Corporate Governance

Basic Stance

The JGC Group remains aware that, in line with the JGC Way corporate philosophy, the foundation for management in pursuit of higher corporate value over the medium-to long-term and sustained growth is sound governance. We are therefore strengthening our corporate governance, which we view as one of the Group's priority material issues.
Our central mechanism for corporate governance is the Board of Directors, through which we continuously review governance structures, functions, and roles. Effectiveness of the board of directors itself is analyzed and assessed each year, as we seek progress through steady improvement. In shareholder and investor engagement, we take a proactive stance in highly transparent information disclosure, and viewpoints from this dialogue are applied to strengthen governance and management.
In regulatory compliance and other matters essential to appropriate corporate governance as well, the JGC Way philosophy serves as a shared value that calls on each employee and officer to maintain high ethical standards in everything they do, so that the Group as a whole works to enhance medium- to long-term corporate value and achieve sustained growth.

Outline of Corporate Governance System

JGC maintains a board of directors and audit and supervisory board. JGC Group has adopted a holding company structure under which operating companies pursue the Group's core business. Separating management from execution provides greater clarity on roles and responsibilities of the holding company and operating companies. The holding company's role is to formulate management policies and oversee the operating companies from a medium- to long-term group perspective. Operating companies apply group management policies and strategies to respond flexibly and rapidly to market characteristics and seek further business expansion.
To reinforce management oversight and enhance transparency toward this end, we have appointed outside directors and outside audit/ supervisory board members meeting the criteria for independent officers. Additionally, an executive officer system has been introduced to ensure rapid, efficient managerial decision-making and execution. This is intended to maximize corporate value and ensure optimal allocation of management resources for the Group as a whole while enhancing transparency of corporate management and strengthening overall group governance.
Main elements of the corporate governance system are as follows.

Body Purpose Meetings Members Head of organization
Board of Directors
  • Resolves key matters of business execution
  • Oversees directors' executive actions
  • Deliberates on medium- to long-term strategies and issues
Generally
monthly
Nine directors (including three outside directors)
Five auditors (including three outside auditors)
(For fuller discussions, others also attend as needed, such as operating company officers, executive officers in charge of certain areas, and those in relevant divisions)
Chairman and CEO
Masayuki Sato
Audit & Supervisory Board
  • Discusses and resolves issues based on reports of key auditing matters
  • Presents opinions based on the results to directors or the board of directors as necessary
Generally
monthly
Five auditors (including three outside auditors) Full-time Audit & Supervisory Board Member
Yukihiro Makino
Nominating and Remuneration Committees
  • Deliberates on appointment and dismissal of officers, renumeration, etc.
Annually
(and as needed)
Chairman and CEO Masayuki Sato
President and COO Tadashi Ishizuka
Three outside directors* (Shigeru Endo, Masayuki Matsushima, and Kazuo Ueda)*In order to improve fairness and transparency, the majority of the committee consists of outside directors.
Chairman and CEO
Masayuki Sato
Group Steering Committee
  • Discusses the direction that the Group should take as well as steering matters such as management/ business strategies for the Group as a whole and each operating company
Generally
monthly
Chairman and CEO Masayuki Sato
President and COO Tadashi Ishizuka
Auditors (rotating)
(Consists of members such as group company officers appointed by the chairperson)
Chairman and CEO
Masayuki Sato
Group Investment and Loan Committee
  • Deliberates on holding company and group investment and lending projects
Generally
monthly
Standing members: Eight directors, executive officers, and auditors of the holding company and Group.
Non-standing members: Four executive officers of the holding company may attend, depending on the agenda.
Chairman and CEO
Masayuki Sato
Accounting Auditors
  • CPAs Michitaka Shishido, Takemitsu Nemoto, and Atsushi Nagata of KPMG AZSA LLC audit JGC accounts.
  • Auditing support is provided by 11 other CPAs and nine assistants.
Corporate Governance System

Improvement Status of Internal Control System

JGC's Board of Directors determines the basic principles of the internal control system and revises them as necessary.

【Improvement Status】

  1. 1.The Internal Auditing Office monitors, evaluates, and improves the effectiveness of the internal control systems of JGC and the JGC Group and conducts separate audits as necessary
  2. 2.Rules of Management Authority regulate the duties and authority of each role, and clarify the system of responsibilities in corporate management and business execution
  3. 3.Management rules for Group companies have been formulated and implemented to ensure efficient and appropriate operations across the Group

About JGC's Response to the Corporate Governance Code

Since the implementation of the Tokyo Stock Exchange's Corporate Governance Code in June 2015, we have consistently held discussions on appropriate corporate governance for JGC and are making steady efforts to further solidify our corporate governance.

【Content】

  1. 1.Implementation of all principles laid out in the CG Code
  2. 2.Disclosure according to all 11 general principles, principles, and supplementary principles required by the Tokyo Stock Exchange

Board of Directors

Board Functions

The Board of Directors is responsible for decision-making on medium- to long-term group strategy and issues, and it provides oversight regarding business execution of group companies. Board composition is intended to enable effective and efficient execution of these functions.

