Corporate Governance

Basic Approach to Corporate Governance

On the basis of our corporate philosophy of providing safety, security and comfort in movement areas and living space with our unique motion control technology, the Nabtesco Group will endeavor to strengthen its corporate governance by practicing the Nabtesco Way, in order to achieve sustained growth of the group, enhance corporate value over the medium and long term and earn greater trust from our stakeholders.

We have developed the “Basic Policy on Corporate Governance” by taking fully into account the intent and spirit of the Corporate Governance Code prescribed by Tokyo Stock Exchange, Inc.

We are implementing all general principles provided for in the revised Corporate Governance Code released on June 1, 2018.

Corporate Governance System

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Measures to Improve Corporate Governance

Nabtesco is working to improve its corporate governance to achieve sustainable growth, enhance its corporate value in the medium to long term and earn further trust from its stakeholders based on the Nabtesco Corporate Governance Basic Policy.
Specifically, in order to have a view toward further strengthening supervision based on independent and objective perspectives, we have been taking steps to increase the number of independent outside directors. Currently, of the 10 directors, 4 are independent outside directors (40%). In addition, the Nominating Committee and Remuneration Committee are in place as advisory bodies to the Board of Directors. Furthermore, we evaluate the effectiveness of the Board of Directors and provide training for directors and auditors once a year. Through these initiatives, we have continued to enhance our corporate governance system.

Explanation of Company Organizations

Organization Name	Roles and Responsibilities	No. of People^＊1	Frequency of meetings
Board of Directors	Formulates the Group’s basic policies and strategies, makes decisions about the execution of important business matters and supervises the way business is carried out. Formulates the Group’s basic policies and strategies, makes decisions about the execution of important business matters and supervises the way business is carried out. The Board of Directors consists of 10 directors including three independent outside directors.	10 (incl. 4 outside directors)	16 times (At least once a month, in principle)
Nomination Committee	As an advisory board to the Board of Directors, the Nomination Committee deliberates on candidates for directors, Audit & Supervisory Board members, the president (CEO) and representative directors as well as succession plans for the president (CEO) and reports the results to the Board of Directors. The Committee consists of three to five members, a majority of which is formed by independent outside directors/Audit & Supervisory Board members.	4 (incl. 3 outside members)	3 times
Remuneration Committee	As an advisory board to the Board of Directors, the Remuneration Committee deliberates on compensation for management and reports the results to the Board of Directors. The Committee consists of three to five members, a majority of whom are independent outside directors/Audit & Supervisory Board members.	4 (incl. 3 outside members)	2 times
Compliance Committee	As an advisory board to the Board of Directors, the Compliance Committee deliberates on the formulation and amendment of the Nabtesco Group Code of Ethics and priority issues related to the Group-wide compliance system and reports the results to the Board of Directors. The Committee consists of members including outside directors/Audit & Supervisory Board members and outside experts.	7 (incl. 2 outside members)	3 times
Audit & Supervisory Board (Members)	The Audit & Supervisory Board audits the execution of duties of the Board of Directors and prepares audit reports. The Audit & Supervisory Board also strengthens the audit system by setting up a Group Audit & Supervisory Board, including Audit & Supervisory Board members of Group companies, in response to the strengthened Group management. The Audit & Supervisory Board consists of not more than five Audit & Supervisory Board members, a majority of whom are independent outside Audit & Supervisory Board members.	5 (incl. 3 outside auditors)	13 times
Corporate Officers Committee	The Corporate Officers Committee is the body devoted to the execution of business pursuant to the policies and strategies of the Board of Directors under the supervision of the Board. The Committee consists of 20 members including corporate officers of three major Group companies who are the representatives of the companies. In FY2019, the Committee held 12 meetings.	20	12 times
Management Committee	In line with the policies decided by the Board of Directors, the Management Committee serves as the body that discusses important matters relating to execution of the Group’s business and reports on results and the execution of business. It comprises the president (CEO), officers in charge of corporate departments, general managers, and internal company presidents.	-	18 times (At least once a month in principle
Business Auditing Department	As a department that reports directly to the president (CEO), the Business Auditing Department conducts internal audits of corporate departments, internal companies and the Group companies. The basic policy of the Department is to “improve the efficient operation and the quality of management activities in organizations inside the Nabtesco Group by evaluating compliance and the structure and management system of each business in the organizations to prevent risks expected in the future from occurring through internal audits.”	8	-
Accounting Auditors	Accounting auditors conduct accounting audits based on the Companies Act and the Financial Instruments and Exchange Act.	3^*1(Assistants: 17 certified public accountants and 17 other persons)	-

*1. The number of people is as of the end of March 2020 (However, the number of people for accounting auditors is as of the end of December 2019).
*2. The number of meetings is the aggregation of meetings in FY2019.

