Shin Etsu Chemical : Corporate Governance Report

[Translation for reference and convenience purposes]

Corporate Governance Report

Last Update: June 7, 2021

Shin-Etsu Chemical Co., Ltd.

Representative Director-President: Yasuhiko Saitoh Contact: Finance & Accounting Department Tel: [phone] Securities Code: 4063 https://www.shinetsu.co.jp/en/

The corporate governance of Shin-Etsu Chemical Co., Ltd. (the "Company") is described below.

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

Other Basic Information

1. Basic Views

It is our fundamental management policy to continue enhancing corporate value, thereby meeting the expectations of our shareholders. In order to realize this policy, our basic approach for corporate governance is to work on accurate and timely information disclosure to our shareholders and investors in terms of improving management transparency and strengthening monitoring functions, as well as to develop an efficient organizational structure and various systems able to quickly respond to changes in the business environment. The Company regards the aforementioned idea as one of our most important management priorities.

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

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

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

【Principle 1-4:Cross-Shareholding】

(Policy on cross-shareholding)

The Company may hold shares of the other parties for the purpose of maintaining and strengthening stables relationships therewith. However, the Company will sell the stocks of the parties which it judges not to be beneficial considering the above purposes.

(Verification on significance of ownership and rationality)

At the Board of Directors meetings, the Company verifies medium- and long-term economic rationality of individual policy holdings at least once a year after considering the maintenance and strengthening of relationships and whether the benefits and risks associated with the holding of the stocks are commensurate with the capital cost.

As of the end of March 2018, the number of shares owned by policies, which had 86 issues, was 60 issues as of the end of September 2020. The Company will continue to sell stocks which it judged not to be beneficial, and will continue to reduce policy holdings.

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(Exercise of voting rights)

The Company exercises voting rights through comprehensive judgment after considering whether each individual proposal will lead to the damage of shareholder value or whether it will contribute to the improvement of corporate value based on the Company's sustainable growth and to the enhancement of the corporate value of the investee.

【Principle 1-7: Related Party Transactions】

Pursuant to the Companies Act and the Regulations of the Board of Directors of the Company, any transaction between the Company and a Director shall require the approval of the Board of Directors, and such Director shall not participate in the discussion or the resolution.

In addition, pursuant to the "Accounting Standard for Related Party Disclosures" and the "Guidance on Accounting Standard for Related Party Disclosures," we confirm with each Director every year about the existence of any transactions with related parties and the importance of any such transactions. We disclose any such transactions if there is a requirement to do so.

【Principle 2-6: Roles of Corporate Pension Funds as Asset Owners】

Since the Company does not offer a defined benefits plan, the Company does not assign persons to manage corporate pension funds.

The Company regularly offers its employees briefing sessions concerning the operation of its defined contribution plan, and is implementing measures to assist employees in the management of their pension assets.

【Principle 3-1: Full Disclosure】

1. Our business principle and management policies are as follows. For management strategies, please see management messages from the "Annual Report" posted on our website. (https://www.shinetsu.co.jp/en/ir/ir-data/ir-annual/)

The Shin-Etsu Group's Business Principle: We contribute to people's living, society and industry through value creation in materials and technologies, while observing all laws and regulations as well as conducting fair corporate activities.

Management Policies: (1)Basic Management Policies

The Company aims to respond to our shareholders' expectations by contributing to people's daily lives, society and industries through value creation with our materials and technologies. To achieve this, we will move forward with business management that enables us to establish stable relationships with customers worldwide and to cope adequately with changes in the economic situation and market conditions, while continuously making efforts to improve productivity as well as pursuing the world's best technology and quality. In addition, keeping the "Sustainable Development Goals (SDGs)" in mind, we will conduct business operations that will contribute to these goals in multiple aspects. We recognize that the Group's products, businesses and operational methods have an inherent affinity with the SDGs, and we will enhance them further.

(2)Targeting Our Management Objectives: Shin-Etsu'sMid-toLong-term Management Strategies

The management indicator sets a target of increasing revenue and earnings every fiscal year. Among our main products, there are some that are affected by changes in business environment including market conditions. We need to adapt speedily to changes in the external environment in order to manage each business in rapidly changing markets. Based on the policies mentioned in "Basic Management Policies" above, we strive to carry out solid management every day, every month and every year and will focus on increasing sales and earnings. Given the growing need today to realize the sustainable development of human society and the improvement of its quality while minimizing the burden on the environment, it is essential to maximize efficiency. Technologies such as the high-speed processing of data, automatic driving, IoT, 5G and AI should be utilized and continue to evolve for these purposes. We believe we have a significant role to play in this regard. We will make efforts so that many of our products will contribute to these objectives and will pursue tangible results in developing new products to this end.

