Governance

• Corporate Governance
• Risk Management
• Information security
• Compliance

Corporate Governance

Basic approach

The Aichi Steel Group believes in the importance of realizing a sustainable society through business activities in order to achieve sustainable growth and improve medium- to long-term corporate value. Based on this belief, we work to enhance corporate governance so that we can manage our businesses with a high level of fairness, transparency, and efficiency in accordance with our vision, and build strong relationships with our shareholders, customers, and all other stakeholders.

Compliance with the Corporate Governance Code

We implement all principles of the Corporate Governance Code and detail our actions in the Corporate Governance Report that we submit to the Tokyo Stock Exchange. Aichi Steel's Corporate Governance Reports are available on the Tokyo Stock Exchange website.

Changes in the corporate governance system

Corporate governance system

Aichi Steel uses an Audit & Supervisory Board Member system to enhance the supervisory function of the Board of Directors and improve the effectiveness of business execution of the Managing Executive Officers and Executive Officers. To further facilitate accurate, prompt, and fair decision-making, we also introduced a management system in June 2018 with at least one-third of the Board of Directors being independent outside Directors. The Officer Remuneration and Nomination Committee is in charge of nomination and remuneration of Directors and Managing Executive Officers. With a majority of members being independent outside Directors and the chairman also being an independent outside Director, this committee helps to improve independence and objectivity by considering and discussing these matters before presenting their decisions to the Board of Directors.

Board of Directors

Comprising six Directors, which include two independent outside Directors, the Board of Directors make decisions concerning important matters for management of Aichi Steel, and supervises business execution.

Audit & Supervisory Board

Comprising four Audit & Supervisory Board Members, which includes two outside Audit & Supervisory Board Members, the Audit & Supervisory Board audits lawfulness and appropriateness of the Board of Directors in execution of their duties. Where necessary, it also liaises with accounting auditors and internal audit departments to audit the state of the Internal Control System.

Officer Remuneration and Nomination Committee

The Officer Remuneration and Nomination Committee discusses and responds to inquiries from the Board of Directors in relation to the following matters.

• Officer remuneration: Basic policies related to the remuneration system and remuneration decisions, the remuneration structure, payment levels for each position, and individual remuneration amounts, etc.
• Officer appointments: Basic policies related to the officer system and structure, proposed appointments and dismissals of the Board of Directors and members of the Audit & Supervisory Board, and succession plans, etc.

Directors and Audit & Supervisory Board Members

Support system for outside officers

We are working to improve the efficiency of our Board of Directors by having relevant departments provide explanations of agenda items to outside officers prior to discussion. Our aim is to eliminate differences in access to information compared to internal officers, and to maximize performance from an independent and objective perspective. We also provide opportunities for outside Directors to attend meetings of the Audit & Supervisory Board to not only actively provide information, including explanations of management issues, but to energize discussions and communication between outside officers as well.

Audit and supervisory roles of management

Four member of the Audit & Supervisory Board (two Audit & Supervisory Board Members and two outside Audit & Supervisory Board Members) make use of dedicated members of staff to supervise the Board of Directors in execution of their duties and to audit business and financial performance of Aichi Steel and its subsidiaries. In addition to attending meetings of the Board of Directors and other important meetings, Audit & Supervisory Board Members audit the execution of business by the Board of Directors, and provide oversight of management, through such things as communication and information sharing with internal audit departments and accounting auditors.

Business execution structure

At Aichi Steel, we separate the functions of the Board of Directors, which supervises management, and the officers, who are responsible for business execution. Managing Executive Officers fulfill the roles of General Managers and Presidents of each Headquarters and Company, and support the Aichi Steel president from a companywide perspective. Executive Officers lead frontline business practices as officers, and are responsible for executing business functions by making prompt decisions with a sense of urgency.

Board of Directors effectiveness evaluation

We interview and survey all members of the Board of Directors on topics such as operation of the Board of Directors, matters discussed by the Board of Directors, the decision process, and support for outside officers. We are working to improve effectiveness by reporting the results of our evaluations to the Board of Directors, and sharing issues and matters that need improvement. In fiscal 2021, we reported that the Board of Directors as a whole operates effectively, but we also identified the following issues and solutions.

Policies and procedures for achieving balance and diversity in the Board of Directors

To enable accurate and prompt decision-making and appropriate risk management that delivers sustainable growth and improved medium- to long-term corporate value, our Board of Directors is composed of members with expertise in all business and function areas who can also achieve a balance between knowledge, experience, skills, and diversity. We take particular care to appoint outside officers, with management experience at other companies, who are expected to supervise management at Aichi Steel.

Procedure for appointment of Directors and Audit & Supervisory Board Members

1. The Officer Remuneration and Nomination Committee (voluntary committee with a majority of members being independent outside Directors and the chairman also being an independent outside Director) regularly and as required evaluates and carefully considers experience, knowledge, performance and other factors, and then reports its nomination candidates to the Board of Directors.
2. The Board of Directors makes tentative decisions on nomination candidates with reference to the reports of the Officer Remuneration and Nomination Committee, and then makes final decisions through resolutions at general meetings of shareholders (and after prior approval of the Audit & Supervisory Board in the case of nominations for members of the Audit & Supervisory Board).

