Governance

• Corporate Governance Philosophy and Structure
• Board of Directors effectiveness evaluation
• Officer remuneration
• Cross Shareholdings
• Succession plan
• Risk Management
• Compliance
• Information Security

Corporate Governance Philosophy and Structure

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, investors, customers, and all other stakeholders.

Initiatives for enhancing corporate governance

To sustainably increase our corporate value within a drastically changing business climate, we are striving to enhance our corporate governance based on the recognition that we need to anticipate change and address management issues with a sense of speed. We implement all of the principles of the Corporate Governance Code, which was revised in June 2021, and disclose details such as our sustainability initiatives and our constructive dialogues with shareholders and investors in our Corporate Governance Report. We also conduct management in a way that improves return on capital, including strengthening our intellectual and human capital and reviewing our portfolio.

Changes in corporate governance structure

Corporate governance structure

Aichi Steel uses an Audit & Supervisory Board member system, with a General Meeting of Shareholders, Board of Directors, Audit & Supervisory Board, and accounting auditors, to ensure the transparency and health of management. We also use a managing executive officer and executive officer system to reduce the number of directors, and improve the efficiency and speed of business execution. We enhance the function of the Board of Directors and improve its quality of management decision-making by ensuring at least one third of directors are independent outside directors. The Director Remuneration and Personnel Planning Committee is in charge of the nomination and remuneration of directors and managing executive officers. It enhances independence, objectivity, and transparency by considering and discussing these matters before consulting the Board of Directors. To conduct our operations, we have established in-house companies (four virtual companies built around our main businesses) and a Corporate Office (consisting of five headquarters that act as functional axes to support our business operations.) To strengthen compliance, particularly with regard to safety and quality, we established the Risk Management Headquarters in April 2024. The president of each in-house company and the headquarters general managers of the Corporate Office are responsible for executing operations as the chief officers. They are appointed by managing executive officers or executive officers, respectively, to support Aichi Steel's president from a companywide perspective.

Number of board meetings held: 14

The Board of Directors makes decisions concerning legal matters, and important matters for the management of Aichi Steel, and supervises business execution. Having one or more meetings a month, it comprises ten members in total; six directors (including two outside directors), two inside audit & supervisory board members, and two outside audit & supervisory board members. The two outside directors selected as independent officers meet the independence criteria set by securities exchanges. We have created support structures that enable our outside directors to adequately fulfill their management advisory and supervisory functions.

Main agenda items in FY2023 for the Board of Directors

Number of Director Remuneration and Personnel Planning Committee meeting held: 3

We have established a discretionary Director Remuneration and Personnel Planning Committee as an advisory body to the Board of Directors on matters related to nomination and remuneration of directors, managing executive officers, and other officers. Comprising two independent outside directors and one inside director, the committee is chaired by an independent outside director to ensure objectivity and transparency.

Main agenda items for the Director Remuneration and Personnel Planning Committee

Number of Audit & Supervisory Board meeting held: 13

The Audit & Supervisory Board is made up of four Audit & Supervisory Board members, including two outside members. It audits the execution of duties of directors and other officers, as well as business and financial performance. In addition to attending meetings of the Board of Directors and other important meetings, Audit & Supervisory Board members coordinate with accounting auditors and departments in charge of internal audits to provide oversight of management.

Approach to balance and diversity of board members Board of Directors effectiveness evaluation and audit & supervisory board members

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, and diverse knowledge, experience, and skills.

Procedure for appointment of Directors and Audit & Supervisory Board members

Determining perspective and independence in appointment of outside officers

In appointing outside officers, we focus on whether they have sufficient qualities to contribute to the company's sustainable growth and the enhancement of our corporate value over the medium to long term. We take particular care to appoint those with management experience at other companies who can be expected to supervise the management of Aichi Steel.
The criteria for determining the independence of candidates for outside directors are based on a general consideration of factors such as career history, knowledge, and personality, with reference to the Enforcement Rules for Securities Listing Regulations provided by the Stock Exchange, etc.

Support structure for outside officers

To eliminate differences in access to information compared to internal officers, and to maximize their performance, we give outside officers briefings on agenda items before meetings, provide onsite inspections, and hold meetings on special topic reports to enable free and open discussion outside of meetings of the Board of Directors. In addition to members of the Board of Directors, presidents and general managers related to the special topics also attend the meetings, where they can all participate in more profound discussions that include medium- to long-term strategies.

Skill matrix for directors and managing executive officers

Our skill matrix defines the experience and expertise that we consider necessary to achieve Vision 2030. This table shows the items that our company expects each person to demonstrate in particular.

• This is not meant to represent the only experience and expertise possessed by each person listed.

