Kyosan Electric Manufacturing : Corporate Governance Report (183KB）

Corporate Governance Report

Last Update: November 14, 2022

Kyosan Electric Manufacturing Co., Ltd.

Ryoji Kunisawa Representative Director, President, CEO Contact: Shigeyuki Fukaya, General Manager of General Affairs Dept. Phone: [phone] Securities Code: 6742 https://www.kyosan.co.jp/english/

The corporate governance of Kyosan Electric Manufacturing Co., Ltd. (the "Company") is described below.

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

1. Basic Approach

The Company believes that excellent governance means operating businesses that enhance the corporate value of the Company for all stakeholders, through fair and open businesses managed from a long-term perspective as a going concern that balances both environmental and social considerations, while aiming to maximize shareholder value. Based on this principle, we strive to establish healthy and functional corporate governance, and to build a corporate ethics system that ensures the transparency and soundness of corporate activities.

We believe that strengthening corporate governance will contribute to the sustainable growth of a company and the improvement of medium- to long-term corporate value. We strive to practice management that improves our corporate value by building a positive relationship with all stakeholders through further enhancing the roles and responsibilities of the Board of Directors, etc., and through the proper disclosure of information and active dialogue with shareholders.

Reasons for Non-compliancewith the Principles of the Corporate Governance Code Updated [Principle 3.1.3: Full Disclosure]

The Company discloses policy initiatives and detailed measures that the Company implements, primarily its approach and initiatives related to its own sustainability, but also regarding issues such as investment in human capital and intellectual property, in the medium-term management plan for the period from the fiscal year ending March 31, 2023, to the fiscal year ending March 31, 2025. Going forward, the Company will also analyze the impact on its business activities from the risks and profit opportunities associated with climate change, promote necessary and effective initiatives, and provide timely and appropriate disclosure of these efforts.

Disclosure Based on the Principles of the Corporate Governance Code Updated

[Supplementary Principle 1.2.4: Exercise of Shareholder Rights at General Meetings of Shareholders]

The Company equally values foreign shareholders. The Notice of Convocation and Reference Documents for the General Meeting of Shareholders are translated into English and disclosed promptly on the Company's website.

(Notice of Convocation of General Meeting of Shareholders (English version): https://www.kyosan.co.jp/english/ir/stock02.html)

In order to create a favorable environment for the exercise of voting rights, the Company has introduced a platform for the electronic exercise of voting rights from the 157th Ordinary General Meeting of Shareholders held on Friday, June 24, 2022.

[Principle 1.4: Cross-Shareholdings]

1. Policy on cross-shareholdings of listed companies

With respect to cross-shareholdings deemed necessary for the Company's sustainable growth and increase of corporate value for the medium to long term, through creating business opportunities and maintaining and strengthening business transactions and procurement partnerships, the Board of Directors determines each year if cross-shareholdings are appropriate or not on a case-by-case basis from viewpoints such as benefits

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and risks associated with cross-shareholdings, based on the perspective of improving capital efficiency. In addition, the Company will also endeavor to reduce cross-shareholdings through dialogue with the companies it invests in and to hold cross-shareholdings in an appropriate manner.

2. Standards for determining if cross-shareholdings are appropriate or not

The Company determines whether to continue to hold a stock based on quantitative verification by calculating the overall yield of each stock based on trading profit and the amount of annual dividends as of the end of each fiscal year, and comparing the results with the capital cost, taking account of the medium- to long-term outlook for the share price and other factors, including the aspect of risks.

3. Standards for exercising voting rights associated with cross-shareholdings

The Company exercises its voting rights associated with cross-shareholdings according to the following standards.

1. Voting rights are to be exercised for all proposals in principle.
2. The Company makes a decision on whether to approve or disapprove each proposal upon consideration of operations and management of each issuing company while paying respect to its management policies.
3. With regard to proposals that may affect the corporate value of the Company or common interests of shareholders, the Company decides whether to approve or disapprove proposals upon confirmation of

the objective of such proposals and the perspective on the improvement of corporate value through individual dialogues.

