Mebuki Financial : Corporate Governance Report

Corporate Governance Report

Last Update : June 24, 2021

Mebuki Financial Group, Inc.

President Ritsuo Sasajima Contact : Corporate Planning Department, Planning Group 029-233-1151(Phone)

Securities Code : 7167

URL: https://www.mebuki-fg.co.jp/eng/

The corporate governance of Mebuki Financial Group, Inc. (hereafter referred to as "the Company" or "we" and "the Group" consisting of the Company together with its consolidated subsidiaries) is described below.

I Our Basic Corporate Governance Policy, Basic Information on Capital Structure, Corporate Attribution, and Other Basic Information

1. Basic Approach

A commitment to management characterized by responsibility, and sound, appropriate business operations will earn greater trust for the Group from all stakeholders - customers, shareholders, local communities and employees - and boost corporate value. By following the approaches listed below, we are working to strengthen and improve corporate governance.

1. We respect shareholders' rights and ensure equality.
2. We consider the benefits of stakeholders, including shareholders, and cooperate appropriately with stakeholders.
3. We disclose company information appropriately and ensure transparency.
4. We ensure the effectiveness of a transparent, fair, prompt and decisive decision-making function and a supervisory function of the Board of Directors on business operation by utilizing independent outside directors.
5. We work to communicate with shareholders constructively about the continuous growth and improvement of medium-to-long term corporate values.

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

The Company complies with all principles of the Corporate Governance Code.

Concerning the "Corporate Governance Report" based on the principles of Corporate Governance Code revised in June 2021, we will immediately submit it as soon as it is ready.

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

[Principle 1.4] (Strategic Shareholdings)

Regarding basic policy on strategic shareholdings and exercising of voting rights, we have established in Article 7 of the "Corporate Governance Policy". It is available on our website at (https://www.mebuki-fg.co.jp/eng/company/governance/)

○Status of efforts for reducing the number and balance of strategic shareholdings

The subsidiary banks that hold strategic shareholdings make efforts to reduce the number and

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balance of strategic shareholdings, taking into consideration the risk reduction and capital efficiency based on its economic rationale. And through sufficient dialogue with the issuing companies, we will reduce those holdings.

Strategic shareholdings	End of FY2017	End of FY2018	End of FY2019	End of FY2020	Year on Year
(Listed issues)					Change
Number of issues	225	221	204	184	- 20
Balance (billion of yen)	123.8	119.1	106.8	92.0	-14.7

The ratio of the balance of strategic shareholdings to consolidated capital assets (the amount of capital in calculating consolidated capital adequacy ratio) decreased to 11.7% from 13.7％.

○Assessing the rationality of strategic shareholdings

・The Company examines each strategic shareholding (of listed companies) held by the subsidiary banks annually for their significance and economic rationale, and the results of examination as of March 31, 2021, is as follows:

・We hold shares aimed for sustainable growth and medium to long term enhancement of corporate value of the Group and customers or building stable business relationships with those customers, upon the examination of the medium to long term economic rationale and future outlook of shareholdings taking into consideration the associated risks and returns.

• We examine each shareholding for economic rationale from the viewpoint of profitability, creditworthiness, regional characteristics (relevancy to our core business area), and improvement of business relationship, etc. Concerning profitability, we examine their overall business RORA(*2) based on our ROE target.

1. overall business RORA = (Net interest margin on loans and deposits - Expenses (including

credit cost) +Fees and Commissions + Dividends) ÷ Risk-weighted Assets (Loans and Stocks) ・As of March 31, 2021, the Board of Directors confirmed every strategic shareholding to be meaningful pursuant to the basic policy to secure sustainable growth, increase corporate value over the medium to long term of the Group and issuing companies, and build stable business relationships with those companies. Regarding profitability, their overall combined business RORA exceeds the target value.

[Principle 1.7] (Related Party Transactions)

When the Company engages in transactions with its directors or principal shareholders, in order to ensure that such transactions do not harm the interests of the Company or the common interests of our shareholders and prevent any concerns with respect to such harm, we have established the following procedures:

・When directors engage in transactions in the same line of business of the Company or transactions involving conflict of interest, the relevant transactions shall be approved by the Board of Directors. ・When the Company shall conduct transactions under unordinary terms and conditions with our subsidiaries or principal shareholders (who hold 10% or more of shareholder voting rights of the Company directly or indirectly), the relevant transactions shall be approved by the Board of Directors.

