Corporate Governance

Supplementary Principle 4.1.3 CEO Succession Planning

The Board of Directors of the Company recognizes that succession planning for the CEO position is an important matter, and the president and representative director assumes the main responsibility for the planning and training of successors.
In addition to supervising the execution of business at the Board of Directors meetings, outside directors attend other important meetings to understand and oversee the competencies of successor candidates and provide necessary advice as appropriate to the president and representative director regarding the development of those candidates. In addition, at the Board of Directors meeting held on March 25, 2024, the Company established a voluntary Nomination and Remuneration Advisory Committee to serve as an advisory body to the Board of Directors. The committee will consider succession planning as part of its activities.

Supplementary Principle 4.3.3 Procedures for Dismissal of the CEO

Currently, the Company does not have evaluation criteria or procedures for the dismissal of the CEO. Should a member of the Company's senior management commit an act that violates or may violate laws and regulations or the Articles of Incorporation, or if any other event occurs that makes it difficult for a member of the Company's senior management to fulfill his or her duties properly, the matter will be submitted for deliberation by the Board of Directors after the reasons for dismissal are discussed and recognized in a timely manner, including for cases where the dismissal is proposed by an outside director.
In addition, the Company will continue to review the procedures from various angles to establish more objective, timely, and transparent procedures. 

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

The Company conducts a questionnaire survey of all directors and corporate auditors regarding the effectiveness of the Board of Directors. After aggregating and analyzing the results, the Board of Directors also shares the results of its self-evaluation on effectiveness and holds discussions to ensure further improvement.
We do not currently disclose the results of these evaluations but will consider doing so in the future.

Principle 1.4 Cross-Shareholdings

(1) Policy on cross-shareholdings
Regarding cross-shareholdings, it is the Company's policy to hold shares deemed to help raise the corporate value of the Group in the medium to long term, in overall consideration of business strategy and relationships, based on the policy of carefully selecting the minimum cross-shareholdings necessary. The policy on exercising voting rights related to strategically held shares is to decide whether to use such rights based on criteria as to whether this will help raise the medium- to long-term corporate value of the Company and the entity whose shares are held.

(2) Cross-shareholding verification details
The Company verifies the appropriateness of continuing to hold certain shares once a year in a Board of Directors meeting based on the above policy. The shares to be held, the number of shares, the purpose and effect of shareholdings, and other factors are disclosed in the Company’s Annual Securities Report.

(3) Criteria for exercising cross-shareholding voting rights
The policy on exercising voting rights related to strategically held shares is based on the decision of whether exercising such rights will enhance the medium- to long-term corporate value of the Company and the entity whose shares are held.

Principle 1.7 Related Party Transactions

The Company positions “Respect for the Individual” at the forefront of its Management Principles, and has established an environment, including policies and systems related to human capital, that respects the rights of each employee with the aim of being a Company where individuals can pursue a meaningful and cultural life; a Company that believes in the ambition of each individual and supports their independent activities; a Company that creates an environment where employees can maximize their capabilities through work; and a Company that rewards abilities and performance.

<Approach to ensuring diversity, measurable goals, and status of progress>
The Company aims to create a work environment in which all employees, regardless of gender, nationality, or age, whether new graduates, mid-career hires, or people with disabilities, can demonstrate their abilities and play active roles. We set targets for the number of female managers, female directors, and non-Japanese employees, and are working to ensure a diverse workforce.

Supplementary Principle 2.4.1 Ensuring Diversity in the Promotion of Key Personnel

The Company positions “Respect for the Individual" at the forefront of its management principles, and has established an environment, including policies and systems related to human capital, that respects the rights of each employee with an aim to be a Company where individuals can pursue a meaningful and cultural life; a Company that believes in the ambition of each individual and supports their independent activities; a Company that creates an environment where employees can maximize their capabilities through work; and a company that rewards abilities and performance.

<Approach to ensuring diversity, measurable goals, and status of progress>
The Company aims to create a work environment in which all employees, regardless of gender, nationality, and age, whether new graduates, mid-career hires, or people with disabilities, can demonstrate their abilities and play active roles. We set targets for the number of female managers, female directors, and non-Japanese employees, and are working to ensure a diverse workforce.

(1) Promotion of woman to management positions
Regarding hiring women, the Company promotes the hiring of new female graduates, and in mid-career hiring, we are actively hiring women and promoting them to management positions. The target for the number of female managers is five on a non-consolidated basis, and as of March 31, 2024, there were two female managers. As for the promotion of women to management positions, the percentage of potential candidates among all employees is small at this time, but we will continue to expand the candidate pool by strengthening support for career development and recruitment. As of March 31, 2024, we have appointed one female outside director and two female executive officers. Furthermore, one female director has been appointed at a subsidiary of the Company.

(2) Promotion of foreign nationals to management positions
To retain human resources who share our Management Principles and possess abilities required by the Group, the Company makes no distinction between Japanese and foreign national employees when recruiting new graduates and mid-career hires with the aim of creating a diverse organization. The Company has long promoted foreign nationals to management positions based on their abilities without regard for nationality or other factors. As of March 31, 2024, foreign nationals accounted for only 1.3% (seven people) of our workforce on a nonconsolidated basis, most of whom are new graduates. We have not set targets for the ratio of foreign national employees in management positions or the number of management positions. We will first give priority to retaining foreign nationals, then consider targets for the number of managers at a later stage.