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Corporate Governance Effort

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*1. In FY2011 and FY2015, the number of Audit & Supervisory Board Members was temporarily four (including three Outside members) due to the resignation of a members for personal reasons.
*2. Outside Directors are only paid on a monthly basis.
*3. Remuneration is linked to medium-term and long-term business results.
*4. The pre-warning anti-takeover measures were introduced with the resolution of the 4th Ordinary General Meeting of Shareholders held on June 26, 2007. However, they were abolished at the conclusion of the 7th Ordinary General Meeting of Shareholders held on June 24, 2010.

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Board of Directors

Composition of Board of Directors

For the Board of Directors to perform effectively fulfill its roles and responsibilities, it consists of members who are selected in consideration of diversity, including their work experience, areas of specializations, gender and internationality.

Appointment Policy of Candidates for Directors

When nominating candidates for directors, the Board of Directors nominates, appoints and select persons who are capable of contributing to the development of the Nabtesco Group and the sophistication of its management as executives based on their work experience and abilities. The Board of Directors also selects from inside and outside the company and among those who have outstanding personal qualities, expertise and abilities, exhibit advanced professionalism and strong ethics, and can demonstrate abundant experience as a director.

Appointment Policy of Independent Outside Audit & Supervisory Board members

Nabtesco has at least two independent outside directors who can give advice and supervise management to help increase the corporate value in a sustainable manner and on a medium- to long-term basis.

All independent outside directors are well experienced, have versatile knowledge, can take a broader view on behalf of the various stakeholders of the company, and can meet Nabtesco’s Criteria for the Impartiality of Outside Directors and Outside Audit & Supervisory Board Members.

Related linkCriteria for the Impartiality of Outside Directors and Outside Corporate Auditors

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Audit & Supervisory Board Members

Composition of Audit & Supervisory Board Members

The Audit & Supervisory Board Members organically combines the robust independence of outside members and the advanced information collection ability of internal members so that it may fulfill its roles and responsibilities effectively.

For the Audit & Supervisory Board to effectively fulfill its roles and responsibilities, the Audit & Supervisory Board members are selected from inside and outside the company and among those candidates who have outstanding personal qualities, expertise, abilities and knowledge in finance, accounting and legal affairs necessary for audits, who exhibit advanced professionalism and strong ethics, and who can demonstrate abundant experience. The Audit & Supervisory Board Members shall include at least one person who is appropriately well versed in financial and accounting issues.

Appointment Policy of Independent outside Audit & Supervisory Board members

All independent outside Audit & Supervisory Board members shall meet Nabtesco’s Criteria for the Impartiality of Outside Directors and Outside Audit & Supervisory Board Members.

Related linkCriteria for the Impartiality of Outside Directors and Outside Audit & Supervisory Board Members

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Remuneration for Directors and Audit & Supervisory Board Members

Basic Policy of Compensation System

It shall be a system for shareholders and executives to share profits by increasing the link between business performance and the share value of the company.
It shall function as an incentive for improving the business performance of the Nabtesco Group over the medium to long terms.
The decision-making process of the compensation system shall be objective and highly transparent.

Structure of Compensation System

The compensation system for directors consists of “monthly compensation,” comprising basic compensation, which is fixed compensation, and performance-linked compensation that reflects short-term business performance, as well as a “Board Benefit Trust (BBT),” a stock compensation plan that reflects the degree of achievement of the medium-term management plan and the share value.
The “basic compensation” is fixed compensation in accordance with the position of directors and granted as monthly compensation.
The “performance-linked compensation (monthly compensation)” is determined based on the formula below according to the degree of achievement of business performance for the fiscal year.
[Short-term performance-linked compensation]
- Short-term performance-linked compensation = Base payment amount by position x Performance evaluation factor
  - *Performance evaluation factor: Determined based on the matrix table with ROIC in the previous fiscal year for which a threshold value is set and net income (attributable to owners of the parent) as indicators (factor: 0.00 - 3.00)
For directors in charge of internal companies, the short-term performance-linked compensation is modified based on the rate of growth of net sales of the relevant company, the degree of improvement in the amount of operating income, the degree of improvement in ROIC, a research and development indicator, and an environmental indicator.
The amount of stock compensation is determined based on the formula below according to the degree of achievement of the medium-term management plan by using the scheme of the board benefit trust (BBT).
[Stock compensation granted during the time in office]
- Stock compensation granted during the time in office = Share issuance points by position x Performance evaluation factor x Medium-term management plan achievement factor
  - *Performance evaluation factor: Determined based on the matrix table with ROIC in the previous fiscal year for which a threshold value is set and net income (attributable to owners of the parent) as indicators (factor: 0.00 - 3.00)
  - *Medium-term management plan achievement factor: Set according to the degree of achievement of net sales and operating income in the medium-term management plan (0 - 0.5)
- The issuance points are vested on the date of an annual general meeting of shareholders for the last fiscal year ending within three years after the points were granted.
[Stock compensation granted at the time of retirement]
- Stock compensation granted at the time of retirement = Share issuance points by position
- The issuance points are vested on the date when the director retired from office.

