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.
We have had a management vision of aiming to be a globally trusted corporate group by inspiring customers with high value-added products that have satisfying features, low cost and superior quality, under our management principles since our establishment (“Create a frank and open-minded business culture,” “Continue efforts to enhance our technology,” “Raise the quality levels of our products,” and “Contribute to society”). We believe that realizing this will lead to benefits shared by shareholders and all other stakeholders and improve corporate value.
We strive to realize the management vision, placing enhancement of corporate governance as one of the most important issues. That is to ensure transparency and solidness of the management and efficiency by expediting the decision-making process.
One of TOK’s material issues and company-wide strategies in the “TOK Medium-Term Plan 2021” is improving corporate governance. The Company created and published the TOK Corporate Governance Guidelines in April 2019 as a compilation of its basic policies and approaches to continuously improve corporate governance.
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 stipulated 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.
Diagram of Corporate Governance System (As of March 27, 2020)
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 supervisory function, the Company selected one independent outside director in June 2006 and another in June 2015 and another in March 2020. TOK currently has three independent outside directors.
In principle, the director system has simplified two layers: 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 27, 2020, the Board of Directors is chaired by Director and Chairman Ikuo Akutsu, and consists of nine directors (three of whom are 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 directors 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 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.
We also revised the content of the questionnaire that was used for the fifth assessment in the fiscal year ended December 31, 2019. We set questions regarding issues identified in the previous fiscal year and the Nomination and Compensation Advisory Committee, and added a question for directors and auditors to write about company-wide management issues. It generated opinions along the lines of the following:
• 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, rapid decision-making has benefited from outside directors and outside auditors with high levels of transparency
However, the following criticisms were also made:
• there should be deeper discussion about medium- to long-term management strategies, utilization of human resources, and business strategies, etc.
• 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.
• generally good self-improvement and in-house check-and-balance 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 and changes in the business environment, the decision-making authority of the Board of Directors was reviewed in April 2019, such as delegating decision-making authority to the Committee of Officers. We also revised the Board of Directors regulations, the Committee of Officers regulations, the Specific Authority by Position, and the Duty and Authority regulations. We are currently in discussions regarding changing the decision-making authorities at subsidiaries inside and outside Japan with the aim of completing these changes during the fiscal year ending December 31, 2020.
Establishment of Independent Officer Meetings
TOK has established meetings for its independent officers, all outside directors and all 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 discussions at the Board of Directors through:
• additional explanations on the agenda of the Committee of Officers that was not put on the agenda of Board of Directors meetings
• exchange of opinions on themes to be taken up at the next Board of Directors meeting
• commentary on 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, allowing for their business responsibilities, capabilities and other factors.
As of March 27, 2020, the Committee of Officers was chaired by President Taneichi and comprised 12 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 27, 2020, 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 meetings are held to receive reports regarding important auditing matters from each auditor, with the goal of deliberating and reaching resolutions on those matters. 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, 2019: 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 five other certified public accountants, three persons who have passed the certified public accountant examination, and 15 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, 2019 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 >
TOK established the Nomination and Compensation Advisory Committee, chaired by an independent outside director with more than 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 (see pages 78 and 82).
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, 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). Furthermore, for shareholders unable to attend the General Meeting of Shareholders, we allow the exercise of voting rights in writing or electromagnetic method such as an electromagnetic platform for institutional investors. At the same time, we prepare a Notice of Convocation in English to help overseas institutional investors understand the resolutions. 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, each of which is in Japanese and English, on the Company website.
Cooperation between the Auditors, Internal Auditing Division and Accounting Auditor
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 regularly exchange information and opinions with the accounting auditor.
