Sankyu : Corporate Governance Report

Corporate Governance Report

Last Update: December 22, 2021

Sankyu Inc.

Kimihiro Nakamura, President (Representative Director)

Contact: General Affairs & Corporate Social Responsibility Department

+81-3-3536-3939

Stock Exchange Code: 9065

https://www.sankyu.co.jp/en/

The corporate governance of Sankyu Inc. (the "Company") is described below.

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

Basic Information

1. Basic Views

1. Basic philosophy

As a listed company, the Company believes that the basis of corporate governance is to ensure management transparency for shareholders and other stakeholders, and to aim for continuous growth and development by improving management efficiency.

Corporate philosophy

(1) Management philosophy

With the guiding principle of valuing people, Sankyu will establish a presence that is indispensable to its customers. The Sankyu Group will contribute to the improvement of employee welfare and the development of society through its business growth.

(2) Management objectives

• We will contribute to the development of the international community as a good corporate citizen.
• We will provide the best services in line with the evolution of industry.
• We will value the wisdom and hard work of our front-line employees and nurture their potential.

(3) Code of conduct - For actions based on morals and ethics

• We will put safety first in everything that we do.
• We will act based on compliance.
• We will act globally, correctly understanding cultures, religions, and values.
• We will proactively work on protecting the global environment.
• We will carry out work that impress the world.
• We will take pride and responsibility in our work.
• We will respect each other and grow together.
• We will aim to be a company where outstanding people grow.
• We will continue to be a strong company, by concentrating efforts in the field.
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2. Systems for decision-making, execution of business, oversight, and auditing in corporate management

1. In order to ensure that Directors execute their duties efficiently, the Company shall hold regular meetings of the Board of Directors each month, as well as extraordinary meetings when necessary, to decide on important matters and mutually supervise the business execution status of Directors. In addition, important matters regarding items such as management policies and strategies are discussed at the Management Committee, and the Board of Directors makes executive decisions after these deliberations. The Company has adopted a corporate officer system to promote the separation of oversight and execution, as well as to enhance the oversight function of the Board of Directors over business execution and speed up its decision- making process.
2. Corporate Auditors attend meetings of the Board of Directors and the Management Committee, as well as other important meetings, receive reports from Directors, Corporate Officers, and employees, and investigate the status of the Company's business and assets, as necessary. In addition, Corporate Auditors are able to take necessary measures in a timely manner, such as presenting opinions, including advice and recommendations, to the Directors, etc., and prohibiting Directors from committing violations.
3. With regard to the internal audit, the Internal Audit Department audits the business, accounting, etc. of business sections and subsidiaries based on the annual internal audit plan, in accordance with the Audit Regulations. The results of the internal audit are reported to the Corporate Auditors, facilitating cooperation with the Corporate Auditors.
4. With regard to the accounting audit, the Company has appointed Deloitte Touche Tohmatsu LLC as its Accounting Auditor, and the Accounting Auditor executes the audit work based on the annual audit plan.

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

[Supplementary Principle 2.4.1] Information disclosure on matters related to ensuring diversity of core human resources

The Company secures human resources through regular and midcareer hiring of employees including women and foreign nationals to address the declining birth rate and aging population in Japan as well as the global expansion of business.

The Company works on developing employees who can generate corporate value and self-actualize, in accordance with the Basic Policy on Human Resource Development.

Going forward, the Company will establish goals for securing and developing diverse human resources based on its medium- to long-term business policies and disclose the status thereof.

[Supplementary Principle 3.1.3] Information disclosure on sustainability and investments

(i) Initiatives for sustainability

• Recognizing that addressing issues around sustainability is an important management issue that leads not only to decreased risks but also revenue opportunities, the Company will promote medium- to long-term initiatives.
• While the Company has not disclosed risks and revenue opportunities related to climate change, the Company is selecting materiality issues and promoting initiatives based on the TCFD framework. The

Company plans to disclose information by June 2022, including its initiatives for SDGs, for which the Company is already conducting various activities.

(ii) Investments in human capital and intellectual properties, etc.

• As the services in logistics and plant engineering offered by the Company are powered by people, the Company recognizes that securing and developing human resources is the most important issue and actively invests in it.
• Driven by the corporate philosophy of "valuing people," the Company actively engages in activities and capital investments to create a safe workplace environment. The Company will further develop an environment in which diverse human resources including the elderly, women, and foreign nationals can work more safely and comfortably.
• The Company secures and develops human resources on a global scale to maintain and expand its capability to "mobilizing workforce" in and outside Japan. The Company will establish a system that can flexibly accommodate the changing business environment and customer needs by appropriately placing
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highly skilled human resources with strong expertise in the right positions, in an effort to increase the mobility of human resources across borders.

