Mitsubishi Chemical Holdings

THE KAITEKI COMPANY

Corporate Governance

Message from the Chairperson

MCHC transitioned to a company with a nominating committee, etc., in June 2015, positioning the strengthening of corporate governance as one of its highest management priorities. In fiscal 2015, MCHC focused efforts on measures to facilitate and improve the effectiveness of the Board of Directors, centered on its oversight function, to enhance the effectiveness of this new corporate structure.
As the chairperson, I led initiatives to further energize the Board of Directors and reinforce management oversight functions.

Establishment of Outside Director Liaison Committee
In addition to the Board of Directors, the Outside Director Liaison Committee was created to share critical management information and serve as a forum for exchanging frank opinions about management issues. The Outside Director Liaison Committee comprises outside directors, the chairperson, the president, and key corporate executive officers who meet once a month to discuss issues with an emphasis on taking advantage of the expertise and advanced insight of our outside directors. In fiscal 2015, the members of the committee held their frank and vigorous discussions about the medium-term management plan APTSIS 20, the Corporate Governance Code, and diversity of human resources.

Deciding on Corporate Governance Guidelines
In November 2015, MCHC formulated Corporate Governance Guidelines based on deliberations by the Outside Director Liaison Committee and the Board of Directors. These guidelines were created to help establish a better corporate governance structure by instituting a constant review of the framework, including the guidelines, and support systems for improving both the soundness and efficiency of management, as well as enhancing management transparency through the timely disclosure of information and dialog with stakeholders.

Evaluation on Effectiveness of Board of Directors
In June 2016, MCHC conducted a survey of all directors and evaluated the effectiveness of its Board of Directors based on discussions of the survey results among non-executive directors, centered on outside directors.
This effectiveness evaluation served as an opportunity for all directors to reaffirm their understanding of the responsibilities of the Board of Directors as set forth by the Corporate Governance Guidelines, as well as to discover issues to be addressed in future meetings of the Board of Directors.
Based on the results of this effectiveness evaluation, MCHC will endeavor to further improve the oversight function of the Board of Directors, such as by strengthening the reporting system and properly monitoring the execution of APTSIS 20 that began in fiscal 2016.

Increasing Number of Outside Directors
In fiscal 2016, MCHC welcomed as new outside director Mr. Takayuki Hashimoto, Vice Chairperson of IBM Japan, Ltd., who has served in the past as the president and the chairperson there, adding diversity to the members of the Board of Directors. Along with the President Hitoshi Ochi and the rest of the management team, the Board of Directors will make proper decisions through intense deliberations over medium- and long-term strategies and the business portfolio, with the ultimate aim of realizing KAITEKI and enhancing corporate value.

September 2016
Yoshimitsu Kobayashi
Chairperson

Basic Approach to Corporate Governance

The Company believes that, based on our Group philosophy, “Good Chemistry for Tomorrow—Creating better relationships among people, society, and our plant.”, to contribute to the realization of KAITEKI through all corporate activities as well as to the sustainable development of the society and the Earth, in addition to solving environmental and social issues, is to meet the expectations of shareholders, customers and other stakeholders. The term KAITEKI signifies achieving true sustainability where we create comfort for people as well as for society and the Earth.
To this end, the Company intends to develop a framework that improves both the soundness and efficiency of management, as well as enhance management transparency.
In June, 2015 the Company transitioned to a company with a nominating committee, etc. and has been making efforts to enhance corporate governance by increasing transparency and fairness, strengthening oversight functions and improving agility by accelerating decision-making.

Governance System

MCHC has transitioned to a company with a nominating committee, etc. after receiving approval at the June 2015 General Meeting of Shareholders. This system separates functions for the supervision and execution of business in a bid to enhance management transparency and openness, strengthens management oversight functions, and improves management agility by accelerating decision-making. While management supervision is now undertaken by the Board of Directors and three committees comprised of the Nominating Committee, Audit Committee, and Compensation Committee, corporate executive officers make business decisions and are in charge of business execution.

