Corporate Governance Report (Last Update: March 28, 2024)

Last Update: March 28, 2024

TOCALO Co., Ltd.

Kazuya Kobayashi, President

Contact: HR & General Affairs Division

(+81-78-303-3433) Securities Code: 3433https://www.tocalo.co.jp

The corporate governance of TOCALO Co., Ltd. (the "Company") is described below.

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

1. Basic Views

The Company recognizes that effective corporate governance is one of the most important management issues.

Based on the recognition that "a company is a member and public entity of society," our basic stance on corporate governance is to ensure management transparency and to further strengthen the trust placed in us by all of our stakeholders, those being our shareholders, business partners, employees and local communities. Alongside that, we aim to increase corporate value and achieve sustainable and sound growth of the Group as a whole, and thereby contribute to society through our surface treatment processing business.

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

[Principle 1-4 Strategically held shares]

1. Policy on strategically held shares

The Company did not retain any at the end of March 2023. As a general rule, we will not retain any strategically held shares in the future.

2. Criteria for exercising voting rights

Strategically held shares serve to continuously improve the value of the Company through the associated voting rights. Voting rights would be exercised, for example, in cases where shareholder value is significantly damaged or a serious non-compliance is found. Any decisions whether or not to approve proposals will be made only after collecting sufficient information.

[Principle 1-7 Transactions with related parties]

Based on the Rules of the Board of Directors, the Company regards matters such as competitive transactions, conflict-of-interest transactions, and the acquisition/disposal of large amounts of equipment/property by directors, as important management issues that should be presented to the Board of Directors, in a timely manner. These matters are deliberated in the interest of the Company and its shareholders as a whole and are treated in the same way even if our business partners are major shareholders, etc.

[Principle 2-4-1 Ensuring diversity in the appointment of core human resources, etc.]

With "developing diverse human resources to play an active role" set as a priority issue (materiality) for achieving sustainable growth, the hiring practices of the Company emphasize an individual's abilities and achievements, regardless of gender or nationality, while also respecting different perspectives and values. The Company focuses on human capital development and improvement of the internal environment so that employees can work vibrantly by exerting their personalities and abilities.

With regard to human capital development, the Company has taken measures that:

• 1. Improve proposal-type sales skills in order to provide optimal solutions.

• 2. Nurture originality and ingenuity in manufacturing and solidify a firm base for it (human resource development).

• 3. Provide skills in exploring quality control methods.

• 4. Foster a corporate culture in which employees can work on technological development with a flexible mindset.

• 5. Provide digital skills training and identify DX human resources.

• 6. Encourage a higher perspective and foster strategic thinking through the global challenge program (development of core human resources).

For internal environment improvement, the Company has taken measures that:

• 1. Foster a psychologically safe corporate culture.

• 2. Maintain and improve a work environment that is comfortable, healthy and safe.

• 3. Provide fair growth opportunities through performance-based evaluations.

• 4. Support employees in their efforts to balance work and childcare/nursing care responsibilities.

• 5. Create a workplace environment that enables employees to choose flexible workstyles and work healthily.

• 6. Provide learning opportunities and establish an award program.

For details, KPIs, and target values of the measures, please refer to our website

(https://www.tocalo.co.jp/sustainability/employee/).

[Principle 2-6 Fulfilling responsibilities as owner of corporate pension assets]

Regarding the management of corporate pension reserve funds, the Company issues management guidelines that set forth target investment yield, basic portfolio content and divergence tolerance for achieving targets to the asset management institution. Then, we monitor how those funds are managed through reports on the management status, stewardship activities, etc. provided periodically by the asset management institution. The Secretariat for Corporate Pension comprises members with appropriate qualifications selected and assigned from the human resources, finance, accounting, and other departments.

[Principle 3-1 Enhancement of information disclosure]

1. Our goals (Corporate Philosophy, Management Policy, Management Indices) For our corporate philosophy and management policy, please visit our website. (https://www.tocalo.co.jp/ir/management/policy/)

As for management indices, the following items are set as goals in our medium-term management plan.  Maintaining equity ratio of approx. 70% (remaining a real debt-free company)

•  Maintaining ROE (return on equity) (Target: 15%)

•  Maintaining ordinary income ratio (Target: 20%)

•  Maintaining and improving EPS (earnings per share)

 Stable dividend payment of a targeted one-third of net income or higher  Maintaining DOE (dividend on equity ratio) (Target: 5%)

 Continued investment in maintaining and improving technological advantages totaling 25.0 to 35.0 billion yen (5 to 7 billion yen per year)

 Investments in semiconductor production increases, new technological processes, production efficiency improvements, etc.

