Espec : Corporate Governance Report

Corporate Governance Report

Last Update: December 10, 2021

ESPEC CORP.

President: Masaaki Ishida

Contact: General Affairs & Personnel Department Securities Code: 6859 https://www.espec.co.jp/english/

The corporate governance of ESPEC CORP. (the "Company") is described below.

1. Basic Views on Corporate Governance, Capital Structure, Corporate Profile and

Other Basic Information

1. Basic Views

The Company firmly believes that a corporation is a public institution, or a social apparatus with roles and functions for fulfilling people's wishes and living up to the expectations of society. Based on this philosophy, the Company aims to become a highly efficient corporate medium for exchanging value. Accordingly, the Company shall provide all stakeholders with higher value through the mutually beneficial relationships it builds with shareholders, customers, business partners, employees and all other stakeholders it interacts with in the course of conducting its corporate business activities.

By continually enhancing corporate governance with this philosophy as an impetus, the Company shall realize sustainable growth and enhance corporate value over the medium to long term, while fulfilling its social responsibility to stakeholders.

The Company's basic views, policy for engagement in each principle, and status of implementation of the Corporate Governance Code have been formulated in a separate Basic Policy on Corporate Governance, publically disclosed on the Company's website. https://www.espec.co.jp/english/ir/management/pdf/governance_policy.pdf

[Reasons for Non-compliance with the Principles of the Corporate Governance Code] (Updated)

The Company has implemented each principle of the Corporate Governance Code after its revision in June 2021 in accordance with the above basic policy.

[Disclosure Based on the Principles of the Corporate Governance Code] (Updated)

The Company has disclosed information based on the Corporate Governance Code after its revision in June 2021.

Please refer to the following articles of the Basic Policy on Corporate Governance for details on matters that ought to be disclosed under the Corporate Governance Code.

[Principle 1.4 Cross-Shareholdings]

Article 5. Cross-Shareholdings

At a meeting of the Board of Directors held on December 8, 2020, the Company verified the need for individual cross-shareholdings in its possession. As a result of the verification, the Company disclosed in its Annual Securities Report the shares it decided to continue to possess and the objectives in doing so.

[Principle 1.7 Related Party Transactions]

Article 6. Related Party Transactions

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[Supplementary Principle 2.4.1 Ensuring Diversity in the Promotion of Core Human Resources, etc.]

Article 9. Promotion of Diversity

(1) Policies on Ensuring Diversity in the Promotion of Core Human Resources, etc.

The Company embraces diversity regardless of gender, age, nationality, or any other characteristic, and appropriately manages frameworks for human resources recruitment, promotion, training, evaluation and so forth, so that the Company's broad spectrum of human resources can demonstrate their individuality and abilities. For information on initiatives to promote the active participation of diverse human resources, please see the Company's Sustainability Report.

https://www.espec.co.jp/sustainability/report.html

1. Voluntary and Measurable Goals for Ensuring Diversity and Current Status Thereof

1. Promotion of women to managers

The Company is actively engaged in building an organization where motivated and capable women can enjoy a good working environment and actively participate in the workforce. Since fiscal 2013, the Company has been offering female leader development programs, along with striving to nurture female employees into managers and to expand the scope of their occupations and job duties. As of the end of fiscal 2020, the Company has 1 female officer (including executive officers) and the ratio of female managers stood at 4.7%. By fiscal 2025, the Company aims to achieve a ratio of female managers of 10% or more.

2. Promotion of foreign nationals to managers

The Company strives to secure talented human resources, regardless of nationality. For example, in the hiring process, the Company has set a certain target for the recruitment of non-Japanese nationals and actively hires such individuals. Currently, the Company does not yet have a foreign national manager. It will push ahead with human resources development to secure such managers.

3. Promotion of midcareer hires to managers

Midcareer hires account for 30% of the number of the Company's managers, almost the same percentage as the ratio of midcareer hires to all employees. Going forward, the Company will continue to promote midcareer hires to managers, with a view to ensuring even more diversity.

1. Policies on Human Resource Development and Internal Environment Development to Ensure Diversity

1. Provide motivated and capable human resources with a diverse range of support for growth and

opportunities to succeed

Personal growth is highly dependent on individual will and motivation. Indeed, such growth can be described as a personal priority. The Company provides capable employees who are eager to grow with a diverse range of support for growth and opportunities to realize their ambitions.

