LIXIL : Corporate Governance Report

Corporate Governance

Corporate Governance	LIXIL Corporation

Last updated: June 25, 2021

LIXIL Corporation

Kinya Seto, Director, Representative Executive Officer, President, and Chief Executive Officer

Contact: IR Office 03-6706-7001

Securities code: 5938

https://www.lixil.com/en/investor/

The corporate governance system at LIXIL Corporation is described below.

1. Basic Philosophy Regarding Corporate Governance, and Other Basic Information Regarding Corporate Profile and Capital Structure

1. Basic Views

LIXIL Corporation (the "Company") constantly strives to build the best possible corporate governance system needed to realize its belief that publicizing and implementing its management philosophy throughout the Company and all of its subsidiaries and affiliates (the "Group") will enable it to achieve the maximum sustainable improvement of corporate value.

The following is the Company's Management Philosophy.

(1) LIXIL Purpose

Make better homes a reality for everyone, everywhere

1. LIXIL Behaviors (3 Actions) Do the Right Thing
   Work with Respect Experiment and Learn

The Group has adopted the following fundamental framework and has undertaken initiatives to strengthen and enhance corporate governance in order to maintain the Group's standing as a corporate group that inspires confidence through the creation and provision of attractive value to its stakeholders.

1. Company with Nomination Committee, etc.

The Company has adopted the governance format of a "Company with Nomination Committee, etc." with the aim of clearly separating its executive and supervisory functions, thereby enabling executive officers to make swift and decisive business decisions and ensuring management transparency.

1. Enhancement of Functions by Utilizing Discretionary Organs

In addition to the three committees (the Nomination Committee, the Audit Committee and the Compensation Committee) which are legally required of a "Company with Nomination Committee, etc.", the Company has established the Governance Committee as a voluntary permanent committee to continuously strengthen the Company's corporate governance. As for the other governance systems, the Company has established the Board of Executive Officers and other voluntary committees. (Refer to the Corporate Governance Structure at the end of the document.)

1. Implementation of a Uniform Corporate Governance System Across the Entire Group

By setting forth the LIXIL Behaviors and the LIXIL Code of Conduct, and group-wide financial and accounting management policies, having the entire Group comply therewith, and carrying out integrated education and training for directors, executive officers and employees as well as uniform implementation of

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a compliance system, Group, the Company shall strive to cause the core elements of its corporate governance permeate to the entire globalized corporate group.

Since 2001, the Company adopted a holding company structure to optimize overall operations while maintaining cooperation between each operating company. However, as the Group's strategy has evolved, it is placing greater focus on actively managing its core businesses and driving synergies across these business areas to accelerate growth. The highest priority is to enhance corporate value by focusing on its core businesses inside and outside of Japan. Therefore, the Company conducted an absorption-type merger with LIXIL Corporation (the absorbed company, hereinafter "former LIXIL"), its 100% subsidiary on December 1, 2020, and changed the company name to LIXIL Corporation.

By dissolving the two-tier structure of a holding company and former LIXIL, the Group will improve efficiency by eliminating duplication of management, operating costs and human resources. Furthermore, it will enable faster decision-making, as well as improve corporate governance by simplifying the group management system and increasing the transparency of management.

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

The Company has implemented each principle of the Corporate Governance Code.

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

Because the LIXIL Corporate Governance General Policy (the "General Policy") contain provisions with regard to many of the disclosure items below, a note has been added referring to the related provision in the General Policy. https://www.lixil.com/en/about/governance/pdf/CorporateGovernanceGuideline20210401.pdf

[Principle 1-4Cross-Shareholdings]

The Company holds shares on a cross-shareholding basis in a case where it has been recognized to be necessary in order to facilitate sales or as part of an alliance necessary for its business activities. Under Article 9 of the General Policy "Cross Shareholdings", based on the stipulated process, each year, for each share name, the Company will comprehensively evaluate cross-shareholdings from a quantitative and qualitative perspective in respect of whether the purpose of holding is appropriate, whether the capital cost matches the benefits and risks of the holding, whether there is any future risk as a result of sale, etc., and promptly dispose by sale in the case where it is not needed, and strive to reduce cross-shareholdings. Also, in exercising voting rights of such shares, the Company will make a full consideration from the point of view of whether it contributes to improving value over the mid to long-term of the Group and the invested company, etc., and with respect to resolutions that may violate the goal for such holding of the Group and resolutions that may harm shareholder value, the Group shall carefully determine whether to support or oppose after discussion with such company as needed and then exercise the voting rights.

[Principle 1-7 Related Party Transactions]

As for the procedures and framework for related party transactions by the Company's officers, "Rules of the Board of Directors" stipulates that all related party transactions are required to be approved by the Board of Directors. In addition, "Rules of the Board of Directors" provides that criteria to follow for each transaction explicitly and systems to prevent related transactions executed to benefit himself or herself or the third party, impairing shareholders common interests (Article 11 of the General Policy "Related-Party Transactions").

