1. Corporate Governance in Japan Board Structure and its implication to the function of the Board – Japanese Experience 26th February 2004 Masatoshi Toriihara, Statutory Auditor, CSK Corporation and Member, Committee of Corporate Governance, Japan Association of Corporate Directors Policy Dialogue on Corporate Governance in China

2. Executive officers 1 ． Transitions of Japanese-style management Mutual dependence among companies Crossholding of shares, main financing bank system, company groups, etc. Mutual dependence among companies Crossholding of shares, main financing bank system, company groups, etc. Japanese-style employment practice Lifetime employment, seniority system, company union, etc. Japanese-style employment practice Lifetime employment, seniority system, company union, etc. Industrial policy Administrative control, public-private cooperation framework, coordination in a industry group, etc. Industrial policy Administrative control, public-private cooperation framework, coordination in a industry group, etc. Ambiguous corporate accounting practice Limited disclosure of corporate information Ambiguous corporate accounting practice Limited disclosure of corporate information Era of Japanese-style corporate governance Governance by management, bank and economic agencies of state Japanese-style management 1960s ・・・ 1980s High-growth period 2000 ～ ・・・・・・ Change of capital market Indirect financing → Direct financing Change of capital market Indirect financing → Direct financing Shift to borderless economy Global economization Trade and capital liberalization Big ban, IT revolution Shift to borderless economy Global economization Trade and capital liberalization Big ban, IT revolution Corporate scandal (Limitation of Japanese-style governance) New corporate governance Reform of the board of directors Introduction of US-style Enhancement of auditor's authority Independent board members Independent board members System selectivity 1990s Lost decade Economic bubbles Shareholder value

3. 2 ． Transitions of corporate governance 1960s ・・・ 1980s2000 ～ 1990s ・ Employee board member (representative from each department) Loyalty Moral ・ Large number ・ Expansion of the president's (CEO's) authority ・ Authority for personnel shuffle of the President's auditor ・ Stultified as an auditing organization (auditor and executor) ・ No external control ・ Authority for operational audit ・ Accounting auditor system ・ Several statutory auditors ・ Coordination with accounting auditors 1993 ・ 3 years,3 auditors ・ Independent auditors ・ Board of auditors 1998 ・ Introduction of executive officers ・ Internal appointment 2002 ・ Company with the boad committee established ・ Independent dorectors 2003 ・ Term: 4 years ・ Independent auditors （ more than half ） ・ Independence Points (issues) Reform Board directors Auditors Stateenterprise 1985 Privatization of Nippon Telegraph and Telephone Public Corporation (NTT) 1987 Privatization and separation of the Japanese National Railways (JR) 2003 Launch of Japan Post Heyday of Japanese- style management Cross shareholdings Main financing bank system Lifetime employment Promotion by seniority Administrative control (Public company)

4. 3 ． Request for establishment of corporate governance with emphasis on shareholders 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 1950556065707580859095200002 Individual shareholders Financial institutions Business corporations Foreign shareholders Annuity trust Investment trust ％ National stock exchange 2002 Increase of individual shareholders The total number of individual shareholders increased 250, 000 to 33,770,000. It has been increasing for 7 years in a row. Increase of individual shareholders The total number of individual shareholders increased 250, 000 to 33,770,000. It has been increasing for 7 years in a row. Transition of shareholding ratio by holder Fund-raising of the companies has consistently depended on indirect financing centered on banks since the World War II. It is now shifted to direct financing-oriented fund-raising after experiencing financial Big Bang and collapse of bubble economy. Main financing bank Loan Crossholdings of shares Individual Corporate stock Credit ・ Financial crisis ・ Big Bang ・ Deregulation of stock market ・ Financial crisis ・ Big Bang ・ Deregulation of stock market ＜ Indirect financing ＞＜ Direct financing ＞ Change of company's fund raising

5. Board meeting Shareholders’ meeting Auditors’ meeting Selective starting from April 2003 4 ． Selective system ～ Commercial law revision on board reform ～ Existing type Auditor model Company with the committee established Company with the major asset committee established Board meeting Shareholders’ meeting Auditors’ meeting Major asset committee Board meeting Shareholders meeting Nomination committee Executive officer Audit committee Compensation committee Commercial law revision of 2002 focused on enhancing compliance and transparency/efficiency of the management using external human resources (independent board members), and established the new system which separates the operating organization from the supervisory organization and ensures the effectiveness of agile management and supervisory functions. It also allows major corporations to select the company form from the following models. 62 companies have been shifted to this type of company form from April 2003 to October 2003. ・ Evaluation of achievement of management objectives conducted by the independent directors. ・ Audit by audit committee ・ Operation of performance-linked reward system by the compensation committee ・ Change of the president (CEO) by the nomination committee Objectives

6. 5 ． The company with committee established 62 companies have been shifted to "Company with committee established" from April 2003 to October 2003. The reason for this shift is "to speed up the management dramatically by clearly separating the supervisory function from the operating function and to realize the fair and highly transparent management“. 1. Adopted for placing emphasis on the group strategyHitachi 2. Adopted mainly expecting the increase of foreign investorsSony, Mitsubishi Electric 3. Adopted by holding company and affiliated companyNomura Holdings 4. Adopted by being affiliated by foreign companySeiyu 5. Others 1. Adopted for placing emphasis on the group strategyHitachi 2. Adopted mainly expecting the increase of foreign investorsSony, Mitsubishi Electric 3. Adopted by holding company and affiliated companyNomura Holdings 4. Adopted by being affiliated by foreign companySeiyu 5. Others There are several tendencies for the companies adopting "Company with committee established" type. Most of such companies fall into pattern 1 or 3 at present.