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

Our core subsidiaries, The Joyo Bank, Ltd.(hereafter referred to as "Joyo Bank") and The Ashikaga Bank, Ltd.(hereafter referred to as "Ashikaga Bank") have established each corporate pension fund. At the two banks, in order to demonstrate the expected functions as an asset owner, staffs with expertise in asset management are allocated at the secretariat.

Furthermore, in the asset management committee, consisting of members familiar with asset

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management and pension fund in each department of market trading, risk management, corporate management and personnel, regular meetings are held to deliberate on basic policy for management and evaluation of the managing trustee organization, etc., enabling establishment of a framework to realize stable asset building for the participants/beneficiaries in the corporate pension plan and appropriate management of pension finance.

With regards to preventing conflict of interest between the Company and beneficiaries of the funds, we shall ensure that it is managed appropriately as provided in the fund regulations preventing any act to harm fair fund management and investment for the purpose of its own interests or those of third parties. In addition, the significant matters such as the change of regulations shall be referred to the representative conference consisting of one-half of members who are pension funds' participants.

[Principle 3.1] (Full Disclosure)

1. Under the Group philosophy of "providing high-quality comprehensive financial services to continue building a more prosperous future by together with local communities," we will promote a sustainable growth together with local communities, with solid relationship of trust with local communities, by providing high-quality comprehensive financial services. With aim to ensure the sustainable growth and improving our corporate value through the realization of the group philosophy, we have formulated medium-term group business plan as the basic strategies and the Group performance objectives. For details, it is available on our website at (https://www.mebuki-fg.co.jp/eng/company/policy/)
2. The Company has established "Corporate Governance Policy" that has defined basic corporate governance policy, framework and management policy. It is available on our website at (https://www.mebuki-fg.co.jp/eng/company/governance/governance.html)
3. The policies and procedures for determining the compensation of directors have been stipulated in Article 24 (Compensation of Directors) of "Corporate Governance Policy".
   It is available on our website at (https://www.mebuki-fg.co.jp/eng/company/governance/governance.html)
4. The policies and procedures for election and dismissal of directors have been stipulated in Article 14 (Composition of the Board of Directors), 16 (Election of Directors), 17 (Dismissal of Directors) and 20 (Composition of the Audit and Supervisory Committee) of "Corporate Governance Policy"
   It is available on our website at (https://www.mebuki-fg.co.jp/eng/company/governance/governance.html)
5. See "Notice convocation of the ordinary general meeting of shareholders" for the reasons for being selected as candidates. And it is available on our website at (https://www.mebuki-fg.co.jp/eng/shareholder/stock/generalmeeting.html)

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

The approach to decision-making on business execution matters that have to be determined solely by the Board of Directors, and scope of delegation to management have been stipulated in Article 13 (Roles and responsibilities of the Board of Directors) of "Corporate Governance Policy".

And it is available on our website at (https://www.mebuki-fg.co.jp/eng/company/governance/governance.html)

[Principle 4.8] (Effective Use of Independent Directors)

The Board of Directors shall have a balanced composition that shall provide a wealth of knowledge and expertise in wide range of fields and shall appoint two (2) or more independent outside directors, and the Company has appointed five (5) independent outside directors currently.

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The composition and election of the Board of Directors have been stipulated in Article 14 (Composition of the Board of Directors) and Article 16 (Election of Directors) of "Corporate Governance Policy". And it is available on our website at (https://www.mebuki-fg.co.jp/eng/company/governance/governance.html)

[Principle 4.9] (Independence Standards and Qualification for Independent Directors) Independence Standards for Outside Directors of the Company has been stipulated in Footnote 5 of "Corporate Governance Policy". And it is available on our website at (https://www.mebuki-fg.co.jp/eng/company/governance/governance.html)

[Supplementary Principle 4.11.1] (Preconditions for Board Effectiveness)

View on the balance of knowledge, experience and skills, diversity and size of the board of directors as a whole, the policies and procedures for the election of directors have been stipulated in Article 14 (Composition of the Board of Directors) and Article 16 (Election of Directors) of "Corporate Governance Policy". And it is available on our website at (https://www.mebuki-fg.co.jp/eng/company/governance/governance.html)

