Overview of INNOTECH Corporate Governance Scheme and Reason for Adopting the Relevant Corporate Governance Scheme

Overview of INNOTECH Corporate Governance Scheme

INNOTECH transferred from a company with the Audit & Supervisory Board to a company with the Audit & Supervisory Committee on June 23, 2023 by the resolution of the 37th Annual General Meeting of Shareholders held on the same date to partially amend the Articles of Incorporation.
The objectives of this transfer were that (i) by adding the Audit & Supervisory Committee Members, who are in charge of audit of execution of duties by Directors, to the members of the Board of Directors, INNOTECH believes that it can reinforce the supervisory function of the Board of Directors and further strengthen its monitoring mechanism, thus enhance the quality of its corporate governance, (ii) by enabling the Board of Directors to delegate the decision making on a wide range of important business operations to the designated Director, the supervisory functions of management and execution of business are segregated, the speed of managerial decision-making is accelerated, and its corporate value will become higher.

In addition, INNOTECH has adopted the Executive Officer System to reinforce execution of business and improve its corporate governance by the resolution of the 37th Annual General Meeting of Shareholders to partially amend the Articles of Incorporation to establish such system. INNOTECH has 5 Directors (one of them is a female director) who are appointed and in order to clarify the responsibility and flexibly to cope with the changes of the management environment, their term of service is one year (the term of Directors who are Audit & Supervisory Committee Members is two years). Majority of the members, who are 3 out of 5, are Outside Directors. The Board Members are, Nobuyuki Otsuka as the President and Representative Director, Yoshinori Tanahashi as the Senior Managing Executive Officer and Representative Director, Ichiro Anjo as the chairman of the Board of Directors, and Kimito Nakae and Shino Hirose who are Outside Directors. 3 Audit & Supervisory Committee Members (one of them is a female member) are appointed at INNOTECH and by having three of them from outside the company, INNOTECH believes that audits are conducted independently enough. The Audit & Supervisory Committee Members are Outside Directors, Kimito Nakae (Chairman), Ichiro Anjo and Shino Hirose.

The Advisory Committee whose majority of members consist of the Independent Outside Directors is established as a voluntary advisory body to the Board of Directors to provide advice and recommendations with respect to election and dismissal of Directors and Executive Officers and remuneration of such Directors and Executive Officers, thus strengthens the independence, objectiveness and the accountability of the function of the Board of Directors. The members of the Advisory Committee are the Independent Outside Directors Shino Hirose (Chairperson), Ichiro Anjo, Kimito Nakae, and the President and Representative Director Nobuyuki Otsuka.

Below is the chart showing INNOTECH corporate governance scheme and how it functions;

Reason for Adopting the Relevant Corporate Governance Scheme

INNOTECH has adopted the current corporate governance scheme since June 23, 2023 with a belief that it will enhance the quality of its corporate governance and increase its corporate value as the company accelerates the speed of decision-making and execution of work by delegating authority of the Board of Directors to Directors and reinforce the supervisory function on management through exercising voting right at the Board Meetings by the Audit & Supervisory Committee Members, who are in charge of audit of execution of duties by Directors.

INNOTECH Officers

Outside Officers

As of June 23, 2023, the number of Outside Directors at INNOTECH is 3, and all of them are Audit & Supervisory Committee Members. None of these Outside Directors have any special interest relationship with the company.

Outside Director Ichiro Anjo supervises and provides effective advices from an independent perspective to improve management and administration of the Company by taking advantage of his many years of experience and deep insight in the semiconductor business. Ichiro Anjo is a president of Jisso Partners, Inc. INNOTECH believes there is no special interest with them.

Outside Director Kimito Nakae has many years of experience and specialist expertise in the administrative organizations and the financial industry, and therefore is assigned as an Outside Director, with the expectation that he is able to supervise and provide effective advices from a broad range of view to improve management and administration of the Company.
Kimito Nakae is the Outside Auditor of Daiwa Securities Co., Ltd. INNOTECH has IR-related transactions with the parent company of Daiwa Securities Co., Ltd., which is Daiwa Securities Group, Inc. However, the transaction amount is insignificant and therefore, INNOTECH believes that there is no materiality that would create a special relationship from the standpoint of the company’s sales volume. Also, Kimito Nakae concurrently holds a post of the Auditor at the Tokyo Foundation For Policy Research, which is a public interest incorporated foundation, and INNOTECH has no special relationship with the Foundation.

