Corporate Governance

Materiality
Related ESG: G SDGs16
Corporate governance

Management approach

Basic approach

Based on the corporate philosophy “Jun-Ri-Soku-Yu,” the Company believes that its purpose is to contribute to solving social issues through its proprietary technologies after ascertaining these issues from a long-term perspective.

The Company, to respond to the changing times and enhance sustainable corporate value in the future as well, has established the policies of (1) ensuring timeliness and accuracy in decision-making, (2) ensuring transparency in management, and (3) emphasizing fairness, and will work to appropriately collaborate with all stakeholders, such as shareholders. Furthermore, by carrying out its fiduciary responsibility and accountability to shareholders, the Company will ensure the effectiveness of corporate governance and continually work on its improvement.

Corporate governance structure

Toyobo is a company with Board of Corporate Auditors and, under this governance system, has adopted the executive officer system. In the executive officer system, which is defined in our management regulations, the Board of Directors oversees the business execution of executive officers. Under Toyobo’s governance framework, a clear separation is made between the role of the Board of Directors—which oversees decision-making and performs management oversight—and the executive officers who are in charge of business execution. This system enables rapid decision-making and efficient business execution.

Corporate Governance Structure (as of June 2020)

Main issues (FY2021)

Number of meetings held
Board of Directors 18
Board of Corporate Auditors 15
Nomination Committee 5
Advisory Board on Compensation 3
Board of Managing Executive Officers and Controlling Supervisors 31
Sustainability Committee 4
Corporate Planning Committee 8
Financial Control Committee 19

Board of Directors

At the Annual General Meeting of Shareholders held in June 2021, one director was added to the Board of Directors to make a total of 11, including four outside directors. A director’s term of office is set at one year to ensure a swift response to changes in the business environment and to clarify the responsibilities, and this is led by the Chairman & Director.

In order to separate decision-making and supervision from business execution, we have built a system in which the Board is elected from outside directors and executive officers who oversee departments that are engaged in operations with a company-wide scope. This system makes it easier for executive officers, who are responsible for specific businesses, to concentrate on their respective businesses and fields, however so that directors can supervise the execution of business appropriately and smoothly, we increased the number of executive officers in charge of specific offices by one to a total of two.

Board of Directors meetings are in principle held monthly, and otherwise as needed. In fiscal 2021, they made decisions on matters stipulated in laws and the Articles of Incorporation, and on important investment deals including acquisitions. In addition, the Board received reports on each business and conducted appropriate supervision.

Main issues (FY2021)

  • (1) Important Investment deals
  • (2) Fire accidents, quality deficiency-related incidents
  • (3) Risk management-related
  • (4) Revision of the Charter of Corporate Behavior, formulation of Human Rights Policy, etc.
  • (5) Sustainability related (identifying materiality, handling carbon neutrality, etc.)
  • (6) Reports on the Nominations Committee and Advisory Board on Compensation
  • (7) Evaluation of Board of Directors' effectiveness
  • (8) Cross-shareholdings (policies,verification)
  • (9) Reports on the Emergency Safety Meeting, etc.

Board of Corporate Auditors

The Board of Corporate Auditors has four members, two of whom are outside corporate auditors(Both are independent officers:50%). Their responsibilities include attending meetings of the Board of Directors and other important meetings, stating their opinions when necessary, and auditing each department’s operation in order to audit directors’ execution performance.

KPMG AZSA LLC has been appointed to conduct the Toyobo Group’s independent audits required under Japan’s Companies Act. The Board of Corporate Auditors receives auditing plans and reports from the independent auditor and meets with the independent auditor periodically to exchange information. The Board of Corporate Auditors also exchanges information with the internal audit department, which monitors the effectiveness of internal control.

Board of Corporate Executive Officers and Controlling Supervisors

There are 20 corporate officers, including some who serve concurrently as directors. The Board of Corporate Executive Officers and Controlling Supervisors deliberates in advance on matters to be resolved by the Board of Directors, and determines matters related to business execution, which has been entrusted by the Board of Directors. The Corporate Planning Committee and the Financial Management Committee are established under the Board of Corporate Executive Officers and Controlling Supervisors. They deliberate on important investments and new projects, important borrowing, etc. from their respective realms of expertise, thereby managing business risk.

A working group comprised of directors was also established to discuss issues including the future vision of the Toyobo Group.