The Company addresses issues of cross-shareholdings in accordance with the aforementioned "1. Policy on cross-shareholdings of listed companies," "2. Standards for determining if cross-shareholdings are appropriate or not" and "3. Standards for exercising voting rights associated with cross-shareholdings."

[Principle 1.7: Related Party Transactions]

In principle, the Company carries out a legal review on related party transactions, if any, followed by a consultation at the Board of Directors' meeting with the official involved in such transactions excluded from its quorum as a party with special interest, thereby it examines the appropriateness of such transactions.

[Principle 2.4.1: Ensuring Diversity within the Company, Including the Promotion of Women's Social Advancement]

The Company's Board of Directors has adopted the following resolutions regarding the Company's approach to ensuring diversity and its policy for personnel development and improvement of the internal working environment.

The Kyosan Group believes that diversity, equity and inclusion (DE&I) initiatives are essential to implementing its management philosophy and achieving sustainable growth as a company. We promote DE&I to provide equitable opportunities for our employees, protect their dignity, and promote mutual respect in the workplace. We will strive to create a working environment that is fair, free from bias, and respectful of individuality for all employees.

The Kyosan Group encourages the autonomous growth of individual employees through systematic career development and the enhancement of systematic educational programs, and promotes the appointment of core personnel who are the right person for the right job, regardless of age, gender, nationality, or other attributes.

In addition, the Company will promote efforts to secure diversity in our core personnel, including foreign nationals and mid-career hires, primarily by increasing the currently insufficient number of female managers by 150% compared to that of 2022 by 2025.

In order to transform into a company with a global perspective, the Kyosan Group will promote an evaluation system that gives employees a sense of fulfillment, including the sense that they are needed, they can grow, and they can exercise their abilities, as well as working style reforms, including improvements in the workplace environment, in order to increase employee engagement and develop personnel that will generate sustainable value.

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

The Company has a defined benefit corporate pension plan in place, where management of its fund is outsourced to a dedicated asset manager. Meanwhile, the Company, as appropriate, provides the managers of the department in charge of the pension plan with the opportunities to receive an explanation from the asset

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manager, in order to enhance its function as the asset owner, in an effort to ensure development of internal personnel in this area.

[Principle 3.1: Full Disclosure]

1. The Company has disclosed in "KYOSAN VISION" that its corporate philosophy is "Based on the themes of 'Safety and Reliability' and 'Global Environment Conservation,' we will contribute to 'the development of society and a better quality of life' with our advanced technologies and high-quality assurance," the details of which have been made public through the Company's website. Please refer to the following.
   (Philosophy: https://www.kyosan.co.jp/english/company/vision.html)
   The Company has also formulated its medium-term management plan and outlook for the current fiscal year, and the details of which have been made public through the Company's website. Please refer to the following.
   (Medium-term management plan: https://www.kyosan.co.jp/company/pdf/medium- term_management_plan2025.pdf))
2. The Company's basic approach to corporate governance is disclosed in its Corporate Governance Report. For details, please refer to "I. 1. Basic Approach" in the Report.
3. Policies and procedures in determining Directors' remuneration by the Board of Directors are disclosed in the Company's Corporate Governance Report. For details, please refer to "Remuneration for Directors" in "II. 1. Organizational Composition and Operation" in the Report.
4. On the appointment and dismissal of senior management and nomination of candidates for Director, the Board of Directors resolves such issues based on the judgement by Directors on the basis of their skills and qualifications deemed suitable to fulfill their respective roles, with reference to reports by the Nomination and Remuneration Committee.
   The basic qualifications, skills, and other qualities required in the selection of candidates for Director are as follows.
5. • Is fit in mind and body to fulfill duties as Director
   • Possesses integrity, high ethical values, and a strong sense of responsibility
   • Possesses a high degree of compliance awareness, in terms of the sound management of a listed company and the establishment of substantial corporate governance
   • Aims for the sustainable growth of the Company and the improvement of corporate value by contributing to local communities, clients, suppliers, shareholders, and other stakeholders
   • Has no special interests that may influence the Company's management decisions
   • Is able to actively express his/her own opinion from a company-wide perspective
   • Is subject to none of the reasons for disqualification from serving as a director prescribed under Article 331, Paragraph 1 of the Companies Act
   • For internal Directors, possesses the experience and ability to contribute to the Company's management and businesses
   • For Outside Directors, possesses useful career experience to contribute to improving medium- to long- term corporate value; specifically, possesses expert knowledge and experience in fields such as management, finance, accounting, law, government administration, and technical development Regarding the dismissal of Directors, if either the Board of Directors or the Nomination and

