Daiwabo : Corporate Governance Report

This document has been translated from the Japanese original for reference purposes only. In the event of any discrepancy between this translated document and the Japanese original, the original shall prevail.

Last updated: June 30, 2022

Daiwabo Holdings Co., Ltd.

Yukihiro Nishimura, Representative Director, President and Chief Executive Officer Contact: Legal/Compliance Department Securities Code: 3107 https://www.daiwabo-holdings.com/

The status of the corporate governance of Daiwabo Holdings Co., Ltd. (hereinafter, "we," "us," "our" or the "Company") is as follows:

I. Basic views on corporate governance, capital structure, corporate attributes, and other basic information

1. Basic views

We regard corporate governance as one of our highest management priorities. Our basic management policy is to strengthen the business management of Group companies and to improve the management efficiency of, and ensure thorough governance of, the entire Group by improving our audit system. We also strive to ensure the transparency and soundness of our management through sufficient, appropriate and timely disclosure.

One of our group norms is "truth and justice." Through prompt, appropriate decision-making and our internal control function, we intend to build good trusting relationships with our shareholders, customers, employees, local communities, and other stakeholders and to fulfill our corporate social responsibility.

[Supplementary Principle 2.4.1]

In our Medium-Term Management Plan covering the period up to the fiscal year ending March 2024, our policy for developing human resources who will support our continuous growth includes: making strategic investments in active promotion of employees and educational and training programs; utilizing human resources through cooperation across the Group; and creating working environments that allow our employees to work energetically.

Pursuant to the aforementioned policy, we have, with the intention of creating working environments that will allow active participation of women: worked on the active promotion of female employees through training and fair evaluation processes that are free from sexual discrimination; and improved our maternal protection and childcare leave programs, among other things.

In addition, we have actively worked on the employment of foreign nationals, mainly in technical fields, in order to enhance our international competitiveness.

As for midcareer hiring, although we have not regularly hired midcareer workers, we intend to consider doing so to recruit core human resources in technical fields.

Although we have not yet set numerical goals for these efforts to ensure diversity in our human resources, we intend to consider setting target values according to the respective categories and policies of our Group's businesses.

[Principle 2.6]

Our Group's corporate pension funds are managed in different ways by different Group companies.

Each Group company entrusts the management of contributions, either directly or through funds, to fund management organizations in Japan and abroad. By leaving the selection of individual investments and the exercise of voting rights to the discretion of its fund management organizations, each Group company prevents conflicts of interest between beneficiaries of its corporate pension funds and the company.

Each Group company checks the soundness of the general management of its corporate pension funds through deliberation at regular meetings of its asset management committee, etc. A future action for consideration is to develop human resources with expertise in financial and personnel affairs to give instructions on the management of our corporate pension funds. The aim of this is to allow more advanced management and to monitor our fund management organizations and fulfill other expected functions. We intend to consider providing systematic training programs.

[Supplementary Principles 3.1.3 and 4.2.2]

Our Group's basic views on sustainability are disclosed on our website. Our Board of Directors has established an ESG Promotion Committee chaired by the representative director. The Committee's basic policy is consistent with our business strategies and business issues, and lists priority topics including not only "defensive ESG," which will lead to a reduction in business risk, such as CO2 emission reduction or occupational health and safety in business activities, but also "aggressive ESG," which will lead to an increase in business

opportunities, such as providing goods and services intended to help solve social problems. The Committee plans, approves, and checks the progress of, various activities including our climate change action.

As for our response to the TCFD, we have been analyzing the risks and opportunities that climate change poses to the business of the Company. We endorse its aims and have made disclosures on our company website based on the framework.

(Investments in human capital and intellectual property rights)

Our Medium-Term Management Plan aims to increase our return on invested capital (ROIC) in excess of the capital cost over the medium to long term through capital-efficiency-conscious management, thereby striving to increase our corporate value continuously.

In that plan, our investments in human capital include, under our policy for developing human resources who will support our continuous growth, making strategic investments in the active promotion of certain human resources and in educational and training programs. They also include striving to utilize human resources through cooperation across the Group and to create working environments that will allow our employees to work energetically.

As for investments in intellectual property rights, we have focused on research and development, mainly in our textile business and industrial machinery business, to lead to the provision of goods and services that help solve social problems. We have also promoted efficient measures utilizing information and communications technology (ICT).