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

Under the LIXIL Pension Fund in which the Company participates, the goal is to ensure long-term overall profits within the scope of allowable risks, in order to undertake properly payments of pension and bonuses in the future under management of the pension assets. The management policy for such purpose is based on analysis of the risk/return for each managed asset and plan for diverse investments considering synergies among each of the managed assets. In detail, while setting up a strategic asset composition ratio that matches the efficiencies of each shares, bonds, and other managed assets, select appropriate management operators in line with that, and conduct investments and evaluations in a flexible manner.

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Also, in considering the selection, evaluation, etc., of management operators and decisions of investment policy for these pension assets, LIXIL Pension Fund shall consult an asset management committee whose committee members are Management Execution Directors from the LIXIL Pension Fund with expert ability and opinions.

For the LIXIL Pension Fund, a report is submitted by the management operator every month regarding the asset management and investment status, and at least once every quarter a report of management results is received directly from the person in charge.

[Principle 3-1 Full Disclosure]

Article 38 "Basic Policy Regarding Information Disclosure" and Article 39 "Methods of Disclosure" of the General Policy stipulate disclosure methods and the Company's fundamental policy regarding information disclosure. For the Company's Disclosure Policy, please refer to the following page on the Company's website:

https://www.lixil.com/en/investor/strategy/policy.html

1. Company Philosophy, Management Strategy, and Management Plan The Company's philosophy is set forth in Article 3 of the General Policy.
   As for the management strategy, the Group is steadily promoting major policies based on the four pillars of the medium-term plan.

[The Four Pillars of the Medium-Term Plan]

1. Create an Organization for Sustainable Growth

In order to build an environment that enables us to respond quickly to changes, the Group is transforming its organizational culture. We will foster an organizational culture that encourages employees to exercise their entrepreneurial spirit, to actively exchange opinions and to engage in experimental initiatives. We also aim to create an environment in which employees can respect each other, be stimulated by each other, and work with enthusiasm, and to become a company in which employees can be united through the achievement of great goals which are socially meaningful.

2. Development of attractive and differentiated products

The Group has strong brands that correspond to diverse lifestyles, needs and preferences. By investing in these brands and strengthening the DNA that is the essence of these brands, the Group seek to achieve growth with profits. In addition, we will further pursue innovation, design and quality improvements to meet changes in consumers' needs and preferences. In addition, we will shift to the "Asset-Light" business model so that we will be able to have a strong intellectual property base for product development and bring differentiated products to market in a short cycle, and we will review our domestic organizational structure to improve the speed of the product development cycle by integrating the product development, production and sales functions into one organization.

3. Achieve Competitive Costs

The Group will use new technologies and infrastructures to create an efficient and flexible supply chain management system, and improve cost control, for the improvement of its balance sheet and profit margins. In addition, the Group will improve cost efficiency through measures such as improving productivity in back- office departments and redeploying personnel to departments that need them.

4. Marketing to End User Influencers

The Group will expand its contacts with end users and influencers such as contractors, designers and builders' offices. In addition, through the promotion of various services such as online showrooms, we will create new demand for remodeling in Japan by eliminating end users' concerns about it.

(ii) Basic Philosophy and Policy with Respect to Corporate Governance

This is set forth in Article 1 "Purpose", Article 3 "Corporate Management Philosophy" and Article 4 "Basic Corporate Governance Framework" of the General Policy, and in the section entitled "I -1. Basic Views" of this report.

1. Procedures and Policies Regarding Determination of Compensation for Directors and Executive Officers
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As a "Company with Nomination Committee, etc.", the Compensation Committee follows the policies set forth below in "Disclosure of Policy on Determining Remuneration Amounts and Calculation Methods" in deciding the compensation of executive officers and directors (Article 28 of the General Policy "Compensation Policy").

1. Procedures and Policies Regarding Determination of Director Candidates and the Removal of Directors, and the Election and the Removal of Executive Officers
   As a Company with Nomination Committee, etc., in deciding upon the candidates for director seats, the Nomination Committee will apply the Company's own criteria (Article 25 of the General Policy "Policy for Nomination of Director Candidates and Removal of Directors") while considering not only the individual qualities of director candidates but also the appropriate composition of the Board of Directors. Criteria regarding the election, appointment, removal, and dismissal of executive officers and Representative Executive Officer are set forth in Article 26 of the General Policy "Policy for Appointment, Election, Removal and Dismissal of Executive Officers and Representative Executive Officer", and criteria regarding the appointment and dismissal of CEO are set force in Article 27 of the General Policy "CEO Succession Plan and Basic Policy on Selection and Dismissal of CEO". When independent outside director candidates are decided, the Company's own independence criteria will be used, as set forth in Article 31 of the General Policy "Independence Criteria".
2. Explanation of Each Election and Removal

The reasons for the election of independent outside directors are as set forth below, and the reasons for the nomination and expected roles of other directors are also disclosed on the Company's website. https://www.lixil.com/en/about/board/reason.html

The Company also discloses the reasons for election of executive officers on its website. https://www.lixil.com/en/about/board/reason_exec.html

In case of the removal and dismissal of executive officers and Representative Executive Officer, the reasons for that removal and dismissal shall be clearly specified on the Company's website. Paragraphs 6 and 7 of Article 26 "Policy for Appointment, Election, Removal and Dismissal of Executive Officers and Representative Executive Officer" of the General Policy apply to those disclosures, and those disclosures are carried out in accordance therewith.