(3) Promotion of mid-career hires to management positions
To retain human resources who share our Management Principles and have abilities required by the Group, we actively recruit mid-career hires with various experience, skills, and qualifications who can be expected to achieve immediate results, in addition to the regular hiring of new graduates, with the aim of creating a diverse organization. The Company has long promoted new graduates and mid-career hires without distinction to management positions, based on their abilities. Since the ratio of mid-career hires and the number of management positions is sufficient, no specific targets have been set.
・Percentage of mid-career hires in management positions: 55.4%
・Percentage of mid-career hires in Executive Officer positions (excluding those concurrently serving as directors): 80.0%

<Summary and status of human resource development and internal environment improvement policies in order to ensure diversity>
(1) Human resource development policy
Our basic policy is to develop human resources capable of realizing the Company’s Management Principles. We strategically develop human resources based on our human resource development policy, which is divided into the following three phases.
Phase I Education and training: Adhering to the basics of the type of employee the Company seeks.
Phase II Practical application: Supporting individual efforts as employees improve their competencies and establish their expertise, primarily through practical work. Also, nurturing future executive candidates.
Phase III Demonstration of expertise: Leveraging abilities and experience in management and specialized skills and techniques accumulated up to now, and contributing to division operations and younger employee development (nurturing role).

Principle 2.6 Roles of Corporate Pension Funds as Asset Owners

The Company has both defined-benefit and defined-contribution pension plans. With respect to asset management (including selection of investees, exercise of voting rights, etc.) for the covenant-type defined-benefit pension plan, the Company formulates the basic investment policy, selects asset management institutions that are expected to appropriately fulfill their fiduciary responsibilities, including stewardship activities, and entrusts the management of the assets to these institutions. In addition, the department in charge of the asset management of the Company requests regular reports from the relevant asset management institutions and verifies their investment performance and systems.
Regarding the defined-contribution pension plan, the Company provides eligible officers and employees with educational opportunities related to asset management institutions and investment products as appropriate.

Principle 3.1 Full Disclosure

(1) Management principles, business strategies, and mid-term plans
The Company defines management principles, strategies, and mid-term business plans and discloses these on the company website. 
Management principles (https://www.hds.co.jp/english/company/idea/)
Business strategies and mid-term business plan (https://www.hds.co.jp/english/ir/management_policy/strategy/) 

(2) Basic views on corporate governance
These are described in “I. Basic views on corporate governance, capital structure, corporate profile, and other basic information, 1. Basic views” of this report.

(3) policies and procedures for determining remuneration of directors
These are described in this report in “II. Management organization and other corporate governance systems regarding decision-making, execution, and management oversight, 1. Matters concerning the organizational structure and operation, Director remuneration, Disclosure of policy on determining remuneration amount and the calculation methods thereof.”

(4) Policies and procedures for nominating directors and Corporate Auditors
When appointing or reappointing directors, the Board of Directors consults with and receives reports from its advisory body, the Nomination and Remuneration Advisory Committee. After considering the content of such reports, the Board of Directors resolves an agenda for the General Meeting of Shareholders, and a final decision is reached by resolution at the General Meeting of Shareholders.

The appointment of corporate auditor candidates is recommended by the Board of Directors and submitted to the General Meeting of Shareholders after obtaining the consent of the Board of Corporate Auditors.

In appointing outside directors and outside corporate auditors, we comprehensively consider the personal, capital, and business relationships between the Group and the potential candidates and companies to which they belong, and only those individuals deemed able to fulfill the required functions and roles from an independent standpoint are nominated as candidates.

 

(5)Explanation of nomination and appointment of candidates for directors and Board of Corporate Auditors
When candidates for director and corporate auditor positions are submitted for discussion at the General Meeting of Shareholders, the Company provides a summary of their career history and assessment materials that include achievements and experience. The Company also discloses the reasons forappointment and the expertise required by the Company in the form of a skills matrix included in the reference documents and at the end of this report.

(6) Policies and procedures for the dismissal of senior management
In the event that a member of the Company's senior management commits an act that violates or may violate laws and regulations or the Articles of Incorporation, or if any other event occurs that makes it difficult for a member of the Company's senior management to perform his or her duties properly, the matter will be decided by the Board of Directors after the reasons for the dismissal are discussed and recognized in a timely manner through consultation with and reporting from the Nomination and Remuneration Advisory Committee, including for cases where the dismissal is proposed by an outside director.

Supplementary Principle 3.1.3 Sustainability Initiatives

<Sustainability initiatives>
Recognizing the importance of sustainability initiatives, the Company established the Sustainability Committee on April 1, 2023, as an organization to promote, oversee, and manage overall sustainability to strengthen and promote the Group's overall sustainability in a strategic
manner. The Sustainability Committee consists of executive directors and is chaired by the president and representative director.
In addition, we regularly review materiality in preparation for formulating new mid-term business plans and promote initiatives in our mid-term
business plans and annual plans.

Response to climate change
We recognize that addressing climate change is an important management issue, so we have set a long-term goal of “Net Zero by 2050” and
are working to achieve it. Specifically, we have identified climate change-related risks and opportunities that may affect the Group’s
operations, conducted scenario analyses as recommended by the TCFD under the 1.5℃ and 4.0℃ scenarios, and analyzed the impact of
individual risks and opportunities on our operations and their likelihood under the various suppositions of their manifestation in the short,
medium, or long term. Based on the results of these scenario analyses, we promote initiatives to create opportunities and minimize risks,
mainly via the Sustainability Committee. We include details of risk management and greenhouse gas emissions performance in our Integrated
Report and Annual Securities Report.

