Corporate Governance System

Outline of corporate governance system

The Board of Directors of SECOM Co., Ltd., makes decisions pertaining to business execution and other corporate matters. Executive officers, led by the President and Representative Director, are responsible for business execution. Corporate auditors, of whom three are outside corporate auditors, and the Board of Directors coordinate with internal audit departments, to audit and oversee directors and executive officers in the discharge of their duties. SECOM has adopted the Corporate Auditor System.

Pursuant to the provisions of Article 427, paragraph 1 of the Companies Act, SECOM has entered into a contract with each of its three outside corporate auditors that limits liability for compensation for damages under Article 423, paragraph 1 of the Companies Act. The contract states that:

1. In the event the outside corporate auditor is liable to compensate the Company for damages due to negligence in the performance of his or her duty, compensation shall be limited to the minimum amount as provided for in Article 427, paragraph 1 of the Companies Act.
2. The limitation on compensation described in (1) shall be restricted to instances in which the outside auditor has discharged his or her duties in good faith and the liability has not resulted from gross negligence.

Reasons for adoption of corporate governance system

The Company has adopted an executive officer system with the aim of strengthening field divisions and enhancing customer service systems by expediting business execution and clarifying responsibilities and authority. Three outside corporate auditors who are separate from management, are appointed to fulfill the Company's responsibility to conduct independent audits of management performance that take into account the interests of stakeholders.

Other information regarding the corporate governance system (status of internal control and risk management systems)

To comply with Article 362, paragraph 4, Item 6 of the Companies Act and Article 100, paragraphs 1 and 3, of the Companies Act Enforcement Order, the Board of Directors passed a resolution regarding the Company’s basic policy on the establishment of an internal control system, i.e., the system under which execution of duties by directors is ensured to comply with laws and regulations and the Articles of Incorporation, and the system under which the Company’s business is ensured to be properly executed. In accordance with this resolution, the Company has set forth a basic policy for an internal control system (also pertinent to the Company’s risk management system) to be implemented by the President and Representative Director, pursuant to Article 362, paragraph 5 of the Companies Act. In line with this resolution, pertinent directors are pressing forward with efforts to establish an internal control system, subjecting the system to constant review to facilitate improvement.

Internal Audits and Audits by Corporate Auditors

Organization of internal audits and audits by corporate auditors

Corporate auditors and the Board of Corporate Auditors

The Board of Corporate Auditors comprises five members, of whom two are full-time auditors and three are outside corporate auditors. In principle, the Board of Corporate Auditors meets once monthly. The Company appoints persons who are well versed in the Company’s businesses and internal affairs, as well as in finance and accounting, to serve as full-time corporate auditors. For outside corporate auditors, the Company appoints persons who are independent of the management team, have extensive knowledge of management, legal, financial and other matters and are capable of providing appropriate oversight and supervision of management.

Corporate auditors attend almost all meetings of the Board of Directors, as well as other important meetings, exchange opinions with directors and others on overall corporate management, collect reports on the discharge of duties from directors and other pertinent individuals and conduct audits focused on the possible occurrence of violations of laws, regulations, the Company’s Articles of Incorporation and/or shareholders’ interests. The Board of Corporate Auditors also conducts audits of the Company’s businesses, as well as those of subsidiaries and affiliates, in accordance with the annual audit plan.

Office of Corporate Auditors

The Office of Corporate Auditors, which is administered by the Board of Corporate Auditors, comprises a minimum of two full-time assistants who are well versed in the Company’s businesses and internal affairs. These employees, who are assigned exclusively to this office, operate independent of the directors and are not subject to instructions or orders from directors, corporate officers or other employees with respect to the discharge of their auditing duties. Transfers and evaluations of employees assigned to the Office of Corporate Auditors are subject to approval by the Board of Corporate Auditors.

Audit and Compliance Department

Under the direct control of the President and Representative Director, the Audit and Compliance Department is an internal auditing body that conducts cross-organizational inspections of administrative practices and the status of operations independent of day-to-day operations that aim to ensure business is conducted in an appropriate manner. The Audit and Compliance Department also functions as a hotline for employees who wish to report incidents or seek advice regarding compliance.