• The Company will work on securing intellectual property rights such as patent rights arising from work and technological improvements and actively make investments to enhance its competitiveness.

[Supplementary Principle 4.2.1] Setting appropriate proportions of performance-linked remuneration and stock-based remuneration

The Company has a remuneration system that consists of basic remuneration and a bonus based on comprehensive consideration of single-year results, within the scope of remuneration determined by the General Meeting of Shareholders, and it functions as an incentive.

The Company is currently considering the establishment of the Nomination Committee and the Remuneration Committee as advisory committees to the Board of Directors. As part of this process, the Company will also consider the introduction of a remuneration system linked to its medium- to long-term results and the balance of cash remuneration and stock remuneration, and the Board of Directors will determine specific amounts of remuneration.

[Supplementary Principle 4.2.2] Basic policy on sustainability and business portfolio

• The Board of Directors recognizes that addressing issues around sustainability is an important management issue that leads not only to decreased risks but also revenue opportunities.
• While the Company has not disclosed its basic policy for sustainability initiatives, the Company is selecting materiality issues and promoting initiatives based on the TCFD framework, and will formulate a basic policy going forward. The Company is preparing for the disclosure of information including its initiatives for SDGs, for which the Company is already conducting various activities.
• The Board of Directors evaluates profitability and growth potential for each unit of business portfolio when formulating medium-term management plans and single-year business plans, and evaluates and deliberates on the allocation of management resources including the necessary allocation of human capital and investments in intellectual properties at the stages of planning and implementation, thereby ensuring effective supervision.

[Supplementary Principle 4.10.1] Use of optional approach

The Company's Board of Directors makes decisions on particularly important matters, such as the nomination and remuneration of senior management and Directors, in accordance with their respective policies and procedures.

The Company is currently considering the establishment of the Nomination Committee and the Remuneration Committee as advisory committees to the Board of Directors. The Company will also consider disclosing the mandates and roles of the committees, as well as the policy regarding the independence of the committee structure, such as setting a base policy of ensuring a majority of the members of each committee to be Independent External Directors.

[Supplementary Principle 5.2.1] Basic policy on the business portfolio and the status of its review

• The Company evaluates profitability and growth potential for each unit of business portfolio when formulating medium-term management plans and single-year business plans, and makes decisions after evaluating and deliberating on the allocation of management resources including the necessary allocation of human capital and investments in intellectual properties at the stages of planning and implementation.
• The Company will consider more detailed disclosure of the basic policy on the business portfolio and the status of its review in conjunction with the announcement of the next medium-term management plan.

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

[Principle 1.4] Cross-shareholdingscross-shareholdings>

While the Company holds cross-shareholdings of other companies that are deemed rational in light of the impact on the medium- to long-term increase of corporate value and business operations, the Board of Directors specifically examines, annually, each cross-shareholding in terms of its economic rationality, benefits, risk as an asset, whether it covers the cost of capital, and other factors, in order to assess whether or not to hold the shares.

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The Company sells or otherwise reduces the number of shares which it has deemed not necessary to continue holding.

cross-shareholdings>

When exercising voting rights on cross-shareholdings, the Company determines approval or disapproval of proposals upon appropriate examination of each proposal.

[Principle 1.7] Related party transactions

• The Company's corporate rules, the Regulations of the Board of Directors, stipulate that approval on competing transactions by Directors, as well as approval on transactions between the Company and its Directors, are matters that require a resolution by the Board of Directors.
• These regulations also prescribe that, with regard to resolutions by the Board of Directors, Directors with special interests may not participate in the resolutions, and that any Director who has conducted a competing transaction or a transaction with the Company shall be required to report to the Board of Directors the material facts about the transaction.

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

• In order to ensure the proper management of the corporate pension plan, the Company has formulated a basic policy at its Management Committee, which is a business execution body, and has established an Asset Management Committee to determine a medium-term portfolio and discuss, review, and make proposals on asset management.
• In order to maximize the benefit of corporate pension beneficiaries, the Asset Management Committee conducts evaluation and monitoring, including stewardship activities for each asset manager, and periodically reports to the Management Committee.
• In addition, the Company carries out appropriate pension management to prevent conflicts of interest between the corporate pension beneficiaries and the Company.
• Furthermore, a committee secretariat is staffed with specialist finance and labor relations personnel. The expertise of these personnel is enhanced through participation in training sessions, various seminars, etc., in coordination with financial institutions.

[Principle 3.1] Full disclosure

In addition to making information disclosure in compliance with relevant laws and regulations, the Company discloses and provides the following information, in order to enhance transparency and fairness in its decision- making and ensure effective corporate governance.