Board of Directors effectiveness evaluation

We evaluate the effectiveness of the Board of Directors every year to maintain and improve the effectiveness of our corporate governance. We interview and survey all members of the Board of Directors, analyze and evaluate their performance, and report effectiveness-related results, issues, and responses to the Board of Directors.
Our efforts and the results of our effectiveness evaluation are summarized below.

(1) Evaluation method

(2) Evaluation items

(3) Summary of FY2023 evaluation results

• Special theme reports were provided to outside directors to enhance their understanding of our corporate activities and facilitate discussion. We worked on continuous improvement through annual planning in advance, increase in time and frequency, provision of opportunities for outside officers to provide information based on their own knowledge and experience, and on-site plant inspections. Board of Directors meeting times were also extended to achieve the above.
  Based on these efforts and questionnaire results, we evaluate that our Board of Directors is fulfilling its functions of important management decision-making and supervision of business execution.
• With regard to sustainability initiatives, there was a need to further deepen discussions and promote discourse on a wider range of topics.
• As for industrial knowledge acquisition and training opportunities, there were requests for on-site inspections of locations where defects had occurred.

(4) Main improvement measures

We work to improve the following issues to further ensure the effectiveness of the Board of Directors.

1. (ⅰ) Full discussion on sustainability initiatives
   We organize required agenda items throughout the year and systematically hold discussions on overall strategy topics as well as more targeted discussions on individual themes.
2. (ⅱ) Support for outside officers
   In order to deepen their understanding of Aichi Steel and contribute to discussions at Board of Directors meetings, we hold extensive site visits that can lead to future strategies, investment projects, etc., and provide relevant information and opportunities to exchange opinions with internal officers.

Officer remuneration

Basic approach

Decision process

Aichi Steel established the Director Remuneration and Personnel Planning Committee, with the chair being an independent outside director and the majority of members also being independent outside directors, to ensure objectivity, fairness, and transparency in decisions such as remuneration for directors. The committee discusses director remuneration structures, levels, decision-making policies and procedures, and individual levels of remuneration based on the decision-making policies. Based on the results of those discussions, the Board of Directors determines policies for director remuneration, individual levels of remuneration, and other matters. From the perspective of maintaining independence, remuneration for outside directors is at fixed rate.

Remuneration structure

Remuneration and other payments to directors and Audit & Supervisory Board members

• 1. Performance-based remuneration includes bonus amounts determined by resolution at the meeting of the Board of Directors on May 16, 2024.
  2. Stock 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 and one audit & supervisory board member who retired at the close of the 119th General Meeting of Shareholders held on June 21, 2023.

Cross Shareholdings

Basic approach

Maintaining and strengthening of trade and collaborative relationships with a range of companies are needed to ensure sustainable growth in a rapidly changing business environment. For this reason, Aichi Steel engages in cross holdings with other companies, but only if it deems them to be effective in improving corporate value from a medium- to long-term perspective in a comprehensive evaluation that considers its business strategy, future relationships with suppliers and affiliated companies, and other factors.

Verification of cross shareholding suitability

Each year, at a meeting of the Board of Directors, we make comprehensive verifications and assessments of the suitability of each cross shareholding based on quantitative factors, including whether dividends, business profits, and other figures exceed our weighted average cost of capital, as well as qualitative factors, including trading status and business-level collaborations. If a shareholding is determined to be unsuitable according to the verification, we decide on what course of action to take, including disposing of the shares.

Criteria for exercising voting rights

Rather than applying uniform decisions from typical and short-term criteria, we make decisions on each agenda item separately. We consider them from various perspectives, including corporate value improvement and shareholder returns 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 comprehensive decisions on whether to approve agenda items after closely investigating factors such as business performance, governance, and capital policy that would represent a conflict of interest with us, or would change or dilute our shareholdings.

Changes in volume of cross shareholdings

Succession plan

We recognize that cultivating the next generation of management is an important issue. We believe that we have secured a system in which the Director Remuneration and Personnel Planning Committee, a discretionary body, discusses and evaluates the qualities, development direction, and achievements of candidate personnel from an objective perspective, while also providing appropriate advice. Also, the president personally conducts training for the next generation of managers by meeting with managing executive officers and executive officers on a regular basis to discuss their individual goals and accomplishments.
In an environment of increasing uncertainty, Aichi Steel continuously provides training to cultivate the ability to take managerial decisions based on diverse knowledge and perspectives required of top management. In FY2023, we provided training for directors, managing executive officers, and executive officers under the title "Corporate Management: Sustainability and Human Capital." Keeping in mind recent cases involving corporate governance, the training was designed to reaffirm the importance of sustainability and human capital essentials, working with stakeholders, ensuring diversity, and human resource development. In addition, we have focused on nurturing management personnel by targeting executive officers who are candidates for the next generation of management executives, introducing a new support system in FY2024 for self-study to cultivate their organizational management and leadership skills.