[Supplementary Principle 4.11.2]

See "Notice convocation of the ordinary general meeting of shareholders" for significant concurrent positions. And it is available on our website at (https://www.mebuki-fg.co.jp/eng/shareholder/stock/generalmeeting.html)

[Supplementary Principle 4.11.3]

The Board of Directors of the Company conducts analysis and evaluation of its effectiveness as a whole each year, in order to utilize the results of such evaluation to improve the operations of the Board of Directors, by confirming the opinions of each director on such matters as the composition and operation of the Board of Directors. The summary of the evaluation of the Board of Directors for fiscal year 2020 is as follows:

Regarding the FY2020 evaluation, opinions were exchanged on the evaluation method and the contents of the questionnaire at the executive session comprising all outside directors of the Company and its subsidiary banks, as was the case in the previous fiscal year.

Based on this discussion, questionnaires on the composition and operations of the Board of Directors and other matters were distributed to all directors, and replies and comments were obtained. With regard to the results of the evaluations based on these replies and comments, the Board of Directors of the Company, upon deliberation by the Corporate Governance Committee (with outside directors accounting for the majority of its members), finalized and determined the results of analysis and evaluation of the effectiveness of the Board of Directors as a whole.

1. Rules and responsibilities of the Board of Directors (each director)
2. Composition of the Board of Directors
3. Operation of the Board of Directors
4. Execution of function by the Board of Directors

・Exchange of opinions in the Executive Session : November 27, 2020

・Questionnaire distribution : December 21, 2020 (deadline for response : January 25, 2021)

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・Deliberation at the Corporate Governance Committee : February 15, 2021

・Deliberation (making-decision) at the Board of Directors : March 22, 2021

The Board of Directors of the Company has confirmed that directors with diverse knowledge and experience have been elected and the composition is well balanced; all directors, upon sharing the roles and responsibilities of the Board of Directors, have successfully fulfilled both decision-making and supervising functions while taking advantage of the perspective of independent outside directors; and thus the effectiveness of the Board of Directors as a whole has been mostly assured.

The initiatives for enhancing the quality of discussions resulted in continued improvements in the issues identified by the previous evaluation, specifically in "Improvement of the discussions by the Board of Directors" and "Utilization of the perspectives of independent outside directors". However, based on each director's assessment and opinions, we recognized that it is necessary to continue working toward further improvement.

The following matters were continued to be recognized as issues that we need to address in order to aim for the sustainable growth of the Group and the further improvement of its corporate value in the medium- to long-term. By implementing the necessary responses to these issues, our Group will strive to enhance the effectiveness of its corporate governance structure.

1. "Improvement of the discussions by the Board of Directors"

• Enhancement of discussions regarding management strategy and providing value to

stakeholders

・Expression of opinion by directors beyond the boundary of their duties

(2) "Utilization of the perspectives of independent outside directors"

・Improvement of information provision to outside directors and facilitation of communication among outside directors

・Enhancement of discussions at the Corporate Governance Committee

[Supplementary Principle 4.14.2] (Director Training)

The policy for directors training has been stipulated in Article 25 (Directors Training) of "Corporate Governance Policy". It is available on our website at (https://www.mebuki-fg.co.jp/eng/company/governance/governance.html)

[Principle 5.1] (Policy for Constructive Dialogue with Shareholders)

The policies concerning measures and organizational structures aimed at promoting constructive dialogue with shareholders has been stipulated in Article 26 (Dialogue with shareholders and investors) of "Corporate Governance Policy". It is available on our website at (https://www.mebuki-fg.co.jp/eng/company/governance/governance.html)

2. Capital Structure

Foreign Shareholding Ratio	UPDATED			Over 10 % and less than 20 %
[Status of Major Shareholders]	UPDATED
Name / Company Name	Number of Shares	Shareholding
				Owned (Shares)	Ratio (%)
Nomura Securities Co., Ltd.				106,816,881	9.20
The Master Trust Bank of Japan, Ltd. (Trust Account)	69,164,500	5.96
Custody Bank of Japan, Ltd. (Trust Account)	44,677,600	3.85
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