Mutual coordination among audits by outside auditors, internal audits, auditors’ audits, and accounting audits and their relationship with the internal control department
To enable outside auditors to audit the directors’ performance of duties, they attend the Board of Directors meetings. They also receive internal audit reports from the Internal Auditing Division, reports on the results of audits conducted by the standing statutory auditor after attending important meetings and audits performed by viewing and surveying important documents, etc., and audit reports from the accounting auditor. Moreover, the outside auditors exchange information and opinions with the Internal Auditing Division, the standing statutory auditor, and the accounting auditor as needed. In addition, the outside auditors receive reports as appropriate from the Internal Auditing Division regarding its evaluation of the effectiveness of internal controls over financial reporting and from the accounting auditor regarding its opinion on the internal control audit.
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 for Directors and Auditors
TOK’s guidelines for remunerating its directors and auditors are set for each position 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.
Basic Policy on Determination of Remuneration, etc. for Directors (Excluding Outside Directors)
The Company has established a Nomination and Compensation Advisory Committee, chaired by an outside director, to serve as an advisory function to the Board of Directors. The committee has held multiple deliberations to examine the preferred remuneration system for the Company, giving consideration to the outlook for the management environment and the approach to corporate governance in Japan. As a result of these deliberations, starting in February 2020, the Company’s remuneration policy for directors (excluding outside directors) has been decided as follows.
Basic Principle of Remuneration
Remuneration for directors (excluding outside directors) is determined based on the following basic concepts.
Aim to support the Company’s sustainable value creation
· Set the composition and level of remuneration so as to provide healthy motivation to generate sustainable growth and corporate value in the medium to long term
· Clarify responsibility for each fiscal year’s results by fairly and impartially reflecting quantitative evaluations based on financial performance and evaluation of efforts to address issues taking into consideration medium- to long-term strategy in annual bonuses
· Strive to create sustainable corporate value by continuously providing long-term incentives linked to the Company’s medium- to long-term performance
· Promote long-term holding of shares while serving in management and share interests with shareholders
Ensure objectivity and transparency in remuneration decisions
· Determine the remuneration decision policy and the individual amount of payment upon deliberation by the Nomination and Compensation Advisory Committee, which is composed primarily of outside directors
· Employ an independent remuneration advisor and set an appropriate remuneration level taking into consideration the Company’s business characteristics, etc., and based on verification through comparisons with corporate groups of the same size using objective data from outside, also taking into account recent public opinion
· Proactively disclose information necessary for stakeholders including shareholders, to monitor the relations between remuneration and corporate value
The Company’s remuneration structure for directors (excluding outside directors) consists of basic remuneration, which is a fixed salary, and performance-linked remuneration. Performance-linked remuneration consists of an “annual bonus” that is linked to company-wide performance for each fiscal year, a “performance-linked share-based remuneration system (performance share units)” that is linked to the sustainable creation of corporate value, and a “restricted share-based remuneration system” that is provided to continually share value with shareholders through the continued holding of stock. An outline of each remuneration component is presented below.
◦Outline of Remuneration Components
|Type of remuneration||Objective/Summary|
|Basic remuneration||Fixed cash salary based on position|
Performance-linked cash remuneration to evaluate steady achievement of targets for each fiscal year
· To clarify responsibility for results in each fiscal year, the payment rate is determined in a range from 0% to 200% of the standard amount, in proportion to the degree of achievement of the targets for consolidated operating margin and consolidated net sales for each fiscal year, which are key performance indicators.
· In some cases, the payment rate determined above may be multiplied by any of 0.95, 1.00, or 1.05 depending on discretionary evaluation by the Nomination and Compensation Advisory Committee or by the president.
Performance-linked share-based remuneration to provide an incentive to sustainably increase corporate value
· The number of shares to grant is decided within the range of 0%–200% of the standard amount (the “payment rate”), according to the achievement rate for numerical targets such as earnings during the performance evaluation period*1.
· The method for calculating the number of the Company’s shares granted and amount of cash paid is as follows. First, the number of the Company’s shares to be granted to each eligible director is calculated in accordance with formula (i) below (fractions of less than 100 shares being rounded down); then the amount of cash to be paid to each eligible director (cash for payment of taxes) is calculated in accordance with formula (ii) below.