Roles and Responsibilities

(Board of Directors)

The Board of Directors determines basic management policies, such as medium- to long-term business strategies and annual budgets. As a general rule, corporate executive officers are entrusted with the responsibility of executing operations in accordance with these basic policies, excluding matters that must be legally resolved by the Board of Directors. It primarily supervises the execution of duties by the corporate executive officers.
The Company has appointed directors from inside the company that are well-versed in the group’s wide range of businesses and the three main segments of the Company—performance products, healthcare, and industrial materials, as well as five outside directors — one is a certified public accountant, one is a lawyer, one is experienced in corporate management, one is an expert in socio-economic matters and one is an expert in technology. We aim to factor their diverse opinions into our management decisions and also strengthen our oversight functions. In addition to the outside directors, the Company has chosen three non-executive directors from among those directors appointed from inside the company who are not serving concurrently as an executive officer for the Company and not responsible for the execution of operations at a core business company (Mitsubishi Chemical Corporation., Mitsubishi Tanabe Pharma Corporation., Mitsubishi Plastics, Inc., Mitsubishi Rayon Co., Ltd., Life Science Institute, Inc., and Taiyo Nippon Sanso Corporation). Consequently, the majority of directors on the Board are non-executive directors to ensure that the oversight of corporate executive officers is carried out properly.
That being said, the Articles of Incorporation stipulate that there shall be no more than 20 directors at one time. As of the date of the submission of this report, there are a total of 14 directors (of which two directors are also corporate executive officers), including the five outside directors. Each director services a term of one year. This is to facilitate the establishment of a management structure that can quickly respond to changes in the business environment, and to further clarify the responsibilities and roles of each director.

(Nominating Committee)

The Nominating Committee nominates director candidates and executive officers, and also nominates president candidates for key directly-owned subsidiaries that are not listed companies (Mitsubishi Chemical Corporation., Mitsubishi Plastics, Inc., Mitsubishi Rayon Co., Ltd., and Life Science Institute, Inc.).
An outside director serves as committee chair to enhance the transparency and soundness of the nominating process.

(Audit Committee)

The Audit Committee is responsible for auditing the execution of duties by the corporate executive officers and directors and reviewing the Group’s internal control system. As a general rule, the committee meets once a month. As of the date of the submission of this report, the Audit Committee consists of five members including three outside directors. Together with selecting two full-time members, the Audit Office that performs internal audits and the Internal Control Office that formulates and promotes policies on establishing internal control systems collaborate closely to enhance the audit system administered by the Audit Committee. An inside director who is a full-time member of the Audit Committee serves as the chairman of the committee to ensure the smooth collection of information and sufficient cooperation between divisions.

(Compensation Committee)

The Compensation Committee determines the individual amount of compensation for each director and corporate executive officer at the Company. The committee also determines the individual amount of compensation for the presidents of key directly-owned subsidiaries that are non-listed companies (Mitsubishi Chemical Corporation., Mitsubishi Plastics, Inc.., Mitsubishi Rayon Co., Ltd., and Life Science Institute, Inc.).
An outside director serves as committee chair to enhance transparency and fairness of the decision-making process.

(Corporate Executive officers)

Corporate Executive officers, under the guidance of the President, are in charge of making decisions on business execution and executing business operations, as entrusted to them by the Board of Directors. The Board of Directors determines the division of duties among the corporate executive officers. In addition, the Board of Directors establishes the scope of authority of each executive officer to enhance efficiency, and decisions on the execution of important business operations are approved by the president to ensure that proper decision-making is carried out.

(Management Committee)

The Management Committee was established as an organization to support and assist the President in his decision-making. Important matters related to the management of the Company and the Company Group (important business execution such as investment and financing, compliance, risk management, environment and safety, human rights education and social contributions) are discussed by the Management Committee, after which a decision is made by the President. The Management Committee is comprised of the President, corporate executive officers and the presidents of major subsidiaries. The committee meets about twice each month.
That being said, the non-executive directors can attend the Management Committee at any time to supervise business execution.

Corporate Governance System (as of June 24, 2015)

Transition of Strengthening Corporate Governance

Date Details Objective
June 2006 Introduced Stock-Based Compensation (Stock option) Plans Connected director compensation to share price
June 2013 Election and accession of an outside director Strengthened management oversight
June 2014 Election and accession of a foreign director Improved diversity in directors
June 2015 Election and accession of a female director Improved diversity in directors
Transition to a company with a nominating committee, etc. Enhanced management transparency and fairness, strengthened management oversight functions

Approach to Board Membership

The Board of Directors consists of directors with various backgrounds to strengthen management oversight functions and reflect diverse opinions in business decisions.
MCHC has elected not only internal directors who rose through the ranks with an intimate knowledge of the Group’s wide range of operations and its three business domains comprising Performance Products, Health Care and Industrial Materials, but also four outside directors with experience in corporate management, expertise in social and economic issues as well as science and technology, and accreditations as certified public accountants and attorneys. In addition to the four outside directors, there are three non-executive directors among the internal directors who are not executive officers or in charge of business execution at key operating companies. Accordingly, a majority of the members of the Board of Directors are in non-executive roles, enabling the proper supervision of executive officers.

