AEON Financial Service : Corporate Governance Report

regarding the advantages, disadvantages and risks; and engaging in unfettered discussions from multilateral viewpoints to identify the gains and losses expected from the decided action. This applies to all parties involved in the decision, from the Board of Directors to the relevant departments.

1. Pursue the improvement of operational efficiency and business innovation for the purpose of enriching the lives of our customers and strive for continuous growth by maximizing Group synergies.
2. Develop employees who think and act autonomously and maximize their abilities by treating them fairly and providing them with appropriate opportunities to demonstrate their skills as well as by conducting fair performance evaluations.
3. Strive for social contribution through business activities and sustainable business management.

Our business strategies and medium-term management plan are established based on the above stated Basic Policies, and we implement appropriate business management for Group companies to achieve them. For overseas subsidiaries that hold important positions in terms of our growth strategy, we will build an effective governance system reflecting specific features of each country such as the economic environment, government, and laws and regulations.

We will stive to ensure that the above stated Basic Principles is widely enforced and complied with across all business activities of AFS Group companies including overseas subsidiaries and fulfill our social responsibility.

We believe that the essence of corporate governance comprises of respecting the rights of our shareholders, securing fairness and transparency of management, and increasing the vigor of management, and will endeavor to realize effective and best corporate governance with on-going reviews.

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

We comply with all principles of the Corporate Governance Code revised in June 2021.

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

We disclose based on Principles of the Corporate Governance Code revised in June 2021.

[Principle 1.4: Cross-Shareholdings (strategic shareholdings)]

1. Policy on Strategic Shareholdings
   Our basic policy is not to engage in strategic shareholdings except where it is considered to have significance based on comprehensive consideration of business and economic rationale such as maintenance of business partnership as a financial institution originating from retail business, and status of individual business transactions.
2. Standard for Exercise of Voting Rights Concerning Strategic Shareholdings
   When exercising voting rights for strategic shareholdings, we will carefully determine how to vote on each agenda by considering perspectives such as enhancement of the corporate value of the issuing
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company over the medium to long term and improving shareholder returns, and the issuing company's status of business.

[Principle 1.7: Related party transactions]

We have established the following framework to ensure that transactions with our directors or major shareholders do not harm the interests of the company or the common interests of our shareholders:

• With respect to transactions with the parent company Aeon Co., Ltd., and Aeon Group companies, we established and operate the "Detailed Rules on Management of AFS Group Transactions" to enforce the arms-length rules for transactions with related parties. In addition, significant transactions with the parent company, etc., requires approval of the Board of Directors.
• We expressly require an approval by the Board of Directors for competing transactions and conflicting interest transactions between AFS and our directors pursuant to the Companies Act, in principle. Furthermore, the strict procedure prohibits the director engaging in such transactions from taking part in the resolution as a special interested party.
• Transactions with directors, corporate auditors and major shareholders, etc., are confirmed periodically.

[Supplementary Principle 2.4.1 :Ensuring diversity in the promotion to core human resources, etc.]

1. Policies for ensuring diversity, policies for human resource development and internal environment development, and the status of implementation

We respect each employee's personality and promote creation of a structure where diverse human resources can participate to realize provision of services and products from the customers' perspective. Therefore, we accept diverse human resources regardless of gender, age, or nationality, etc., and actively provide opportunities to participate; and strive to create a corporate culture and workplace that respects diversity of views and opinions and encourages vigorous discussions.

We engage in business in eleven countries including Japan and recognize that we should further promote diversity in Japan. For overseas, dispatch of human resources from Japan is limited, and we already have diversity in core human resources mainly comprising of local personnel. Going forward, we will promote global resource exchange.

1. Goal for ratio of female managers FY2025: Group total of 50.0%
2. Goal for ratio of foreign nationals

Ratio of foreign nationals in Japan and ratio of dispatch from Japan to overseas is few percent for both. We have consistently endeavored to develop local resources and respected local management. To promote global cross-border resource exchange, we will continue to provide education programs for excellent employees from various countries (e.g., AFS Management Course, AFS Global Course) and implement appointment of management regardless of nationality.

(4) Goal for ratio of midcareer hires

Ratio of midcareer hires among managerial positions in Japan is high, at around 80%. We have consistently hired employees with various experiences and have not prioritized periodic hiring. Consequently, we have diverse views and values in the Company.

[Principle 2.6: Roles of corporate pension funds as asset owners]

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We do not have fund-type or contract-type defined benefit corporate pension plan as assumed under the Corporate Governance Code. In addition, Aeon Corporate Pension Fund is operated in order to secure over the long term the total returns considered necessary, within an acceptable range of risk, for the purpose of reliably paying pension benefits and making lump-sum payments to beneficiaries into the future. In light of the pension fund's financial status, the policy asset mix is determined and periodically reviewed after listening to the opinions of outside experts. The fund has an Asset Management Committee, which selects investment products and monitors fund performance quarterly, and decisions are made by the Board of Representatives so as to maximize the interests of beneficiaries and appropriately manage conflicts of interest. AFS's subsidiaries have a representative in the Board of Representatives. Also, the Asset Management Committee includes the Chief Financial Officer and external experts.