2. Developing an environment in support of diverse workstyles

The Company believes that it is important for it to develop an environment where employees can fully demonstrate their abilities with peace of mind. The workstyles that people desire are constantly changing with the times. To an appropriate extent, the Company will strive to develop an advanced workplace environment in support of diverse workstyles that meet the demands of the times.

[Principle 2.6 Roles of Corporate Pension Funds as Asset Owners]

To ensure appropriate operation of its defined benefit pension plan, the Company has established operational goals and a policy asset composition from a medium- to long-term standpoint, and entrusts its corporate pension to an investment management institution that accepts Japan's Stewardship Code. From an operational viewpoint, the Company assigns human resources with appropriate skills as heads of the finance and personnel departments and monitors the operational status of the operational institution. Moreover, to ensure transparency in regard to conflicts of interest, the Company notifies employees of the results of fund operations.

[Principle 3.1 Full Disclosure]

Article 1. Basic Stance on Corporate Governance

Article 7. The Company's Corporate Philosophy, Management Policy, and Relationship with Stakeholders Article 14. Method and Procedures for Nominating a Candidate for Director

Article 17. Method and Procedures for Nominating a Candidate for Audit & Supervisory Board Member Article 19. Compensation of Directors and Audit & Supervisory Board Members

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・The Company shall disclose its reasons behind the nomination of candidates for director and audit & supervisory board member in the reference materials to its Notice for Convening a Shareholders Meeting. https://www.espec.co.jp/english/news/2021/0525.pdf

・The policy and procedures by which the Board of Directors determines the compensation of the management executives and directors is disclosed in this report under "Disclosure of Policy and Calculation Method for Determining Compensation Amounts", in the business report included in the convocation notice for the general meeting of shareholders, and the Annual Securities Report.

[Supplementary Principle 3.1.3 Initiatives on Sustainability] Article 8. Policy on Sustainability

(1) Initiatives on Sustainability

THE ESPEC MIND, which is the Company's corporate philosophy, contains two important beliefs. The first belief is that a corporation is a public institution. The second belief is that the Company should aim to enhance its value exchangeability with all its stakeholders. Guided by this corporate philosophy, the Company has formulated ESPEC Vision 2025, where it clearly defines what kind of company and team it wants to be in the future, and what kinds of businesses it will pursue to create value. By implementing THE ESPEC MIND and ESPEC Vision, the Company seeks to achieve sustainable growth and contribute to society. For information on policies and initiatives related to the Company's sustainability, please see its Sustainability Report. https://www.espec.co.jp/sustainability/report.html

(2) Investments in Human Capital

The Company aims to maximize employees' abilities and energy through efforts to develop and nurture high- quality human resources who are strongly ambitious. For information on initiatives related to investments in human capital, please see the Company's Sustainability Report. https://www.espec.co.jp/sustainability/report.html

(3) Investments in Intellectual Properties

Regarding patents and technology-based designs, the Company strategically submits applications and acquires and exercises rights, along with continuously making a certain level of investment in the development of new technologies and products. In addition, the Company has developed a security framework to protect intellectual properties. Moreover, the Company regularly holds Company-wide technology networking meetings to bring out the creativity and ingenuity of employees. Concurrently, the Company works to raise employee motivation and enhance technical capabilities by, for example, presenting awards through the ESPEC Idea Challenge program, and by providing incentives based on invention and design handling regulations. For details on specific research and development initiatives, please see "Research and Development Activities" in the Annual Securities Report. https://www.espec.co.jp/ir/library/security.html

[Supplementary Principle 4.1.1 Scope of Delegation to Management] Article 12. Roles of the Board of Directors

[Principle 4.9 Criteria for the Independence of Independent Outside Directors] Article 14. Method and Procedures for Nominating a Candidate for Director

[Supplementary Principle 4.11.1 Size, Diversity and Overall Balance of the Board of Directors] Article 13. Composition of the Board of Directors

Article 14. Method and Procedures for Nominating a Candidate for Director

[Supplementary Principle 4.11.2 Directors and Audit & Supervisory Board Members Concurrently Holding Positions at Other Listed Companies]

Article 20. Tenure of Outside Directors and Outside Audit & Supervisory Board Members and Their Concurrent Positions at Other Companies

The Company discloses the status of its directors and audit & supervisory board members holding important concurrent positions in other companies in the reference materials, business report and other content attached to its Notice for Convening a Shareholders Meeting.