Reasons for Appointment of Outside Directors

Name Reasons for Appointment Name Reasons for Appointment Attendance at Meetings of the Board of Directors (fiscal 2015)
Takeo Kikkawa Mr. Kikkawa was elected as an outside director as he currently plays appropriate roles as an Outside Director of the Company by utilizing his profound insight into company management from the perspective of business history and his experience as an expert in theories on the energy industry.
In addition, Mr. Kikkawa satisfies our standards for director independence. We thereby designated Mr. Kikkawa as an independent director in accordance with the regulations stipulated by the Tokyo Stock Exchange.
Mr. Kikkawa attended 11 of 10 meetings of the Board of Directors that was held during the fiscal 2015, and provided relevant input that drew on his profound insight on company management from a view of the business history as well as his experience as an energy industry expert.
Taigi Ito Mr. Ito was elected as an outside director as he currently plays appropriate roles as an Outside Director of the Company by making the best of his experience and profound insight as a certified public accountant.
In addition, Mr. Ito satisfies our standards for director independence. We thereby designated Mr. Ito as an independent director in accordance with the regulations stipulated by the Tokyo Stock Exchange.
Mr. Ito attended all 11 meetings of the Board of Directors that was held during the fiscal 2015, and provided relevant input that drew on his experience and profound insight as a certified public accountant.
Kazuhiro Watanabe Mr. Watanabe was elected as an outside director as he currently plays appropriate roles as an Outside Director of the Company by making the best of his experience and profound insight as a prosecutor and lawyer.
In addition, Mr. Watanabe satisfies our standards for director independence. We thereby designated Mr. Watanabe as an independent director in accordance with the regulations stipulated by the Tokyo Stock Exchange.
Mr. Watanabe attended all 11 meetings of the Board of Directors that was held during the fiscal 2015, and provided relevant input that drew on his experience and profound insight as a prosecutor and lawyer.
Hideko Kunii Ms. Kunii was elected as an outside director as she currently plays appropriate roles as an Outside Director of the Company by making the best of her extensive experience in company management and as an expert in the information processing domain, as well as her profound insight in diversity promotion as a member of the Cabinet Office Gender Equality Promotion Joint Meeting.
In addition, Ms. Kunii satisfies our standards for director independence. We thereby designated Ms. Kunii as an independent director in accordance with the regulations stipulated by the Tokyo Stock Exchange.
Ms. Kunii attended all 11 meetings of the Board of Directors that was held during the fiscal 2015, and provided relevant input that drew largely on her profound insight in diversity promotion as well as extensive experience in company management and expertise in the information processing domain.
Takayuki Hashimoto Given Mr. Hashimoto’s extensive experience in corporate management as a president and CEO of a Japanese subsidiary of a global corporation and his profound insight in ICT (information and communication technology), Mr. Hashimoto would contribute to proper decision-making and fair oversight of the Board of Directors of the Company.
In addition, Mr. Hashimoto satisfies our standards for director independence. We thereby designated Mr. Hashimoto as an independent director in accordance with the regulations stipulated by the Tokyo Stock Exchange.

Risk Management

The MCHC Group defines risks as potential events that could, during the course of corporate activities, undermine public trust in or the corporate value of the MCHC Group. We identify, evaluate and analyze risks and prevent materialization of significant risks. We take measures to minimize the personal, economic and social damage arising in case of materialization.

Risk Management System

Under this basic approach to risk management, MCHC has compiled the MCHC Group Risk Management Basic Rule, and has in place a risk management framework covering the whole Group. In line with the basic policy and procedures for risk management at the MCHC Group, major matters relating to risk management are discussed by the Management Committee. Decisions are made by the President of MCHC, who is responsible for the entire Group’s risk management. From time to time, reports on risk status are submitted to the Board of Directors, and decisions are made by the Board of Directors regarding particularly significant issues.
The Internal Control Office serves as the risk management secretariat. The corporate executive officer in charge of the Internal Control Office assists the President, and deals with all kinds of risk management across the board. We take measures to ensure that employees of the MCHC Group follow risk management rules and work to prevent risk materialization at all times in the operations for which they are themselves responsible. In the event of a major incident, they are encouraged to promptly submit reports to the department in charge of risk management through their superior.

Risk Management Process

At the MCHC Group, risks are identified, analyzed and evaluated from the three perspectives, and we take measures for each kind of risk.