In addition to a wealth of experience in the areas of corporate law and compliance as an attorney, Outside Director Shino Hirose has a broad range of expertise in international businesses and corporate activities. Therefore, she is assigned as an Outside Director, with the expectation that such highly-specialized experience and perspectives are utilized in the overall management of the Company.
Shino Hirose is a partner of Abe/Ikubo/Katayama Law Office and works for other organizations. INNOTECH believes there is no special interest with such parties.

INNOTECH determines that Outside Directors are independent when they do not contradict with any of the requirements with respect to Outside Directors provided by the Companies Act of Japan, independence criteria provided by the Tokyo Stock Exchange, as well as any of the following items provided by INNOTECH;

・He or she is the shareholder with more than 10 % of voting rights of INNOTECH or its group companies, or has experience in working in such shareholders’ organization.

・He or she has experience in working at major business counterparts, major lenders, or lead managing security companies of INNOTECH or its group companies in the past 5 business years (“A major business counterpart” shall mean a company whose transaction amount with INNOTECH or its group companies exceeds more than 2 % of the consolidated annual sales amount of INNOTECH, its group companies, or such company. “A major lender” shall mean a company whose loan amount to INNOTECH or its group companies is more than 2% of the consolidated total assets of INNOTECH, its group companies, or such company).

・He or she has received a large sum of legal counsel fee, auditing fee, consulting fee or alike from INNOTECH or its group companies in the past 5 business years other than the Corporate Officers’ remuneration from INNOTECH or its group companies or has experience in working in such company which received such a large sum of fees (“a large sum” means annual 50 million yen or more).

・He or she belongs to an entity which received more than a certain cumulative amount of financial contribution from INNOTECH or its group companies (“a certain cumulative amount” shall mean 20 million yen or more).

・He or she has the second-degree familial relation or closer with those or is a relative who lives together with those defined in the above items.

・He or she has served as Director of INNOTECH for longer than a period of 10 years in aggregate.

The Company, based on the provisions of the Tokyo Stock Exchange, has reported Ichiro Anjo, Kimito Nakae, and Shino Hirose as independent officers.

Linkage among the supervision by Outside Directors and the internal audits, audits by the Audit & Supervisory Committee and the accounting audits, and relationship with the Internal Control Department

All 3 Outside Directors are the members of the Audit & Supervisory Committee. Outside Directors regularly meet to exchange opinions and information with the Internal Audit Office and the Accounting Auditors, or attend audits as necessary, in order to improve the reliability of financial reporting. In addition, Outside Directors regularly receive reporting on the operation status of internal control at the Board Meeting to share and understand relevant information.

Evaluation on the Effectiveness of the Board of Directors

INNOTECH has started its analysis and evaluation on the Effectiveness of the Board of Directors and continues to disclose such analysis and evaluation results since FY2015 (ending March 2016). During FY2022 (ending March 2023), INNOTECH conducted self-evaluation on the Effectiveness of the Board of Directors with all the Directors and the Audit & Supervisory Board Members as follows. This fiscal year, INNOTECH outsourced the creation and distribution of the questionnaire to a third party in order to obtain new objective viewpoints.

Officers’ Remuneration

Matters related to the Policy to Determine Amount or Calculation Method of the Officers’ Remuneration

INNOTECH resolved to change its Articles of Incorporation to become a company with an Audit & Supervisory Committee and to introduce the Executive Officer System at the General Meeting of Shareholders held on June 23, 2023, and INNOTECH transferred to a company with an Audit & Supervisory Committee on the same date. INNOTECH resolved the company policy to determine the content of individual compensations of the Directors at the Board Meeting. Prior to the resolution, the Board of Directors consulted with the Advisory Committee, which was established as a voluntary advisory body to the Board of Directors, whose majority of members consist of the Independent Outside Directors and whose commissioner is one of the Independent Outside Directors. The Advisory Committee advised the Board of Directors that the policy was appropriate.
The policy is as follows;

Basic Policy

• Remuneration structure depends on a role and the duty of each Director.
• Remuneration works as an appropriate incentive to enhance business performance and corporate value.
• Remuneration structure contributes to enhance corporate value for mid- term and long-term, and make directors share a profit-based awareness from the perspective of stockholders.
• Transparency in decision-making processes, objectiveness and fairness of remuneration standards are ensured.
• Remuneration structure and standards are reviewed and updated based on the economic and social conditions and the business environment of INNOTECH Group as appropriate.

