We have positioned the corporate governance
as one of our most important management issues.
Aiming to become a company that is able to earn the trust of all stakeholders, TOK positions enhancement of corporate governance as one of the most important management issues: the means to maintain a sound and transparent management and to enhance its operational efficiency by speeding up the decision-making process.
*Corporate governance: A generic term that describes a management supervision system designed to enhance management efficiency and enforce compliance and to promote stakeholders' interests by raising enterprise value.
Type of System
As a company with corporate auditors, TOK employs the corporate auditor system. We are taking actions to strengthen audits performed by the corporate auditors with the greater authority endowed by the Companies Act of Japan. In addition, TOK is taking advantage of the benefits of reforms to its Board of Directors, establishment of the executive officer system, and the election of an independent outside director to fortify the management decision-making and supervisory function and the business execution function while clarifying responsibility for performing these functions. We are convinced that these measures are the most effective means to strengthen management and upgrade our corporate governance.
Corporate Governance System
Directors and Board of Directors ＜Diagram ① ＞
To quickly respond to changes in the operating environment and clarify accountability for the directors concerning operating results in each fiscal year, we have shortened the tenure of the directors from two years to one year since June 2006.
With the aim of enhancing the transparency of the Board of Directors and strengthening the corporate governance system, the Company selected one independent outside director in June 2006 and another in June 2015. TOK currently has two independent outside directors.
In principle, the director system has a flat structure with two levels: representative director and directors. This creates a framework that allows the Board of Directors to fulfill its primary responsibilities by effectively reaching management decisions and supervising the Company’s management.
As of March 28, 2019, we had eight directors, including two outside directors. In principle, the Board of Directors meets once a month on a regular basis and holds extraordinary meetings as required. The meetings are held to decide important
matters of business execution, with the goal of supervising the business duties executed by the representative director and directors.
The number of directors on the Board of Directors is set to not exceed 10 directors in the Company’s Articles of Incorporation. The articles also stipulate that resolutions for the election of directors must be approved by a non-cumulative majority vote at a General Meeting of Shareholders with a third or more of the shareholders in attendance.
Assessment of the Effectiveness of the Board of Directors
Our directors and auditors conduct an assessment and discuss at the Board of Directors using an anonymous self-evaluation questionnaire format of the composition of the Board of Directors; the effectiveness of the Board of Directors; information related to the Board of Directors; the decision-making process; and external communications. This offers an analysis and assessment of the effectiveness of the Board of Directors as a whole.
The following opinions were received during the fiscal year ended December 31, 2018, the fourth time the assessment has been conducted:
• having an impartial composition offering inside directors with thorough understanding of each field, and a good balance between experience and actual performance
• maintaining diversity by incorporating outside directors with differing backgrounds, knowledge and expertise
• the size of the Board of Directors, frequency of meetings, matters discussed, and time spent on discussions are all appropriate
• in an atmosphere of frank and open discussions, the outside directors and outside auditors continue to positively contribute to high levels of transparency and rapid decision-making
• generally good self-improvement and in-house check-andbalance functions
However, the following criticisms were also made:
• authority should be delegated to deepen discussions about business strategy
• the reporting system should be improved in terms of risk analysis and important matters
Considering this feedback, the Company will continue to focus on further improving the effectiveness of the Board of Directors.
Review of Decision-Making Authority of the Board of Directors
Within the context of strengthening the functions of the Board of Directors amid changes in the business environment, TOK has started a review of the decision-making authority of the Board of Directors, including authorities delegated to the Committee of Officers. The Company modified decision-making authorities in April 2019 and has started to examine changes to decisionmaking authorities at subsidiaries inside and outside Japan with the aim of implementing these changes in January 2020.
Establishment of Independent Officer Meetings
TOK has established meetings for its independent officers, currently two outside directors and three outside auditors. They are held with the same frequency as Board of Directors meetings. The standing statutory auditor also attends the meetings.
The meetings aim to strengthen the effectiveness and add vigor to deliberations at the Board of Directors through:
• additional explanations on topics from management meetings that were not on the agenda of the Committee of Officers
• exchange of opinions on themes to be taken up at the next Board of Directors meeting
• explanations of cutting-edge technology matters
Officers and Committee of Officers <Diagram ② >
While taking steps to strengthen the Board of Directors’ functions in management decision making and supervision, TOK has the Committee of Officers made up of all officers to reinforce its business execution capabilities. The committee members include the chief executive officer, the chief operating officer, senior executive officers, executive officers and officers.Those officers’ ranks derive from differences in business responsibilities and other considerations.
As of March 28, 2019, the Company had 14 officers including five officers also serving as directors. In principle, the Committee of Officers meets once a month on a regular basis and holds extraordinary meetings as required. The meetings are held to share instructions and orders resolved by the Board of Directors and information among the officers, and with the goal of planning management strategies, deliberating and approving certain important decisions that are not subject to a Board of Directors resolution.