Compensation for directors has the composition ratio that places emphasis on the link between the business performance and the shareholder value.

Position	Fixed compensation	Performance-linked compensation
Position	Basic compensation	Short-term performance-linked compensation	Stock compensation granted during the time in office	Stock compensation granted at the time of retirement
Chairman of the Board and President	30%	30%	20%	20%
Directors	35%	30%	20%	15%

*This table shows medians for each position, and it is a model in the event that the degree of achievement of targets for the performance-linked compensation is 100%.

Compensation for outside directors and Audit & Supervisory Board members consists only of fixed compensation, excluding the portion that reflects the business performance, given that they are in a position independent from the execution of business.
The bylaws for compensation stipulate that, in the event of a significant retrospective change in the business results of a past year, on which the calculation of performance-linked compensation was based, as a result of the revision of operating results due to inappropriate accounting or for other reasons, or if the company incurs a serious loss due to wrongful or illegal acts by a director or Audit & Supervisory Board member, the company is entitled to demand the return of performance-linked compensation paid to directors or Audit & Supervisory Board members, in whole or in part.

Approach to Indicators for Performance-linked Compensation

Indicators for the performance-linked compensation for directors (excluding outside directors) are based on ROIC and net income (attributable to owners of the parent), which are principal indicators that show the results of activities of all the employees and lead to an improvement in ROE. Based on these indicators, all directors will promote management in consideration of the cost of capital, the dividend payout ratio and the sustainable growth of the Nabtesco Group. In addition, by setting a research and development indicator for promoting the creation of intellectual property and an environmental indicator according to the degree of reduction of CO₂ emissions, in addition to management indicators such as the degree of improvement in ROIC, for directors in charge of businesses, a function as an incentive for the better business performance in the medium to long term is added.

For the degree of achievement of the medium-term management plant, “net sales” and “operating income” are used for the purpose of promoting activities with a unified direction, because these indicators are the outcome of business activities of all the directors and employees.

The above indicators may be modified if an event not attributable to the management decisions of the company has an impact.

Actual results of major indicators for performance-linked compensation

ROIC	Net sales	Operating income	Net income
7.5％	294,626million yen	21,889million yen	15,305million yen

*Performance-linked compensation for the current term is calculated based on financial results for the fiscal year ended December 2018.
For the current term, proceeds were generated mainly associated with the issuance of new shares carried out by Harmonic Drive Systems Inc., an equity-method affiliate of the Nabtesco Group, acquired by Harmonic Drive Systems Inc. Therefore, we use indicators that deduct the said proceeds from the above figures.

Method to Determine Compensation

The policy for compensation for directors, the compensation system and level, and the amount of payment to each director are determined by the Board of Directors following deliberations at the Remuneration Committee, which consists of one internal director and two independent outside directors, and the reports of the Committee.
Compensation for Audit & Supervisory Board members is determined through discussions among the Audit & Supervisory Board members.

Deliberations on compensation for directors for the current term and activities of the Remuneration Committee, etc. for determining the compensation are as follows.

Number of meetings of the Remuneration Committee, etc. (from January to December 2019)

Committee, etc.	Number of meetings
Remuneration Committee	2
Board of Directors	2

Total Amount of Compensation Paid to Directors and Audit & Supervisory Board Members (for FY2019)

(Unit: Million yen)
	Total Amount of Compensation	Types of Compensation				Number of Directors and Audit & Supervisory Board Members
		Fixed Compensation	Performance-linked Compensation
		Monthly Compensation		Board Benefit Trust (BBT)
		Monthly Compensation		Compensation granted during the time in office	Grant at the time of retirement
Directors	350	184	65	21	80	12
(Of whom, Outside Directors)	（30）	（30）	-	-	-	（3）
Audit & Supervisory Board Members	78	78	-	-	-	5
(Of whom, Outside Audit & Supervisory Board Members)	（24）	（24）	-	-	-	（3）
Total	427	262	65	21	80	19