Organizational Culture Committee

The Company has established the Organizational Culture Committee, a standing committee chaired by the President and Representative Director that is tasked with examining key corporate culture-related issues, including compliance issues, as well as with determining important official commendations and punishments.

Cooperation in the implementation of internal audits, corporate audits and accounting audits and relations among related departments

Regular meetings between the Representative Director and others and the corporate auditors

Corporate auditors hold regular meetings (once monthly) with the President and Representative Director, during which they report on the results of audits and other matters and exchange opinions with the President and Representative Director on important management-related tasks with the aim of ensuring common understanding. These meetings are also attended by the Chairman and the Executive Vice Chairman, both of whom are also directors.

Meetings between corporate auditors and accounting auditors

Corporate auditors hold regular meetings (six times annually) with the accounting auditors, as well as additional meetings if necessary, for the purpose of exchanging opinions and information. The corporate auditors receive explanations from the accounting auditors regarding the annual audit plan and audit results from, and exchange opinions with, the accounting auditors. If necessary, corporate auditors also act as witnesses during audits and auditing reviews conducted by the accounting auditors.

Cooperation with internal audit departments and other departments

Corporate auditors hold regular meetings (once monthly) with the Audit and Compliance Department, where they receive reports on internal audit results and exchange opinions with the Audit and Compliance Department. If necessary, to ensure the efficiency of audits, corporate auditors also request internal audit departments to conduct investigations.

Outside Directors and Outside Corporate Auditors

Number of outside directors and outside corporate auditors and relationships (personal, financial, business or otherwise) of these individuals with the Company

The Company has not appointed outside directors, but it has appointed three outside corporate auditors. One of these individuals is an attorney with the law firm that has advised the Company since its founding and serves as an independent officer. The other two individuals also bring extensive experience to the position, having served as CEOs for companies in other industries. The Company has taken care to ensure its relationships with the law firm and the first corporate auditor involve no conflict of interest. For the other two corporate auditors, no relevant relationships exist.

Role of outside corporate auditors in corporate governance and status of the appointment of outside corporate auditor

The Company appoints corporate auditors who have extensive knowledge of management, legal, financial and other matters (including three independent outside corporate auditors) and has established auditing organizations (including the Office of Corporate Auditors) that operate independent of day-to-day operations and a process (includes periodic meetings between the President and Representative Director and the corporate auditors) that ensures the objective and neutral opinions of corporate auditors are reflected promptly in operations. As a consequence, the Company believes it fulfills its responsibility to conduct independent audits of management performance that take into account the interests of stakeholders.

Coordination of audits by outside corporate auditors with internal audits, audits by corporate auditors and accounting audits, and relations with internal control department

Regular meetings between the Representative Director and others and corporate auditors

Outside corporate auditors hold regular meetings (once monthly) with the President and Representative Director, during which they report on the results of audits and other matters and exchange opinions with the President and Representative Director on important management-related tasks with the aim of ensuring common understanding. These meetings are also attended by the Chairman and the Executive Vice Chairman, both of whom are also directors.

Meetings between corporate auditors and accounting auditors

Outside corporate auditors hold regular meetings with the accounting auditors for the purpose of exchanging opinions and information. The corporate auditors receive explanations from the accounting auditors regarding the annual audit plan and audit results from, and exchange opinions with, the accounting auditors. If necessary, outside corporate auditors also act as witnesses during audits and auditing reviews conducted by the accounting auditors.

Cooperation with internal audit departments and other departments

Outside corporate auditors hold regular meetings with the Audit and Compliance Department, where they receive reports on internal audit results and exchange opinions with the Audit and Compliance Department. If necessary, to ensure the efficiency of audits, corporate auditors also request internal audit departments to conduct investigations.

Internal system that functions in place of outside directors and reasons for adopting this system

The Company has not appointed outside directors, but it has appointed corporate auditors (including three independent outside corporate auditors) who have extensive knowledge of management, legal, financial and other matters and has established auditing organizations (including the Office of Corporate Auditors) that operate independent of day-to-day operations and a process (includes periodic meetings between the President and Representative Director and the corporate auditors) that ensures the objective and neutral opinions of corporate auditors are reflected promptly in operations. As a consequence, the Company believes it fulfills its responsibility to conduct independent audits of management performance that take into account the interests of stakeholders.