Auditors and Board of Auditors ＜Diagram ③ ＞
As of March 28, 2019, we had four auditors, including three outside auditors. In principle, the Board of Auditors meets once a month on a regular basis and holds extraordinary meetings as required. The auditors attend the Board of Directors, the Committee of Officers, and other important meetings. Their duties are performed in accordance with auditing standards (Corporate Auditor Auditing Regulations), the auditing policy, the division of tasks, and other considerations. In addition, the auditors check the performance of directors by receiving reports from directors and other corporate staff, and requesting an explanation if necessary. For financial audits, the auditors
receive reports from the accounting auditor and use other means, including requesting an explanation if necessary, to verify the suitability of financial accounting methods and the results of these audits.
To improve the effectiveness of corporate audits, and to ensure smooth execution of audit duties, one person is also assigned to assist the auditors.
Internal Auditing Div. <Diagram ④ >
The Internal Auditing Division is under the direct control of the president. In addition to internal audits, this division offers suggestions, proposals, and advice for continuous improvement through evaluations of the effectiveness of internal controls in financial reporting.
Accounting Auditor <Diagram ⑤ >
The accounting auditor conducts accounting audits of the Company from an impartial and independent standpoint. There were two certified public accountants who conducted the accounting audit of the Company in the fiscal year ended December 31, 2018: Hiroki Kitagata and Masato Shoji, both of whom are designated limited liability partners and executive members of accounting auditor Deloitte Touche Tohmatsu LLC.
Moreover, there were six other certified public accountants, two junior accountants, and 14 other people who assisted in conducting the Company’s accounting audit. The details of the remuneration of the Company’s certified public accountants
(Deloitte Touche Tohmatsu LLC) for conducting the accounting audit during the fiscal year ended December 31, 2018 are as follows:
• Remuneration in relation to the services set forth in Article 2, Paragraph 1 of the Certified Public Accountants Act (Act No. 103 of 1948):¥54 million
Nomination and Compensation Advisory Committee <Diagram ⑥ >
In December 2018, TOK established the Nomination and Compensation Advisory Committee, chaired by an independent outside director with half of its members consisting of independent
outside directors, to enhance corporate governance by strengthening the fairness, transparency, and objectivity of procedures related to the nomination, dismissal, and remuneration of directors.
Legal Adviser, etc. <Diagram ⑦ >
The Company has concluded advisory contracts with a number of law firms, and receives appropriate advice from legal advisors in situations requiring legal assessment.
Efforts to Invigorate the Shareholders’ Meeting and Facilitate Smooth Exercise of Voting Rights <Diagram ⑧ >
To facilitate the exercise of voting rights by shareholders, we hold our General Meeting of Shareholders in March, when most other Japanese companies’ shareholder meetings are not hosted at the same time, set a period for reviewing the resolutions for approval by the meeting that is longer than the number of days required by law, and publish the Notice of Convocation of the General Meeting of Shareholders on our website ahead of time, 28 days (four weeks) before the day of the meeting. It is also sent out early (21 days (three weeks) before the day of the meeting).
To enable the shareholders in attendance to better understand the proceedings of the General Meeting of Shareholders, we use narrated video footage to report the items up for resolution.
In addition, we also upload the Notice of Convocation, Notice of Resolution, and Results of the Exercise of Voting Rights to the General Meeting of Shareholders for disclosure on the Company website.
Internal Audit and Corporate Audit <Diagram ⑨ >
Cooperation between the auditors and accounting auditor
The auditors receive reports on the result of accounting audits and other work from the accounting auditor (auditing firm) four times a year. They also receive an explanation of the auditing plan from the accounting auditor once a year. In addition, the auditors also accompany the accounting auditor to the factory audits the accounting auditor conducts if necessary, as well as examine the auditing method of the accounting auditor. Apart from this, the auditors also exchange information and opinions with the accounting auditor as required.
Relationship between internal audits, corporate audits, accounting audits and Internal Auditing Division and the internal control department
The TOK Group’s internal control department comprises divisions in charge of compliance and risk management in addition to the Internal Auditing Division, which is in charge of evaluating
the effectiveness of internal control as it pertains to internal audits and financial reporting.
The Internal Auditing Division, as a part of the internal control department, reports the results of internal audits to the president, auditors and the relevant divisions. In addition, it provides the relevant divisions with suggestions, proposals and advice as required.
As for corporate audits, the auditors report the results of their corporate audits of directors’ execution of duties to the president and the accounting auditor (auditing firm). In conducting internal control audits, the auditors receive evaluation reports and other information from the internal control department as necessary.
The accounting auditor (auditing firm) reports the results of its accounting audits to the president and auditors. It also holds discussions with the internal control department to help them with internal control audits.
Election of Outside Directors and Outside Auditors
The Company has eight directors, of whom two are outside directors, as well as four auditors, of
whom three are outside auditors.
The Company has established the following criteria and policies regarding independence in the
election of outside directors and outside auditors.