Please refer to our Integrated Report, Annual Securities Report, and Company website for information on sustainability initiatives.
・Integrated report: https://www.hds.co.jp/english/csr/hdsreport/
・Annual Securities Report (In Japanese): https://contents.xj-storage.jp/xcontents/AS06879/f4bb57e7/4d05/4d18/9aa2/c5ca4bb97608/S100TR1D.pdf 
・Sustainability section of the Company website: https://www.hds.co.jp/english/csr/

<Investments in human capital and intellectual property>
We have identified investment in human capital and intellectual property in our materiality as “maximizing the value of human capital” and
“creating and using new technologies and skills adapted to changes in the environment.”
Information on human capital is also disclosed in the sustainability section of the Company website (https://www.hds.co.jp/english/csr/) as employee, customer, and social initiatives, and in this report under “I. Basic views on corporate governance, capital structure, corporate profile, and other basic information, 1. Basic views, Disclosure based on the principles of the corporate governance code, [Supplementary Principle 2.4.1: Ensuring diversity in the promotion of key personnel]” and in our Annual Securities Report.
Regarding investments in intellectual property, the Company is proactively working on the rights and protection of intellectual property created
through research, development, and manufacturing, the details of which are disclosed on the Company website.(https://www.hds.co.jp/english/deveakajima lopment/intellectual_property/)

Supplementary Principle 4.1.1 Scope of Delegation to Management

The Company stipulates matters to be decided by the Board of Directors in the Board of Directors Regulations and operates the Board of Directors in accordance with laws and regulations, the Articles of Incorporation, and the Board of Directors Regulations, while delegating specific business execution to executive directors. In addition, the Company has adopted an executive officer system. Executive officers, under the direction of the president and representative director, execute business operations in accordance with the decision-making authority stipulated in the Rules on Administrative Authority to enable prompt decision-making.

Principle 4.9 Independence standards and Qualifications for Independent Outside Directors

In appointing independent outside directors, an overall assessment is made following determination of the applicability of each item of the independence standards set by the Tokyo Stock Exchange. The details are disclosed in the Independent Officers Notifications submitted to the Tokyo Stock Exchange and in this report in “II. Management organization and other corporate governance systems regarding decision making, execution, and management oversight, 1. Matters concerning organizational structure and operation, Directors.”
In selecting independent outside director candidates, we consider various perspectives, such as each candidate’s background, knowledge, personality, gender, international experience, ability of required expertise, and other factors, and select people who we expect will help bring new perspectives to the Board of Directors.

Supplementary Principle 4.10.1: Use of voluntary committees when independent outside directors do not constitute a majority of the Board of Directors

At the Board of Directors meeting held on March 25, 2024, the Company established a voluntary Nomination and Remuneration Advisory Committee to serve as an advisory body to the Board of Directors. Rules stipulate that a majority of the committee’s members shall be independent outside directors and that the chair shall be selected from among the independent outside directors, so we believe the committee’s fairness, transparency, and objectivity are ensured.
Please refer to “II. Management organization and other corporate governance systems regarding decision-making, execution, and management oversight, 1. Matters concerning organizational structure and operation, Voluntary establishment of committee(s) equivalent to Nomination Committee or Remuneration Committee, Supplementary explanation” for detail pertaining to the committee.

Supplementary Principle 4.11.1Views on the Balance, Diversity, and Scale of the Board of Directors as a Whole and Disclosure of Skills, Etc.

The Company’s Articles of Incorporation stipulate that the number of directors shall not exceed 15. Given that the Company is an internationally expanding technology and technical group, basic policy regarding the appointment of directors is to have the Board of Directors comprised of executive directors with specialist skills and knowledge relating to overall management, manufacturing, development, sales, finance, accounting, etc., and outside directors with abundant management experience in other companies and industries as well as in international fields. We began disclosing a skills matrix starting with the Notice of the Ordinary General Meeting of Shareholders in June 2022.

Supplementary Principle 4.11.2 Status of Concurrent Positions Held by Directors and Corporate Auditors

The status of concurrent positions held by directors and corporate auditors is disclosed in the business report accompanying the Notice of the Ordinary General Meeting of Shareholders and in the Annual Securities Report. The number of concurrent positions held at other companies by directors and corporate auditors is limited to the extent that they remain capable of fulfilling their roles and responsibilities as officers of the Company.

Supplementary Principle 4.14.2 Training Policy for Directors and Corporate Auditors

Principle 5.1 Policy for Constructive Dialogue with Shareholders

We consider our shareholders and investors to be important stakeholders and believe it is our responsibility as a listed company to establish and develop systems for promoting constructive dialogue. To that end, we have appointed an executive officer in charge of investor relations, and the IR division works in close cooperation with other relevant departments and actively carries out activities within a reasonable scope.
Specific activities include financial results briefings for institutional investors, corporate briefing sessions for individual investors, plant tours for shareholders, holding of small-group or individual meetings with institutional investors, issuance of an Integrated Report, and enhanced content on the Company website. Through these and other means, we seek to enhance communication with shareholders and investors. For more details, please refer to the “Status of IR- related activities” section of this report.

Measures to Achieve Management Style that is Conscious of Capital and Share Price

Regarding cost of capital, the Company's cost of shareholder’s equity and WACC are calculated based on finance theory with the assistance of outside experts, and the actual results and trends of such figures are shared with the Board of Directors. We recognize that our WACC, calculated using the Capital Asset Pricing Model (CAPM), is approximately 8%. On the other hand, we use the DCF method when making decisions on capital investments, etc., and set the discount rate used in the calculation at a hurdle rate of 10%, which is higher than our WACC and which we verify and deem rational.
Furthermore, we are working to achieve the policies and management targets of our medium-term business plan covering fiscal 2024 through 2026 with the mission of “To contribute to innovation in the society by our motion control technology.” Profitability targets for the final year of the plan, fiscal 2026, are an operating profit margin of 15–20% and an EBITDA margin of 25–30%; efficiency targets are ROE and ROIC each above cost of shareholders’ equity, at least 10%; the stability target is an equity ratio of at least 70%; and the shareholder return target is a dividend payout ratio of at least 30%. The mid-term business plan is discussed and approved by the Board of Directors, and progress is reported at the Board of Directors meeting at the end of each fiscal year, with the management team taking the initiative in examining, analyzing, and evaluating the plan to ensure appropriate allocation of management resources.