We intend to conduct effective monitoring to ensure that the efficient utilization of these management resources will contribute to our continuous growth and to increasing our corporate value.

[Supplementary Principle 4.1.3]

We have not yet established a plan for the development of successors for the post of representative director or any other CEO. However, our policy is to increase these successors' knowledge and experience and improve their abilities by having them involved in our Group's business decisions in their capacity as executive directors, non-executive directors, directors with special titles or directors of Group companies. Hence, the Board of Directors supervises whether the process of their development is managed appropriately, reasonably and fairly. In the future, the Nomination Committee, composed of the Representative Director and the independent outside directors, will carry out deliberations to formulate a succession plan.

[Supplementary Principle 4.11.1]

Our Board of Directors consists of persons who are well versed in the relevant businesses and have knowledge in management. The number of members on the Board must be no more than 10, with no less than one-third of the members appointed having to be outside directors. As described in the Daiwabo Holdings Corporate Governance Guidelines, the qualifications for appointment of our directors include being a person who accepts management responsibility entrusted by shareholders, has extensive experience and broad knowledge in management, and is capable of fulfilling the duties and responsibilities of a director.

In nominating Directors, etc., the Company formulates a draft after taking into consideration the knowledge, experience, ability, etc., required of Directors in light of the management strategy, and the Nomination Committee carries out deliberations, followed by deliberation by the Board of Directors to determine candidates. As for the development and disclosure of what is known as a "skills matrix" which provides an overview of the knowledge, experience, skills, etc. represented by the directors, consideration is currently underway as to how specifically this action should be taken.

[Supplementary Principle 5.2.1]

We established and published on our website our Medium-Term Management Plan covering the period up to the fiscal year ending March 2024. While the plan is based on our current business portfolio, it regards the period it covers as a time of transition for our future development, and sets the following Basic Group Policy: "The creation of next-generation growth drivers," "Contributions to the creation of a new society as a leading company," and "Reform of management foundations." We intend to make efforts to increase our corporate value by putting our growth strategies for the next era into motion and making social contributions through our business, by checking, for each of our business segments, our capital efficiency, the market trends, the growth potential and profitability of our business, among other things. The aim is to ensure that our business portfolio is reviewed promptly and constantly in response to changes in the environment.

[Principle 1.4]

Our holding of any shares for purposes other than investment is subject to our Board of Directors' determination that the shareholding will contribute to the maintenance and improvement of our Group's corporate value over the medium to long term, after the Board's deliberation. This is done by taking comprehensively into consideration: the qualitative side of the purposes of the shareholding, such as securing, enhancing or expanding a business relationship, or facilitating or stabilizing financing; and the quantitative side of purposes such as dividends, profits from related transactions, and other related income, a comparison between return on investment and capital cost, investment risk, and the relevant company's growth potential.

Every year, our Board of Directors checks our individual cross-shareholdings in terms of their purposes, economic rationality, etc. to review whether or not the shareholdings should be continued and the number of shares held. If it is determined that any shareholding will not to lead to an increase in our corporate value over the medium to long term based on the determination criteria described above, we intend to reduce the shareholding through sufficient dialogue with the other company.

As for our voting rights, we will exercise them after fully investigating the reasons, purposes, etc. of all proposals that we deem to require careful consideration in order to increase both our corporate value and that of the company we invest in over the medium to long term, and after checking also from the viewpoint of corporate governance and our social responsibility.

[Principle 1.7]

When we engage in related party transactions, such as with our directors or with corporations substantially controlled by our directors, our Board of Directors secures the soundness and appropriateness of the transactions by informing our directors of the fact that the transactions are related party transactions and conducting careful deliberation and by seeking advice from our outside directors and Audit & Supervisory Board. This is done to ensure that such transactions do not harm our interests or the common interests of our

shareholders.

[Principle 3.1]