Nomination and Compensation Advisory Committee

Up until now, the Nomination Committee and Advisory Board on Compensation have been formed for deliberating and reporting to the Board of Directors from the perspective of ensuring transparency and fairness in the determination of nomination and compensation of directors and other officers.

However, in order that bodies consulting on nominations and compensation could operate in an integrated manner as well as further increase functionality and transparency, on April 1, 2021, these two committees were reorganized into the Nomination and Compensation Advisory Committee.

This committee comprises the two outside directors (Both are independent officers:67%), the Chairman & Director, and an outside corporate auditor as an observer, and is led by an outside director.

Targets and KPI

<Targets>

The Toyobo Group is building a fair and highly transparent governance structure through compliance with the Corporate Governance Code and proactive information disclosure.

<Targets and Results>

Initiatives KPI Targets Results (FY2021)
  • Strengthen corporate governance
  • Strengthen information disclosure
  1. No. of meeting of the Board of Directors/committees
  1. Disclose results
  1. Board of Directors’ meetings: 18, Other meetings*: 7
  1. Attendance rate of officers at meetings in 1.
  1. Disclose results
  1. Disclosure of details of evaluation of Board of Directors’ effectiveness
  1. Disclose details of effectiveness evaluation
  • * Nomination Committee and Advisory Board on Compensation

Progress in system enhancement

The Toyobo Group has worked continuously to strengthen corporate governance.

Initiatives to Strengthen Corporate Governance

Year Initiative & Objective
1998
  • Established the Ethics Committee (the current Sustainability Committee)
    To promote company-wide compliance activities as a key element of management
2004
  • Appointed one outside director, shortened the term of office for directors to one year
    To clarify management accountability by strengthening the supervisory function and shortening the term of office
  • Established an Advisory Board on Officer Provisions, etc. (the current Nomination and Compensation Advisory Committee)
    To ensure transparency and fairness in procedures for determining officer compensation
2005
  • Introduced a corporate officer system, reduced the number of directors
    To split the decision-making/supervisory and executive functions
2015
  • Increased number of outside directors to two
    To strengthen the supervisory function by multiple appointments
  • Established an outside officer liaison meeting
    To hold regular information exchange meetings to optimize the functions of outside officers
  • Established the Nomination Committee (the current Nomination and Compensation Advisory Committee)
    To ensure transparency and fairness in procedures for nominating/dismissing directors
2016
  • Made an analysis/evaluation of the overall effectiveness of the Board of Directors
    Will annually identify issues and make improvements
2018
  • Increased number of outside directors to three, raising their ratio to one third of all directors
    To ensure diversity among members of the Board of Directors, as well as strengthen governance
2019
  • Increased number of outside directors to four (adding a female director)
    To further promote diversity among members of the Board of Directors
  • Revised the officer compensation system (introduced compensation in the form of restricted stock units)
    To offer longer term incentives and realize greater sharing of value with shareholders
2020
  • Implemented further separation between decision-making/supervision and business execution in regard to election of directors
2021
  • Established the Nomination and Compensation Advisory Committee
    Integrated advisory and compensation advisory bodies, and improved their functionality

Policies and procedures for the appointment of officers

For the appointment of top management and nomination of candidates for directors, the Nomination and Compensation Advisory Committee, comprising a majority of outside directors as members and chaired by an outside director, has been established as an advisory body to the Board of Directors, and decisions are made by the Board of Directors based on the deliberations and reports of the Committee. In the nomination of candidates for inside directors, we recommend individuals who have knowledge, experience, and a track record in their areas of responsibility, and who possess a company-wide perspective and qualifications suitable for the post. In the nomination of candidates for outside directors, we recommend individuals who can objectively provide supervision of management, and who have the abundant experience and well-developed insight to increase corporate value. In the nomination of corporate auditors, we recommend individuals who are outstanding in terms of their insight and capabilities with the agreement of the Board of Corporate Auditors.

Furthermore, for the dismissal of a senior management member, in the event of an act of misconduct, impropriety, or actions suggesting a breach of trust, or of other reasons that make the member unsuitable to serve as an officer, then based on the report from the Nomination and Compensation Advisory Committee, the Board of Directors deliberates and decides on the dismissal of a senior management member.

Director Skill Matrix (as of June,2021)

  • ※ Click to enlarge the diagram

Training programs for officers

For our newly appointed directors and corporate auditors, we provide orientation concerning their roles and duties, as they undergo an external training program upon their appointment, in order to acquire the necessary knowledge.