The representative director and director/CFO explain these initiatives and their progress at financial results briefings for analysts, and the materials and scripts for the briefings are published on the Company website.
・Medium-term business plan: https://www.hds.co.jp/english/ir/management_policy/strategy/
・Results briefing materials: https://www.hds.co.jp/english/ir/event/accounts/

Status of Dialogues with Shareholders

The Company positions shareholders and investors as important stakeholders and maintains a policy of actively responding to inquiries and meeting requests from shareholders and institutional investors. Response is led by the representative director/general manager of Corporate Planning, director/CFO, and the executive officer in charge of Corporate Planning and Investor Relations.
Dialogues with shareholders and investors in fiscal 2023 were as follows.
・For institutional investors:195 IR meetings for single institutional investors; 10 small meetings (attended by 293 investors); participation in five IR conferences (attended by 54 investors)
・For individual investors: One Company briefings: Twice (attended by 376 individual investors)  

In addition to formulating basic policies and strategies for the Group, the Board of Directors makes decisions on important matters, including
matters stipulated by law and regulations and the Articles of Incorporation, and supervises business execution.
The Board of Directors consists of 10 members, five of whom are outside directors. Outside directors provide a supervisory function over the
management of the Company from a standpoint independent from executive directors, drawing on their own experience and insight into corporate management.
The status of activities of the Board of Directors in fiscal 2023 is described on page 55 of the Company’s Annual Securities Report (https://contents.xj-storage.jp/xcontents/AS06879/f4bb57e7/4d05/4d18/9aa2/c5ca4bb97608/S100TR1D.pdf) (In Japanese).

 

Advisory Members to the Board of Directors, including experts from Japan and overseas, are appointed to advise the Board of Directors on management issues on a regular basis.

In June 2003, the Company introduced an executive officer system to strengthen business execution supervisory functions and accelerate management decision-making. This clearly separated the policy and strategy formation, decision-making, and supervisory functions of the Board of Directors from the business execution functions of executive officers. In addition, monthly executive officer meetings are held to deliberate important matters and issues related to business execution.

 

At the Board of Directors meeting held on March 25, 2024, the Company established a voluntary Nomination and Remuneration Advisory Committee. The committee stipulates in its regulations that a majority of the committee’s members shall be independent outside directors and
that the chair shall be selected from among the independent outside directors. Currently, the committee has three members, including two independent outside directors.
As an advisory body to the Board of Directors, the committee studies and deliberates on director candidates, candidates for directors with titles,
director remuneration proposals, and other matters, and decides on matters to be reported to the Board of Directors.

To strengthen the Group’s overall sustainability promotion framework, the Company established the Sustainability Committee on April 1, 2023,
as an organization to promote, oversee, and manage the Group’s overall sustainability initiatives. The committee is chaired by the president
and representative director, and its members are executive directors.
Main roles of the committee are to formulate and revise sustainability-related policies and strategies, identify materiality, formulate long-term targets and KPIs and manage their progress, identify and manage risks and opportunities, plan and disseminate information on promotional activities, regularly report and make recommendations to the Board of Directors, and submit basic policies for consideration.
The status of activities of the Sustainability Committee in fiscal 2023 is described on page 18 of the Annual Securities Report
(https://contents.xj-storage.jp/xcontents/AS06879/f4bb57e7/4d05/4d18/9 aa2/c5ca4bb97608/S100TR1D.pdf) (In Japanese).

 

*The Company has also appointed Advisory Members to the Board of Directors that consist of experts from Japan and overseas and act as an advisory body to the Board of Directors. The Company receives advice on management-related issues from the members on a regular basis.

Name	Position	Attendance at Board of Directors meetings	Year in office	Expected insight, experience, capability and expertise, etc.
				Corporate Management/ Management Strategy	Overseas Business	Sales/ Marketing	Manufacturing /Production	Technology/ R&D	Financial Strategy/ Capital Policy/ Accounting	Information and Communication Technology (ICT)	Sustainability
Akira Nagai	Chairperson of board of directors	18/18	11 years	●	●	●			●	●
Akira Maruyama	President and Representative Director	18/18	８ years	●		●	●	●		●
Kazutoshi Kamijoh	Representative Director	18/18	４ years	●		●			●
Yoshihiro Tanioka	Director	18/18	３ years	●	●	●	●	●
Naomi Shirasawa	Director	ー	ー	●	●	●	●	●
Haruhiko Yoshida	Outside Director (Independent)	18/18	21 years	●	●	●
Masanobu Nakamura	Outside Director (Independent)	18/18	11 years	●	●	●			●
Yoshio Fukuda	Outside Director (Independent)	18/18	４ years	●	●	●	●		●
Kazuhiko Hayashi	Outside Director (Independent)	18/18	２ years	●	●			●
Kaeko Kitamoto	Outside Director (Independent)	12/13	１ year	●					●		●

*Ms. Kaeko Kitamoto was newly elected at the Ordinary General Meeting of Shareholders for fiscal 2022 held on June 21, 2023 and subsequently took office on July 1, 2023, and the status of her attendance at meetings of the Board of Directors held on after the date she took office is presented.