Risk Management

Basic approach

The business environment is significantly changing and diversifying due to climate change, tension in international affairs, and other issues impacting business activities, as well as social instability caused by growing inequality. These social and environmental challenges are having a major impact on companies' value creation and business models. Faced with this situation, we have made risk management one of our top management priorities, and are working to minimize risks by enhancing and strengthening our controls. We classify potential impacts on 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.

Specific Initiatives

The Top Management Meeting, the highest decision-making body for business execution, meets twice a year, at the mid-point and at the end of the fiscal year, to review the progress of risk management and to discuss annual policies and the way forward. In 2024, a Chief Risk Officer (CRO) was installed as the person in charge of crisis management, and the Risk Management Headquarters was established, for the purpose of promoting preventive management in the normal course of events and strengthening the response to crisis events as they are foreseen or actually occur.

1. Reassessing major risks and studying

Having acquired IATF 16949^* certification in fiscal 2022, we have begun to reevaluate our major risks and to improve our response when disasters and other events occur, with the aim of strengthening our resilience to such events. We have reviewed our business continuity plan (BCP) by specifically analyzing and projecting the impact on our business.

• An international standard for quality management systems specialized for the automotive industry and used by many of the world’s automakers as their global procurement standard for automotive parts

2. Disaster prevention

(1) Awareness raising

We have updated our Guide to Emergency Disaster Management and distributed them to all employees to ensure that they fully understand the basics of disaster prevention actions in the event of an earthquake or other disaster.

(2) Measures against heavy rains and storm surges

Our main plant is located near the waterfront, so we need to be prepared for flooding and other risks. We are systematically promoting measures to prevent storm surges caused by giant typhoons, such as elevating production facilities and installing watertight panels, as incorporated in our FY2024-2026 Medium-term Management Plan.

(3) Emergency drills

We conduct companywide emergency drills twice a year. In FY2023, we conducted initial firefighting and rescue drills at our Forging Plant jointly with the Tokai City Fire Department. To improve our crisis response and judgment capabilities in emergencies, we also conducted role-playing and map-based simulations as practical training for an earthquake in the Nankai Trough. Without disclosing the hypothetical scenario in advance, we tried to raise awareness of disasters while helping participants understand the importance of an appropriate and prompt response to a constantly changing situation.

Strengthening of risk response

In order to cope more swiftly with an increasingly uncertain and complex business environment, we are verifying the effectiveness of measures to address emerging risks. We are gathering information about possible future risks (potential risks) more extensively and on a more global level than in the past.
Our functional divisions used to take the lead in addressing risks, but from now on, we will strengthen cooperation with our business divisions so that we can recognize risks more accurately than ever before and develop mechanisms to respond to them appropriately. By continuing to strengthen our risk response capabilities and reduce loss when risks materialize, we are striving to sustainably improve corporate value.

Compliance

Basic approach

Based on the recognition that compliance is the foundation of our corporate activities, we established the Aichi Steel Group Action Guidelines which we are working to spread and put into practice among all our officers and employees. In addition to laws and regulations, we also comply with social norms and decency, and internal company rules. To this end, we are constantly striving to raise awareness of compliance, meet society’s expectations, and fulfill our social responsibilities as a company.

Promotion structure

To maintain and strengthen compliance levels across the Group as a whole, we conduct progress reviews at the Top Management Meeting chaired by the president. This system enables us to share, with all employees, the determined initiative policies and activity plans via the persons in charge of compliance in each division and domestic group company, and to reflect them in activities being conducted in each workplace. Group companies engage in compliance activities by establishing promotion structures suited to their own size and circumstances. The Compliance Liaison Meeting also holds four meetings a year to share things like revisions to laws and regulations and points of concern regarding legal compliance, and to promote Groupwide compliance activities.

Specific initiatives

Whistle-blowing system

We have established a 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. Called the Aichi Steel Compliance Hotline, we have established three contact points operated by external legal representatives, internal Audit & Supervisory Board members, and the General Affairs Division. Reported information is shared among the three contact points, and appropriate measures are taken to ensure privacy protection and to prevent disadvantageous treatment. In FY2023, 14 cases were reported, all of which were investigated, verified, and dealt with appropriately in cooperation with the relevant internal and external parties.

Information Security

Basic approach

We possess important information assets, including information entrusted to us by our customers and suppliers, as well as trade secrets held by us. Amid recent advances in the networking of remote operations and plant equipment, it is our corporate responsibility to protect information assets from annually increasing cyber attacks and other threats, as well as information leaks, and to ensure a stable supply of products. We also recognize that this is an important management issue, and are committed to taking information security measures.

Promotion structure

Based on automotive industry cybersecurity guidelines and led by a Chief Information Security Officer (CISO), we have established a system that enables us to maintain and improve our information security on a systematic and ongoing basis groupwide, while ensuring a uniform level of security globally. The CISO oversees our group's overall information security and information asset protection, and individual organizations are responsible for 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.