Kyushu Financial : Corporate Governance Reports

Corporate Governance
CORPORATE GOVERNANCE	Kyushu Financial Group, Inc.
	Last updated: December 28, 2021
	Kyushu Financial Group, Inc.
	Yoshihisa Kasahara, President and Representative Director
	Phone: [phone]
	Securities code: 7180
	https://www.kyushu-fg.co.jp

This document describes the state of the corporate governance at Kyushu Financial Group, Inc. ("Kyushu Financial")

I. Basic Stance on Corporate Governance and Capital Structure, Business Attributes, and Other Basic Information

1. Basic Stance Updated

The Kyushu Financial Group (the "Group") establishes the Group Management Philosophy (see the attachment), and in order to carry it into action, complies with laws and regulations and ensures appropriate business decision-making and execution of operations as well as endeavors to achieve high degrees of transparency, openness, and soundness of management, thereby enhancing corporate governance.

1. The Group will respond to the trust and expectations of customers and will provide optimal, high-level comprehensive financial services to customers.
2. The Group will grow with local communities and actively contribute to the realization of vibrant communities.
3. The Group will nurture an abundance of creativity and an open-minded organizational culture, continuing to challenge itself to move toward a better future.

In accordance with its basic stance on the corporate governance system stated below, Kyushu Financial has adopted the form as a Company with Audit and Supervisory Committee because it regards the form suitable to accelerate and improve the efficiency of decision making through delegation of authority for further enhancement of discussions regarding medium- to long-term management strategies at the Board of Directors, which consists of 15 Directors (including 5 External Directors), as well as to enhance supervision of the Board of Directors and strengthen corporate governance by establishing an Audit and Supervisory Committee, the majority on which consist of the External Directors, and giving voting rights at the Board of Directors meeting to the Directors who are Audit and Supervisory Committee Members (hereinafter the "Audit and Supervisory Committee Members").

1. We clearly define supervision and execution in order to establish an environment that allows the Board of Directors to focus on the supervision of Directors' performance of duty, thereby ensuring the effectiveness of corporate governance.
2. The Board of Directors delegates decision-making on the execution of individual operations to the Senior Management wherever possible unless it involves matters specified in laws and regulations or the articles of incorporation, or material matters of execution of operations such as policies, strategies, or plans pertaining to Kyushu Financial's management.
3. We have in place and leverage optional internal bodies, including the Group Executive Commission and other various committees, in order to help the Senior Management with prompt and decisive decision-making, thereby ensuring flexible execution of operation and enhancing our corporate governance.
4. We leverage objective views offered by our External Officers wherever possible in order to ensure the fairness and transparency of our decision-making process pertaining to our operation.

We have also developed and published our "Corporate Governance Guidelines" with the aim of achieving the sustainable growth of the Group and increasing our medium- and long-term corporate value. The Group's officers and employees read the Guidelines for a full understanding so that they act accordingly.

(URL：https://kyushu-fg.co.jp/company/governance/)

[Reasons for not applying the principles of the Corporate Governance Code] Updated

[Principle 3-1 (iv)] Policy and Procedure regarding the Dismissal of the Senior Management

[Supplementary Principle 4-3 (3)] Establishment of an Objective, Timely, and Transparent Procedure for Dismissal of CEOs We have described our policy for appointment of Directors (including Audit and Supervisory Committee Members) in Articles 9 (Appointment of Directors [Excluding Those Who Are Audit and Supervisory Committee Members]) and 12 (Appointment of Directors Who are Audit and Supervisory Committee Members) of the Corporate Governance Guidelines published on our website. However, we have not formulated the policy and procedure for dismissal of the senior management (including CEO). Nevertheless, Kyushu Financial has established the Nominating and Remuneration Committee and the matters regarding appointment and dismissal of management are referred to the committee, increasing transparency and fairness in the decision- making process pertaining to the nomination of and compensation.

[Supplementary Principle 4-1 (3)] Development and Supervision of Plans for Successors of Chief Executive Officers

Kyushu Financial has not formulated a succession plan. Nonetheless, we are developing successor candidates based on the

training policy for the Directors (including Audit and Supervisory Committee Members) stated in Article 14 (Assistance System and Training Policy for Directors), Paragraph 1 of the Corporate Governance Guidelines published on our website, and the Board of Directors, through comments by Directors, confirms the development status of candidates for the next Representative Directors as needed.

We will continue to discuss application of the above principles in terms of transparency, openness, and soundness of our management.