Reasons for selecting skill areas of the Skills Matrix 

Skill areas	Reason for selecting
Corporate management / Management strategy	A director needs management experience and track record at various companies including a manufacturing company as well as abundant knowledge to deliver technological innovation for a better society under the Group’s mission of “contributing to technological innovation in society through motion control technology,” in addition to achieving a sustainable society and enhancing corporate value.
Overseas business	A director needs abundant knowledge and experience in overseas business management and local culture, etc. to promote the growth strategy of the Group which operates business overseas.
Sales / Marketing	A director needs proven knowledge and abundant experience in sales and marketing to identify essential needs of customers, create attractive and satisfactory products, and provide customer- oriented services.
Manufacturing / Production	A director needs proven knowledge and abundant experience in manufacturing and production which is essential to maintain and develop a production system to achieve added-value manufacturing in total motion control, the domain of the Company, and high customer satisfaction.
Technology / R&D	A director needs experience in R&D for speed reducers and mechatronics products, in addition to expertise and experience in the industry, to ensure high product quality as a leading company of precision speed reducers, and develop high added-value products for customers.
Financial strategy / Capital policy / Accounting	A director needs proven knowledge and abundant experience in finance and accounting to build a solid financial base, promote growth investment and financial strategy to sustainably enhance corporate value and return profits to shareholders.
Information and Communication Technology (ICT)	A director needs proven knowledge and experience in information and communication technology to develop information infrastructure including cyber security measures and to promote ICT across the Company utilizing advanced information technologies.
Sustainability	A director needs proven knowledge and experience in sustainability promotion including the introduction of renewable energy sources to reduce greenhouse gas emissions and human capital such as the promotion of diversity, equity, and inclusion to promote the reduction of global environmental impacts, the development of a rewarding work environment, etc. based on the Basic Policy of Sustainability and material issues (materiality), which were established to realize a sustainable society and enhance corporate value.

Basic Views on the Internal Control Systems

The Company has established the following fundamental policies on establishment of internal control systems, which are necessary to ensure that Directors' execution of duties is in compliance with laws, regulations and the Articles of Incorporation and to ensure the appropriateness of other operations. In accordance with the fundamental policies, the Company will continue to ensure the appropriateness of operations and review and improve the internal control system with the aim of building a more effective system.

 

Status of Development of Internal Control System

1. System for the preservation and management of information related to the execution of duties by Directors
The handling of information and documents relating to the execution of duties by Directors shall be appropriately stored and managed in accordance with the Company’s internal rules on document management.

2. Regulations and other systems for managing risk of loss
(1) The Company shall stipulate risk management rules, establish a Group-wide risk management structure in accordance with the rules and implement risk management.
(2) In the event of a risk should arise, the Company shall establish a system to take appropriate measures in accordance with the " Code of Conduct," "Crisis and Risk Management Regulations," and "Crisis Management - Code of Conduct in the Event of a Crisis" established by the Company.
(3) Responsibility and authority relating to risk management are segregated as follows:
・The President and Representative Director shall have authority and responsibility for establishing risk management systems throughout the Group.
・The Executive Officer responsible for general affairs shall promote maintenance and improvement of risk management systems throughout the Group and manage the systems in accordance with the instructions and supervision of the President and Representative Director.
・Executive officers shall recognize the importance of identification, assessment, monitoring and management of risks with respect to the fields for which they are responsible and establish systems for clarification and management of risks.

3. System ensuring efficient execution of duties by Directors
(1) The Company shall employ the Executive Officer system and separate functions of the Board of Directors, including strategy formulation, decision-making, and supervision, from the function of Executive Officers, namely execution of operations. The Company shall define the responsibility and authority concerning execution of duties in the Authority Rules to clarify responsibility, improve efficiency of decision-making, and accelerate decision-making.
(2) The Company shall continuously monitor the situations of business operations and risks and ensure efficiency of duty execution by Directors, Executive Officers, and the Directors of subsidiaries based on the following management control systems: 
・Board of Directors Meeting (decision-making of important management policies, monitoring of the progress of the mid-term business plan and the annual business plan)
・Executive Officer Meeting (reporting and deliberation of the status of Executive Officers' business execution, deliberation and decision-making on execution of important management matters)
・President's Audit (direct audit by the President on business execution policies of persons responsible for each division, targets, and status of business execution)
・Business process innovation meeting (deliberation on monthly business results, initiatives for business process innovation, etc.)
・Affiliated company meeting (reporting and deliberation of the status of management at affiliated companies)
・Internal audit (audit of appropriateness and efficiency of activities related to operations, accounting, quality, and the environment)

4. System ensuring execution of duties by Directors and employees in compliance with laws, regulations, and the Articles of Incorporation
(1) The Company shall ensure that everyone working at the Company and its subsidiaries complies with the Charter of Corporate Behavior and the Code of Conduct, and foster a high level of awareness of compliance among individual employees. 
(2) In the event of any unfavorable compliance-related eventuality at the Company and its subsidiaries, the Company shall establish a system by which the President and Representative Director, the Chairperson and Representative Director, the Board of Directors, and the Board of Corporate Auditors receive reports on the details of the event and countermeasures via the Executive Officer responsible for general affairs.
(3) The Company and its subsidiaries shall establish a system for ensuring reliability and appropriateness of financial reporting and evaluate the status of development and operation of such system regularly.
(4) As a system for ensuring (1), (2), and (3) above, the Company shall establish a system to ensure business execution is being conducted appropriately by having Internal Auditors primarily led by the Internal Control and Audit Office, to conduct internal audits of the Company and its subsidiaries.
(5) The Company and its subsidiaries shall adhere to the basic policy to comply with laws and regulations and have no relationship whatsoever with anti-social forces or organizations.