1. The following information on the Company's objectives is disclosed on the Company's website. (Please refer to the following URL.)
   ●Long-term vision of the Sankyu Group: https://www.sankyu.co.jp/pdf/long_term_vision.pdf (Japanese only)
   - Corporate philosophy (management philosophy, management objectives, and code of conduct)
   - Long-term vision (direction that should be aimed for, basic policies, and direction of the business)
   ●Medium-term management strategy and medium- to long-term plan: https://www.sankyu.co.jp/ir/plan.html (Japanese only)
   - Basic management policy
   - Targeted management indicators
   - Medium- to long-term business strategy and issues to be addressed
2. As a listed company, the Company believes that the basis of corporate governance is to ensure management transparency for shareholders and other stakeholders, and to aim for continuous growth and development by improving management efficiency.
3. Policies and procedures for the Board of Directors in determining the remuneration for senior management and Directors are as follows:
   (i) Basic policy
   The Company has stipulated a policy on determining the amounts of remuneration, etc. for Directors and Corporate Auditors, which is to determine the remuneration for Directors and Corporate Auditors commensurate with their positions and responsibilities, taking into consideration social trends on
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remuneration for Directors, the performance of the Company, balance with employee salaries, and other factors that should be taken into consideration when determining the level of remuneration.

1. Policy on determining the amounts of remuneration, etc. by individual of basic remuneration and bonus Remuneration for Directors and Corporate Auditors consists of basic remuneration and a bonus.
   The basic remuneration is paid monthly based on each position. On the other hand, the bonus is paid based on performance. As for the method for calculating the bonus, the amount of bonus is determined by multiplying the amount of the Company's ordinary profit for the relevant fiscal year being the total outcome of the business operation by a coefficient for each position.
2. Matters concerning the determination of the details of remuneration, etc. for each individual Director and Corporate Auditor
   The Board of Directors is the body with the authority to determine the amount of remuneration for the Company's Directors, and the Board of Corporate Auditors is the body with the authority to determine the amount of remuneration for Corporate Auditors, which pass resolutions within an amount not exceeding the maximum amount of remuneration resolved at the General Meeting of Shareholders.

1. The Board of Directors selects the most suitable persons for the positions of Director or Corporate Auditor on each occasion, based on a comprehensive assessment of the candidate's background, character, capabilities, insight, and other factors, and nominates the candidates to be proposed to the General Meeting of Shareholders.
   Senior management is appointed by the Board of Directors.
   The Board of Directors will dismiss senior management after adequate discussions, if circumstances arise that make it difficult for them to perform their responsibilities or duties.
2. Reasons for the appointment, dismissal, and nomination of individual candidates for Directors and Corporate Auditors are explained in the Reference Documents for the General Meeting of Shareholders.
   In addition, the appointment and dismissal of senior management are explained in timely disclosure statements.

[Supplementary Principle 4.1.1] Scope of the matters delegated to the management

• The Board of Directors is responsible for deciding on matters that are legally required to be resolved by the Board of Directors, such as disposal and transfer of important assets, appointment and dismissal of important employees, and establishment, revision, and abolition of important organizations, as well as for mutually supervising the business execution status of Directors.
• The abovementioned matters to be resolved are specifically set forth in the Regulations of the Board of Directors, which are the Company's corporate rules. Decision-making on other matters are delegated to the President and other Executive Directors, based on the Company's corporate rules, which also stipulate the scope of decision-making by contents and the monetary amount of each case.
• As for execution after a decision has been made, the Company has adopted a corporate officer system to promote the separation of oversight and execution, as well as to enhance the oversight function of the Board of Directors over business execution and speed up its decision-making process, in an effort to ensure efficient execution of business.

[Principle 4.9] Independence standards and qualification for Independent Directors

• When appointing Independent External Directors, the Company appoints candidates for Independent External Directors in accordance with the independence standards established by the Tokyo Stock Exchange, taking into account their personal, business, and capital relationships with the Company, as well as other interests in the Company, in order to ensure their independence.
• The Company endeavors to select candidates for the position of Independent External Director who are capable of fulfilling their roles and responsibilities to contribute to the Company's sustainable growth and improvement of corporate value, based on a comprehensive assessment of their backgrounds, characters, capabilities, insights, and other factors, on each occasion.

[Supplementary Principle 4.11.1] Stance toward the balance, diversity, and scale for the Board of Directors It is the policy of the Board of Directors to identify knowledge, experience, skills, etc. that should be possessed by Directors in light of the Company's management strategies and to ensure a balance of knowledge,

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