Mitsubishi Chemical HoldingsTHE 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 who has served in the past as the president and the chairperson of IBM Japan, Ltd., 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- 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 Remuneration for Directors and Corporate Executive Officers

The remuneration system for directors, and that for corporate executive officers shall be different. Remuneration 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.

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