SANKI ENGINEERING CO.,LTD

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Sanki Engineering Corporate Governance Guidelines

Established on December 18, 2015
Revised on October 1, 2017

Chapter 1General Provisions

Article 1Purpose

The Sanki Engineering Corporate Governance Guidelines (hereinafter referred to as the “Guidelines”) set forth the basic idea of Sanki Engineering Co. Ltd. (hereinafter referred to as the “Company”) and Sanki Engineering Group (hereinafter referred to as the “Group”) regarding the Group's corporate governance based on its management philosophy.

Article 2Definition

The corporate governance of the Group is a systematic mechanism and approach in which the Board of Directors supervises the execution of duties by the Chief Executive Officers and strengthens their functions, interacts with stakeholders (such as shareholders, investors, customers, business partners, and the Group's employees), and performs transparent and fair as well as prompt and bold decision-making, in order to achieve sustainable growth and increase the medium- to long-term corporate value.

Article 3Organizational Structure for the Company's Decision-Making

The Company shall adopt a Company with a Board of Company Auditors system with dedicated, full-time auditors as its organizational design. Under this structure, the Company Auditors and the Board of Auditors audit the execution of duties by the directors, the accounting auditors audit the financial statements and other documents, and the Board of Directors makes decisions on material issues.

Article 4Attitude of Implementation

As part of the implementation of corporate governance, the Group shall strive to recognize the importance of corporate social responsibility and to establish a lasting trust relationship with its stakeholders by promoting positive communication and constructive dialogue in good faith.

Article 5Revision and Abolition

These Guidelines shall be revised or abolished by a resolution of the Board of Directors.

Chapter 2Securing of Rights and Equality of Shareholders

Article 6General Meeting of Shareholders

The Company shall strive to develop the following environment in which shareholders can appropriately exercise their rights at the general meeting of shareholders:

  1. 1.By dispatching a notice to call a general meeting of shareholders and disclosing such notice on the Company's website, etc., as early as possible, a reasonable period should be provided for shareholders to review the agenda items for the general meeting of shareholders;
  2. 2.With respect to any votes against a resolution of the general meeting of shareholders, the causes should be analyzed as necessary;
  3. 3.If the Board of Directors is entrusted with decision-making on material issues by the general meeting of shareholders, the corporate governance system should be verified;
  4. 4.If any shareholder who holds shares in the name of a trust bank makes a request to exercise their voting rights, etc., this should be dealt with appropriately;
  5. 5.Consideration should be given to the schedule of the general meeting of shareholders; and
  6. 6.In order for all shareholders, including those shareholders who do not participate in the general meeting of shareholders, to appropriately exercise their voting rights, an environment in which shareholders can exercise their voting rights via the Internet, including the use of an electronic voting rights exercise platform, should be developed, and any notice to call a general meeting of shareholders should be translated into English.
Article 7Securing Equality of Shareholders

The Company shall treat all shareholders equally in accordance with the number of shares held by such shareholders and, in particular, shall strive to disclose information so as not to cause information gaps among shareholders.

Article 8Basic Strategy for Capital Policy

The Company shall stabilize its financial base and raise funds basically through indirect finance. In addition, the Company shall implement capital policies that appropriately balance advance investment in technology development and human resource education, etc., for future growth, financial base stability, and shareholder returns.

Article 9Protection of Rights of Shareholders
  1. (1)When the Company implements policies that affect the rights of shareholders, from the viewpoint of protecting the rights of those shareholders, the necessity and rationality shall be fully examined by the Board of Directors and the Company Auditors, appropriate procedures shall be ensured, and sufficient explanations shall be provided to shareholders.
  2. (2)In the case of a tender offer, the policy of the Board of Directors shall be explained to shareholders.
  3. (3)In cases of transactions between relevant parties, the Board of Directors shall establish appropriate procedures so as not to harm the common interests of the Company and the shareholders.
Article 10Basic Policy for Cross-Shareholdings and Exercise of Voting Rights
  1. (1)The Company shall hold shares of listed companies with the aim of increasing the Company's medium- and long-term corporate value by maintaining and strengthening long-term and stable business relationships or by other methods. The Board of Directors shall verify the objectives of holding these cross-shareholding shares and their economic rationality periodically every year.
  2. (2)With respect to exercising voting rights on the above shares, each agenda item shall be examined closely before a decision is made.

Chapter 3Consideration for Interests of Stakeholders Other Than Shareholders

Article 11Ethical Standards
  1. (1)The Group's executive officers and employees shall always act ethically in compliance with its code of conduct, such as the “Sanki Engineering Group Compliance Declaration,” the “Sanki Engineering Group Code of Conduct and Action Guidelines,” and the “Sanki Engineering Group Conduct Standards.”
  2. (2)The Company shall verify the effectiveness of its code of conduct regularly at the Board of Directors meetings, for example, as to whether an organizational culture where ethical judgments and actions related to business activities can be autonomously performed has actually been developed.
Article 12Relationship with Stakeholders
  1. (1)The Group's executive officers and employees shall, when collaborating with stakeholders, always take into account the interests of stakeholders.
  2. (2)The Group shall not treat any stakeholders who become aware of illegal or unethical behavior of the Group and provide notice to the relevant contact person (including the Company's notification contacts for internal reporting) disadvantageously.
Article 13Sustainability

The Group shall take appropriate measures to address sustainability issues, including social and environmental issues, and the Board of Directors should discuss addressing these issues positively and proactively.