Skill matrix for Directors and Managing Executive Officers

Officer Remuneration

Basic approach

The officer remuneration system was designed according to the following policies.

1. Remuneration for each Director shall be in accordance with the roles and responsibilities required of him or her.
2. Remuneration shall be consistent with Aichi Steel business strategies and shall encourage Directors to work toward sustainable improvement of corporate value.
3. Remuneration shall motivate officers to have an even greater sense of responsibility as a member of management and to promote management from the same perspective as shareholders.
4. Remuneration shall be set at a level that takes into account the economic environment, market trends, and payment levels of other companies.
5. The remuneration system decision process shall be objective and highly transparent.

Decision processes

Established as an advisory body to the Board of Directors, the voluntary Officer Remuneration and Nomination Committee has a majority of members being independent outside Directors and the chairman also being an independent outside Director. The committee considers remuneration and other systems and levels, individual levels of remuneration, and other factors, and then responds to the Board of Directors. The Board of Directors makes final decisions with reference to the reports of the Officer Remuneration and Nomination Committee. From the perspective of maintaining independence, remuneration for outside Directors is at a fixed rate. Monthly payments of this fixed remuneration are determined at a level that takes into account the economic environment, market trends, and payment levels of other companies.

System

Remuneration and other payments to members of the Board of Directors and Audit & Supervisory Board

(Note)

1. Performance-based remuneration includes bonus amounts determined by resolution at the meeting of the Board of Directors on May 16, 2023.
2. Non-monetary remuneration includes amounts related to restricted stock granted to Directors (excluding outside Directors) and expensed during the current fiscal year.
3. The above includes one Director who retired at the close of the 118th Ordinary General Meeting of Shareholders held on June 22, 2022.

Cross shareholdings

Basic approach

Cooperative relationships with a range of companies are essential for ensuring continued growth in a rapidly changing business environment. For this reason, we engage in cross holdings with other companies, but only if we deem them to be effective in improving corporate value from a medium-to long-term perspective in light of our business strategy, future relationships, and other factors.

Verification of cross shareholding suitability

At the annual meeting of the Board of Directors, we make comprehensive assessments of the rationality of each cross shareholding based on qualitative analysis (including trading status and business-level collaborations) and quantitative analysis (whether dividends, business profits and other factors exceed our weighted average cost of capital). If the shareholding is not deemed to be suitable, we decide on what course of action to take, including disposing of the shares.

Standard for exercising voting rights

We exercise our voting rights from various perspectives, including whether the decision would lead to improved shareholder profits over the medium- to long-term while fully respecting the management policy, business strategies and other decisions of the companies in which we invest. When exercising our voting rights, we make decisions on individual agenda items after confirming business performance, governance, and whether any capital policy would represent a conflict of interest with us, or would change or dilute our shareholdings.

Changes in volume of cross shareholdings

Status of cross shareholdings

The above stock addition, which increased the number of shares held, was necessary for maintaining and improving the corporate value of Aichi Steel over the medium- to long-term.

Risk Management

Basic approach

Business environments are becoming increasingly diverse and are experiencing major changes, including climate change, resource depletion, tension in international affairs, large-scale disasters and spread of the pandemic, supply chain disruptions and other issues impacting business activities, and instability of society due to growing divides. These social and environmental challenges are having a severe impact on companies' value creation and business models. Such conditions have made risk management one of the most important challenges for management, so we are working to minimize risks and both enrich and enhance risk management. Specifically, we classify threats to business management as either "risks" (matters yet to materialize) or "crises" (emergencies that have materialized). We then focus on preventive measures that eliminate risks before they become crises, and on prompt and accurate initial and recovery responses that minimize damage in the event of a crisis occurring.

Promotion framework

In line with our risk management rules, the General Affairs Officer is responsible for risk management and for promoting risk management across the company. In the event of a crisis occurring, a companywide emergency control headquarters is established and a system is established to deliver a crisis response on a companywide basis.

(Example: Framework for reviewing earthquake preparedness)

Annual policy and example of initiatives

Twice a year, at the midpoint and at the end of the fiscal year, the Corporate Planning Committee discusses and approves the risk management progress review, annual policy, and approach going forward. The fiscal 2022 policy is to focus on improving the company's business continuity plans in light of issues such as the increasing seriousness of climate change and disruptions in supply chains.

