Corporate Governance

The Company believes that maintaining appropriate relationships with various stakeholders and fulfilling social responsibilities through establishing a corporate governance system that ensures effective and fair management will contribute to the long-term and sustainable enhancement of corporate value.

The Company has adopted the governance system as “a company with a board of corporate auditors.” Under this framework, the Company has established a corporate governance mechanism centered on its Board of Directors and Board of Corporate Auditors to improve the effectiveness of the supervisory and monitoring mechanism, while maintaining management efficiency, and to handle issues including management remuneration, selection of new company officers, internal control and risk management.

By establishing this mechanism as described above, the Company believes that the effectiveness of the supervisory and monitoring mechanism will be improved, while maintaining management efficiency, contributing to the long-term and sustainable enhancement of corporate value.

Kuraray’s Steps to Strengthen Corporate Governance

The Company has worked continuously to strengthen corporate governance by taking steps, such as establishing the Management Advisory Committee, separating supervision and execution functions through the introduction of the Executive Officer System, appointing and increasing the number of Outside Directors and Outside Corporate Auditors, establishing the CSR Committee and the Risk Management and Compliance Sub Committee, and Analysis and Evaluating of the Effectiveness of the Board of Directors.

The Company will further strengthen the corporate governance system through measures such as managing compliance risks in its overseas operations.

The Board of Directors and Business Execution Body

The Board of Directors (convenes at least once a month) according to the Board of Directors’ Regulations and deliberates and decides important management matters, including legal matters, and supervises the execution of business. The maximum number of Directors is set at 12, with the aim of promoting agile management decision-making by the Board of Directors, and the term of office of Directors is set at one year to clarify their responsibilities to the shareholders. There are currently nine incumbent Directors including two Outside Directors who have abundant experience in and broad insight into economy, finance, and management and other fields. These two Outside Directors take on the role of overseeing the management from an independent third-party standpoint.

As the chief executive responsible for business execution, the President, appointed by the Board of Directors, exercises control over the execution of business in the Group. Every executive officer (oneyear term of office), appointed by the Board of Directors, is responsible for business execution in the Group organization. As the heads of internal companies, divisions and major functional organizations, the executive officers bear responsibilities for business execution results of operations. In this way, the Company clearly separates the responsibilities of Directors, that is, decision-making and supervision on the management, from the responsibilities of business execution. Some Directors hold concurrent positions as executive officers. The President has established the Executive Committee (in principle, convenes twice a month) and various other councils and committees to deliberate and report on important matters concerning the Group’s management policies and business execution.

Board of Corporate Auditors and Internal Audit

The Board of Corporate Auditors consists of five Corporate Auditors comprising of four males and one female, including three independent Outside Corporate Auditors. The current number of Corporate Auditors is five, including three Outside Corporate Auditors who have extensive experience in and broad insight into areas such as finance, law and management and perform their duties from an independent third-party standpoint.

Corporate Auditors attend meetings of the Board of Directors and other important meetings and monitor the Directors’ performance of duties through inquiries conducted by such means as examining important documents and receiving explanations on the status of business operations. In principle, the Board of Corporate Auditors convenes monthly.

The Corporate Auditors regularly have meetings with the Accounting Auditor to receive reports on audit planning and the implementation status and content of audit. Also, they receive reports on the internal audit result by the Internal Auditors Office (consisting of nine members). The Corporate Auditors also serve as corporate auditors of core subsidiaries to conduct subsidiary audits as needed and attend the Group Auditor Liaison Meeting, which consists of corporate auditors of the Group companies and is held periodically and obtain information about each Group company through the meeting.

The Management Advisory Committee

As an advisory body to provide advice on the execution of duties of the President from the viewpoint of complying with laws and regulations, protecting shareholder rights, and ensuring transparency of management, the Management Advisory Committee has been established. Currently, the Committee is comprised of six permanent members; three outside experts with abundant experience and broad expertise in economics, finance, management, etc.; one Inside Director (President); and two other members (Advisor, Outside Corporate Auditors). Chaired by the Advisor, the Committee is, in principle, held twice a year to provide advice to the President on such matters as important management policies, management issues, resignation of the President, candidates for the successor and remuneration, etc.

Policies for the Appointment of the Candidates for Directors and Corporate Auditors

• The Company appoints individuals who have experience, knowledge and capabilities required for Directors of the Company as candidates at the Board of Directors meeting with the attendance of Outside Directors and Outside Corporate Auditors (hereinafter, “Outside Officers”), and elect them as Directors with the resolution of the General Meeting of Shareholders. However, the candidates for Outside Directors shall satisfy the criteria of independence provided separately.
• The Company appoints individuals who have experience, knowledge and capabilities required for Corporate Auditors of the Company as candidates at the Board of Directors meeting with the presence of Outside Officers and elects them as Corporate Auditors with the resolution of the General Meeting of Shareholders after obtaining the consent of the Board of Corporate Auditors. However, the candidates for Outside Corporate Auditors shall satisfy the criteria of independence provided separately.