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[Supplementary Principle 4.11.3 Evaluating the Effectiveness of the Board of Directors] Article 21. Evaluating the Effectiveness of the Board of Directors

To evaluate the effectiveness of the Board of Directors during fiscal 2020, the Board of Directors met in April 2021 to analyze and evaluate their effectiveness as a whole. As an evaluation method, the outside directors as the responsible officers, had all board members and Audit & Supervisory Board members fill out a questionnaire-styleself-evaluation of the organization, functions,] and conduct of the Board of Directors, as well as the support it had received. Based on the results, follow-up interviews were conducted. As a result, it was judged that the effectiveness of the Board of Directors as a whole has been secured based on the confirmation that the Board had put in place an organization for fulfilling its function of supervising management, and that conditions within the Board contributed to discussions and exchanges of opinions in a free, uninhibited and constructive manner. Meanwhile, the Board of Directors confirmed the need to work on expanding the ratio of outside directors and ensuring the board's diversity as issues that must be addressed going forward. Looking ahead, we will continue to have discussions from various perspectives and endeavor to further improve the Board's effectiveness.

Results of the evaluation of the effectiveness of the Board of Directors have been posted on the Company's website.

https://www.espec.co.jp/english/csr/management/

[Supplementary Principle 4.14.2 Training for Directors and Audit & Supervisory Board Members]

Article 24. Training for Directors and Audit & Supervisory Board Members

[Principle 5.1 Policy for Constructive Dialogue with Shareholders] Article 25. Dialogue with Shareholders

The Company has formulated and disclosed a separate investor relations IR policy outlining its basic stance for realizing a constructive dialogue with shareholders. https://www.espec.co.jp/english/ir/policy.html

2. Capital Structure

		Foreign Shareholding Ratio			From 10% to less than 20%
[Status of Major Shareholders] (Updated)
		Name / Company Name		Number of Shares Owned	Percentage (%)
	The Master Trust Bank of Japan, Ltd. (Trust account)		4,552,500	20.18
	ESPEC Business Partners' Stockholding Association		2,190,160	9.71
	Custody Bank of Japan, Ltd. (Trust account)		1,756,100	7.78
	ESPEC Employee Stockholding Association		742,750	3.29
	Nippon Life Insurance Company		553,600	2.45
	Yoshiki Sasaki		520,000	2.30
	Mizuho Bank, Ltd.		513,500	2.27
	TACHIBANA ELETECH CO., LTD.		419,083	1.85
	Custody Bank of Japan, Ltd. (Trust account 9)		342,400	1.51
	Inaba Denki Sangyo Co., Ltd.		310,600	1.37
		Controlling Shareholder (except for Parent			-
		Company)
		Parent Company			None
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Supplementary Explanation (Updated)

The Company owns 1,231,846 shares of treasury stock in addition to the shares mentioned above.

3. Corporate Attributes

	Listed Stock Market and Market Section		Tokyo Stock Exchange
		First Section
	Fiscal Year-End		March
	Type of Business		Electric Appliances
	Number of Employees (consolidated) as of the End		More than 1,000
	of the Previous Fiscal Year
	Sales (consolidated) as of the End of the Previous		From ¥10 billion to less than ¥100 billion
	Fiscal Year
	Number of Consolidated Subsidiaries as of the End		From 10 to less than 50
	of the Previous Fiscal Year

1. Policy on Measures to Protect Minority Shareholders in Conducting Transactions with Controlling Shareholder
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2. Other Special Circumstances which may have Material Impact on Corporate Governance

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II. Business Management Organization and Other Corporate Governance Systems regarding Decision-making, Execution of Business, and Oversight in Management

1. Organizational Composition and Operation

		Organization Form			Company with Audit & Supervisory Board
[Directors]
		Maximum Number of Directors Stipulated	in	8
		Articles of Incorporation
		Term of Office Stipulated in	Articles	of	1 year
		Incorporation
		Chairperson of the Board			President
		Number of Directors			8
		Appointment of outside directors			Appointed
		Number of Outside Directors			2
		Number of Independent Directors			2

Outside Directors' Relationship with the Company (1)

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