Mitsubishi Chemical HoldingsTHE KAITEKI COMPANY

Corporate Governance

Message from the Chairperson

Aiming for realization of sustainable society and enhancement of corporate value

Review of Fiscal 2016
MCHC transitioned to a company with a nominating committee, etc., in June 2015. Recognizing supervision of management as the central function of the Board of Directors, MCHC has invited outside directors with extensive experience and high level of expertise in different fields to bring their independent and diverse viewpoints to the Board of Directors so as to improve its effectiveness. In fiscal 2016, Mr. Takayuki Hashimoto, who had served as the President and the Chairperson at IBM Japan, Ltd. (now Honorary Executive Advisor of IBM Japan, Ltd.) was newly appointed as an outside director of the Board of MCHC. With the addition of Mr. Hashimoto, it seems that discussions at the Board of Directors have been further activated and that it has created a stronger sense of tension on the management execution side.
In this situation, the Board of Directors met 10 times in fiscal 2016, holding lively discussions on issues such as withdrawal from unprofitable businesses and investment in growth overseas.

Initiatives for Further Improvement
As a general rule, a company with a nominating committee, etc. delegates decisions on individual business execution to the management execution side to a large extent while the Board of Directors will discuss corporate strategies for the sustainable enhancement of corporate value. For MCHC’s Board of Directors, how to improve discussions on the medium- to long-term direction of management was an important issue together with strengthening the management supervision function. Regarding this issue, the Board of Directors repeatedly discussed with the management execution side and in April 2017, MCHC changed the decision-making process for the execution of important businesses. We newly established a decision-making body based on the consensus of the Corporate Executive Officers (Corporate Executive Officers Committee), and by seeking to strengthen the Corporate Strategy Division, MCHC also developed a structure for examining medium- to long term business strategies from a holding company perspective. The Board of Directors also partially reviewed its structure and in June welcomed new Corporate Executive Officers in charge of corporate strategy, corporate management & finance, and compliance & governance. As a result of these initiatives, discussions at the Board of Directors are now livelier and more in-depth, also covering the proceedings and results of discussions at the Corporate Executive Officers Committee, and information asymmetry is also starting to improve. Moving forward, we will examine efficient and effective operation of the Board of Directors, including utilizing ICT and holding discussions based on quantified information, to further enhance the timely provision of appropriate information especially to outside directors.

Aiming for Realization of KAITEKI
In the future, the MCHC Group will also need to utilize technical innovations such as the IoT and AI in our manufacturing technology, and we need to establish business strategies for the realization of a new sustainable society with a speed and impact never seen before. The Board of Directors will continue to hold thoroughgoing discussions with President Ochi and others on the management execution side, and will support decisive decision-making by senior management to achieve further enhancement of corporate value.

September 2017
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- 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, industrial materials, and healthcare, 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., 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 June 27, 2017, there are a total of 13 directors (of which four 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., 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 June 27, 2017, 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. 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)

The corporate executive officers decide the execution based on basic management policies (medium term business strategies and annual budgets, etc.).
Regarding important matters in the management of the Group, deliberations are made at the corporate executive officers, which is the council by the corporate executive officers. In addition to determining the division of duties of each corporate executive officer for other matters, we make it appropriate and efficient decision-making by clarifying the authority to decide the corporate executive officer in charge.

(Corporate Executive Officers Committee)

The Corporate Executive Officers Committee is composed of all corporate executive officers, deliberates and decides on important matters concerning the management of the Company and the Company group, and also monitors the Group's business based on the medium-term management plan, annual budget etc.
That being said, the Member of the Audit Committee and Business Companies’ President and CEO can attend the Corporate Executive Officers Committee at any time to express freely.

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

Standards for Independence of Outside Directors

The Company shall elect those as Outside Directors who do not fall under any of the following and are capable of overseeing the Company’s management from a fair and neutral standpoint, free of a conflict of interest with general shareholders.

1.Related party of the Company
(1)Person engaged in execution of operation of the MCHC Group (Executive Director, Corporate Executive Officer, Executive Officer, Manager, employee, partner, etc. The same shall apply hereafter.)
(2)Person who was engaged in execution of operation of the MCHC Group over the last 10 years

2.Major shareholder
A person who directly or indirectly holds 10% or more of MCHC’s total voting rights or a person engaged in execution of operation of a company that directly or indirectly holds 10% or more of MCHC’s total voting rights

3.Major business partner
(1)A person engaged in execution of operation of a company*1 whose major business partner includes MCHC and Group Operating Companies (Mitsubishi Chemical Corporation, Mitsubishi Tanabe Pharma Corporation, Life Science Institute, Inc., and Taiyo Nippon Sanso Corporation. The same shall apply hereafter.)
(2)A person engaged in execution of operation of a major business partner*2 of MCHC and Group Operating Companies

4.Accounting Auditor
Accounting Auditor of the MCHC Group or an employee thereof

5.Transaction as an individual
A person who receives money and other financial benefits of 10 million yen or more per year from any of MCHC and Group Operating Companies

6.Donation
A person who receives a donation or financial assistance of 10 million yen or more per year from any of MCHC and Group Operating Companies or a person engaged in execution of operation of a company that receives a donation or financial assistance of 10 million yen or more per year from any of MCHC and Group Operating Companies