[Supplementary Principle 4-10 (1)] Authority and Roles of Nominating and Remuneration Committee

Kyushu Financial has the Nominating and Remuneration Committee (hereinafter the "Committee") as the advisory body for the Board of Directors in order to make our decision-making process fairer and more transparent, thereby helping improve our corporate governance, through focused discussions and exchanges of opinions with Representative Directors and External Officers about matters pertaining to the nomination of and compensation to the management (Directors [including Directors who are Audit and Supervisory Committee Members] and Executive Officers).

The Committee is consulted regarding matters such as appointment and dismissal of management and compensation to the management, and seeking prior consultation with the Nominating and Remuneration Committee is built into the decision- making process, when submitting matters regarding nomination of and compensation to the Company's management to the Board of Directors.

The Committee met four times in fiscal 2020 and three times in fiscal 2021 as of the end of September and had sufficient discussions on matters regarding nomination of and compensation to the management, thereby contributing to the strengthening of independence and objectivity of the functions and accountability of the Board of Directors.

The Committee currently consists of four persons-two Representative Directors and two Independent External Directors-and is headed by the President and Representative Director.

External Officers account for a majority in the Committee and we will continue to review the composition of the members.

[Disclosure pursuant to the principles of the Corporate Governance Code] Updated

(Disclosure pursuant to the principle requiring that specified matters be disclosed) [Principle 1-4]Cross-held Shares

1. Cross-shareholding policy and criteria for exercising voting rights

Article 23 (Cross-held Shares), paragraphs 1 and 3 of the Corporate Governance Guidelines specify our cross-shareholding policy and criteria for exercising voting rights. Please visit our website, where the Article is published. (URL：https://kyushu-fg.co.jp/company/governance/)

-Our Approach to Reduction in Cross-held Shares

The Group holds the review stated in "2. Details of the review concerning cross-held shares" below in accordance with the Corporate Governance Guidelines. If the review has concluded that the necessity of cross-holding certain shares is low, we proceed with their gradual reduction with the consent of the issuers, taking account of any impact on the market.

-Specific Criteria for Exercising Voting Rights

As a rule, the Group exercises its voting rights regarding all proposals in accordance with the Corporate Governance Guidelines. We also discuss whether we agree or disagree with each proposal* that will likely have an impact on the corporate value of our Group and/or investee companies.

* The following are examples of proposals.

-Proposal for appointment of a Director/Auditor; proposal for compensation or retirement bonuses (when there is a governance - related concern [e.g. occurrence of a scandal or poor performance over a certain period])

-Proposal for appropriation of surplus (dividends paid despite a loss; no dividend payment despite a surplus for a certain period) -Proposal for material changes to the articles of incorporation

-Proposal for issuance of new shares

-Proposal for material reorganization (e.g. M&A, business merger) -Proposal for anti-takeover measures, etc.

2. Details of the review concerning cross-held shares

The Group regularly makes qualitative (e.g. the purposes of holding the shares and compliance) and quantitative* evaluation of respective cross-held shares in order to comprehensively determine whether retaining those shares is still relevant, and reports the details of the review to the Board of Directors.

* Formula for quantitative evaluation

Gross income from business (Net interest income + Fee and commissions) + Annual dividend - Expenses - Cost of credit/Book value ≧ Return on shareholders' equity

Please note that, even when the review concludes that a stock fails to meet the quantitative criteria, we may retain the stock if the issuer likely improve its performance through dialogue with us.

We also set the alarm (watching) point to review, as appropriate, each stock that may make market risk come to surface and determine whether to retain it.

We also monitor the details and results of reviews by the Group companies and report them to the Board of Directors and other relevant bodies, and ensure consolidated market risk management in order to enhance our functions as a holding company.

[Principle 1-7] Transactions with Affiliated Parties

Please see Article 20 (Prevention of Transactions Contrary to the Interest of Shareholders) of the Corporate Governance Guidelines published on our website.

(URL：https://kyushu-fg.co.jp/company/governance/)

[Supplementary Principle 2-4 (1)] Ensuring Diversity in Appointment of Core Human Resources

(1) Promotion of Female Participation

In April 2021, Higo Bank and Kagoshima Bank formulated the Second Action Plan based on the Act on the Promotion of Female Participation and Career Advancement in the Workplace for realizing a workplace environment that would motivate all female employees, enable them to continue their respective carriers, and demonstrate their abilities, and set forth goals for appointing them to managerial positions.

Based on the fiscal year action plan, we will continue to develop a workplace environment that allows all employees to fully demonstrate their individuality and ability by holding individual interviews and group training sessions, offering opportunities for information exchange, and operation of an in-house nursery school.

