratio of specialty business* 83%

• "Specialty" refers to a business that combines a distinctive nature with high added value, is not easily influenced by external conditions, and has a leading share of its market, as well as businesses with great near-term potential (businesses that have become specialized by fusing new specialty grades and solutions in the healthcare, environment/energy, high value-added infrastructure and basic businesses).

3. Growth strategies

1. Business portfolio shift

1. Accelerate the expansion of our specialty businesses
   Concentrate management resources on three priority areas (Healthcare, The environment and energy, High-value-added infrastructure), and meet numerical targets through aggressive strategic investment (including M&A and business alliances, stepped up R&D and focused human resource policy).
2. Specialize our key businesses
3. Redefine the positioning of the commodity businesses

1. Introduction of Innovative processes

Rather than adhering to precedent, proactively work to introduce cutting-edge ICT technologies, drill down to truly essential processes and promote standardization of processes, to achieve dramatic improvements in productivity, create new businesses, execute work-style reforms and promote diversity

1. Production process reforms
2. R&D process reforms
3. Operational process reforms

4. Investment Plan

Total for five years: ¥200.0 billion

Of this strategic investment: ¥ 75.0 billion (¥15.0 billion/year)

Of this Regular investment: ¥125.0 billion (¥25.0 billion/year)

5. Shareholder returns

Continued commitment to 50% standard for total payout ratio

Regarding shareholder returns, the dividend is prioritized, with flexible purchase of treasury shares, depending on stock price movements and other factors.

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1. • Total payout ratio = (Dividends paid + treasury stock purchased) / consolidated net income
2. Basic views and guidelines on corporate governance based on each of the principles of the Code Please refer to 1.1 "Basic Views" in this report.
3. Board policies and procedures in determining the remuneration of the senior management and Directors 1. Directors
   Remuneration for Directors (excluding Directors who are Audit & Supervisory Committee) shall be in accordance with each Director's roles and responsibilities, and shall be determined by the Board of Directors after receiving recommendations and proposals from the Nomination & Remuneration Advisory Committee, and set forth in internal regulations, in order to enhance objectivity and transparency.
   The structure of Directors' remuneration (excluding Directors who are Audit & Supervisory Committee) shall, in addition to a fixed monthly amount of basic remuneration, consist of performance-linked cash remuneration, designed to increase motivation to improve the financial results for each fiscal year, and stock remuneration, designed to increase motivation to contribute to improving medium- and long-term performance and enhancing corporate value. These function as sound incentives to maintain growth. However, in view of the duties performed by Outside Directors and non-executive Directors, remuneration for these Directors shall consist solely of basic remuneration.
   The total amount of performance-linked remuneration shall be determined with reference to consolidated operating income, a key indicator under the Company's management plan. However, if consolidated operating income is below a certain level, or a massive extraordinary loss is recorded, or if a serious compliance breach has occurred, then no payment shall be made, or the payment amount shall be reduced.
   Remuneration for Directors who are Audit & Supervisory Committee Members consists only of a fixed monthly amount, determined within the total amount resolved by the General Meeting of Shareholders.

2. Executive Officers

Remuneration for Executive Officers shall be in accordance with each Executive Officer's roles and responsibilities, and shall be determined by the Board of Directors after receiving recommendations and proposals from the Nomination & Remuneration Advisory Committee, and set forth in internal regulations, in order to enhance objectivity and transparency.

The structure of Executive Officers' remuneration shall, in addition to a fixed monthly amount of basic remuneration, consist of performance-linked cash remuneration, designed to increase motivation to improve the financial results for each fiscal year. These function as sound incentives to maintain growth.

The total amount of performance-linked remuneration shall be determined with reference to consolidated operating income, a key indicator under the Company's management plan. However, if consolidated operating income is below a certain level, or a massive extraordinary loss is recorded, or if a serious compliance breach has occurred, then no payment shall be made, or the payment amount shall be reduced.

