Nihon Chouzai : Corporate Governance Report

Corporate Governance Report

Last Update: May 19, 2021

NIHON CHOUZAI Co., Ltd.

Representative: Yosuke Mitsuhara, President & CEO

Contact: Kazunori Ogi, Director, General Manager of Finance Department Stock Code: 3341 https://www.nicho.co.jp

The corporate governance of NIHON CHOUZAI Co., Ltd. ("Nihon Chouzai" or the "Company") is described below.

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

1. Basic Views

Nihon Chouzai recognizes that we can enable more sustainable corporate value by building and strengthening a corporate governance system that is capable of continuously ensuring the soundness and transparency of the Company, as well as by responding appropriately to changes in the business environment.

Nihon Chouzai shall establish a Nomination and Compensation Committee as a voluntary committee, with the majority of members being independent outside directors. To enhance the fairness, transparency and objectivity of procedures related to the nomination and compensation of directors, the committee shall endeavor to further enhance the Company's corporate governance.

Furthermore, out of a recognition that stronger compliance is extremely important due to the fact that the Group's businesses are governed by various regulations, Nihon Chouzai shall take various measures for implementing compliance.

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

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

Although the Company has not yet made an English translation of the convocation notice, it will consider doing so in the future in light of the ratio of institutional investors and foreign investors.

[Supplementary Principle 4.2.1 Roles and Responsibilities of the Board of Directors]

With regard to remuneration for directors, the Company continues to review its executive remuneration structure in the belief that directors should be given incentives to improve medium- and long-term performance and enhance corporate value.

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

[Principle 1.4 Cross-shareholdings]

The Company may hold, as cross-shareholdings, shares of companies that it deems necessary for the purpose of maintaining and strengthening business relationships. Every year, the Company holds meetings of the Board of Directors to examine in detail whether the purpose of ownership for individual cross-shareholdings is appropriate, whether the benefits and risks associated with these holdings are commensurate with the cost of capital, etc., to verify the suitability of cross-shareholdings. This year, at the Board of Directors meeting in June, after clarifying the number of shares, acquisition prices, book values and market prices for each issue, the Company, having deliberated on the suitability of cross-shareholdings from the above viewpoints, and having taken into consideration the significance and rationality of these holdings, it was decided to sell, in light of the timing of such transactions, the cross-shareholdings for which the rationale for holding them had weakened. For the exercise of voting rights pertaining to policy-holding stocks, the Company's policy is to make decisions

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based on its viewpoint regarding how votes would contribute to the enhancement of the corporate value of the company invested in, combined with due consideration of the purpose of the holding.

[Principle 1.7 Related Party Transactions]

If the Company conducts transactions (transactions between related parties) with its officers and major shareholders, these transactions are identified as being matters to be referred to the Board of Directors as stipulated in the Board of Directors Regulations so that the transaction will not harm the common interests of the Company or its shareholders. The Board of Directors approves the individual transactions or monitors them by receiving reports about these transactions. The department in charge of legal affairs performs legal checks concerning resolutions of the Board of Directors for transactions between related parties.

[Principle 2.6 Roles of Corporate Pension Fund as Asset Owner]

In October 2011, the Company established a corporate-type defined contribution pension plan. Every year, the Company provides employees with opportunities to learn investment management and investment product selection and asset management. In addition to offering educational opportunities, the Company provides an explanation of the corporate-type defined contribution pension system to new employees at the time they join the company.

[Principle 3.1 Full Disclosure]

(i) Company Objectives (Management Philosophies, etc.), Business Strategies and Business Plans

The Company website shown below is the principal means of disclosure of our corporate philosophy and management policy. In addition, other media such as shareholder newsletters and securities reports are used. Corporate Philosophy: https://www.nicho.co.jp/en/profile/philosophy/