(i) Number of the Company’s shares to be granted to each eligible director Standard share unit number*2 × Payment rate × 50%
(ii) Amount of cash to be paid to each eligible director (Standard share unit number × Payment rate – Number of the Company’s shares calculated in (i) above) × Stock price at the time of grant
· Grant shares in a lump sum after the end of a performance evaluation period
Share-based remuneration to further facilitate the alignment of interests with shareholders by promoting long-term holding of stock
· Grant restricted shares in the number determined by the Company’s Board of Directors each fiscal year in accordance with the rank of each eligible director
· Restriction on transfers is lifted when conditions are met, such as when the restriction period expires, or when an eligible director retires or resigns from their position before the restriction period expires by reason of expiration of their term of office, death, or some other reason the Company’s Board of Directors deems justifiable, and ceases to serve as a director, officer, auditor, employee or any other equivalent position stipulated in advance by the Board of Directors of the Company.
*1 The initial performance evaluation period for the performance-linked share-based remuneration system is the two-year period from the fiscal year ending December 31, 2020 through the fiscal year ending December 31, 2021. Aiming to sustainably create corporate value, the Company will use the ROE target, which is a strategic indicator in the Medium-Term Plan, during the initial performance evaluation period.
*2 Determined by the Board of Directors in accordance with the rank of each eligible director.
Nomination and Compensation Advisory Committee
The Nomination and Compensation Advisory Committee chaired by an independent outside director drafts proposals for deciding the basic remuneration for directors (excluding outside directors). 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 (excluding outside directors), 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 medium- to long-term performance-linked remuneration for directors (excluding outside directors).
In the decision-making process for basic remuneration in the fiscal year ended December 31, 2019, the Nomination and Compensation Advisory Committee convened 8 times in total, and deliberated mainly on reform of the remuneration system and deciding on remuneration for the fiscal year ended December 31, 2019, then provided a recommendation to the Board of Directors. Upon receiving this proposal, the Board of Directors deliberated on these matters and assigned the decision on remuneration, etc. for directors (excluding outside directors) to the president, who made the final decision.
As of March 27, 2020, the Nomination and Compensation Advisory Committee is composed of a majority of independent outside directors, and chaired by an independent outside director. The chairman is Outside Director Hiroshi Kurimoto and the members are the President Noriaki Taneichi, Director Kunio Mizuki, and Outside Directors Noriko Sekiguchi and Kazuo Ichiyanagi.
Basic Policy on Determination of Remuneration, etc. for Outside Directors
Remuneration for outside directors, who serve as an oversight function from an independent standpoint from business execution, consists only of basic remuneration of a set amount, which is determined taking into consideration the result of benchmarking with corporate groups of the same size. The remuneration amount for outside directors is decided by the president within the range approved by the Shareholders’ Meeting (within ¥50.0 million per year), based on the deliberation by the Board of Directors on a draft proposal made by the Nomination and Compensation Advisory Committee.
Basic Policy on Determination of Remuneration, etc. for Auditors
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 Shareholders’ Meeting.
Total Remuneration, etc. Paid to Directors and Auditors (Fiscal Year Ended December 31, 2019)
etc. (Millions of yen)
|Total of various types of remuneration, etc. (Millions of yen)||
|Basic remuneration||Stock options||Bonuses|
(Excluding outside directors)
(Excluding outside auditors)
|Outside directors and auditors||48||47||-||1||6|
1. The amounts for total remuneration, etc. and total of various types of remuneration, etc. for directors (excluding outside director) do not include the portion paid as salary for officers’ activities undertaken by directors who also serve as officers. Because there are no directors or auditors who received total consolidated remuneration, etc. of over ¥100 million, total consolidated remuneration, etc. for individual directors and auditors have not been provided.
2. No special indicators were set for bonuses in the fiscal year ended December 31, 2019. However, the amount of bonuses was decided by the president within the range of total amounts for each type of remuneration approved by the Company’s Shareholders’ Meeting, based on the deliberation by the Company’s Board of Directors on a draft proposal made by the Nomination and Compensation Advisory Committee, giving consideration to the Group’s performance.