Remuneration Committee determines that a Director may not fulfill the criteria for the appointment listed above, the Nomination and Remuneration Committee, either on request from the Board of Directors or of its own initiation, will deliberate on whether or not the Director should serve to the end of his/her present term of office, and report to the Board of Directors on the results of this deliberation. Should the Board of Directors determine, with reference to the report of the Nomination and Remuneration Committee, that the aforementioned Director should not continue to serve in the office of director, then it will dismiss the Director.

The nomination of candidates for Audit & Supervisory Board Member, who are endorsed by Representative Directors, is subject to resolutions of the Board of Directors upon obtaining the consent of the Audit & Supervisory Board.

The basic qualifications, skills, and other qualities required in the selection of candidates for Audit & Supervisory Board Member are as follows.

• Is fit in mind and body to fulfill duties as Audit & Supervisory Board Member
• Possesses integrity, high ethical values, and a strong sense of responsibility
• Is able to ensure independence from executives
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1. • Is able to maintain a fair and unbiased attitude and to actively express his/her own opinions.
   • Possesses an excellent ability to objectively analyze and make decisions from a company-wide perspective
   • Is subject to none of the reasons for disqualification from serving as an Audit & Supervisory Board Member prescribed under the items of Article 331, Paragraph 1 of the Companies Act as applied mutatis mutandis pursuant to Article 335, Paragraph 1 of the Act
   • For Outside Audit & Supervisory Board Members, possesses expert knowledge and experience in fields such as corporate management, financial accounting, law, and government administration
   • For one of the Audit & Supervisory Board Members, possesses a considerable level of knowledge of finance and accounting
2. The agenda relating to the appointment and dismissal of senior management is determined by the Board of Directors after deliberation at the Nomination and Remuneration Committee, which is an advisory body of the Board of Directors, and an explanation of reasons for the nomination of each candidate is contained in Reference Documents for the Ordinary General Meeting of Shareholders.

[Supplementary Principle 4.1.1: Roles and Responsibilities of the Board of Directors (1)]

In addition to matters stipulated by laws and regulations and the Articles of Incorporation, the Board of Directors of the Company deliberates, approves and makes decisions on matters stipulated by the Board of Directors' Regulations.

Furthermore, the Board of Directors of the Company delegates matters related to business execution other than matters to be deliberated that are stipulated by the Board of Directors' Regulations to each Director and Executive Officer within the scope of administrative authority of Directors and Executive Officers.

[Principle 4.2.2: Roles and Responsibilities of the Board of Directors (2)]

From the viewpoint of improving corporate value over the medium to long term, the Company's Board of Directors has positioned the Company's sustainability initiatives as an important issue in the company-wide strategy stated in the medium-term management plan, and has formulated a basic approach to this subject. In addition, the Company will evaluate each business segment in the medium-term management plan and implement effective allocation of management resources.

(Basic Approach to Sustainability: https://www.kyosan.co.jp/english/csr/policy.html)

[Principle 4.9: Independence Standards and Qualifications for Independent Outside Directors]

In the selection of candidates for Outside Directors, the Company has its own standards, namely, whether they meet the requirements for Outside Directors stipulated by the Companies Act and the independence criteria prescribed by the Tokyo Stock Exchange, and whether they are qualified as a specialist with professional knowledge required for corporate management, have experience in corporate management, or have equivalent skills. In addition, the Company selects individuals, who are deemed to have the potential to fulfill duties as Outside Director of the Company by leveraging their broad and professional insight, as independent Outside Director candidates.

[Principle 4.10.1: Use of Voluntary Structures]

The Company has established the Nomination and Remuneration Committee, comprising a majority of Independent Outside Directors, as an advisory body of the Board of Directors. The Nomination and Remuneration Committee considers especially important matters concerning issues such as nomination and remuneration, and receives appropriate involvement and advice from Independent Outside Directors.