 Research and development expenses: Maintaining approx. 3% of consolidated net sales  Technological development expenses: Continued investments by production engineering divisions of each plant

2. Basic views on corporate governance

Our basic views on corporate governance are elucidated in I-1 Basic Views of this Report.

3. Determination of remuneration for senior management and directors

How remuneration for senior management and directors is determined is described in II-1 Organizational

Composition and Operation [Director Remuneration] of this Report.

4. Appointment and dismissal of senior management and nomination of candidates for directors and Audit & Supervisory Board members

As an advisory body for the Board of Directors, the Company has established a Nomination and Remuneration Advisory Committee, with a majority of the members being independent outside directors and chaired by an independent outside director. The Committee deliberates proposals on the appointment/dismissal of director candidates and gives advice and recommendations to the Board of Directors. Director candidates, who as directors are expected to have broad experience and deep insight that they can utilize to manage the Company, are selected by the Board of Directors based on the advice and recommendations of the Nomination and Remuneration Advisory Committee. The Board submits the selected candidates to the General Shareholder Meeting for approval in the form of a resolution. Audit & Supervisory Board member candidates must have expertise and knowledge in auditing. They are selected by the Board of Directors after their qualifications have been deliberated and agreed to by the Audit & Supervisory Board, more than a half of which is comprised of Outside Audit & Supervisory Board members. The Board submits the selected candidates to the General Shareholder Meeting for approval in the form of a resolution. Regarding the dismissal of directors and Audit & Supervisory Board members, if a director/Audit & Supervisory Board member has committed fraud or seriously violated laws, regulations or the articles of incorporation in the course of executing his/her duties, or if no longer meets requirements, a resolution that clarifies the reason for dismissal is made by the Board of Directors and submitted to the General Shareholder Meeting for approval.

5. Explanation of individual appointments, dismissals and nominations

The reasons for the appointment of individual outside directors and outside Audit & Supervisory Board members are described in II-1 Organizational Composition and Operation [Directors] and [Audit & Supervisory Board members] of this Report. With regards to appointments, the background of each candidate and the reasons for appointment are described in the Convocation Notice of the General Shareholder Meeting. When a dismissal takes place, it will be disclosed as appropriate according to its importance.

[Principle 3-1-3 Initiatives on sustainability-related challenges]

The Company holds quarterly Sustainability Committee meetings chaired by the President to discuss various sustainability issues such as greenhouse gas emission reduction, formulate policies, plans, and initiatives, check the progress of initiatives, and other matters. It also strives to appropriately disclose information through the corporate website.

Regarding investment in human capital, based on its human capital development policy, the Company proactively invests in developing human resources to be the best partner to customers. In fiscal 2022, non-consolidated training expenses amounted to 59 million yen (63.2 thousand yen per employee).

As for investment in intellectual property, it is the Company's policy to maintain spending on research and development and technological development at around 5% of consolidated net sales, aiming to create manynew technologies and know-how through advanced and customized coatings. In fiscal 2022, these expenses amounted to 2,252 million yen (4.7%).

In addition, with the vision of "contributing to a bright future for people and nature," the Company has positioned tackling climate change as an important management issue, and is advancing initiatives based on TCFD recommendations and constructively disclosing information in the four core areas of "governance," "strategy," "risk management," and "metrics and targets." In 2023, the Company took analysis farther and estimated the financial impact of risks and opportunities in each area, and based on the results, set indices and goals for measures deemed particularly important. Going forward, the Company will further refine analyses and proceed with measures to mitigate risks and increase opportunities based on the set indices and goals. For details, please visit our website. (https://www.tocalo.co.jp/sustainability/tcfd/)

[Supplementary Principle 4-1-1 Scope of delegation to senior management]

The Board of Directors is operated based on the important matters stipulated in the Rules of the Board of Directors. Based on the management strategies, plans, policies, etc. approved by the Board of Directors, decisions concerning business execution are delegated to the senior management in charge of business execution.

[Principle 4-9 qualifications]Judgement criteria for independency of independent outside directors and theirThe criteria used to judge the independency of independent outside directors and their qualifications are described in II-1 Organizational Composition and Operation of this Report.

[Supplementary Principle 4-10-1 Authority, role, etc. of the Nomination and Remuneration Advisory Committee]

As an advisory body for the Board of Directors, the Company has established a Nomination and Remuneration Advisory Committee, with a majority (four out of seven) of the members being independent outside directors and chaired by an independent outside director. The Committee deliberates the appointment of director candidates (including successor plans), remuneration for directors, and other matters, and gives advice and recommendations to the Board of Directors based on which Board resolutions are made.

At the Company, there are two male and two female independent outside directors who have a broad range of specialized skills in corporate management and management strategies, manufacturing and technologies, legal affairs, finance and accounting, internationalism and diversity, and environmental and social issues, and they provide recommendations based on their expertise.