(Ratio of female employees in managerial positions: targets and results [as of September 2021])

[Higo]	Target: 12% or higher	Result: 11.3% [40 persons]
[Kagoshima]	Target: 5.5% or higher	Result: 4.2% [14 persons]

The banks have been evaluating well-motivated, capable human resources for promotion in a fair manner irrespective of their gender. In order to further promote female participation, we intend to increase the number of female managers, the starting point for future executives, by boosting their abilities as well as by developing a female-friendly working environment and raising awareness by supporting their carrier development.

Based on the fiscal year action plan, we will continue to develop a workplace environment that allows all employees to fully demonstrate their individuality and ability by holding individual interviews and group training sessions, offering opportunities for information exchange, and operation of an in-house nursery school.

(2) Hiring Foreign Employees

A total of 11 foreigners are working at Higo Bank (six) and Kagoshima Bank (five) together as of the end of September 2021. Amid anticipated market contraction due to population decline in Japan, there is a rising need to deepen ties with foreign countries from a long-term perspective. Kyushu Financial, through the hiring of foreign workers, aims to implement measures that would popularize the acceptance of foreign labor throughout the local region, while strengthening our business framework in growing Asia. In the most recent three years, Higo Bank newly hired three foreigners while Kagoshima Bank hired one, and the banks plan to continue with such hiring.

(3) Mid-Career Recruitment

Kyushu Financial Group has three full-time employees (two males [one mid-career recruitment and one new graduate] and one female [mid-career recruitment]), 41 employees on dispatch from Higo Bank and 31 from Kagoshima Bank.

Kyushu Financial Group hires regular employees to improve its expertise and diversity for the following purposes.

1. Hire highly specialized human resources for the future business strategy and business expansion as well as for strengthening of governance structure in order to further accelerate the speed of implementation and contribute to the business of Kyushu Financial.
2. Hire our own employees and combine them with dispatched employees to develop a diverse corporate culture and promote vitalization of Kyushu Financial as a whole.
3. Increase the name recognition of Kyushu Financial Group through the hiring activities of Kyushu Financial and generate synergies with hiring activities at its subsidiary banks to realize high quality hiring at the Group as a whole.
   In 2021, Kyushu Financial Group hired a total of three full-time employees (one new graduate and two mid-career recruitment). Kyushu Financial for the first time hired a new graduate (a science major from a graduate school) for full-time position, of whom we intend to develop as part of its digital human resource by assigning the person to a specialized department. Of the two employees hired in mid-career recruitment, one is a securities audit specialist and the other is a digital human resource, as Kyushu Financial focused on hiring of digital human resources (two out of three) in 2021.
   In its hiring plan for fiscal 2022, Kyushu Financial Group plans to hire one person each for 1. Accounting Operation (accounting and taxation knowledge, bookkeeping), 2. Real Estate Investment, 3. Risk Management Experience (market, credit, cyber), 4. In-house Lawyer, and 5. Digital Specialist (experience in app development and database development) for a total of five persons, mainly in mid-career recruitment.
   (4) Human Resource Development Policy, In-House Environment Development Policy
   The basic strategy of the personnel department is "improving personnel development and engagement" and it aims to realize the goal by combining the two pillars of "developing human resources for realizing value co-creation" and "respecting diversity and improving job satisfaction." In "developing human resources for realizing value co-creation," we aim to implement new growth support measures, which would make the human resources more flexible and energetic, such as systems for transfer and trying out a new post in addition to the support for human resource development in new fields, as well as initiatives that would extend the fields in which employees can thrive to the entire group. In "respecting diversity and improving job satisfaction," we, as a group, will implement initiatives for improving employee engagement so as to raise the job satisfaction of individual employees and realize diverse workstyle and workplace environment.
   For details, see the Integrated Report published on our website. (URL: https://kyushu-fg.co.jp/english/ir/library/disclosure/) Developing human resources and boosting engagement (pp.63-66)

[Principle 2-6] Fulfillment of Functions as an Asset Owner of Corporate Pensions

-The Group manages the reserves of the corporate pensions through the corporate pension funds offered by Higo Bank and Kagoshima Bank (hereafter the "Funds"). To ensure stable and long-term total earnings for corporate pensions and the payment of pension benefits over the years to come, we have thorough reviews and discussions by the asset management committees, councils, and board of representatives (hereafter the "Bodies") at these Funds and work with investment consultants and asset managers, thereby forming optimum pension assets.

-With regard to the management of reserves, we make the following efforts so that we will serve functions expected to be as an asset owner.