7. 6 ． Independent director Rank Origin (personal history ・ attribute ） Number 1 Person involved in the company having a business relation. 19 2 Person involved in the company having no business relations. 12 ” Person involved in the parent company. 12 4 Person involved in the bank such as a main financing bank 11 5 Institutional investors (life insurance) who are big shareholders. 8 ” Person involved in the same enterprise group 8 7Critics, economists, management consultants5 8 Scholars such as university professors 3 ” Former employees of competent authorities 3 10Person involved in public entities2 11 Person of legal profession such as lawyers 1 ― Others (accounting companies, person involved in the company of big shareholder) 5 【 Fiscal year 2002 】 Total of 112 companies Q. Companies adopting the independent director ⇒ 55.4% Q. Origin of independent directors (see the table before) ・ Top management of the other company with extensive experience in business ・ Experts on law, academic, and international relations ・ Former employees of competent authorities ・ Person related to the correspondent bank such as a main financing bank ・ Representative of consumers or local community (Reference: The proposal of "Business Administration Committee" by Japan Association of Corporate Executives) Independence Deep understanding of social common practice High sense of ethics Sound judgment Representative of stakeholders Who is qualified to be an independent director ? Qualification for an independent director An independent director is the person who has not been involved in business and affairs of the corporation of interest or the affiliate company as a board member or employee from past to present. At least approx. 1000 out of the total 1,500 independent directors in the listed companies are big shareholders or former employees of the main financing bank or the same enterprise group. Current situation?

8. 7 ． Scope of responsibility Legality audit Validity audit Auditor (meeting) Auditing system ・ Audit on validity of management decision ・ Audit on legal compliance ・ Audit on compliance with internal rules ・ Audit on legal compliance ・ Audit on compliance with internal rules △（ Note ） ○ ○ Board meeting ○ ○ ○ ○ ○ ○ ○ ○ （ Audit/ Compensation / Nomination Committee ） Board meeting （ Audit/ Compensation / Nomination Committee ） Board meeting of the company with the committee established Note: Auditor performs legality audit. However, laws and regulations include the duty of care and the auditor needs to check for breach of such duty regarding the matters involving business judgment by the board members. Therefore, legality audit performed by the auditor has almost the same effect as the validity audit.

9. 8 ． List of audit overview / structure Item Audit by auditor Audit by audit committee Audit by single auditor Systematic audit by the audit committee Number of auditor 3 or more Number of independent auditor One or more (more than half after 2 years) Majority of the committee members Number of statutory auditor One or more auditor is elected by mutual vote Not required legally Appointment of auditor (committee member) Shareholder meeting Board meeting Term of auditor (committee member) 4 years 1 years Subject of audit Execution of board's duty Execution of board's and executive officer's duties Authority of audit Investigation right on operation and property Investigation right on the affiliated company Attendance at the board meeting ・ statement duty Investigation right on operation and property Investigation right on the affiliated company Scope of audit Legality audit including significant injustice Legality audit including validity audit

10. JCGIndex is an index for the maintenance level of the company's governance system The following graphs show the result of questionnaire conducted from July to September 2003. (No. of response: 201companies) ROA (combined: average of last 3 years)ROE (combined: average of last 3 years) Rate of return on stock (average of last 3 years)Increase of No. of employee (average of last 3 years) 9 ． Effect of governance ～ High-low comparison of JCGIndex ～ -8.54 0.97 -5.58 -10 -8 -6 -4 -2 0 2 Low JCGIndex company High JCGIndex company Company answered all items （％） 4.69 6.45 5.57 0 1 2 3 4 5 6 7 Low JCGIndex company High JCGIndex company Company answered all items （％） -1.35 0.58 1.68 -2 -1.5 -0.5 0 0.5 1 1.5 2 Low JCGIndex company High JCGIndex company Company answered all items （％） 4.68 2.26 -0.03 0 1 2 3 4 5 Low JCGIndex company High JCGIndex company Company answered all items （％）

11. 10 ． What is corporate governance ? (For whom? For what?) ■ Corporate governance focuses on "to whom management is directed". ■ A corporate is a social existence and bears various responsibilities in the society. Company Management Employee Supplier Creditor Shareholder Government Globe ・ Environment Customer Compensation Salary Payment Interest Profit Tax Cost Payment Points for corporate governance ・ Awareness for corporate social responsibility ・ Establishment of check & balance system ・ The ultimate issue is a human mind (ethics, responsibility) Points for corporate governance ・ Awareness for corporate social responsibility ・ Establishment of check & balance system ・ The ultimate issue is a human mind (ethics, responsibility)