Basic Policy on Board Composition and Diversity

From the standpoint of further enhancing discussions on medium- to longterm group strategies and issues and of strengthening oversight regarding business execution of group companies, the board consists of the following members.

  1. 1.Consists mainly of directors with broad experience in business markets and directors with a high level of knowledge and expertise in engineering, procurement, and construction (EPC) operations, which is the primary group business.
  2. 2.Independent outside directors are appointed in order to incorporate outside perspectives in management, with the expectation that these directors will provide objective advice to the board and fulfill oversight functions from an independent viewpoint.

As a matter of policy respecting the importance of diverse perspectives, members are appointed not solely based on professional experience and expertise but also on competence, regardless of nationality, race, or sex.
Although there are currently no female or foreign members, members with various backgrounds and global experience have been appointed, and diversity will continue to be sought in the board.

Background of Directors (six internal, three outside) etc.

Name and position at JGC Term as
auditor
(in years)
Outside director attendance at board meetings in Fiscal 2019 Background
Business planning and management Project management Technology Sales and marketing Human resources Finance and accounting Legal Global experience
Masayuki Sato
Chairman and CEO
10 -
Tadashi Ishizuka
President and COO
3 -
Kiyotaka Terajima
Director, Senior Executive Vice President and CFO
4 -
Masanori Suzuki
Director and Senior Executive Officer
6 -
Keiji Nohira
Director and Executive Officer
Newly appointed -
Yutaka Yamazaki
Director
15 -
Shigeru Endo
Outside Director
7 15/15
(100%)
Masayuki Matsushima
Outside Director
4 14/15
(93.3%)
Kazuo Ueda
Outside Director
1 11/12*
(91.6%)

*appointed on June 27, 2019

Background of Auditors (two internal, three outside), etc.

Name and position at JGC Term as auditor
(in years)
Outside director attendance at Audit & Supervisory Board in Fiscal 2019 Background
Corporate management Legal, finance, accounting Economics
Yukihiro Makino
Audit & Supervisory Board Member
4 -
Yasumasa Isetani
Audit & Supervisory Board Member
2 -
Masao Mori
Outside Audit & Supervisory Board Member
9 26/26
(100%)
Koichi Ohno
Outside Audit & Supervisory Board Member
6 26/26
(100%)
Norio Takamatsu
Outside Audit & Supervisory Board Member
4 26/26
(100%)

Board Effectiveness Evaluation

Board effectiveness is analyzed and evaluated annually, efforts toward improvement are reviewed, and issues linked to further gains in effectiveness are discussed by the board in pursuit of continuous improvement. Presented below are a summary of the process of evaluating board effectiveness in fiscal 2019, the survey, results, and future issues to address, and main past efforts to enhance efficacy.

Process

  • A third-party evaluator conducts an anonymous survey of directors and auditors
  • Progress is reviewed, including progress in areas for improvement when effectiveness was last evaluated
  • Opinions are collected on current board effectiveness and ways to enhance board effectiveness
  • The board reviews the results, focusing on key future issues

Content of survey

  • Checks compliance with principles of Section 4, "Responsibilities of the Board," of the Corporate Governance Code, including progress since the previous evaluation
  • Main evaluation items: Board composition, management, discussion, oversight functions, own involvement, and management of Nominating and Remuneration Committees
  • Solicits open-ended responses on board performance and areas for improvement

Evaluation results and future issues to address

Evaluation results

In addition to confirming steady progress in the establishment and operation of an internal control system for appropriate management and supervision of group companies since adoption of a holding company structure in fiscal 2019, we have confirmed that the increase in the number of outside directors has enlivened board discussions. Thus, we have confirmed improved board functions in the holding company and assurance of overall effectiveness.

Issues to address for greater effectiveness, response policy

Issues

  • Expanded discussion on medium- to long-term group strategies and issues
  • Expanded discussion on digital transformation (DX) and SDG initiatives
  • Expanded reporting to the board on the content of shareholder dialogue

Policy in responding

  • Expand discussion on strategies and issues in enhancing group corporate value and achieving sustained growth
  • Establish and maintain systems for prompt and accurate business decisions by group companies and proper management and oversight by the holding company

Director Compensation

Policy on Determining Director Compensation Amounts or Calculation Methods

Basic policy, general shareholders' meeting resolutions

  • Under a basic policy to secure the management personnel needed for greater global competitiveness and sustained gains in corporate value, a resolution made at the 113th general shareholders' meeting on June 26, 2009 set annual director compensation at an amount not exceeding 690 million yen, with auditor compensation not exceeding 88 million yen
  • As for the policy on determining the amount or calculation of director compensation, compensation shall not exceed the range resolved at the general shareholders' meeting, and details are discussed in advance by the Remuneration Committee, whose report is considered by the board to reach a decision