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1. Basic views on corporate governance Please see "I 1. Basic Views" of this report.
2. Policies and procedures in determining the remuneration of Directors

Please see "Disclosure of Policy on Determining Remuneration Amounts and Calculation Methods" of "II 1. Organizational Structure and Operation, etc." of this report.

1. Policies and procedures with respect to the nomination of Directors/Audit & Supervisory Board Members candidates and appointment/dismissal of executives
   The appointment of Director/Audit & Supervisory Board Member candidates and appointment/dismissal of executives (a) are discussed at meetings of the Officers' Remuneration Committee, which was voluntarily established as an advisory body to the Board of Directors and is headed by an Independent Outside Director to enhance objectivity/transparency, and (b) are decided by the Board of Directors based on the Committee's reports. In addition, Audit & Supervisory Board Member candidates are subject to approval by the Audit & Supervisory Board.
   The policies concerning appointment of Director/Audit & Supervisory Board Member candidates are as follows.

[Policy concerning appointment of Director candidates]

With respect to both Internal Directors in charge of the execution of business and Outside Directors, candidates are chosen irrespective of nationality or gender and are required to have good character and relevant expertise.

Secondly, candidates for Internal Director positions in charge of the execution of business are required to have considerable business knowledge and experience. Candidates for Outside Director positions are required to have considerable management experience or advanced knowledge and experience in their field of expertise.

[Policy concerning appointment of Audit & Supervisory Board Member candidates]

With respect to both Internal Audit & Supervisory Board Members and Outside Audit & Supervisory Board Members, candidates are chosen irrespective of nationality or gender and are required to have good character, relevant expertise, and necessary knowledge of financial, accounting, and legal matters.

Secondly, candidates for Internal Audit & Supervisory Board Member positions are required to have a wide- ranging familiarity with the Company's business, general business practices and industry practices. Candidates for Outside Audit & Supervisory Board Member positions are required to have advanced knowledge and experience in a field such as law, finance or accounting, or wide-ranging expertise in general management matters.

1. Explanations with respect to the individual appointments/dismissals and nominations for the nomination of Director/Audit & Supervisory Board Member candidates and appointment/dismissal of executives Reasons for the appointment/dismissal of each Outside Officer are described in "II 1. Organizational Structure and Operation, etc." of this Corporate Governance Report.
   Reasons for the appointment/dismissal of all Directors and Audit & Supervisory Board Members are described in the "Notice of Convocation of the General Meeting of Shareholders" posted on our website. (https://www.shinetsu.co.jp/en/ir/ir-general-meeting/)

【Supplementary Principle 4-1-1: Roles and Responsibilities of the Board of Directors (1)】

The Company determines that the matters requiring a resolution of the Board of Directors under laws and regulations and other important matters relating to its business, as listed below, must be decided by resolution of the Board of Directors:

1. Matters set forth in the Companies Act and other laws and regulations; (2) Matters set forth in the Articles of Incorporation; (3) Matters delegated by a resolution of the General Meeting of Shareholders; and (4) Important business matters and other matters set forth in the Regulations of the Board of Directors of the Company.
   In addition, the following matters must be reported to the Board of Directors:

1. Status of execution of business and other matters set forth in the Companies Act and other laws and regulations; (2) Matters set forth in the Regulations of the Board of Directors; and (3) Other matters which the Board of Directors considers necessary.
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【Principle 4-9: Independence Standards and Qualification for Independent Outside Directors】

Independent Outside Directors are elected in accordance with the requirements for Outside Directors set forth in the Companies Act and the "Standards for Independence of Outside Directors/Audit & Supervisory Board Members" which the Company adopted based on the independence standard set forth by the Financial Instruments Exchange. The "Standards for Independence of Outside Directors/Audit & Supervisory Board Members" adopted by the Company are described in "Matters relating to Independent Directors/Audit & Supervisory Board Members" in "II 1. Organizational Structure and Operation, etc." of this Corporate Governance Report.

【Principle 4-11/Supplementary Principle 4-11-1: Preconditions for Board and Audit & Supervisory Board Effectiveness】

The Company's corporate group globally develops its various businesses relating to the materials industry. To enable the Board of Directors to make correct and timely decisions about these business activities and provide sufficient supervision, the Company's basic policy is (a) to elect, regardless of their nationality or gender, Internal Directors who have business expertise in sales, manufacturing, research and development, etc. and several Outside Directors who can proactively provide their opinions about enhancing growth strategies and governance from a comprehensive viewpoint and (b) to have an appropriate number of Internal and Outside Directors on its Board of Directors, considering the Company's business scale.

We have appointed five Outside Directors (including one foreign Director) with achievements and extensive experience in a variety of industries.