[Principle 3-1 Full disclosure]

1. We disclose our Management Philosophy, Basic Policies, and Medium-Term Strategy on our corporate website, etc.
2. • Management Philosophy and Basic Policies:https://www.aeonfinancial.co.jp/corp/philosophy
   • Medium-TermStrategy:https://www.aeonfinancial.co.jp/en/ir/strategy/medium/
3. Our basic views and basic policy on corporate governance are stated on the "Basic Views" section of this Report.
4. The Board policies and procedures in determining the remuneration of the senior management and directors are as stated below:
5. • With respect to the remuneration of directors and corporate auditors, the Nomination and Compensation Committee references the Regulations on Remuneration of Directors and engages in discussions and exchanges opinions concerning the payment of remuneration (cash, stocks, etc.) and the appropriateness of the amount to be paid. In accordance with the internal rules, and within the limit of total remuneration for directors and corporate auditors as resolved by the General Meeting of Shareholders, the directors' remuneration is determined by the resolution of the Board of Directors, and the corporate auditors' remuneration are determined by the discussion at the Board of Corporate Auditors, taking into consideration the business performance and management of the Company, and the state of economy, etc.
   • Details of the policies are stated in the "Matters Relating to Directors' Remuneration" section of this Report.
6. Policies and procedures for appointment of senior management and nominations of candidates for Directors/Corporate Auditors by the Board of Directors are as stated below:
7. • Nomination of candidates for Directors are determined by the Board of Directors based on the discussion and exchange of opinions concerning the candidates for Representative Director and other Directors, skills development policy, development plan, and appropriateness of Director's remuneration by the Nomination and Compensation Committee.
   • Directors are removed if they are deemed unfit to execute duties as a director where there are objective and reasonable grounds that they do not meet the following criteria:
   • 1. Understands management principles and management policy of the Company.
     2. Has extensive knowledge and experience necessary to deliberate agendas at the meetings of the Board of Directors, or has a track record and insight necessary to exercise management supervisory function.
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1. • 1. Has outstanding management sense and leadership.
     2. Has a personality and insight appropriate for a director.
     3. Maintains good physical and mental health.
     4. Has been nominated by an existing Director (in case of newly appointed Directors).
     5. Performance evaluation (in case of existing Directors).
   • Nomination of candidates for Corporate Auditors are proposed by the President & CEO in accordance with the following criteria, and determined by the Board of Directors subject to discussion and consent by the Board of Corporate Auditors:
   • 1. Has appropriate experience/ability, and necessary knowledge regarding finance, accounting, and legal matters. One of the nominees for Corporate Auditors must have sufficient knowledge on finance and accounting.
     2. Does not have interests or transaction relationships that may affect management decisions for the Company.
     3. Capable of ensuring soundness and transparency of company management by performing audit from neutral and objective perspective.
     4. Capable of ensuring effectiveness of compliance and governance.
2. Reasons for appointment of candidates for Directors and Corporate Auditors are disclosed in the Notice of the General Meeting of Shareholders.

[Supplementary Principle 3.1.3: Sustainability initiatives]

• We recognize that sustainable development of society is necessary for our business operation. We engage in environmental preservation and social contribution activities and promote sustainability management that supports both economic and social values through business activities to ensure that our Group business will be positioned as an essential social infrastructure in Japan and overseas.
  To realize a sustainable society, we have established the AFS Sustainability Policy, and each employee actively and proactively promotes sustainability activities together with local communities, customers, and business partners.
  On sustainability issues to be addressed, we have identified important issues for the medium- to long-term ("Materiality") based on the analysis of significance for our stakeholders and the AFS Group. Pursuing happiness through innovative financial services, exerting diversity and the potential of our people, establishing organizational resilience, and addressing climate change have been identified as our Materiality, and we will endeavor to resolve these issues through AFS Group business strategy.
  In particular, we recognize that addressing climate change will have significant effect on the lifestyles and health of customers as well as development of regional economy and community, and we are committed to supporting the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) that promotes information disclosure by companies on "risks and opportunities" towards creating a decarbonized society. We will conduct a climate scenario analysis for our business activities in accordance with this framework and enhance information disclosure.
  We have established the Sustainability Committee chaired by the Director in charge of Corporate Planning to promote our sustainability targets together with management strategies and to engage in deliberation, decision-making, and monitoring of Group-based activities. The Committee reports regularly to the Board of Directors.
  In addition, the Company makes annual reports on the progress on our initiatives through our
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