Status of the Corporate Governance

As of June 24, 2020

Status of Compliance with the Corporate Governance Code

We are responding to the principles prescribed in the Corporate Governance Code of the Tokyo Stock Exchange. However, the following principle is not implemented for the following reason set out below.

■Principles not Implemented

【Principle 4-10-1: Establishment of an Independent, Voluntary Advisory Committee】

Each of the Company’s directors is working to actively stimulate deliberations by the Board. Independent outside directors engage in lively discussions, stating their opinions based on their advanced insight, specialized knowledge and global experience. The Board receives appropriate recommendations from our independent outside directors. The Audit & Supervisory Committee (comprising three members, two of whom are independent outside directors) verifies the candidates for director and director compensation and other matters discussed at meetings of the Board of Directors and, at times, expresses its opinion as part of a framework that aims to strengthen the independence, objectivity and accountability of the Board of Directors. To enhance objectivity and transparency going forward, we will conduct multi-faceted investigations into the option of establishing a voluntary advisory committee.

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

In its Articles of Incorporation, the Company stipulates that the appropriate number of directors shall be no more than 17, in order to make decisions promptly and resolutely to address changes in the business environment on a global basis, and to ensure the diversity of opinions. In accordance with its standards, directors are appointed based on their ability, insight, and experience, as well as other qualities that are necessary to monitor and oversee corporate management from a global perspective, and to make important business decisions. The incumbent nine directors are composed of a corporate manager, multiple persons with experience in international business, a person with expert knowledge in finance and accounting, and a legal expert, thereby securing the diversity of the Board members. We will continue examining methods to secure the diversity of the Board members, not only in terms of seeking gender diversity, but also through the election of non-Japanese directors as a global company, and recommend persons who are considered to be well-qualified as candidates for directors.

Improving the Effectiveness of the Board of Directors and Audit & Supervisory Committee

Board of Directors

In fiscal 2019, the Board of Directors met ten times (seven regular meetings, three extraordinary meeting). The Board receives reports and makes swift decisions on important matters related to management and business execution. The Company distributes materials in advance to the Board of Directors to allow them enough time for deliberation and to support productive discussions. For further improvement, actions will be taken to enhance the effectiveness of the Board of Directors.

Result of Evaluations of Board of Directors’ Effectiveness (Overview)

The Company has been conducting a questionnaire on the effectiveness of the Board of Directors at the conclusion of Board of Directors’ meetings since the end of fiscal 2017. In fiscal 2019 as well, we obtained responses from all directors, and at the first Board meeting in fiscal 2020 they analyzed and evaluated effectiveness based on the response results. As a result, although there were issues raised, we evaluated that our Board of Directors is functioning effectively. Going forward, we will continue to make improvements to enhance the effectiveness of the Board of Directors.

■Board of Directors’ Evaluation Implementation Guidelines

【Content that could be evaluated】

Subjects of evaluation: All nine fiscal 2019 directors
Implementation method: Anonymous survey (freedom to express own opinions)

Question content: 25 questions in all, related to the degree of deliberation at Board of Directors’ meetings, the status of ensuring the effectiveness of the Board of Directors, the status of the Board of Directors’ management, and the self-evaluation of Company and outside directors.

Evaluation Method: Compilation of questionnaire results, implementation of comparative aggregation with previous year
The results of the questionnaire were reported at a Board of Directors’ meeting and, based on the response results, the evaluation with regard to the Board’s effectiveness was confirmed.

【Content that could be evaluated】

• Each director is proactive in ensuring lively deliberations
• It was confirmed that the Board of Directors is functioning effectively

【Points to be improved】

• Improvement of secretariat system
• Early distribution of materials for Board meetings to ensure effective deliberations

【Other opinions expressed】

There were opinions given on further ensuring diversity of the Board of Directors through the election of foreign directors, etc

Directors

By resolution at the 85th Ordinary General Meeting of Shareholders held on June 24, 2020, the Board of Directors has nine directors, the same as the previous fiscal year (including three directors who are Audit & Supervisory Committee members). Three (or one-third) of the Board members are independent outside directors. Candidates for directorships are selected based on individual abilities, insight, and experience as well as in consideration of the balance of the overall Board of Directors and the Audit & Supervisory Committee and diversity. (At least one person who is an expert in finance and accounting is appointed as a director serving on the Audit & Supervisory Committee.) A decision will be made on the candidates following verification by the Audit & Supervisory Committee and an ensuing discussion by the Board of Directors. The dismissal of executive management and directors uses the same procedure, with the final decision made after deliberation by the Board of Directors.