[Supplementary Principle 4-11-1 Policy for ensuring diversity in the Board of Directors, etc.]

When appointing members to the Board of Directors, our first priority will be to seek persons who have demonstrated leadership in business execution as a department head and have the knowledge and insight tooversee our business from multiple perspectives. The candidates are then selected through deliberation by the Board of Directors, after fully considering their management skills, aptitude and contributions made to the company, and ensuring balance and diversity among our human resources. As for the experience and expertise expected of each candidate, a skills matrix is presented in the Convocation Notice of the General Shareholder Meeting and the Securities Report for the fiscal year ending in March 2023.

[Supplementary Principle 4-11-2 members]

Status of concurrent position of directors and Audit & Supervisory BoardIf directors and Audit & Supervisory Board members, including outside directors and outside Audit & Supervisory Board members, also serve as officers of other companies, the Board of Directors confirms the details thereof and ensures that said dual service does not pose any problems for the business of the Company. The status of any concurrent positions held by officers as of the date of account closing is described in the "Business Report" of the Convocation Notice of the General Shareholder Meeting, and that of any candidates to be appointed as new officers, in the "Reference Material for the General Shareholder Meeting".

[Supplementary Principle 4-11-3 Evaluation of the effectiveness of the Board of Directors]

At the Company, all directors and all Audit & Supervisory Board members evaluate the effectiveness of the Board of Directors based on questionnaires prepared by the Secretariat for the Board of Directors. In fiscal 2022, the Board of Directors was evaluated as being generally appropriate in terms of composition, operation, agenda and other relevant matters. The results were reported to all directors and all Audit & Supervisory Board members. Efforts are being made to further enhance the effectiveness of the Board of Directors.

[Supplementary Principle 4-14-2 members]

Policy on training for directors and Audit & Supervisory BoardDirectors of the Company acquire knowledge of roles, responsibilities, laws and regulations by actively participating in external courses and seminars for self-improvement. Our full-time Audit & Supervisory Board members, as members of the Japan Corporate Auditors Association, enhance their knowledge by attending seminars and so on, and share information with other Audit & Supervisory Board members.

[Principle 5-1 Policy on constructive dialogue with shareholders]

Company management or personnel in charge of IR hold financial results briefings and small meetings for institutional investors every time we announce our quarterly financial results, and hold briefings for individual investors as well. We also accept requests for individual interviews. By posting IR-related information and an inquiry form on our website, we provide a platform where general shareholders can obtain information and ask us questions.

【Response Toward Achieving Management Conscious of Cost of Capital and Stock Price】【Available in English】

The company have analyzed our current cost of capital and return on capital and formulated a policy for improvement. For details, please refer to our website.

(Japanese) URL:https://ssl4.eir-parts.net/doc/3433/tdnet/2412684/00.pdf(English) URL:https://ssl4.eir-parts.net/doc/3433/ir_material11/226458/00.pdf

2.

Capital Structure

[Status of Major Shareholders]

Supplementary Explanation

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3. Corporate Attributes

4. Policy on Measures to Protect Minority Shareholders in Conducting Transactions with Controlling

Shareholder

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5. Other Special Circumstances which may have Material Impact on Corporate Governance

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II. Business Management Organization and Other Corporate Governance Systems regarding Decision-making, Execution of Business, and Oversight in Management

1. Organizational Composition and Operation

[Directors]

Relationship with the Company (1)

• * Categories for "Relationship with the Company"

• * "○" when the director presently falls or has recently fallen under the category; "△" when the director fell under the category in the past

• * "●" when a close relative of the director presently falls or has recently fallen under the category; "▲" when a close relative of the director fell under the category in the past

• a. Executive of the Company or its subsidiaries

• b. Non-executive director or executive of a parent company of the Company

• c. Executive of a fellow subsidiary company of the Company

• d. A party whose major client or supplier is the Company or an executive thereof

• e. Major client or supplier of the listed company or an executive thereof

• f. Consultant, accountant or legal professional who receives a large amount of monetary consideration or other property from the Company besides compensation as a director/Audit & Supervisory Board member

• g. Major shareholder of the Company (or an executive of the said major shareholder if the said shareholder is a juridical person)

• h. Executive of a client or supplier company of the Company (which does not correspond to any of d, e, or f) (the director himself/herself only)

• i. Executive of a company at which an executive of the Company holds concurrent position as an outside officer (the officer him/herself only)

• j. Executive of a company or organization that receives a donation from the Company (the director himself/herself only)

• k. Others

Relationship with the Company (2)

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Tocalo Co. Ltd. published this content on 28 March 2024 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 28 March 2024 09:31:04 UTC.