5. System ensuring the appropriateness of operations of the corporate group consisting of the Company and its subsidiaries
(1) The Company shall foster a high level of awareness of compliance by thoroughly communicating the Code of Conduct to the employees of its subsidiaries as well.
(2) The Company shall establish an appropriate system for managing its subsidiaries in accordance with the Rules for Management of Affiliated Companies. 
(3) The Company shall continuously monitor the status of execution of operations at subsidiaries and risks by periodically holding Affiliated Companies Meeting.
(4) Internal Auditors primarily led by the Internal Control and Audit Office shall periodically conduct operational audit of Group companies.
(5) The Company shall promote personnel exchange between the Company and its subsidiaries in order to achieve close collaboration of the Group.

6. Matters concerning employees who provide assistance to Corporate Auditors upon request
The Company shall establish an organization to assist with the duties of Corporate Auditors and assign appropriate personnel to that organization.

7. Matters concerning the independence of employees mentioned in 6. above from Directors
Transfer of the employees who provide assistance to Corporate Auditors and their performance evaluation shall require the consent of the Board of Corporate Auditors and its members.
8. System for Directors and employees of the Company and its subsidiaries to report to Corporate Auditors, and other systems regarding reports to corporate auditor
(1) Corporate Auditors shall attend important meetings to gain important information on the execution of duties by Directors and employees.
(2) Directors and employees of the Company and its subsidiaries shall swiftly notify the Board of Corporate Auditors and its members of matters that may have a material impact on the Group, in addition to matters designated by law.
(3) Any matters discovered through internal audits of the Company and its subsidiaries shall be reported to the Board of Corporate Auditors and its members by the General Manager of the Internal Control and Audit Office.
(4) Directors and employees of the Company and its subsidiaries are required to provide the necessary reports and information in response to requests from the Board of Corporate Auditors and its members.
(5) Any whistleblowing reports from the Company and its subsidiaries shall be handled according to the whistleblowing system and reported to the Board of Directors and its members and the Board of Corporate Auditors and its members periodically or as necessary. Furthermore, the identity and personal information of any whistleblowers shall be protected to ensure they are not treated disadvantageously. 
9. Other Systems Ensuring the Effectiveness of Audits Conducted by Corporate Auditors
(1) The Board of Corporate Auditors and its members shall periodically meet with the Company's Accounting Auditors to exchange opinions.
(2) If deemed necessary for auditing, the Board of Corporate Auditors and its members may appoint lawyers, certified public accountants, or other external experts, in addition to internal staff, at the expense of the Company. 

 

The Company has prescribed the following basic policy concerning the elimination of anti-social forces in the Charter of Corporate Behavior:
・The Company shall not compromise with anti-social forces and shall maintain a resolute attitude.

Regarding the above-mentioned Charter of Corporate Behavior, we regularly conduct group awareness-building training sessions to ensure all employees are thoroughly familiar with the charter’s contents and distribute the content on a pocket-sized card to all employees. 
In addition, regarding responses to anti-social forces, we have created an internal control manual that serves as an internal regulation, and strive to implement its specific operations. 
We also receive information on anti-social forces and advice on appropriate ways to respond, through cooperation with the police and the Special Violence Prevention Coalition.

The Board of Corporate Auditors comprises four corporate auditors, two of whom are full-time and two part-time (including two outside corporate auditors). After the Ordinary General Meeting of Shareholders, the Board of Corporate Auditors determines audit policies, plans, and work assignments, and each Board of Corporate Auditors member audits the execution of duties by directors, executive officers, and others in accordance with the “Board of Corporate Auditors Regulations,” “Board of Corporate Auditors Auditing Standards” and “Implementation Standards for Internal Control Systems.” Specifically, the Board of Corporate Auditors audits the execution of duties by directors through attendance at important meetings, including Board of Director meetings, executive officer meetings, Business Process Innovation meetings, Development Promotion meetings, affiliated company meetings, and the president's audit. Furthermore, the Board of Corporate Auditors meets with representative directors, shares information with outside directors, exchanges opinions with directors, executive officers, division heads, office managers, divisional sales managers, and presidents of domestic and overseas subsidiaries, and
inspects important documents including approval requests and credit application forms. The Board of Corporate Auditors also plans and holds Group corporate auditor liaison meetings with auditors from affiliated companies to share information among Group companies and take the lead in improving knowledge related to auditing duties.

The Internal Control and Audit Office is responsible for internal audits, with one manager and three auditors conducting internal audits of the
Company and its subsidiaries throughout the year based on a pre-planned audit schedule.
In addition, the Corporate Planning and Investor Relations Office of the Corporate Planning Division serves as secretariat and implements a “president’s audit” twice a year in which the Company president directly audits the status of business execution by those in charge of each division and monitors progress on the Company’s business plan and the status of risk management, etc.

In terms of accounting audits, PricewaterhouseCoopers Japan LLC conducts strict accounting audits based on an audit contract and the Company exchanges opinions on the audit results and receives recommendations for improvements.
The certified public accountants performing the accounting audit of the Company in fiscal 2023 were Mr. Tatsuya Chiba and Mr. Yoshitaka Sakurai, both of whom are designated limited liability partners at the Tokyo office of PricewaterhouseCoopers Japan LLC. They were assisted by two certified public accountants, one associate member of the Japanese Institute of Certified Public Accountants, and eight other staff members.

The Corporate Auditors exchange opinions with the accounting auditor regarding audit plans, receive reports on audit results, discuss and evaluate the content of audits, and ensure cooperation. Furthermore, regarding key audit matters (KAM), the corporate auditors hold discussions with PricewaterhouseCoopers Japan LLC, receive reports on the status of their audits, and request explanations as necessary.