1. Board policies and procedures in the appointment and dismissal of the senior management and the nomination of candidates for Directors
   The Company, in nominating candidates for Directors, selects personnel who have abundant experience and great insight in their respective fields and also are expected to contribute to enhancing the Company's corporate value. Those candidates are proposed by the President who is the Representative Director, and deliberated and decided by the Board of Directors after having received reports and suggestions from the Nomination & Remuneration Advisory Committee.
   In appointing Executive Officers, candidates are proposed by the President who is the Representative Director and the Board of Directors then deliberates on the candidates and decides in accordance with the appointment criteria set out in the Executive Officers Regulations (1. Abundant business experience and familiarity with the business of the Company; 2. Excellent management sense; 3. Superior guidance, leadership, vitality and planning abilities; 4. Personality and insight suited to an Executive Officer; and 5. Good physical and mental health) and dismissal of Executive Officers will be deliberated and determined by the Board of
   Directors, with a draft prepared by the Representative Director in accordance with each of the dismissal criteria set out in the Executive Officers Regulations (1. when there is an act that damages the Company's credibility and honor; 2. when the Company's trade secrets or technical secrets have been leaked; 3. when the Company has been damaged as the result of willful intent or gross negligence; 4. when the President's instructions are not followed for no logical reason; 5.
   when there is a sharp slump in business results; and 6. when there is any other adverse act equivalent to the preceding 1. to 5.), after having received reports and suggestions from the Nomination & Remuneration Advisory Committee.

[Supplementary Principle 4.1.1 Scope of Delegation to Management]

After review of the role of the Board of Directors, the Company clearly positioned the role of Board of Directors as a body with decision-making function and supervisory function for management. The execution of business has been delegated to the respective Executive Officers, except for important business

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executions. Matters to be resolved by the Board of Directors, including basic policies regarding corporate management and other important matters relating to business execution, are clearly set forth in the Board of Directors Regulations. In accordance with the Regulations, the Board of Directors oversees and supervises the execution of business. In addition, the Board of Directors resolves on the assignment of duties and authority of the Executive Officers responsible for business execution. As well as delegating business execution to Executive Officers within that scope, the Board of Directors receives reports on the status of their execution of business.

The Company has also established the Management Committee composed of Directors (including Directors who are Audit & Supervisory Committee Members) and some Executive Officers, with the aim of engaging in deliberation and discussion on important management issues. With the Executive Officer responsible for each item participating in discussions on that item, the Company is pursuing more efficient discussions and swifter decision-making on important management matters.

[Principle 4.8 Effective Use of Independent Outside Directors]

The Company considers that it is necessary to appoint Independent Outside Directors to comprise at least one-third of the Board of Directors, in light of the factors such as the progressive globalization and computerization of the management environment. Based on this policy, currently four (44.4%) of the Company's 9 Directors are Outside Directors (including Outside Directors who are Audit & Supervisory Committee Members).

All four Outside Directors have been designated as independent directors pursuant to the rules of the Tokyo Stock Exchange and registered with the Exchange.

[Principle 4.9 Independence Standards and Qualification for Independent Outside Directors]

For independent Outside Directors, the Board of Directors of the Company selects candidates for appointment as independent officers based on judgment focused on substantiality, such as whether they can be expected to contribute to increasing the Company's corporate value. Details are specified as follows and are based on the externality requirements prescribed in the Companies Act and the independence standards set by the Tokyo Stock Exchange.

○Independence standards for Outside Directors

The independence standards for the Company's Outside Directors are that they must be persons who do not fall under any of items (1) to (5) below.

1. An operating officer(*1) of a main customer(*2), main supplier(*3) or main lender(*4) that is a main business partner of the Company.
2. A consultant, accountant, lawyer or the like who has received money or other property from the Company
   exceeding a yearly amount of 10 million yen, other than officer's remuneration, in the most recent fiscal year.
3. In the event that the party receiving the property referred to in item (2) above is an organization, a person belonging to an organization in which the amount paid by the Company to that organization in the most recent fiscal year comprised 2% or more of that organization's net sales or gross revenue.
4. A person who fell under items (1) to (3) above within the period of the past year.
5. A person who is the spouse or a relative within the second degree of kinship of a person listed below

(excluding immaterial persons):

1. A person falling under items (1) to (4) above;
2. A person who is currently, or was within the period of the past year, an operating officer at the Company

or a subsidiary of the Company;

*1 Operating officer: an Executive Director, Operating Executive, Executive Officer, or other employee or the like.

*2 Main customer: a customer that paid to the Company an amount that comprised 2% or more of the Company's net sales in the most recent fiscal year.

*3 Main supplier: a supplier to which the Company paid an amount that comprised 2% or more of that supplier's net sales in the most recent fiscal year.

*4 Main lender: a lender that, at the end of the most recent fiscal year, was essential to the Company's financing and is relied upon by the Company to the extent that there is no substitute.

[Supplementary Principle 4.11.1 View on Diversity and Size of the Board of Directors]

The Company's Board of Directors is currently composed of 9 Directors, including five Directors from within the Company (of whom one is Audit & Supervisory Committee Member) and four Outside Directors (of whom three are Audit & Supervisory Committee Members). However, in terms of the transparency and soundness of management, the Company considers it appropriate to increase the number of Directors to 15

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