Remuneration paid to the Directors consists of “Monthly Compensation” as fixed compensation, “Performance-based Compensation” which is linked to short-term business performance, and “Restricted Stock Compensation” as mid-term and long-term incentives. Remuneration for Outside Directors and Directors who are Audit & Supervisory Committee Members, is “Monthly Compensation” only, taking their role to supervise and provide advices on management into consideration.

The Advisory Committee deliberates the appropriateness and the fairness of total remuneration amount and individual compensation amount of “Monthly Compensation” and “Restricted Stock Compensation” paid to Directors including the President and Representative Director (excluding Outside Directors and Directors who are Audit & Supervisory Committee Members, hereinafter the same shall apply), based on the resolution made by the General Meeting of Shareholders as well as the standards prescribed by the “Corporate Officers’ Remuneration Rules” and the performance evaluation, and reports to the Board of Directors. Based on the report from the Advisory Committee, the Board of Directors determines the individual compensation amount.

For “Performance-based Compensation” paid to Directors including the President and Representative Director and Executive Officers, the Board of Directors resolved the maximum total payment amount and that the individual compensation amount would be up to the sole discretion of the President and Representative Director, Nobuyuki Otsuka. The authority delegated to the President and Representative Director was to evaluate and distribute Performance-based Compensation paid to each Director, taking contribution level of each business area where he is in charge to the consolidated operating profit, achievement level of the original business plan made in the beginning of the fiscal year for the said business area, results of ESG/SDGs-related activities, and his position and duty into account. The reason why such authority was delegated to the President and Representative Director was that he was considered to be the best person to evaluate the business area where each Director and Executive Officer is in charge, overlooking the performance of the entire INNOTECH Group. The Advisory Committee deliberates the appropriateness and the fairness of individual compensation amount of “Performance-based Compensation” paid to Directors and Executive Officers including the President and Representative Director, based on the resolution made by the General Meeting of Shareholders as well as the standards prescribed by the “Corporate Officers’ Remuneration Rules” and the performance evaluation, and reports to the President and Representative Director. Based on the report from the Advisory Committee, the President and Representative Director determines the individual compensation amount under his authority which is delegated by the Board of Directors.

As for determining the content of individual compensations of the Directors, since the Advisory Committee reviewed the draft proposal from various aspects, including its consistency with the relevant company policy, the Board of Directors has decided to respect the report presented by the Advisory Committee and to follow the relevant company policy in principle. The number of Directors at INNOTECH Corporation is prescribed as 5 or less in its articles of incorporation and the remuneration amount of Directors (excluding Directors who are Audit & Supervisory Committee Members) was resolved as 300 million yen or less on an annual basis at the 37th Annual General Meeting of Shareholders held on June 23, 2023 (the amount does not include the employee-portion salary for a Director who also holds an employee post at the Company). Also, at the 37th Annual General Meeting of Shareholders held on June 23, 2023, separately from the said maximum amount of the remuneration, it was resolved that the Directors (excluding Outside Directors and Directors who are Audit & Supervisory Committee Members) may receive 150 million yen or less of compensation by Restricted Stocks on an annual basis.
Remuneration amount of Directors who are Audit & Supervisory Committee Members was resolved as 60 million yen or less on an annual basis at the 37th Annual General Meeting of Shareholders held on June 23, 2023. The number of Directors (excluding Directors who are Audit & Supervisory Committee Members) is 2, and the number of Directors who are Audit & Supervisory Committee Members is 3 (the number of Outside Directors is 3) at the 37th Annual General Meeting of Shareholders held on June 23, 2023.