1. Risk map overhaul
   During the annual overhaul of Aichi Steel's companywide risk map (matrix of priorities and impacts on management), all risk factors on the risk map were checked and risk measures were largely confirmed to have been taken.
2. Flood control measures for super typhoons, etc.
   One issue identified during the risk map overhaul was flood prevention for buildings and equipment, which was considered as a measure against storm surges from super typhoons on the scale of Typhoon Vera (Isewan Typhoon) and heavy rains from linear rain bands.
3. Emergency drills
   If an earthquake were to occur in the Nankai Trough, it is predicted that the Tokai Region, where Aichi Steel's manufacturing sites are concentrated, would be impacted enormously. To prepare for such a situation, we conduct companywide evacuation drills twice a year, hold nighttime drills, and have meetings to confirm procedures for evacuating production lines, with a focus on initial response measures to minimize damage. We also conduct simulations once a year, with the companywide emergency control headquarters controlling everything from the initial earthquake through to confirming the status of damage, and formulating a recovery plan. In fiscal 2022, we conducted our first firefighting training in collaboration with the Tokai City Fire Department, from initial efforts to extinguish a fire to use of fire hoses, as part of efforts to strengthen our disaster preparedness.

Information security

Basic approach

In addition to holding important information assets, including entrusted customer and supplier information and proprietary trade secrets, Aichi Steel has been adopting remote operations and networking factory equipment over recent years. We are implementing information security measures in recognition that stability of product supply is a company responsibility and an important management issue. We are doing this by protecting information assets from cyberattacks and other threats, data leaks, and other issues that have been increasing on a yearly basis, and by maintaining continuity of normal business activities.

Promotion framework

We have established a groupwide system, based on the All Toyota Security Guidelines (ATSG) shared within the Toyota Group and led by the Chief Information Security Officer (CISO), for maintaining and improving information security on a systematic and ongoing basis. We are also working to ensure the same level of security can be maintained on a global level. The CISO oversees all information security and information asset protection for the group as a whole, while the Security Management, Office Automation and Business System Security, and Plant System Security organizations are in charge of planning, promotion, auditing, and support. Twice a year, the Board of Directors receives progress, issue, and other reports from the CISO as part of its supervisory function.

Security Management

To prevent leakages of trade secrets and personal information, we have established rules regarding the procedures for handling documents and data, sending and receipt of email, and management standards and procedures for computers and peripheral devices.

Cybersecurity

We have adopted a range of security systems and use the monitoring services of specialized security organizations to enable detection, defense, rapid response to incidents and accidents, and other measures against cyberattacks on our networks, infection by computer viruses, and other problems. With a recent increase in the threat of cyberattacks on factory equipment, we are taking a number of measures such as establishing dedicated security policies for our plants and strengthening physical measures.

Auditing and education

To maintain and improve security, each of our worksites does a self-assessment once a year using a confidentiality management audit sheet to ascertain the state of their confidentiality management. Depending on the result of that assessment, the department responsible for managing confidential information carries out an onsite inspection to audit the site and provide guidance. We also conduct local inspections of group companies and provide ongoing support for ATSG-based measures. To improve the IT literacy of employees and raise their awareness, we regularly provide and share the latest information at the Workplace Representative Liaison Meeting, and provide training about suspicious emails, e-learning opportunities and other education to all employees.

Compliance

Basic approach

Based on the belief that commitment to compliance is the basis and the foundation for a company's continued existence, we not only follow the Aichi Steel Group Action Guidelines and comply with laws and regulations, but we also comply with social norms and decency, and internal company rules. For this reason, we strive to raise awareness of compliance, to prevent misconduct, and to fulfill the social responsibilities of the company.

Promotion framework

We aim to be a trusted company through the protection of human rights and compliance with laws and regulations, and by respecting public decency. o enhance the overall compliance of our Group, the Corporate Planning Committee?headed by the Corporate Planning Headquarters General Manager?sets and reviews compliance policies on a regular basis.

Specific initiatives

Education and awareness activities

The Compliance Liaison Meeting, which comprises the people in charge of compliance in each department, meet once each quarter. The General Affairs Division and each department share information, including revisions to laws and regulations and points of concern regarding legal compliance, with the rest of the company. Other measures to prevent violations of laws and regulations include "Compliance Close Call" (analysis of events in daily operations that could lead to violations of laws and regulations) awareness activities conducted by all employees, and compliance education for promotees and others through job level-based training. In addition to education on what not to do, which has been the norm until now, we are also introducing "ethical' compliance education from fiscal 2021 to encourage employees to act with honor and pride as members of the Toyota Group with its long history.

Awareness surveys

In fiscal 2021, we conducted our first compliance survey of all employees to understand the current state of compliance and any related issues. While we found a generally high level of compliance awareness among employees and workplaces, we did identify some issues such as the need for greater knowledge of laws and regulations. Going forward, we will continue making improvements through regular awareness surveys and related measures.

Whistle-blowing system

We have established the Aichi Steel Group Hotline, our internal whistle-blowing system, to promote early detection of violations of laws and regulations, and misconduct, within the company and to self-govern through appropriate measures. Whistleblower protections and operational matters are defined in the Code of Corporate Ethics, and are revised in line with amendments of the Whistleblower Protection Act. In fiscal 2021, a total of 13 reports were received. The Audit & Supervisory Board Members and General Affairs Division followed them up through information sharing and fact-finding activities, and took corrective and disciplinary action where required.