*1 The number of Directors and Audit & Supervisory Board Members includes two Directors who retired from office during the current term. The number of Directors and Audit & Supervisory Board Members includes two Audit & Supervisory Board Members who retired from office during the current term.
*2 Monthly Compensation consists of basic compensation and short-term performance-linked compensation, paid out in total on a monthly basis.
*3 The amount of Board Benefit Trust (BBT) shows the amount recorded under expenses under JGAAP based on the number of points for issue of shares granted or to be granted during the current term.
*4 The limit for compensation is 400 million yen for directors (50 million yen for outside directors) and 90 million yen for Audit & Supervisory Board members as resolved at the 14th Annual General Meeting of Shareholders (held on March 28, 2017).
*5 In addition to the compensation above, the board benefit trust (BBT) is introduced for directors (excluding outside directors) as resolved at the 14th Annual General Meeting of Shareholders (held on March 28, 2017), and we contributed 450 million yen (3 fiscal years) and 420 million yen (3 fiscal years) at maximum as compensation granted in office and compensation granted at retirement, respectively, to the trust based on the regulations of stock benefits for directors provided for by the BBT. At the 14th Annual General Meeting of Shareholders (held on March 28, 2017) separately from the limit for compensation in 4.
Above, in the BBT, 56,000 points (1 fiscal year) and 51,000 points (1 fiscal year) are set as the limit of share issuance for compensation granted during the time of office and compensation granted at the time of retirement, respectively.

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Measures to Ensure Effectiveness of Board of Directors and Its Evaluation

Nabtesco conducts a yearly analysis and evaluation of the effectiveness of the Board of Directors based on self-evaluations of directors to improve its function. In FY2019, we conducted an anonymous self-evaluation questionnaire survey targeting every director and auditor. Taking into consideration the collection of questionnaires and an analysis by an outside lawyer, we evaluated the effectiveness of the Board of Directors through meetings of the Board of Directors. The summary of results is as described below.

In the questionnaire, respondents self-evaluated that they have been able to have free, frank and constructive discussions and exchanges of opinions at Board of Directors’ meetings that consisted of the appropriate number of directors. From FY2020, more than one third of the directors are independent outside directors, reflecting an increase in the number of independent outside directors. Additionally, we expect that discussions will be had from more diverse viewpoints due to the rise in the number of female directors. Taking these factors into consideration, we believe that the effectiveness of the Board of Directors has been secured.

On the other hand, we are beginning to identify issues such as the need to further increase the number of female directors and appoint directors of foreign nationalities, as well as the need to implement measures to improve the efficiency of the operations of Board of Directors’ meetings to ensure sufficient time for the discussion of key management issues, including growth strategies.

With an eye toward the further enhancement of corporate governance, we will continue to work toward solving these issues and improving the functionality of the Board of Directors.

Attendance Rates of Members at Board of Directors and Audit & Supervisory Board Members Meetings in FY2019

Board of Directors and Audit & Supervisory Board Members Meetings
Average Attendance Rate		100.0%
Average Attendance Rate of Outside Directors		100.0%
Katsuhiro Teramoto	Representative Director, President & CEO	100.0%
Shinji Juman	Representative Director	100.0%
Daisuke Hakoda	Representative Director	100.0%
Goro Hashimoto	Director	100.0%
Toshiaki Akita	Director	100.0%
Shigeru Naoki	Director	100.0%
Kazumasa Kimura	Director	100.0%
Yutaka Fujiwara	Outside Director	100.0%
Norio Uchida	Outside Director	100.0%
Naoko Yamazaki	Outside Director	100.0%
Kensuke Ioku	Audit & Supervisory Board Member	100.0%
Kenichi Kikuchi	Audit & Supervisory Board Member	100.0%
Zenzo Sasaki	Audit & Supervisory Board Member (Independent)	100.0%
Takemi Nagasaka	Audit & Supervisory Board Member (Independent)	100.0%
Tetsuro Hirai	Audit & Supervisory Board Member (Independent)	100.0%

Audit & Supervisory Board Members
Average Attendance Rate		100.0%
Average Attendance Rate of Outside Audit & Supervisory Board Members		100.0%
Kensuke Ioku	Audit & Supervisory Board Member	100.0%
Kenichi Kikuchi	Audit & Supervisory Board Member	100.0%
Zenzo Sasaki	Audit & Supervisory Board Member (Independent)	100.0%
Takemi Nagasaka	Audit & Supervisory Board Member (Independent)	100.0%
Tetsuro Hirai	Audit & Supervisory Board Member (Independent)	100.0%

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Current Status of Internal Control System

Based on its Basic Polices for the Construction of an Internal Control System, Nabtesco is working to enhance all the areas associated with internal control—such as increased efficiency of management, compliance, information management, risk management and collaboration with the Audit & Supervisory Board Members under consistent principles, and integrate them to construct an internal control system.

Internal control for the Nabtesco Group shall be based on making The Nabtesco Way and the Nabtesco Group Code of Ethics cornerstones of proper and fair business activities, and requiring the Group’s directors, audit & supervisory board members and employees to comply with these norms and rules.

The Chief Executive Officer (CEO) shall be the top executive responsible for the promotion of internal control. The Board of Directors shall examine the maintenance of internal control systems on a continual basis in line with changes in the business environment and social needs, revisions to laws and regulations, risk diversification and other factors, and shall conduct a review yearly and whenever else necessary.

Related linkBasic Policies for the Construction of an Internal Control System

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