Article 14Diversity

The Group shall promote diversity based on recognition of the fact that the existence of diverse perspectives and values reflecting a variety of experiences, skills, and attributes within the company is a strength in achieving sustainable growth.

Article 15Internal Reporting

The Company shall strives to establish an appropriate framework for internal reporting to protect the confidentiality of information providers and prohibit any disadvantageous treatment thereof by establishing notification contacts for internal reporting both inside and outside the company, and the Board of Directors shall supervise its enforcement.

Chapter 4Appropriate Information Disclosure and Securing of Transparency

Article 16Basic Policy for Information Disclosure

The Company shall disclose information on the Group in a timely and appropriate manner in accordance with the Companies Act and other laws and regulations, and applicable financial instruments exchange rules.

Chapter 5Responsibilities of the Board of Directors, etc.

Article 17Roles of Directors and the Board of Directors
  1. (1)The directors and the Board of Directors shall strive to achieve sustainable growth and increase medium- to long-term corporate value by being mandated by shareholders, realizing efficient and effective corporate governance, making decisions on material issues of the Company, and supervising the execution of duties.
  2. (2)The directors and the Board of Directors shall strive to establish an internal control system, develop a risk management system, and disclose information in a timely and appropriate manner.
  3. (3)The Board of Directors shall supervise the situation as needed regarding the selection of the successor of the Chief Executive Officer.
  4. (4)The Board of Directors shall establish procedures for conflict of interest transactions to deliberate and approve the transactions.
Article 18Policy for Composition of the Board of Directors

The Board of Directors shall be composed of a variety of directors with different backgrounds of expertise and experience, etc., and the number of directors shall be an appropriate number that ensures its most effective and efficient function within the range specified in the articles of incorporation. An opportunity shall be created to periodically review its composition and other matters. In this regard, the Company Auditors shall attend the Board of Directors meetings and, when they deem necessary, state their opinions.

Article 19Policy for Nomination of Director Candidates
  1. (1)As candidates for directors, the Board of Directors shall nominate those persons who have extensive practical experience and knowledge as well as deep insight and high ethics, and who are expected to play a role as director and on the Board of Directors as set forth in Article 17.
  2. (2)As candidates for external directors, the Board of Directors shall nominate those persons who are expected to provide advice from an independent and objective position, in addition to the provisions set forth in the preceding paragraph.
Article 20Role of Company Auditors

The Company Auditors shall strive to ensure appropriate collaboration with stakeholders, achieve sound and sustainable growth while increasing medium- to long-term corporate value, and establish a high-quality corporate governance system worthy of society's trust by playing a supervisory role in collaboration with the Board of Directors and supervising the execution of duties by the directors as a dedicated organization mandated by the shareholders.

Article 21Policy for Nomination of Company Auditor Candidates
  1. (1)The Board of Directors shall, with the prior consent of the Board of Company Auditors, nominate those persons who have deep insight and high ethics and are expected to play the role of Company Auditor under the preceding article as candidates for Company Auditors.
  2. (2)As candidates for external auditors, the Board of Directors shall nominate those persons who are expected to provide advice from an independent and objective position, in addition to the provisions set forth in the preceding paragraph.
  3. (3)The Board of Directors shall strive to appoint at least one (1) person who has appropriate expertise on finance and accounting as a Company Auditor.
Article 22Disclosure of Reasons for Individual Nominations

The Company shall disclose the reasons for the nomination of the directors and the Company Auditors candidates.

Article 23Advisory Committee on Nomination and Remuneration

The Company shall establish the Advisory Committee on Nomination and Remuneration under the Board of Directors, comprising the President, external directors, etc., to nominate candidates for directors and to deliberate on matters, such as the level and system of remuneration.

Article 24Nomination Procedures

When the Company nominates candidates for the Board of Directors, the Advisory Committee on Nomination and Remuneration shall deliberate thereon and submit the results of its deliberation to the Board of Directors. When the Company nominates candidates for Company Auditors, the Board of Directors shall, with the prior consent of the Company Auditors, determine this issue as an agenda item at the general meeting of shareholders.

Article 25Role of External Officers
  1. (1)The external officers shall secure sufficient time for the management of the Company in order to play an important role in verifying and evaluating the management results of the Company from the viewpoint of the common interests of shareholders.
  2. (2)If an external officer concurrently serves as an officer of another company etc., the concurrent service status shall be disclosed.
  3. (3)The independence standards for the external officers shall be as set forth in the Attachment.
Article 26Meetings of External Officers

The Company shall regularly hold a Liaison Meeting of External Officers comprised of external officers to exchange the necessary information and share recognition, and to openly exchange views.