The Company has disclosed that its Nomination and Remuneration Committee is composed of a total of five members: three Independent Outside Directors and two internal Directors. This composition, with the Chairperson appointed from among the Independent Outside Directors, ensures that independence is fully assured. The Board of Directors considers reports and advice received from the Nomination and Remuneration Committee as an important input in its deliberation and resolutions.

[Supplementary Principle 4.11.1: Preconditions for the Board of Directors and Audit & Supervisory Board Effectiveness]

The Board of Directors of the Company consists of Directors who are familiar with respective operating and administrative divisions, and independent Outside Directors who satisfy independence criteria stipulated by the Companies Act and prescribed by the Tokyo Stock Exchange as well as the Company's own standards.

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When appointing Directors, in addition to using a skills matrix to determine candidates, the Company also discloses a skills matrix as a reference document for proposals for the appointment of Directors at the General Meeting of Shareholders. Please refer to the Company's website for details.

(Notice of Convocation of the General Meeting of Shareholders: https://www.kyosan.co.jp/english/ir/stock02.html)

[Supplementary Principle 4.11.2: Preconditions for the Board of Directors and Audit & Supervisory Board Effectiveness]

Directors and Audit & Supervisory Board Members may concurrently serve other significant positions to the extent reasonable, and the status of concurrent positions is included in the disclosure documents, such as Reference Documents for the General Meeting of Shareholders and Business Reports.

(Notice of Convocation of the General Meeting of Shareholders: https://www.kyosan.co.jp/english/ir/stock02.html)

[Supplementary Principle 4.11.3: Preconditions for the Board of Directors and the Audit & Supervisory Board Effectiveness]

Based on the opinions from Directors and Audit & Supervisory Board Members, the Company strives to improve the method of operation and agenda items of the Board of Directors' meetings in order to enhance the effectiveness of the Board. The Company also conducts an anonymous survey of the Directors and Audit

• Supervisory Board Members in relation to the Board of Directors aimed at further securing and improving the effectiveness of the Board.
  By conducting an evaluation by the Board of Directors based on aggregation and analysis of the results of the survey, a certain degree of positive evaluation has been given to the effectiveness of the Board, taking into account an objective evaluation by a legal advisor. Efforts to secure and improve the effectiveness of the Board of Directors will be continuously implemented.

[Supplementary Principle 4.14.2: Director and Audit & Supervisory Board Member Training]

The Company encourages Directors and Audit & Supervisory Board Members to participate in classes hosted by the Company's departments in charge or external specialists, external seminars and other programs, as needed, to enable Directors and Audit & Supervisory Board Members to properly perform their respective duties.

[Principle 5.1: Policy for Constructive Dialogue with Shareholders]

In order to promote constructive dialogue with shareholders, the Company takes the following initiatives:

1. The Company engages more actively in constructive dialogues with shareholders to a reasonable extent through opportunities such as IR briefings, etc., held regularly by the Company in addition to General Meetings of Shareholders.
2. The Company strives to provide feedback to comments by shareholders received through dialogues to Directors and senior management, and appropriately reflect such comments in the Company's corporate activities.
3. The official in charge of the General Affairs Department presides over the dialogue with shareholders, and the General Affairs Department functions as a secretariat to disclose corporate information in a timely and appropriate manner and to promote further dialogue with shareholders.
4. As for conducting dialogues with shareholders, the Company appropriately manages insider information in accordance with the Company's internal regulations. To ensure fairness for all of its shareholders with regard to financial information, the Company refrains from answering questions and having dialogues concerning performance outlook during the period between the closing of each quarter and the announcement of its financial results.

[Principle 5.2.1: Formulation and Disclosure of Management Strategy and Management Plans]

The Company's Board of Directors has resolved the following basic policy regarding its business portfolios.

The Kyosan Group aims to build robust business portfolios that combine high profitability and growth potential with resistance to severe environmental changes, according to the corporate philosophy of "Based on the themes of 'Safety and Reliability' and 'Global Environment Conservation,' we will contribute to 'the development of society and a better quality of life' with our advanced technologies and high-quality assurance."

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