 

With regard to corporate governance, the functions and roles of the Company's Outside Directors are supervision and creation of proposals concerning the Company's overall management from independent perspectives based on their experience and insight, so as to strengthen the Company's management systems and corporate governance structure.
The Company's Outside Directors are as follows:

Name	Independent Officer	Reason for Election
Haruhiko Yoshida		Mr. Haruhiko Yoshida has served in prominent positions at Mitsui & Co., Ltd., and possesses abundant experience and superior insight regarding corporate management, in addition to extensive international experience. Based on the above, the Company has judged that he has been helping further strengthen the Company’s management system by making recommendations and supervising the overall management of the Company utilizing his ability and experience. （Designation as an Independent Director） Mr. Yoshida is designated and filed as an independent officer because he does not fall under any of the criteria for independence set forth by the Tokyo Stock Exchange and has a high degree of independence, and the Company has determined that there is no risk of a conflict of interest between him and ordinary shareholders.
Masanobu Nakamura		Mr. Masanobu Nakamura has served in prominent positions in major banks and securities companies, and possesses abundant experience and superior insight regarding corporate management, in addition to extensive international experience. Based on the above, the Company has judged that he has been helping further strengthen the Company’s management system by making recommendations and supervising the overall management of the Company utilizing his ability and experience. （Designation as an Independent Director） Mr. Nakamura was previously an executive officer of the Company’s main bank, but approximately 19 years have elapsed since his retirement. The Company did not invite him at the request of a financial institution, but rather at its own discretion, to utilize his extensive management experience and broad insight into management of the Company. Furthermore, the Company has transactions with multiple financial institutions and is not influenced by any one financial institution in its management decision making. Based on consideration of all these factors, the Company has concluded that there is no conflict of interest with ordinary shareholders and has registered him as an independent officer.
Yoshio Fukuda		Mr. Yoshio Fukuda has served in prominent positions at Teijin Limited and Teijin Group and possesses abundant experience and superior insight regarding corporate management, in addition to extensive international experience. In addition, he has a high level of knowledge of strategic planning, establishment of joint ventures, M&A, etc. Based on the above, the Company has judged that he has been helping further strengthen the Company’s management system by making appropriate recommendations and supervising the overall management of our internationally expanding Group from an independent standpoint. There are no material transactions between the Company and Teijin Limited or the Teijin Group, where he served as an executive officer until 2016, or Toyo Construction Co., Ltd., where he served as an outside director until June 27, 2023. （Designation as an Independent Director） Mr. Fukuda is designated and filed as an independent officer because he does not fall under any of the criteria for independence set forth by the Tokyo Stock Exchange and has a high degree of independence, and the Company has determined that there is no risk of a conflict of interest between him and ordinary shareholders.
Kazuhiko Hayashi		Mr. Kazuhiko Hayashi has leadership experience as the person in charge of development and design at the Toyota Group and possesses abundant experience and a high degree of insight into corporate management gained during his tenure in prominent positions at the Sumitomo Electric Industries Group. The Company assesses that he has been helping further strengthen the Company’s management system by making recommendations and supervising the overall management of the Company from a research and development standpoint, given the nature of the Company’s business as a development-type manufacturer. There are no material transactions between the Company and Sumitomo Electric Industries, Ltd., Sumitomo Wiring Systems, Ltd., or AutoNetworks Technologies, Ltd., where he was an executive officer until 2017. （Designation as an Independent Director） Mr. Hayashi is designated and filed as an independent officer because he does not fall under any of the criteria for independence set forth by the Tokyo Stock Exchange and has a high degree of independence, and the Company has determined that there is no risk of a conflict of interest between him and ordinary shareholders.
Kaeko Kitamoto	〇	As a certified public accountant at Ernst & Young ShinNihon LLC, Ms. Kaeko Kitamoto has been involved in the accounting audits of various listed companies and has served as a partner and managing director of that firm, giving her a wealth of experience and deep insight into financial accounting. She is currently also a member of the Electricity and Gas Market Surveillance Commission of the Ministry of Economy, Trade and Industry, and has expertise in CO2 reduction and the introduction of renewable energy. Based on the above, the Company concluded that she has been helping further strengthen the Company’s management system by making recommendations and supervising the overall management of the Company and sustainability initiatives, including climate change and diversity, equity, and inclusion. There are no material transactions between the Company and Ernst & Young ShinNihon, where she served as an auditor. Although she currently serves as a member of the Electricity and Gas Market Surveillance Commission of the Ministry of Economy, Trade and Industry, and as an outside corporate auditor at Daikin Industries, Ltd., there are no material transactions between the Company and the Electricity and Gas Market Surveillance Commission or Daikin Industries. （Designation as an Independent Director） Ms. Kitamoto is designated and filed as an independent officer because she does not fall under any of the criteria for independence set forth by the Tokyo Stock Exchange and has a high degree of independence, and the Company has determined that there is no risk of a conflict of interest between her and ordinary shareholders.