Independence Standards for Outside Officers

(1) The Company judges that its Outside Officers and the candidates for the Outside Officers are fully independent from the Company if they do not fall under any of the following items:

• A business executive of the Company and its subsidiaries (hereinafter collectively referred to as the “Group”);
• A counterparty which has transactions principally with the Group or a business executive thereof;
• A major business partner of the Group or a business executive thereof;
• A major lender of the Group or a business executive thereof;
• A counterparty that receives a large amount of donations from the Group or a business executive thereof;
• A major shareholder of the Company (who possesses 10% or more of the total voting rights either directly or indirectly) or a business executive thereof;
• A business executive of a party whose major investor (who possesses 10% or more of the total voting rights either directly or indirectly) is the Group;
• A consultant, certified public accountant or other accounting professional, attorney or other legal professional who receives a large amount of monetary or other assets from the Group other than the executive remunerations (in case of a legal entity, association or other organization, a person belonging thereto);
• A person who belongs to an accounting firm that conducts the statutory audit of the Company;
• A person who has fallen under the above criteria (i) in the past ten years;
• A person who has fallen under any of the above criteria (ii) through (ix) in the past three years;
• A person who belongs to a company which has a relationship with the Company of interlocking Outside Officers; and
• A relative of the person listed in the above criteria (i) through (xi)

(2) Even in cases where a person falls under any of the above items, if the person is deemed to be appropriate for the post of an independent Outside Officer in light of personality, knowledge and other qualities, the Company may appoint him/her as independent Outside Officer on condition that the reasons that the person is deemed appropriate for the post will be explained to the public.

Policies for Determining the Remuneration for Directors

• Remunerations for Directors are determined by taking into consideration the remuneration level of other companies and other factors so that the remuneration will function as one of the incentives for mid- to long-term and sustainable enhancement of the corporate value.
• Remunerations for Directors are comprised of monetary remuneration consisting of fixed remuneration by position and performance-linked remunerations, and stock option-based remunerations. However, monetary remuneration for Outside Directors does not include performance-linked remunerations.
• Remuneration for each Director is determined based on the calculation method stipulated by the Board of Directors within the extent of the maximum amount resolved at the General Meeting of Shareholders. The remuneration for the President, which serves as the basis for calculating the remuneration for each Director, is determined upon deliberation at the Management Advisory Committee comprised of Outside Corporate Auditors and outside experts.

Performance-Linked Remuneration System

The Company abolished the bonus scheme to Directors and introduced a performance-linked remuneration system in July 2006, thereby strengthening the incentives of Directors for increasing the Company’s corporate value. In addition, to respond to the increase in the amount of performance-linked remuneration in conjunction with the improved business performance, it was resolved to increase the maximum amount of annual remunerations to Directors to ¥800 million from ¥450 million (including ¥100 million annually for Outside Directors) at the Company’s 131st Ordinary General Meeting of Shareholders held on June 22, 2012.

Calculation Method of Performance-Linked Remuneration

As a short-term performance incentive, the performance-linked remuneration for the President shall be the amount that is obtained by multiplying the amount of net income attributable to owners of the parent for the prior fiscal year by a predetermined coefficient. The performance-linked remuneration for Directors shall be determined by dividing the said amount in proportion to the index corresponding to each position of Directors. The Company does not have a performance-linked remuneration system for Outside Directors based on the above calculation method.

Remuneration-Type Stock Option Scheme

The Company abolished the severance and retirement benefits system for Directors in July 2006 and introduced a remuneration-type stock option scheme that entails the issuance of share acquisition rights for the purpose of further boosting Directors’ motivation and morale towards improving the Company’s performance. The maximum amount of stock option-based remunerations under this scheme shall be set at ¥90 million, separately from the maximum amount of annual remunerations to Directors. The number of share acquisition rights to be granted shall not exceed 120 units each year (the number of common stock to be issued upon exercise of share acquisition rights shall not exceed 60,000 shares each year).

Analysis and Evaluation of the Effectiveness of the Board of Directors

(1) Analysis and evaluation method

The Company distributed “Questionnaire on Effectiveness of the Board of Directors” (non-anonymous) to all the Directors and Corporate Auditors in December 2017 and collected responses and opinions from all members in January 2018. The secretariat of the Board of Directors compiled the responses, and analyzed and evaluated the effectiveness of the Board of Directors based on the data.

Questionnaire items:

• Structure of the Board of Directors
• Operation of the Board of Directors
• Agenda of the Board of Directors
• Systems outside the Board of Directors

(2) Outline of analysis and evaluation results

The evaluation confirmed that the Company’s Board of Directors is generally functioning properly and that the effectiveness of the Board of Directors is ensured in all aspects, such as its size, composition, diversity, agenda selection, scope of matters to be discussed or reported, timing for scheduling the Board of Directors meetings, frequency of the meetings, operation of the Board of Directors including deliberation time, provision of additional information to the Directors, systems outside the Board of Directors such as those for providing training opportunities, etc.

Furthermore, proposals made during the evaluation last year for the purpose of enhancing the effectiveness of the Board of Directors, namely, “the timing of materials distribution” and “content and quality of materials,” were confirmed to have improved through efforts such as ensuring distribution of materials in advance, and preparation of written summaries of proposals.

Based on the results of this evaluation, the Company will examine and implement necessary measures in the future to make discussions more lively and productive at the Board of Directors meetings.