Process for determining amount of compensation

  • Amounts of director compensation are at the discretion of the chairman and CEO, within the range resolved at the general shareholders' meeting
  • To ensure fairness and transparency, the chairman and CEO takes the results of deliberation by Remuneration Committee into account when deciding

Fixed, performancebased, and restricted stock compensation (new)

Fixed compensation

  • Determined according to each director's position and the value of their duties, accounting for the capabilities required and the weight and impact of those duties
  • Consists of base compensation and an allotment for directors or representative directors
  • Outside director compensation is limited to fixed compensation, to enable management oversight from a position independent of business execution

Performance-based compensation

  • Indexed to current-term net income attributable to owners of parent, a target in the medium-term business plan
  • Performance-based compensation is determined from an evaluation of each director's professional duties and contribution to fiscal-year performance, acknowledging that in the Group's main EPC operations, several years pass from when orders are sought until projects contribute to earnings, and accounting for whether the director contributed to gains in medium- to long-term corporate value
  • As a greater incentive for each director in attaining performance targets, performance-based compensation will more directly reflect the extent that targets have been met. Additionally, when targets are met, a higher proportion of variable compensation (consisting of performance-based compensation and the restricted stock compensation described below) is applied in overall compensation

Restricted stock compensation

  • Introduced so that directors share the benefits and risks of stock price fluctuations with shareholders and conduct business accordingly, and to further incentivize a higher stock price and greater medium- to long-term corporate value
  • Some 14,723 restricted shares corresponding to 10% of base compensation (equivalent to 22 million yen) were allocated to six directors on August 5, 2019
  • The restricted stock compensation system is summarized below
    • Scope: Directors and executive officers of the holding company and directors of group companies
    • Maximum monetary compensation: 90 million yen per year
    • Total shares of restricted stock (maximum): 71,200 shares per year (approximately 0.03% of total issued shares)
    • Restricted stock period: 3-30 years

Policy and Procedures Regarding Appointment and Dismissal of Upper Management / Succession Plan

Appointment process

Appointment of senior management and nomination of candidates for directors

  1. 1.Deliberations of the Nomination Committee, which includes outside directors, are focused on the following items.
    1. (1)Qualities such as character and views
    2. (2)Senior management and inside directors: Qualities such as performance and management capabilities
    3. (3)Outside directors: Qualities such as independence and expertise
  2. 2.After comprehensive deliberation by the Nominating Committee, a decision is made by the Board.
    Appointment of senior management and nomination of director candidates follows this process and involves ample discussion before decisions are made, with the understanding that these individuals may one day be candidates to succeed the CEO.

Dismissal process

Dismissal of senior management

In the event of any of the following, the board decides on dismissal after deliberation by the Nominating Committee.

  1. (1)Wrongdoing, impropriety, or breach of faith
  2. (2)Violation of laws or articles of incorporation
  3. (3)Loss of the qualities and capabilities initially required for appointment

Succession Plan

In nominating a director or executive officer, the Nominating Committee addresses potential CEO succession by discussing whether the individual possesses the qualities required of a CEO, has demonstrated the requisite past performance, and can be viewed as a worthy successor. Only after this discussion will the board proceed with nomination.
Furthermore, in order to make the previously tacit succession plan more concrete and effective, relevant divisions are establishing detailed criteria on the personal qualities, experience, and other attributes required of the CEO to draw up a specific plan for cultivating leaders based on these criteria.

Cross-shareholdings

1. Purpose

Following revision in June 2018, the CG Code now includes guidance on topics such as reduction of cross-shareholdings and the cost of capital. The Group refrains from cross-shareholdings except in cases where maintaining and strengthening relationships with clients and business partners will contribute to higher medium- to long-term corporate value for the Group. Moreover, each year, the board reviews the significance of maintaining each cross-shareholding. Both quantitative and qualitative aspects of the shares are reviewed. Specifically, quantitative considerations include dividend yield and valuation gains, and aspects that are difficult to quantify include whether business benefits and risks are commensurate with capital costs. Sale of shares deemed to have lost their significance is investigated accounting for the market environment and changes in stock prices. The review process is described below, along with a record of past sales and reductions.

2. Basis for exercising voting rights

In exercising voting rights for cross-shareholdings, advantages and disadvantages are weighed based on whether the decision will contribute to sustained growth of the company involved, and thus, higher group corporate value over the medium to long term.

Review Process of Holding Objective and Stock to be Sold

History of Sales and Reductions in Cross-shareholdings Since the Introduction of the CG Code

Number of companies whose stock was sold Total value of sales (based on acquisition price) Reduction rate*
Fiscal 2015 to fiscal 2019
(fiscal 2019 in parentheses)
32 companies (three companies) 4,457 million yen (626million yen) Approx. 35%

* Represents the reduction rate for publicly listed stock held as of April 1, 2015 (ratio based on acquisition prices).