With regard to corporate governance, the functions and roles of the Company's Outside Auditors are to strengthen the Company's audit systems from independent perspectives based on their experience and insight.
The Company's Outside Auditors are as follows:

Name	Independent Officer	Reason for Election
Yoshitsugu Yokogoshi		Mr. Yoshitsugu Yokogoshi possesses abundant management experience and broad insight gained at a major banking group. In addition, he possesses a wealth of experience in auditing operations and substantial knowledge of finance and accounting since he has served as a full-time corporate auditor at a major oil company. Since his appointment as a full-time corporate auditor of the Company in June 2020, he has provided recommendations from a neutral and objective perspective as a member of the Board of Directors and Board of Corporate Auditors, contributing to the improvement of auditing functions. Based on the above, the Company has judged that he can further strengthen the corporate governance structure of the Group from an independent standpoint, and therefore appointed him as an outside corporate auditor. （Designation as an Independent Director） Mr. Yokogoshi was previously an executive officer of the Company’s main bank, but approximately 15 years have elapsed since his retirement. The Company did not invite him at the request of a financial institution, but rather at its own discretion, to utilize his extensive management experience and broad insight into auditing the Company, as well as his considerable knowledge of audit-related finance and accounting gained through his experience as a full-time auditor of a major oil company. Further, the Company has transactions with multiple financial institutions and is not influenced by any one financial institution in its management decision-making. Moreover, the Company does not have any significant transactions with Cosmo Oil Co., Ltd., where Mr. Yokogoshi served as a full-time corporate auditor or other Cosmo Energy Group companies. Based on consideration of all these factors, the Company has concluded that there is no conflict of interest with ordinary shareholders and has registered him as an independent officer.
Eisaku Imazato		Mr. Eisaku Imazato possesses abundant management experience and broad insight gained at major securities companies. Since his appointment as a corporate auditor of the Company in June 2020, he has provided recommendations from a neutral and objective perspective as a member of the Board of Directors and Board of Corporate Auditors, contributing to the improvement of auditing functions. Based on the above, the Company has judged that he can further strengthen the corporate governance structure of the Group from an independent standpoint, and therefore appointed him as an outside corporate auditor. （Designation as an Independent Director） Although Mr. Imazato is a former executive officer at Mitsubishi UFJ Financial Group, Inc., the parent of the Company’s main bank MUFG Bank, Ltd., 10 years have elapses since his retirement. He was also an executive officer of a securities company with which the Company has a business relationship, but has already been retired for 10 years. The Company did not invite him at the request of a financial institution, but rather at its own discretion, to utilize his extensive management experience and broad insight in auditing the Company. Furthermore, the Company has transactions with several financial institutions and securities companies and is not influenced by any one financial institution or securities company in its management decision-making. Moreover, the Company does not have any significant transactions with Marusan Securities Co., Ltd., where Mr. Imazato currently serves as an outside director. As such, the Company believes that Mr. Imazato’s appointment poses no risk of a conflict of interest with ordinary shareholders, and has registered him as an independent officer.

In order to create an environment where the Company can invite capable personnel to serve as Directors, and to enable them to sufficiently perform the duties expected of them, the Company stipulates in its Articles of Incorporation that it may enter into an agreement with Directors (excluding persons who are Executive Directors, etc.) to limit their liability to the Company to a certain range.

An overview of the content of the liability limitation agreements that the Company has entered into with incumbent Outside Directors is as follows.
・If Directors (excluding persons who are Executive Directors, etc.) causes damages to the Company owing to the neglect of his or her duties, his or her liability shall be limited to the minimum amount for liability set forth in Article 425, Paragraph 1 of the Companies Act, provided that he or she has performed his or her duties in good faith and without gross negligence.

1. Basic Policy

2. Policy on Determining the Amount of Base Remuneration for Each Individual

The base remuneration for Directors shall be paid in the form of a fixed monthly remuneration, and it shall be set within the range of remuneration that was resolved at the Fiscal 2022 General Meeting of Shareholders held on June 21, 2023 (320 million yen including 100 million yen for Outside Directors). The base remuneration shall be determined after comprehensively considering the Company’s business performance and the level of employee salary, including for Executive Officers, etc., depending on whether they have representative rights or not, their position, and responsibilities.

3. Policy on Determining the Details and Calculation Method for Performance-Linked Remuneration

In an attempt to raise awareness for improving business performance in each business year, performance-linked remuneration for Directors shall be decided at the General Meeting of Shareholders following a resolution by the Board of Directors after comprehensively considering business results for each business year (approximately 4% of non-consolidated profit) and the degree of achievement of the annual business plan. The payment is made one a year.

4. Policy on Determining the Ratio of Base Remuneration and Performance-Linked Remuneration to the Amount of Remuneration for Individual Directors

 The Company’s Director remuneration consists of base remuneration (cash remuneration and restricted share-based remuneration) a variable remuneration (performance-linked bonuses). Since non-consolidated profit, which becomes the source of bonuses, fluctuates along with the business performance, we do not determine the ratio of the different types of remuneration in advance but instead determine the ratio subsequently depending on the determined amount of bonus for each fiscal year calculated by the method described in paragraph 3. 

5. Policy on Determining the Amount of Restricted Share-Based Remuneration

The total amount of monetary remuneration claims to be paid as restricted shared-related remuneration, etc. to directors (excluding Outside Directors) shall be within the range of 100 million yen resolved at the Fiscal 2021 General Meeting of Shareholders held on June 22, 2022, and the amount of remuneration for each director shall be determined by the Board of Directors.

6. Matters Concerning Decisions Relating to the Details of Remuneration, etc. for Individual Directors

The determination of the amount of remuneration to be paid to each Executive Director shall be entrusted to the President and Representative Director, taking into consideration whether a director has representative rights or not, their position, responsibilities, level of contribution, etc. However, when making those decisions, the President and Representative Director shall consult other Representative Directors and two Outside Directors appointed by the Board of Directors based on the draft of individual Director remuneration amount prepared in advance and make the final decision after considering their reports.
The determination of the amount of remuneration to be paid to each Outside Director shall be entrusted to the President and Representative Director. The determination shall be made after considering and evaluating each Outside Director’s responsibilities, attendance at Board of Directors meetings, and the comments and recommendations made at various meetings, and after consultation with each Outside Director.