-At the Funds, the Bodies discuss matters regarding managements (e.g., the selection of investment products, allocation of investments, and earnings/risk analysis). Then the Funds appraise investments and manage earnings in accordance with the investment policies they have determined. We also conduct overall evaluations and monitoring of asset managers, taking account of their track records, investment policies, investment systems, and investment processes, among others.

-We select the Funds' employees who are qualified in terms of skills in investments and administration (e.g. Heads of Market, Personnel, and Planning departments; union representatives) as the members of the Bodies at the Funds. Moreover, we assign employees with expertise in investments (e.g. those with experience in market departments) to the position of business managers at the Funds.

In December 2019, the Funds announced that they would adopt the "Principles for Responsible Institutional Investors <>" (hereafter the "SS Code"). In the role of "Institutional investors as asset owners," the Funds will urge asset managers to follow the principles of the SS Code, thereby helping increase the corporate value of investee companies and boosting medium- and long-term return on investment.

[Principle 3-1 (i)] The Group Management Philosophy and Medium-term Management Plan

We have established and published the Group Management Philosophy. The details of the Philosophy are stated in "I. 1. Basic Stance" in this document. The Group Medium-term Management Plan is also published on our website. (URL：https://kyushu-fg.co.jp/company/plan/)

[Principle 3-1 (ii)] Basic Stance on Corporate Governance and Basic Policy

Details are stated in "I. 1. Basic Stance" in this document. Please also refer to Article 3 (Basic Stance of the Group on Corporate Governance) of the Corporate Governance Guidelines published on our website. (URL：https://kyushu-fg.co.jp/company/governance/)

[Principle 3-1 (iii)] Policy and Procedure for Determining Directors' Remuneration

Please see Article 13 (Compensation to Directors) of the Corporate Governance Guidelines published on our website. (URL：https://kyushu-fg.co.jp/company/governance/)

We also have the Nominating and Remuneration Committee as the advisory body for the Board of Directors concerning the nomination of and compensation to the Management. We follow the processes specified below when we make decisions regarding compensation and other benefits to the Management.

-The total compensation to Directors who are not Audit and Supervisory Committee Members and Executive Officers for each fiscal year is submitted to the Nominating and Remuneration Committee for deliberation and determined by the Board of Directors.

-The individual amount of compensation to Directors who are not Audit and Supervisory Committee Members and Executive Officers is submitted to the Nominating and Remuneration Committee for deliberation and determined by the President within the bounds of the total compensation for the fiscal year determined by the Board of Directors.

-Compensation and other benefits to Audit and Supervisory Committee Members shall be treated separately from those to Directors who are not Audit and Supervisory Committee Members, and determined through discussions among Audit and Supervisory Committee Members within the amount resolved on at the General Shareholders Meeting.

[Principle 3-1 (iv)] Policy and Procedure for Appointment, Dismissal, or Nomination of Directors

Please see Articles 9 (Appointment of Directors [Excluding Those Who Are Audit and Supervisory Committee Members]) and 12 (Appointment of Directors Who are Audit and Supervisory Committee Members) of the Corporate Governance Guidelines published on our website.

(URL：https://kyushu-fg.co.jp/company/governance/)

We have established the Nominating and Remuneration Committee in order to ensure transparency and fairness in the decision- making process pertaining to the nomination of and compensation to the Management, and continuously discuss our policy and procedure for dismissal of Directors, etc.

[Principle 3-1 (v)] Explanation about the Appointment, Dismissal, or Nomination of each Candidate for the Post of Director in nominating them

The reasons for the appointment of individual candidates for the posts of Directors at Kyushu Financial are disclosed in the attachment to the Convocation Notice of the General Shareholders Meeting. Copies of the Convocation Notice of the General Shareholders Meeting are mailed to all shareholders. The Notice is also published on our website.

(URL：https://kyushu-fg.co.jp/ir/stock/shareholders/)

We will also ensure accountability should we dismiss a Director.

[Supplementary Principle 3-1 (3)] Sustainability Initiatives

As a financial institution firmly rooted in the local region, the Kyushu Financial Group considers a sustainable local community a key premise for its

sustainable growth. Our long-term vision, as expressed in the Group's 3rd

Medium-Term Management Plan, is the "evolution into a Group that co-creates regional value, building a better future together with customers, local communities, and employees." We are working to "pivot to a sustainable business model" toward achievement of this long-term vision.

In February 2019, the Group issued its "Sustainability Declaration," and simultaneously the Group's Higo Bank and Kagoshima Bank formulated the "Overall Sustainability Concept." Under these, we work toward the realization of a sustainable local

community.