The Audit & Supervisory Board consists of five Audit & Supervisory Board Members, including three Outside Audit & Supervisory Board Members, one of whom is a lawyer (a specialist in legal issues), and one of whom is a certified public accountant (a specialist in accounting issues).

Currently, we do not have any women Directors/Audit & Supervisory Board Members. However, if we encounter a suitable person, we will appoint her to the appropriate Officer position, and we aim to promote the appointment of diverse human resources to Officer positions.

【Supplementary Principle 4-11-2: Preconditions for Board and Audit & Supervisory Board Effectiveness】

For the status of concurrent Directors and Audit & Supervisory Board Members as Officers of other listed companies, please see "II 1. Organizational Structure and Operation, etc." of this report.

【Supplementary Principle 4-11-3: Preconditions for Board and Audit & Supervisory Board Effectiveness】

The Company's major discussion and decision-making bodies for business execution include the Board of Directors, as stipulated by law, and the Managing Directors' Committee. Directors and Audit & Supervisory Board Members, including Outside Directors and Audit & Supervisory Board Members, attend the Board of Directors and the Managing Directors' Committee. During these Meeting, Outside Directors ask questions and make proposals, and active discussions are held each time. In fiscal year 2019, the Board of Directors' meeting was held 13 times, and the matters stipulated under the laws and regulations, Articles of Incorporation and the Regulations of the Board of Directors of the Company were submitted without omission and resolved after deliberation.

In addition, the Company individually hears opinions from Outside Directors on the effectiveness of the entire Board of Directors every year. The Company received an evaluation from Outside Directors that the Company's Board of Directors was effective, and also received valuable opinions on our sustainable development such as "future-oriented research and development," "utilization of human resources" and "risk management and organizational management in case of emergencies."

As described above, the Board of Directors of the Company is operating appropriately. In addition, as a result of self-assessment and analysis, the Board of Directors ensures the effectiveness of the entire Board of Directors and fully demonstrates the functions that the Board of Directors should fulfill. The Company will continue to improve the effectiveness of the Board of Directors.

【Supplementary Principle 4-14-2: Director and Audit & Supervisory Board Member Training】

In order to realize the business principle, "we contribute to people's living, society and industry through value creation in materials and technologies, while observing all laws and regulations as well as conducting fair

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corporate activities," we provide the Directors and the Audit & Supervisory Board Members with training and seminars focusing particularly on compliance at the time of their appointment and at other appropriate times. The Audit & Supervisory Board Members also attend external training events to acquire necessary knowledge and improve their skills.

【Principle 5-1: Policy for Constructive Dialogue with Shareholders】

The Company recognizes that constructive communication with the shareholders can enhance corporate value based on the Company's sustainable growth and has determined the following policies:

1. Shareholders' requests for communication are handled mainly by (i) the Chairman, (ii) the President, (iii) the Officers in charge of each Division, Finance & Accounting or Public Relations and (iv) the full-time persons in charge of Investor Relations (IR) in the Public Relations Department.
2. For promoting constructive communication with the shareholders, the Public Relations Department, which is in charge of IR, shares information as needed with each Division, the Office of the President, the Finance & Accounting Department and the General Affairs Department, and ensures an organized cooperation within the Company.
3. We hold Company-sponsored earnings calls, business briefings and plant tours, and also participate in the meetings held by securities companies for the investors, etc.
4. The opinions, etc. acquired through communication with the shareholders and investors are reported as needed to the management and relevant Divisions.
5. We endeavor to perform fair and transparent information disclosure and set a "silent period (from the day following the date of quarterly financial settlement to the date of publication of financial settlement)" during which we decline any communication regarding the information of the financial results and, during such period, we decline any inquiries about the financial results and interaction with news media so as to securely prevent any insider information leakage.

2. Capital Structure

	Foreign Shareholding Ratio	More than 30%
[Status of Major Shareholders]
	Name / Company Name		Number of Shares Owned	Percentage (%)
	The Master Trust Bank of Japan, Ltd. (Trust Account)	55,466,400	13.36
	Custody Bank of Japan, Ltd. (Trust Account)		26,001,300	6.26
	Nippon Life Insurance Company		21,933,030	5.28
	JP MORGAN CHASE BANK 385632		18,698,896	4.50
	Custody Bank of Japan, Ltd. (Trust Account 4)		11,950,200	2.88
	The Hachijuni Bank, Ltd.		11,790,677	2.84
	Meiji Yasuda Life Insurance Company		10,687,919	2.57
	SSBTC CLIENT OMNIBUS ACCOUNT		9,392,628	2.26
	GOVERNMENT OF NORWAY		8,783,994	2.12
	Custody Bank of Japan, Ltd. (Trust Account 5)		7,014,000	1.69
	Controlling Shareholder (except for Parent	―
	Company)
	Parent Company	None

Supplementary Explanation

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