Article 27Management of the Board of Directors

The Company shall strive to foster a climate where open and constructive discussions take place at the Board of Directors meetings and to implement the following for its smooth operation:

  1. 1.Decide on the annual schedule and anticipated agenda items;
  2. 2.Distribute materials for the Board of Directors meetings well in advance of each meeting date;
  3. 3.Set an appropriate number of agenda items and frequency of meetings;
  4. 4.Secure time for deliberations; and
  5. 5.Provide sufficient information in addition to the materials for the Board of Directors meetings.
Article 28Evaluation of the Board of Directors

The Board of Directors shall create the opportunity to verify the agenda deliberation process and identify points for improvement by itself once a year, and analyze and evaluate the effectiveness of the entire Board of Directors, and then make use of these results to improve the operation, etc., of the Board of Directors in the future. In this regard, a summary of the evaluation results shall be disclosed.

Article 29Training of Directors and Company Auditors
  1. (1)At the time the directors and the Company Auditors assume their positions, the Company shall provide them with information on the Company's history, business performance, and future business plans, and information related to laws, finance, and accounting, etc.
  2. (2)After the directors and the Company Auditors take office, the Company shall strive to provide them with training opportunities on the supervision and auditing of management, and other opportunities to acquire knowledge periodically.
Article 30Remuneration of Directors and Company Auditors
  1. (1)The Company shall each year decide on the remuneration for directors and Company Auditors separately depending on their full-time and part-time status, within the limits adopted by the general meeting of shareholders, based on the three (3) components: fixed remuneration, bonus, and stock options, ensuring that the amount is aligned with the long-term interests of shareholders and offers motivation for maximizing corporate value, with due consideration for balancing each of the following elements:
    1. 1. Fixed remuneration:According to rank and scope of responsibilities
    2. 2. Bonus:Portion linked to performance during the period
    3. 3. Stock options:Granted according to rank as a long-term incentive
  2. (2)The elements and procedures for remuneration for directors and Company Auditors depending on their full-time and part-time status are as follows:
  Fixed
remuneration
Bonus Stock
options
Procedure
Full-time Directors Decided by the Board of Directors following deliberation by the Advisory Committee on Nomination and Remuneration
Part-time Directors - -
Full-time Company
Auditors
- Decided by consultation among the Company Auditors
Part-time Company
Auditors
- -
Note:
“○” and “-” mean with elements and without elements, respectively.

Chapter 6Dialogue with Shareholders

Article 31Basic Policy for Dialogue with Shareholders

With respect to dialogue with shareholders, the Board of Directors shall strive to grasp the structure of shareholders, arrange meetings within a reasonable range, and develop a system to create a constructive dialogue.

Supplementary Provisions

The Guidelines shall take effect on October 1, 2017.

(Attachment)

Independence Standards for External Officers

The Company deems that an external director or an external auditor has independence if he/she does not fall under any of the following items at the time of deciding on the agenda item for a nomination to be submitted to the general meeting of shareholders:

  1. 1.A person who considers the Company as a major business partner (Note 1), or if the person is a juridical person, etc. (Note 2), the business executor (Note 3);
  2. 2.The Company's major business partner (Note 1), main lender (Note 4), or if the person is a juridical person, etc. (Note 2), the business executor (Note 3);
  3. 3.A consultant, accounting specialist, or legal expert who has received a large amount of money or other property (Note 5) from the Company, in addition to remuneration for officers;
  4. 4.A person who has fallen under any of the above items 1 to 3 recently (Note 6);
  5. 5.A spouse or relative within the second degree of kinship of a person who falls under any of the following (a) to (d) (except in cases where the kinship relation has been dissolved through divorce or any other similar reason);
    1. (a)A person listed in items 1 to 4 above,
    2. (b)A business executor of a subsidiary of the Company (Note 3),
    3. (c)A non-executive director of a subsidiary of the Company (when designating an external auditor as an independent officer), and
    4. (d)A person who falls under (b) or (c) above, or the Company's business executor (Note 3) recently (Note 6).
  6. 6.A major shareholder of the Company who holds 10% or more of the shares of the Company for three (3) consecutive years or more, recently (Note 6), or if the person is a juridical person, etc. (Note 2), the business executor (Note 3).
(Note 1)
“Major business partner” means, in principle, a person whose transactions with the Company amount to 3% or more of the annual consolidated sales of the Company for three (3) consecutive years or more.
(Note 2)
“Juridical person, etc.” means a juridical person and any other body, such as an association, other than a juridical person.
(Note 3)
“Business executor” means a person who is in a position of an executive director or a division head (a general manager, division manager, or branch manager) out of the employees, or who is in a similar important position thereto.
(Note 4)
“Main lender” means, in principle, a person from whom the Company borrows money and the borrowing balance at the end of each business year is equivalent to 2% or more of the consolidated total assets of the Company at the same point in time for three (3) consecutive years or more.
(Note 5)
“Large amount of money or other property” means an amount of money or other property worth 10 million yen or more per year.
(Note 6)
“Recently” means a period of five (5) years before the time of deciding on agenda items on nominations to be submitted to the general meeting of shareholders.
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