Management Policy: https://www.nicho.co.jp/en/ir/management.html

1. Basic Views and Guidelines on Corporate Governance Based on Each of the Principles of the Code This subject is described in "I. 1. Basic Views" in this report.
2. Policies and Procedures in Determining the Remuneration of Directors by the Board of Directors
   This subject is described in "Disclosure of Policy on Determining Remuneration Amounts and Calculation Methods" in "Director Remuneration" under "II.1 Organizational Composition and Operation."
3. Policies and Procedures in Appointing/Dismissing and Nominating Directors (Excluding Directors Who Are Members of the Audit and Supervisory Committee) and Directors Who Are Members of the Audit and Supervisory Committee by the Board of Directors
   The standards and procedures upon which the Board of Directors of the Company appoints or dismisses directors are as follows.
   (Criteria for Appointment)
   ・Must possess profound insight and high ethical standards, fair and impartial judgment, as well as a strong will and ability to take action in order to adequately fulfill the duties of a director.
   ・Must possess a strong understanding of, profound insight in, as well as sufficient work experience in the businesses of the Group.
   (Criteria for Dismissal)
   ・If a director has violated the public order, standards of decency, laws and regulations, the Articles of Incorporation, or important internal regulations.
   ・If a director faces difficulties in performing his or her duties due to health or other reasons.
   ・If a director has seriously damaged the corporate value of the Company by neglecting his or her duties. ・If, following the appointment, the director is found to clearly not fulfill the criteria for appointment. (Procedure for Appointment/Dismissal)
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The Nomination and Compensation Committee proposes candidates for directors (including directors who are members of the Audit and Supervisory Committee) to the Board of Directors, which uses the proposal as a reference to determine the candidates (however, its decisions may differ from the recommendations of the committee) and submit a proposal for appointment and dismissals to the general meeting of shareholders. The proposed appointments and dismissals are ultimately carried out at the general meeting of shareholders.

(v) Explanations of Appointments/Dismissals and Nomination of Individual Directors

The Company discloses its reasons for appointing directors (excluding directors who are members of the Audit and Supervisory Committee) and candidates for directors who are members of the Audit and Supervisory Committee in the notices of the general meeting of shareholders and discloses this information on the Company's website. In addition, when dismissing a director (excluding a director who is a member of the Audit and Supervisory Committee) or a director who is a member of the Audit and Supervisory Committee, the reason for the dismissal is stated in the notice of the general meeting of shareholders and disclosed on the website.

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

In accordance with laws and regulations, the Articles of Incorporation and the Board of Directors Regulations, the Company makes judgments and decisions on management policies, strategies and important matters concerning the execution of business by the Board of Directors. In addition, the matters to be delegated to management are stipulated in the Regulations on Administrative Authority and Regulations on Segregation of Duties and the Board of Directors receives reports on the status of business execution and aims to enhance supervisory functions.

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

The independence criteria and qualification for independent outside directors stipulated by the Company are as follows.

(Independence Criteria)

Individuals who do not fall into any of the following categories.

1. Executive of the Company, its subsidiaries, or affiliated companies (collectively "the Group").
2. Major shareholder of the Company, or an executive thereof
3. Major client or supplier of the Group, or an executive thereof
4. A party whose major client or supplier is the Group, or an executive thereof
5. Consultant, attorney, certified public accountant, or other individual who provides professional services and receives a large amount of monetary consideration or other property from the Group besides executive remuneration
6. Individual who has received a substantial donation from the Group
7. Relative of the individuals described in b. to f. above (spouse or relative within the second degree of kinship)
8. Individual who has served as an outside director for a period exceeding eight years
9. Other individual for whom conflicts of interest with general shareholders may arise, and who is subject to conditions reasonably deemed to prevent him or her from executing his or her duties.

(Qualification criteria)

・Individuals who possess profound insight and objective judgement, allowing them to provide advice to support appropriate management oversight of business execution by the Group

・Among business managers, individuals who possess professional knowledge in fields such as economy, law, accounting, or other fields, and individuals who possess other relevant expertise, those who have extensive experience in their field

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[Supplementary Principle 4.11.1 Preconditions to Ensure the Effectiveness of the Board of Directors] The Company's stance on the composition of its Board of Directors is as follows.

・To ensure it can adequately fulfill its overall functions and duties, the Board of Directors comprises a diverse range of directors from different backgrounds, who possess professional knowledge, experience, and capabilities in various fields that are essential to the management of the Group, including business administration, dispensing and nursing care, legal affairs and risk management, personnel and labor, and finance and accounting.

・To encourage substantive discussion, the Board of Directors has an optimal size that concurrently facilitates adequate oversight of management and flexible decision-making.