We also recognize that creating a sustainable community should come not only from social contribution activities but also through the business. In September 2020, we signed the PRB (Principles for Responsible Banking), reaffirming that our business strategy is in alignment with the SDGs. Going forward, we are working to expand the positive impact of our financial functions (and, conversely, reduce negative impacts) on the economy, environment, and society.

We have identified "sustainability materiality," important challenges shared across the Group that should be tackled so that we can improve our business's alignment with the SDGs, do business in a way that is considerate of our impact on the economy, environment, and society, and secure sustainability for the local community and for the Group and have been implementing initiatives for solving the issues.

In investment in human capital, we have set forth the personnel strategy of "improving personnel development and engagement" as part of the 3rd Medium-Term Management Plan, and are working to "developing human resources for realizing value co- creation" and "respecting diversity and improving job satisfaction."

For details, see the Integrated Report published on our website. (URL: https://kyushu-fg.co.jp/english/ir/library/disclosure/)

-3rd Group Medium-Term Management Plan: "Reform" (pp. 21-24)

-Efforts related to sustainability of Kyushu Financial from the perspective of improving corporate value Efforts for SDGs through business (pp. 25, 26)

Efforts for achieving SDGs through financial functions (pp. 27, 28) -Investment in human capital and intellectual properties Developing human resources and boosting engagement (pp.63-66)

Kyushu Financial Group regards environmental issues, including climate change, as important management challenges, and in June 2019, it declared its support for the TCFD recommendations. The Group is striving for transparent disclosure based on the TCFD recommendations for disclosure.

For details, see the Integrated Report published on our website. (URL: https://kyushu-fg.co.jp/english/ir/library/disclosure/)

-Response to climate changes (disclosure based on the TCFD recommendations) (pp. 29-31)

[Supplementary Principle 4-1 (1)] Summary of the Scope of Delegation to the Management

Please see Article 8 (Roles of Directors and the Board of Directors), Paragraph 2 of the Corporate Governance Guidelines published on our website.

(URL：https://kyushu-fg.co.jp/company/governance/)

[Principle 4-9] Criteria for independence of an Independent External Director and his/her qualifications

Please see the Attachment (Criteria for Independence of an External Officer) to the Corporate Governance Guidelines published on our website.

(URL：https://kyushu-fg.co.jp/company/governance/)

[Supplementary Principle 4-10 (1)] Authority and Roles of Nominating and Remuneration Committee

Kyushu Financial has the Nominating and Remuneration Committee (hereinafter the "Committee") as the advisory body for the Board of Directors in order to make our decision-making process fairer and more transparent, thereby helping improve our corporate governance, through focused discussions and exchanges of opinions with Representative Directors and External Officers about matters pertaining to the nomination of and compensation to the management (Directors [including Directors who are Audit and Supervisory Committee Members] and Executive Officers).

For the roles and composition of the Committee, see "Reasons for not applying the principles of the Corporate Governance Code."

[Supplementary Principle 4-11 (1)] About the Balance between Knowledge, Experience, and Skills Required of the Board of Directors

Please see Articles 7 (Composition of the Board of Directors), 9 (Appointment of Directors [Excluding Those Who Are Audit and Supervisory Committee Members]), Paragraphs 2 and 4, and 12 (Appointment of Directors Who are Audit and Supervisory Committee Members), Paragraph 2 of the Corporate Governance Guidelines published on our website.

(URL：https://kyushu-fg.co.jp/company/governance/)

From the perspective of the medium- to long-term value creation to realize its co-creation vision of "evolution into a regional value co-creation Group that creates a better future together with customers, local communities, and employees," Kyushu Financial identified the 10 skills of corporate management, sales, market investment, legal, risk management, financial affairs, accounting, regional industry promotion, global business, personnel, human resource development, SDGs, ESG, and DX, technology and prepared a skill matrix that lists knowledge, experience, and ability of each Director. Among these items, we listed seven fields in which we expect contributions from External Directors-corporate management, market investment, legal and risk management, regional industry promotion, SDGs, ESG, and DX, technology. The skills matrix is included in the last page of this report.

[Supplementary Principle 4-11 (2)] Directors Serving as Officers at Other Listed Companies

Our Directors who also serve as officers at other listed companies are disclosed on Page 50 in the Convocation Notice of the General Shareholders Meeting. Copies of the Convocation Notice of the General Shareholders Meeting are mailed to all shareholders. The Notice is also published on our website.

(URL：https://kyushu-fg.co.jp/ir/stock/shareholders/)