(Risks to be identified by individual departments)

Identification of risks is undertaken each year at every company of the Group. It includes consideration of frequency and degree of impact from the personal, economic and public reputational perspectives. Risks revealed in this process are graded according to significance, and appropriate measures are taken by the management of the department responsible.

(Risks of current concern in social situation)

We pre-assume certain risks, such as political and social risks in each country and global warming, while keeping an eye on rapidly changing social trends. We take a range of measures to prepare ourselves for materialization of such risks within the MCHC Group.

(Risks pre-assumed by top management)

With regard to the execution of business and duties under their management, the top management at MCHC indicates the appropriate measures to be taken in their departments to deal with any risk that could have a major impact on Group operations, taking the two categories above into account.

Risk Management Process

Major Risks Facing the MCHC Group

Through the risk management process, MCHC has isolated the following categories of risk as warranting priority measures. After identification of such risks, we take measures to avoid their incidence or to minimize the resulting damage if the risks materialize.

(Compliance violations)

In order to entrench compliance within the Group, MCHC and its operating companies have compiled rules and standards, such as the MCHC Group Charter of Corporate Behavior, published a compliance guidebook, provided education, training and seminars on compliance, performed audits, and operated a compliance hotline. At overseas Group companies as well, we endeavor to strengthen compliance by compiling rules and codes of conduct in accordance with the laws, regulations and social norms of each country.

(Accidents in our facilities and injuries in the workplace)

Each MCHC Group operating site endeavors to prevent facility-related accidents by ensuring the soundness of facilities and equipment and the proper operation through their appropriate maintenance as well as extensive education and training of their operators. If an accident occurs, the Group works to avoid recurrence by analyzing the cause, taking countermeasures, and verifying their effectiveness through inspections or maintenance patrols. Moreover, the Group works to prevent accidents by applying these countermeasures laterally to similar facilities and equipment or operations.

(Information security breaches)

MCHC has formulated an Information Security Policy in order to protect its information systems and assets from internal and external threats, with the aim of maintaining and improving the corporate value. We have established the Information Security Committee according to this policy and charged it with reinforcing the management of information security at our business sites inside and outside Japan. We periodically conduct educational and training sessions for all employees including those overseas on our Information Security Policy to ensure employee awareness and compliance with the policy.

(Overseas business development risks)

As Group companies become more active overseas, we have created the Global Risk Map as a collection of publically available case studies of significant problems and legal violations that have occurred in each country, to prevent lapses in awareness of the serious risks related to the particular laws, regulations and systems of the country in which they do business. We distribute this publication to Group companies overseas. We aim to enhance the content of the publication by increasing the number of countries covered. In addition, we have established a communications system for local companies, the head offices of operating companies, and MCHC to use in the event of disruption in the country, such as political turmoil.

(Natural disasters)

Learning lessons from the Great East Japan Earthquake in 2011, which damaged a number of our business sites and facilities, MCHC has made improvements to its business continuity plan (BCP). In the event that it is impossible to continue operations in Tokyo where the head office of MCHC is located, we have made plans to transfer head office functions to a temporary backup site with the aim of minimizing damage and ensuring business continuity in a disaster situation. We are examining ways to maintain the procurement of raw materials and the responsibilities for supply products by procuring from several suppliers as a part of business continuity planning.

Compliance

The MCHC Group recognizes the word “Compliance” as a broader definition covering corporate ethics and general social norms, not staying at basic legal adherence. We regard compliance as the most important managerial issue to remain a company that earns the trust of the public and we take measures to ensure full compliance awareness.

Compliance Promotion Structure

The Chief Compliance Officer (CCO) of the Group is appointed by the Board of Directors of MCHC. The Internal Control Office supports the CCO, acting as a secretariat dealing with compliance matters on a Group-wide basis. To support Group activities, the secretariat compiles joint education tools, has established hotline systems and arranges training courses for overseas Group companies. Major individual operating companies have set up Compliance Promotion Committees and internal control promotion departments at each company to serve as secretariats. We also aim to ensure compliance to adapt to regional conditions through the regional control companies established in North America, Europe and China. Each major operating company has its own Compliance Promotion Committee and internal control promotion department to serve as the secretariat. They operate hotline systems and arrange training courses and seminars, business audits and compliance perception surveys based on the Group basic compliance regulations. The company that caused compliance violations should report to and consult with its internal control promotion departments and Internal Control Office of MCHC and take corrective actions and measures to prevent recurrence.
* CCO: Chief Compliance Officer