No. of directors stipulated in the Articles of Incorporation 17
Term of members of the Board stipulated in the Articles of Incorporation 1 year
Chairperson of meetings of the Board of Directors Chairman of the Company (except when the Chairman also holds the position of President)
No. of directors 9
Election of outside directors Elected
No. of outside directors 3
No. of outside directors designated as independent directors 3

Reasons for Appointment of Outside Directors

Name Audit & Supervisory Committee member Independent outside director Supplementary Explanation Reasons for Selection

Masanaka Yokota

Number of Board of Directors meetings attended: -
Attendance rate: -

The Sanwa Group has no business relationship with the company where Mr.Masanaka Yokota concurrently serves. Moreover, concerning transactions between the Sanwa Group and the corporate group where he concurrently serves, the average transaction amount for the past three fiscal years was less than 1% of the annual consolidated net sales of each of the groups, and the Company has determined that he has no conflict of interest with ordinary shareholders. Since his diagnosis of corporate management in a broad range of industries in Japan and overseas as a consultant, and his achievements and knowledge related to management reform will contribute to enhancing the corporate value of the Company and strengthening the functions of the Board of Directors, the Company has determined that he is qualified as an Outside Director.

Tsunekatsu Yonezawa

Number of Board of Directors meetings attended: 10
Attendance rate: 100%

Number of Audit & Supervisory Committee meetings attended: 10
Attendance rate: 100%

Mr. Yonezawa is a former employee of Marubeni-Itochu Steel Inc. (MISI), which has a business relationship with the Group. The Group and the MISI Group have transactions involving the Sanwa Group’s purchase of raw materials and the sale of Sanwa Group products. However, the amount of transactions between the Sanwa Group and the MISI Group accounted for less than 1% of the Sanwa Group’s and the MISI Group’s annual consolidated net sales in each of the past three fiscal years. Therefore, the Company determined that Mr. Yonezawa satisfies the independence criteria for the Company’s outside directors and has no conflict of interest with ordinary shareholders. Mr. Yonezawa has been involved in corporate management for many years as a company manager, and has global experience and in depth understanding of management and economics. On that basis, the Company believes he can provide appropriate advice and recommendations from an independent standpoint regarding the Company’s management in general. He was thus deemed qualified as an outside director serving as an Audit & Supervisory Committee member

Akira Gokita

Number of Board of Directors meetings attended: 9
Attendance rate: 90%

Number of Audit & Supervisory Committee meetings attended: 10
Attendance rate: 100%

The Company had a legal consultation agreement with Mr. Gokita until December 2015, but the contract has since been terminated. For the duration of the agreement, the monthly legal fees paid to Mr. Gokita were ¥100,000 (there was no payment for compensation outside of the advisory agreement). Therefore, the Company determined that Mr. Gokita meets the independence criteria for the Company’s outside directors and has no conflict of interest with ordinary shareholders. Mr. Gokita has many years of experience as a prosecutor and lawyer, and has applied his extensive experience and knowledge as a legal professional to the management of the Company. He has thus been selected as an outside director to serve as a member of the Audit & Supervisory Committee.

Audit & Supervisory Committee

The Audit & Supervisory Committee met ten times in fiscal 2019. Directors on the Audit & Supervisory Committee monitor the status of business execution by directors who are not Audit & Supervisory Committee members and executive officers, and then they report and express their opinions to the Board of Directors. In this way, we work to ensure legal and appropriate corporate management. We believe that the transition to a company with an audit & supervisory committee has contributed to improving the supervisory role and transparency of the Board of Directors, and that this demonstrates the effectiveness of the Board.

Committee Composition and Chairperson

Total Number of Members Full-time Members Internal Directors Outside Directors Chairman
Audit & Supervisory Committee 3 2 1 2 Internal Directors
Directors and employees who support the work of the Audit & Supervisory Committee Yes

Policies for Determining the Compensation and Amounts of Compensation of Directors and Audit & Supervisory Committee Members

With regard to the compensation of directors (excluding directors serving as Audit & Supervisory Committee members), a director delegated by the Board of Directors (Representative Director and Chairman [CEO] Toshitaka Takayama for fiscal 2019) determines the compensation for each director based on the policies below, which are set by the Board of Directors. (Stock options are determined by the Board of Directors.) The Company does not currently have a voluntary compensation committee, but the Audit & Supervisory Committee has the authority to verify and form opinions, from policy decisions with regard to compensation to the amounts decided, thereby ensuring objectivity and transparency. The policy for determining compensation for directors who are Audit and Supervisory Committee members will be determined based on the following policies, in consultation with directors who are Audit and Supervisory Committee members.