1. An outline of our business principles is disclosed on our website. An outline of our business strategies and business plans is disclosed in our securities reports.
   We also announced and published on our website on May 13, 2021 our Medium-Term Management Plan covering the period up to the fiscal year ending March 2024.
2. As for our basic views on corporate governance, we have established and published on our website the Daiwabo Holdings Corporate Governance Guidelines.
3. The remuneration of our directors is described under the heading, "Disclosure of the policy for determining the amounts of, or the method of calculating the amounts of, remuneration" under the heading "Remuneration of directors" in part II of this report.
4. Our policy for appointing directors is to appoint from candidates who accept management responsibility entrusted by shareholders, have extensive experience and knowledge in management, and are capable of fulfilling the duties and responsibilities of directors. Our policy for appointing kansayaku (corresponding to our Audit & Supervisory Board Members) is to appoint from candidates who have extensive knowledge and advanced expertise and are capable of fulfilling the duties and responsibilities of kansayaku.
   Pursuant to these policies, when we nominate director candidates or appoint or dismiss our president, who serves as the chief executive officer, and other members of the management team, we prepare an original proposal by taking into consideration the knowledge, experience, and abilities required of Directors in light of the management strategy based on the continuous evaluation of the candidates' past performance records, knowledge, qualifications, etc. and the Nomination Committee carries out deliberation, followed by submission to and a decision by the Board of Directors. When we nominate candidates for kansayaku or dismiss kansayaku, we not only conduct examinations as with director candidates but also take fully into consideration opinions expressed during discussions with the Audit & Supervisory Board and, upon the consent of the Audit & Supervisory Board, the Nomination Committee carries out deliberation, followed by submission to and a decision by the Board of Directors. In addition, if a director or kansayaku violates any law or regulation or our Articles of Incorporation or if any other event arises that is considered to make it difficult for a director or kansayaku to perform their duties appropriately, we will decide on their dismissal from their post or on any other action or on the submission of a proposal for their dismissal to the General Meeting of Shareholders after the Nomination Committee carries out deliberation, followed by submission to and a decision by the Board of Directors.
5. The grounds for the individual appointments or nominations of director or kansayaku candidates are described in the reference materials for the relevant general meeting of shareholders attached to the notice of convocation of the meeting.

[Supplementary Principle 4.1.1]

Our Board of Directors establishes business strategies, business plans, and other business policies, creates an environment where appropriate risk-taking by the management is supported, and carries out effective oversight of the management.

The Board of Directors leaves daily management tasks that are not subject to the Board's resolution to the executive directors, and receives reports from them on the status of their respective tasks and on business issues. The directors provide feedback and opinions on these reports, while outside directors provide advice, etc. from their independent stance.

[Principle 4.9]

Our basic requirements for appointing independent officers are: having an excellent personality and knowledge; being expected to fulfill such functions and roles as conducting objective and appropriate supervision and audit from a professional perspective; and being unlikely to cause conflicts of interest with general shareholders.

Our independence criteria have been established and are disclosed on our website as part of the Daiwabo Holdings Corporate Governance Guidelines, based on the Tokyo Stock Exchange's criteria.

[Supplementary Principle 4.10.1]

Currently, we have four independent outside directors out of a total of seven, with the former forming a majority. The Company has established the Remuneration Committee and the Nomination Committee as voluntary advisory committees to the Board of Directors, with a majority of the total number of committee members being independent outside directors. The Remuneration Committee is required to provide the Board of Directors with reports and recommendations for determining, among other things, the amount of performance-based monetary remuneration and performance-based stock remuneration, etc., and the Board of Directors is to make determinations pursuant to the content of these reports. The Nomination Committee shall submit reports and recommendations to the Board of Directors on the draft proposal for the election of Directors or kansayaku, etc., to be consulted by the Board of Directors, and the Board of Directors shall decide such proposals pursuant to the content of these reports.

[Supplementary Principle 4.11.2]

None of our officers concurrently serves as an executive director of any other listed company. This provides a framework that allows our officers to concentrate on their respective duties at our organization.

The status of concurrent service of our officers is disclosed every year in the notices of convocation of general meetings of shareholders and the securities report, and they indicate that the status of concurrent service of our officers other than as executive directors of other listed companies is within a reasonable extent.

Any such concurrent service by any of our officers is decided on subject to approval of the Board of Directors.

[Supplementary Principle 4.11.3]

In order to evaluate and analyze the effectiveness of the Board of Directors as a whole for the 2021 fiscal year, we conducted a questionnaire survey on all directors and kansayaku during the period from mid-April to mid-May 2022, and discussed the summarized results of the survey at the Board of Directors meeting.

The questionnaire contained questions broadly categorized into, among others: the composition of the Board of Directors; the holding of the Board of Directors meetings; matters required to be submitted or reported to the Board of Directors; deliberation at the Board of Directors meetings; support to officers; and the respondent's own efforts. Each of the categories contained individual questions to be answered.

The survey results indicate that, in terms of the timing of submission of proposals, prior explanations, the understandability of