In addition, newly appointed outside directors and outside corporate auditors also attend orientations regarding the Company’s operations, finances and organization, and more.

They are also encouraged to continue participating in external training programs and lectures to continuously build on their managerial literacy.

Officer compensation system

  1. Basic Policy

    Toyobo’s system of officer compensation is designed as follows, in line with basic policy, within the monetary amount resolved at the Annual General Meeting of Shareholders.

    • 1) Provide incentives that lead to Toyobo Group’s sustained growth and enhance corporate value over the longer term
    • 2) Secure highly talented management personnel
    • 3) Set determination procedures that are objective and highly transparent

    Compensation structure and levels are reviewed based upon the company’s business environment, levels of employee salaries, and other companies’ levels based upon surveys conducted by specialized external organizations.

  2. Monetary compensation (including performance-based amounts)

    (1) Composition of monetary compensation

    Monetary compensation for directors (excluding outside directors) is a fixed monthly compensation, comprising the following two components:

    • 1) Compensation by position for directors (representative director, director)
    • 2) Compensation by position for directors also serving as executive officers

    (2) Compensation by position for directors who also serve as executive officers

    • 1) Comprises set amount by position and the short-term incentive reflecting the previous fiscal year company-wide evaluation and performance evaluation of the overseen department.
    • 2) The performance indicator (KPI) for the company-wide performance evaluation is the consolidated operating income, given that this is a major management indicator. The specific amount shall be determined in accordance with this by the Board of Directors based upon advice from the Advisory Board on Compensation*.
    • 3) Performance evaluations of overseen departments will be determined by a comprehensive overview of its performance taking into account improvements in operating profit and ROA.
    • 4) Compensation is calculated individually using formulas determined by the Advisory Board on Compensation*, and based upon company-wide performance evaluations and the performance evaluation of the overseen department, and decided upon by the Board of Directors.
    • 5) Compensation for the Chairman & Director is the same as the President, taking into account their duties.
  3. Stock compensation

    In order to increase incentives to sustainably enhance corporate value and to promote more value sharing with shareholders, a certain percentage of compensation is granted annually as non-monetary compensation for granting restricted shares (non-performance-based, provided in advance).

  4. Ratios of compensation

    Compensation for directors also serving as executive officers is designed to appropriately increase incentives to increase corporate value, and the ratio of the fixed portion, short-term incentive portion, and the non-monetary compensation is 7:2:1 (when 100% of KPI acheived).

  5. Other
    • (1) Compensation for outside directors is to be fixed monetary compensation in view of their role and independence.
    • (2) Compensation for corporate auditors is to be fixed monetary compensation in accordance with their duties and responsibilities, and is to be decided by discussions with the corporate auditors in view of their duties and responsibilities.
    • (3) The Advisory Board on Compensation, comprising a majority of outside directors as members, has been established as an advisory body to the Board of Directors to ensure the transparency and objectivity of decisions regarding compensation. The Advisory Board on Compensation receives advice from the Board of Directors and deliberates on the system, level, and calculation method of officer compensation, in addition to the targets set for the company-wide performance evaluations forming part of the compensation by position. The Board of Directors makes the final decision on the amount of individual compensation based upon the report from the Advisory Board on Compensation*.
  • *On April 1, 2021, the Advisory Board on Compensation merged with the Nomination Committee to form the new Nomination and Compensation Advisory Committee.

Details of Officer Compensation (FY2021)

Evaluating the effectiveness of the Board of Directors

From January to April 2021, in order to further enhance the functions of the Board of Directors, the Company carried out an overall analysis and evaluation of the effectiveness of the Board of Directors in fiscal 2021 with the support of an external organization. An outline of this evaluation is as follows.

Method of analysis and evaluation of effectiveness

We have conducted a survey with 40 questions for our directors and corporate auditors, and the responses to this survey are continuously provided directly to the external organization.

Analyses and evaluations after the survey was conducted were carried out by the Board of Directors based on the aggregated survey reported by the external organization.

Summary of evaluation results

  1. Analysis and Evaluation
    • (1) Member numbers for the Board of Directors, the ratio of internal and external members, and the Chair's management of meetings procedures were evaluated as generally appropriate.
    • (2) Efforts are underway to further separate decision-making / supervision from execution, but there is insufficient discussion on solutions to medium- to long-term management issues such as digital transformation (DX), human resources strategies, and business portfolios.
    • (3) Fire accidents and quality deficiency-related incidents need to be taken seriously, and further efforts should be made to improve the effectiveness of the risk management system by strengthening this and confirming how it is progressing.
  2. Issues and Future Initiatives

    In order to improve the effectiveness of the Board of Directors, we have identified the following issues and initiatives for future attention.