[Supplementary Principle 4-1① Outline of the Scope of Delegation from the Board of Directors to Executive Officers]

Based on the philosophy of a "Company with Nomination Committee, etc.", which is to separate supervisory functions from management execution functions, the Company has determined and summarized the scope of delegation in Paragraph 2 of Article 20 of the General Policy "Role and Duties of the Board of Directors", and concrete matters to be decided by the Board of Directors and the Board of Executive Officers, respectively, are specified in the "Regulations of Board of Directors" and the "Regulations of Board of Executive Officers".

[Supplementary Principle 4-1③ Outline of the CEO Succession Planning] [Supplementary Principle 4-3② Election and Removal of the CEO]

The Company's Nomination Committee will assume responsibility to establish and revise the "CEO Succession Planning", which stipulates the basic policy as well as the roadmap for "replacement of the CEO" expected in the future, and "actively supervise" the operation of the succession planning. It is also prescribed that information related to creation and amendment of the "CEO Succession Planning" shall be reported to the Board of Directors at all times.

The "CEO Succession Planning" provides guidelines for the appointment of the CEO to be implemented, removing any arbitrary intent and while maintaining objectivity, transparency and fairness in any circumstances. The main items and ideas of the "CEO Succession Planning" are as follows.

1. Clarification of roles of the present CEO, etc.

Major roles of the present CEO, the Nomination Committee, and internal related divisions are prescribed as below.

① Major roles of the present CEO

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Role 1 The preparation of the pipeline for CEO succession candidates. (lead the election, addition and change of succession candidates）

Role 2 The establishment and execution of the "development plans" of CEO succession candidates. (provide succession candidates "opportunities for growth" and "opportunities for improvements" regarding their lack of experience, capabilities and behavioral patterns in light of the "ideal CEO image")

Role 3 The implementation of the "new CEO appointment process" cooperated with the Nomination Committee at normal times.

②Major roles of the Nomination Committee

Role 1 The establishment and supervision of the CEO succession planning as well as "active supervision" of its operation.

Role 2 Defining and periodically review of "Qualities and Requirements Required for LIXIL's CEO in the Future."

Role 3 The following items regarding CEO succession candidates: ・Development of the pipeline for CEO succession candidates ・Evaluation and understanding of CEO succession candidates

・Monitoring and advising on the "development plans" of CEO succession candidates Role 4 The following items regarding CEO succession planning at normal times:

・Supervision of the CEO appointment process and progress by the present CEO ・Deliberation on the CEO appointment process

・Establishment and submission of proposals regarding the CEO selection to the Board of Directors

Role 5 In an emergency that is when replacement of the CEO is unexpectedly required, such as at times when the present CEO becomes unable to perform its duties due to disease or accident, take the lead in appointment and approval process of a new CEO.

③Major roles of internal related divisions

・The Nomination Committee Office (placed within the Board of Directors' Office) will assist the Nomination Committee in the preparation, revision and operation of the CEO Succession Planning, as well as assume responsibility of "maintenance of consistency with the CEO Succession Planning related rules (Regulations of the Board of Directors, Regulations of Nomination Committee, etc.) and the collection and management of information on CEO succession candidates.

・The Corporate HR Department will follow the instruction of the CEO and lead "Senior Management Development Program" as well as periodically explain to the Nomination Committee the implementation status. When searching for CEO succession candidates outside the Company, the HR Department will, upon sharing ideas with the present CEO and the Nomination Committee, play a central role in the search.

2. Basic ideas and process of CEO appointment

Basic ideas and process of CEO appointment is prescribed as follows.

① Basic ideas on CEO's term of office

The basic ideas on the CEO's term of office is "the required time to accomplish the management plan (including the quantitative target value) that was agreed by the CEO at the Board of Directors meeting." The Nomination Committee will conduct periodic monitoring regarding the progress of the plans and goals held by the CEO, and deliberate on the continuation and reappointment of the CEO. In addition, the Nomination Committee stipulates the items regarding the CEO's dismissal standards, procedures and resignation recommendations.

②Basic ideas of new CEO appointment process

New CEO appointment process is considered separately in the case of "an emergency" and "normal times." At normal times, the appointment process of a new CEO shall commence based on the present CEO's proposal and suggestion or the decision made by the Nomination Committee. In such case, CEO succession candidates are appointed based on pipeline for succession candidates and an order of priority which are discussed by the CEO and the Nomination Committee. The Nomination Committee submits recommendation on the new CEO to the Board of Directors after the appointment process, and the Board of Directors examines and decides on the matter. In an emergency that is when replacement of the CEO is unexpectedly required, such as at times when the present CEO becomes unable to perform its duties due to disease or accident, the Nomination Committee shall take the lead in appointment process of a new CEO.

③Development and evaluation of pipeline for CEO succession candidates

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