7.Reciprocal assumption of the position of Director
A person engaged in execution of operation of a company that has elected any of the Directors and employees of the MCHC Group as its Director

8.Close relatives, etc.
(1)Close relatives, etc. of a person engaged in execution of important operations of the MCHC Group (spouse, relatives within the second degree of relationship or any person who shares the same livelihood. The same shall apply hereafter.)
(2)Close relatives, etc. of any person who meets the definition of items 3 through 7 above
(3)A person who met the definition of items 3 through 7 above over the last three years

*1 if the said business partner receives from MCHC and Group Operating Companies an amount equivalent to 2% or more of its annual consolidated net sales in the latest fiscal year, this company shall be considered as the one whose major business partner includes MCHC.

*2 If MCHC and Group Operating Companies receives from the said business partner an amount equivalent to 2% or more of MCHC’s annual consolidated net sales in the latest fiscal year or the said business partner loans to the MCHC Group an amount equivalent to 2% or more of MCHC’s total consolidated assets, the said business partner shall be considered as a major business partner of MCHC.

Reasons for Appointment of Outside Directors

Name Reasons for Appointment
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.
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.
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.
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.
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.

Activities by Outside Directors

Name Status of activities Attendance
Takeo Kikkawa During the Board of Directors meetings, he 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. Serving as the chair of the Nominating Committee, he fulfilled his assigned duties by presiding over the committee meetings and reporting to the Board of Directors on meeting outcomes. As a member of the Compensation Committee, he provided relevant input to the committee. Board of Directors meetings
9/10 (90%)
Nominating Committee meetings
8/8 (100%)
Compensation Committee meetings
6/6 (100%)
Taigi Ito During the Board of Directors meetings, he provided relevant input that drew on his experience and profound insight as a certified public accountant. As a member of the Audit Committee, he developed audit plans, conducted interviews to ascertain implementation status and results of audits, and contributed relevant input. Serving as the chair of the Compensation Committee, he fulfilled his assigned duties by presiding over the committee meetings and reporting to the Board of Directors on meeting outcomes. Board of Directors meetings
10/10 (100%)
Audit Committee meetings
13/13 (100%)
Compensation Committee meetings
6/6 (100%)
Kazuhiro Watanabe During the Board of Directors meetings, he provided relevant input that drew on his experience and profound insight as a prosecutor and lawyer. As a member of the Nominating Committee and the Compensation Committee, he provided relevant input to the committees. As a member of the Audit Committee, he developed audit plans, conducted interviews to ascertain implementation status and results of audits, and contributed relevant input. Board of Directors meetings
10/10 (100%)
Nominating Committee meetings
2/2 (100%)
Audit Committee meetings
13/13 (100%)
Compensation Committee meetings
6/6 (100%)
Hideko Kunii During the Board of Directors meetings, she provided relevant input that drew largely on her profound insight in diversity promotion, etc. as well as experiences as a company manager and an information processing domain expert. As a member of the Nominating Committee, she provided relevant input to the committee. As a member of the Audit Committee, she developed audit plans, conducted interviews to ascertain implementation status and results of audits, and contributed relevant input. Board of Directors meetings
10/10 (100%)
Nominating Committee meetings
8/8 (100%)
Audit Committee meetings
13/13 (100%)
Takayuki Hashimoto During Board of Directors meetings, he provided relevant inputs that drew on his extensive experience in company management and profound insights into information communication technology (ICT).
As a member of the Nominating Committee, he provided relevant input to the committee.
Board of Directors meetings
6/7 (85.7%)
Nominating Committee meetings
4/6 (66.7%)

Policy on Deciding Compensation for senior management

The Compensation system for directors, and that for corporate executive officers shall be different. Compensation is determined by the Compensation Committee based on the following concepts:

Aggregate Amount of Remuneration of Company’s Officers

Category Remuneration
No. of Persons Amount (in million yen)
Inside Directors 8 205
Outside Directors 5 60
Corporate Executive Officers 8 297
Sum Total 21 562

Notes:
1. Directors who also serve as Corporate Executive Officers are remunerated for their services as Corporate Executive Officers as Policy on Deciding Remuneration for Directors and Corporate Executive Officers.
2. The above-stated total amounts of remuneration paid to Inside Directors include performance remuneration of ¥6 million utilizing Stock Options. This remuneration was paid to the Inside Director who served as Corporate Executive Officer in the previous fiscal year as performance remuneration at the time of standing as a Corporate Executive Officer.
3. The above-stated total amounts of remuneration paid to Corporate Executive Officers include performance remuneration of ¥29 million utilizing Stock Options.
4. In addition to the above remuneration paid to Inside Directors, and Corporate Executive Officers, ¥341 million, and ¥169 million of remuneration were respectively paid by MCHC’s subsidiaries to Inside Directors, and Corporate Executive Officers who concurrently served as executive officers of the said subsidiaries.
5. The above-stated amounts of remuneration paid to Outside Directors include ¥60 million paid to five Outside Directors as well as ¥11 million paid by MCHC subsidiaries, including MCC and MPI, to Outside Directors who also serve as Corporate Auditors of these subsidiaries.