    • (1) Strengthened risk management including of safety and disaster prevention, and quality assurance
      • → Establish the Risk Management Committee, and monitor its activities to further enhance the Group-wide risk management system.
    • (2) Strengthen the Group-wide internal audit functionality
      • → In order to strengthen the internal audit functionality, have a mechanism by which to periodically report directly to the Board of Directors the status of internal audits.
    • (3) Initiatives including ESG, DX, and business portfolios for continuously increasing corporate value
      • → We will set up a venue separate from the Board of Directors as necessary to discuss medium- to long-term themes such as ESG, DX, and business portfolios that require ongoing discussions.
    • (4) Further initiatives towards succession planning and appointment procedures for Chief Executive Officers
      • → In order to achieve transparency, fairness, and effectiveness of the decision-making procedures regarding the nomination of officers and their compensation, review the operations of the advisory body to the Board of Directors.
    • (5) Further streamlining of Board of Directors’ management of meetings procedures
      • → We will review the operation of the Board of Directors as follows in order to further improve the efficiency of management of meetings procedures, and to ensure sufficient time for deliberation on important management issues.
        • 1) Narrow down the number of individual cases by reviewing the criteria for selecting items on the agenda
        • 2) Earlier advance distribution of materials
        • 3) More thoroughly organize issues, and shorten explanations
        • 4) Establish an annual agenda plan (incorporating important themes)

      Through these initiatives, the Board of Directors is working to increase its own effectiveness.

Return to the origins of manufacturing

My approach as an outside director

Masaaki Harima
Outside Director

I have been involved investigations related to whistle-blowing incidents and providing recommendations for the public interest as a member of corporate and academic third-party investigation committees examining the causes of misconduct, proposing measures to prevent recurrence, and serving on community compliance committees. I have also participated in corporate auditing of the business execution of directors as an outside corporate auditor, and in accounting and public sector auditing as a local government auditor.

As a member of an independent committee related to anti-takeover measures, over the past six years I have learned a great deal about the Company’s business from the perspective of protecting the common interests of shareholders. Now that I have been appointed as an outside director, I look forward to deepening my understanding of the Company.

As an outside director representing the common interests of all shareholders, I will endeavor to provide corporate governance oversight from a standpoint that is independent from the executive officers.

Reflections after a year as an outside director

Toyobo’s efforts to engage in fair business and profit-making activities following the corporate philosophy of Jun-Ri-Soku-Yu (adhering to reason leads to prosperity) has garnered praise for the Company as an earnest, high-quality company. Nevertheless, the Company’s reputation has suffered in the past year from incidents that went against the core philosophy. The Company has already begun implementing corrective measures, but it will take a full and concerted effort to regain the trust that has been lost as a manufacturer. I believe that to regain that trust we must once again identify, fully comprehend, and take steps against all risk.

The perspective I will take when providing counsel for the Company’s execution of business will be to follow the philosophy and strictly ensure that the profit it generates does not include any inappropriate activities.

Board of Directors effectiveness

The purpose of evaluating the effectiveness of the Board of Directors is to improve the Board’s ability to promote the sustainable growth of the Company and enhance corporate value over the medium to long term.

Measures under way to ensure the Board’s effectiveness include improving management procedures, determining policy for medium- and long-term issues, and implementing more extensive risk management, and I will be encouraging greater effort in these areas. I will also advise management to ensure full compliance with revised Corporate Governance Code of the Tokyo Stock Exchange, to be fully dedicated to addressing Company issues, and to continue to improve its effectiveness.

Addressing issues

Toyobo has various issues that it must confront, and I have been impressed with the speed and flexibility of its responses. I also think the Board of Directors has been fully open to accepting the advice of its outside directors. I believe the Company will soon begin seeing tangible results from the organic connections that are developing among the various projects and committees created at the advice of the outside directors to address the Company’s issues.

I am committed to doing my very best to ensure the Board of Directors acts in full conformity with the fundamental philosophy and to create organically-linked actions and initiatives to reestablish the trust in Toyobo as a manufacturer as quickly as possible.