Policies for Determining Compensation of Directors and Audit & Supervisory Committee Members

■Basic Concept of Compensation for Directors

Compensation of directors and Audit & Supervisory Committee members is intended to contribute to continual improvement of the Company’s business performance and corporate value. The Company designs its compensation system so that the level and structure of compensation are in accordance with the roles and responsibilities required of the Company’s directors and Audit & Supervisory Committee members, and enable the recruitment and retention of well-qualified people.

■Compensation of Directors

(1) Compensation of directors (excluding directors serving as Audit & Supervisory Committee members)
The compensation of directors consists of base compensation, performance-linked variable compensation, and stock options. The compensation of outside directors, however, consists only of base compensation. The total amounts of base compensation and performance-linked variable compensation shall be within the limits of the total compensation determined by the General Meeting of Shareholders. The total amount of stock options shall be within the limit for stock options, also determined by the General Meeting of Shareholders.
(2) Compensation of directors serving as Audit & Supervisory Committee members
Comprises only base compensation, the total amount of which shall be within the limit for the amount of compensation determined by the General Meeting of Shareholders.
(3) Base compensation
The base compensation for each director (excluding directors serving as Audit & Supervisory Committee members) is set for each position based on consolidated performance with reference to the compensation levels of other companies presented by a specialized outside organization. The compensation for each director serving as an Audit & Supervisory Committee member is determined by discussion among the Directors who are Audit and Supervisory Committee members, also with reference to the compensation levels of other companies presented by a specialized outside organization.
(4) Performance-linked compensation
For performance-linked compensation, a standard amount is set for each executive position based on the Company’s consolidated business results with reference to the compensation levels of other companies presented by a specialized outside organization. The standard amount of this type of compensation is determined by taking into account standard amount indicators and the levels of contribution of each executive director, evaluated quantitatively and qualitatively. As far as serving as a reward that functions as a sound incentive for sustainable growth that reflects the Company’s business performance is concerned, consolidated operating income has been selected as the primary indicator of performance-linked compensation, the amount of which is calculated on that indicator basis following the Company’s set standards.
(5) Stock options
Stock options are provided to further raise the incentive of directors (excluding directors serving as Audit & Supervisory Committee members and non-executive directors) to increase the Company’s corporate value by sharing not only the benefits from stock price increases but also the risk of stock price declines with shareholders. The number of stock options allotted to each director (excluding directors serving as Audit & Supervisory Committee members and non-executive directors) is decided by the Board of Directors, taking the director’s duties into consideration.

Overview of Compensation (Fiscal 2019)

Classification Total Compensation
(Millions of yen)
Total Compensation by Type
(Millions of yen)
Number of Officers Eligible
Base Compensation Performance-Linked Compensation Stock Options
Directors
(excluding directors serving as Audit & Supervisory Committee members and outside directors)
385 215 136 33 4
Directors serving as Audit & Supervisory Committee members
(excluding outside directors)
33 33 - - 1
Outside directors
(excluding Audit & Supervisory Committee members)
10 10 - - 1
Outside directors
(Audit & Supervisory Committee members)
40 40 - - 2

(Notes)

  1. The amount paid to directors does not include the portion of employee’s salary for those directors who concurrently serve as employees.
  2. The compensation limit for directors (excluding directors serving as Audit & Supervisory Committee members) is ¥680 million per year (as approved at the 81st Ordinary General Meeting of Shareholders held on June 28, 2016). For performance-linked compensation, consolidated operating income has been adopted as the key indicator to provide incentives that enable sustainable growth based on the consolidated performance of the Company as a whole. In fiscal 2019, consolidated operating income was ¥34.2 billion (actual result for the fiscal year ended March 31, 2019, an 8.3% year-on-year increase) compared to the initial forecast of ¥34.0 billion.
  3. Separately from (2) above, the compensation limit for director stock options (excluding outside directors and directors serving as Audit & Supervisory Committee members) is within ¥60 million per year (as approved at the 81st Ordinary General Meeting of Shareholders held on June 28, 2016).
  4. The compensation limit for directors serving as Audit & Supervisory Committee members is ¥100 million per year (as approved at the 81st Ordinary General Meeting of Shareholders held on June 28, 2016).
  5. Stock options are in the amount recorded in the current fiscal year related to stock acquisition rights granted as stock options.
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