Independence Standards for Outside Officers
Independent outside officers under this criteria are defined as those who fulfill the legal requirements of an outside officer, and to whom any one of the following does not apply.
a. A person who executes the business of the Company or its consolidated subsidiaries (the “Group”), or who did so for a period
of 10 years before being appointed.
b. A person/entity for which the Group is a major client (Note 1), or who executes the business of such a person/entity.
c. A major customer of the Group (Note 2) or a person who executes the business of such customer.
d. A major lender of the Group (Note 3) or a person who executes the business of such lender.
e. A person who, apart from receiving officer compensation from the Group, belongs to a consulting, accounting, or legal firm (corporate entity, cooperative, or other such group) receiving large amounts of cash or other assets (Note 4) from the Group.
f. A person to whom the above b. through e. applied in the previous three years.
g. A person who in the past three years has received donations from the Group averaging more than ¥3.0 million per year.
h. Major shareholders of the Group (Note 5) or a person who executes the business of such shareholder.
i. A person who executes the business of a company with a mutual relationship between outside officers. (Note 6)
j. A person whose spouse or a relative within the second degree of kinship come under any one of above items a. through i.
k. A person who has served a total of more than eight years as an outside officer.
l. Regardless of the above provisions, a person for whom it is deemed likely that conflicts of interest will arise with the Company.
Notes: 1. A person/entity for which the Group is a major client, means a supplier that provides the Group with products or services, the amount of which transactions averaged more than ¥10.0 million per year over the past three years and represented more than 2% of the supplier’s consolidated annual revenue in the most recent fiscal year.
2. A major customer of the Group means a customer to which the Group provides products and services, the amount of which transactions averaged more than ¥10.0 million per year over the past three years and represented more than 2% of the Group’s consolidated annual revenue in the most recent fiscal year.
3. A major lender of the Group means a financial institution which has lent an amount equivalent to more than 2% of the Group’s consolidated total assets.
4. A large sum of cash or other assets, means assets that averaged more than ¥10.0 million per year over the past three years, and which in the most recent fiscal year had an economic value in excess of 2% of said consultant or accounting or legal expert’s consolidated annual revenue. (In the event the beneficiary of said assets is a corporation, association or other organization, then assets that averaged more than ¥10.0 million per year over the past three years, and which in the most recent fiscal year had an economic value in excess of 2% of said organization’s consolidated annual revenue).
5. Major shareholder, means a shareholder with a ratio of voting rights of more than 10%.
6. A mutual relationship between outside officers means a relationship in which a person who executes the business of the Group is also an outside officer at another company, and in which a person who executes the business of said outside company is also an outside officer of the Company.
Remuneration of Directors and Auditors
TOK’s guidelines for remunerating its directors, senior management and auditors are as follows. The guidelines focus mainly on complying with laws and regulations and maintaining sound management, while also seeking to set remuneration at a level that satisfies the expectations of shareholders and other stakeholders by increasing earnings and corporate value.
Directors’ remuneration consists of a fixed salary as base remuneration, a bonus linked to financial performance in the fiscal year, and stock options linked to results, enhancement of corporate value and stock price performance as an incentive to
enhance drive and motivation to increase the stock price.
The fixed salary, bonus and stock compensation-type stock options are decided based on the Policy and Procedures for Deciding the Remuneration of Directors and Senior Management (“the policy and procedures for remuneration”),
within a remuneration framework (up to ¥420 million per year) approved by the General Meeting of Shareholders.
Outside directors do not receive stock compensation-type stock options (subscription warrants) in consideration of their roles.
Remuneration for Senior Management
Remuneration for senior management consists of a fixed salary as base remuneration, a bonus linked to financial performance in the fiscal year, and stock compensation-type stock options linked to medium- to long-term performance.
The fixed salary, bonus and stock compensation-type stock options are decided based on the policy and procedures for remuneration.
Policy and Procedures for Deciding the Remuneration of Directors and Senior Management
The Nomination and Compensation Advisory Committee chaired by an independent outside director drafts proposals for deciding the remuneration (fixed salary and bonuses) of directors and senior management. The committee takes care to set appropriate percentages of cash remuneration and stock remuneration, as well as the ratio of remuneration linked to medium- to long-term performance, while paying due consideration to the degree of contributions to the medium-term plans and budgets in the previous fiscal year of the directors and senior managers, as well as the self-evaluations of the Board of Directors, in addition to the TOK Group’s financial performance.The committee also drafts proposals for deciding the weighting of stock compensation-type stock options as medium- to longterm performance-linked remuneration for directors (excluding outside directors) and senior managers. Based on these proposals, the Board of Directors makes the final decision.
Auditors are responsible for supervising and auditing business duties executed by the directors, in a position that is independent of the Board of Directors. They receive only a basic remuneration in the form of a basic salary, which is decided on and paid out following discussions among the auditors, within a remuneration framework (of within ¥72 million per year) approved by the General Meeting of Shareholders.