・The Board of Directors includes three or more independent outside directors to strengthen the effectiveness of the oversight of business execution by directors.

[Supplementary Principle 4.11.2 Preconditions to Ensure the Effectiveness of the Board of Directors]

The Company keeps the number of additional posts held by the directors within a reasonable range in order to enable them to fulfil their roles and duties. Information about the additional posts is included in the notices of the general meeting of shareholders.

[Supplementary Principle 4.11.3 Analysis and Evaluation of the Effectiveness of the Board of Directors]

In May 2020, based on the opinions of an external consultant, the Company carried out a questionnaire survey with 22 items for the evaluation of the effectiveness of the Board of Directors. This survey included the Structure and Operation of the Board of Directors and other items, involving directors. Just as in the previous fiscal year, the results of this survey led to favorable conclusions concerning the evaluations of all items, resulting in the decision that the Board of Directors is performing effectively. Although there has been a certain degree of improvement in the executive training compared with the previous fiscal year, some further constructive opinions on how to further improve the effectiveness of the Board of Directors have also been presented and so, based on the results of this evaluation, we will continue to work to improve the overall effectiveness of the Board of Directors.

[Supplementary Principle 4.14.2 Policy on Training Directors]

The Company provides opportunities for internal directors to properly explain the responsibilities of executives, etc., and to participate in training and seminars by third-party organizations as necessary, and the expenses are borne by the company. Also, with the aim of deepening the understanding of our company's business activities and management issues, the Company provides opportunities for executives of the management teams and of departments to deliver explanations about business activities, management issues and other matters involving their departments.

[Principle 5.1 Policy on Constructive Dialogue with Shareholders]

The Company fairly and in an appropriate and timely manner discloses information about business and financial conditions to shareholders and investors. The Company also has the following structure for investor relations (IR) with the aim of promoting the proper formation of the share price.

1. Department responsible mainly for dialogue with shareholders and executive officers overseeing these activities

The Corporate Planning Department, which is the department in charge of IR, is responsible for conducting and maintaining dialogues with shareholders, and this department is supervised by the director in charge of corporate planning.

(ii) Measures for collaboration with related departments

The Corporate Planning Department, which is the department in charge of IR, shares information with and gathers information from the General Affairs Department, the Public Relations Department, the Accounting

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Department, the Finance Department, other department heads and officers of subsidiaries, and also organizes a cooperative structure among them.

(iii) Initiatives other than individual interviews

The Company conducts activities to deepen understanding of the Company's business strategy and of the business environment in general by holding general shareholders meetings, information meetings about results of operations, information meetings about business activities and plant tours and by providing information on the Company's website and through other channels.

1. Measures for providing feedback to executives of the management teams and to the Board of Directors The Company regularly submits reports about the recommendations it receives from shareholders and investors, etc. to the directors in charge in order to maintain a system to deliver feedback to the Company's management team.
2. Measures for the management of insider information

To prevent insider trading in IR, the Company establishes a quiet period for financial results information from the day after the last day of a financial period to the earnings announcement date. Moreover, the Company has its own Internal Information Management Regulations and has improved its information management structure.

2. Capital Structure

		Foreign Shareholding Ratio	Less than 10%
[Status of Major Shareholders]
		Name / Company Name		Number of Shares Owned		Percentage (%)
	Hiroshi Mitsuhara	4,680,000		31.21
	Yosuke Mitsuhara	3,320,000		22.14
	Max Planning, Inc.	1,120,000		7.47
	Nihon Chouzai Employee Shareholding Association	452,600		3.02
	Yoko Mitsuhara	400,000		2.67
	The Master Trust Bank of Japan, Ltd. (Trust Account)	327,200		2.18
	Keiko Yeow	269,300		1.80
	STATE STREET BANK AND TRUST CLIENT	210,900		1.41
	OMNIBUS ACCOUNT OM02 505002
	Japan Trustee Services Bank, Ltd. (Trust account 9)	180,700		1.21
	Japan Trustee Services Bank, Ltd. (Trust account)	161,900		1.08
		Controlling Shareholder (Except for Parent Company)		Hiroshi Mitsuhara
			Yosuke Mitsuhara
		Parent Company		None

Supplementary Explanation

The above major shareholders are as of March 31, 2020.

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