Explanatory Memorandum on theAudit & Supervisory Board Members(The companies without Audit & Supervisory Board)

Japan Audit & Supervisory Board Members Association(JASBA)

1Table of Contents
1 Corporate Governance in Japan (two different systems)
2 Comparison of the Audit & Supervisory Board Members andthe Audit Committee
3 Comparison of the Audit & Supervisory Board Members andthe Audit Committee Members
4 Who are “the Audit & Supervisory Board Members”?
5 Activities of the Audit & Supervisory Board Ｍembers
6 Roles of the Audit & Supervisory Board Members forprevention and settlement of misconduct and wrongdoing

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1 Corporate Governance in Japan (two different systems)
In Japan, most of companies limited by shares must adopt either of the following
two governance systems, namely the “Companies with Audit & Supervisory BoardMembers” or the “Companies with the Three Committees”.
※ 97.8% of the companies listed on the Tokyo Stock Exchange (2,275 companies in total) are
Companies with Audit & Supervisory Board Members（as of September 2012）

The Companieswith Audit & Supervisory Board Members
page 3

The Companieswith the Three Committees

page 53

1 Corporate Governance in Japan (two different systems)
The Companies with Audit & Supervisory Board Members＝externalShareholders
Appointment

Supervisory Function(1) Board of Directors(to supervise the Directors
in charge of Management)(2) Collaboration(attend/report/advice)(4) Audit & Supervisory BoardMembers

Director(3) Audit as a part ofSupervisory Function※see page4 (4) Individuality

Executive Directorsand management
officers

Supervision

Management

Collaboration

Audit

Internal Auditors

ReportAudit(review of reasonableness,fairness and independence
from the management onthe audit conducted by theExternal Auditors)

External Auditors

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1 Corporate Governance in Japan (two different systems)
Features of the Companies with Audit & Supervisory Board Members(1) Board of Directors
Each Director can act as a member of management as well as a member of the Board ofDirectors.

(2) Independence and Collaboration
Each Audit & Supervisory Board Member (hereinafter referred to as the “Member”) isappointed directly by the shareholders. Each member is independent not only ofmanagement but of the Board of Directors though it is required to collaborate with theBoard of Directors in performing its supervisory functions over management.

(3) Major Supervisory Function
The major supervisory functions of the Members are “checking and monitoring
management activities, including abuse of power by management over the externalauditors” and “reporting (with opinions) to the Board of Directors”.

(4) Individuality
Except for some prescribed matters, namely (1) preparation of audit reports, (2)appointment and removal of full-time Members and (3) preparation of annual audit
policy and coordination of the roles among the Members such as allocation of territories
and/or commodities to be audited by each Member and (4) consent to appointment andremoval of the External Auditors, which need decisions by the Audit & Supervisory
Board (hereinafter referred to as the “A&S Board”), each Member is expected to perform
his/her roles individually (not as a body). Although it would not prevent the Members
from consulting among them or acting jointly, legal effects of their activities shall betreated as several.

51 Corporate Governance in Japan (two different systems)
The Companies with the Three Committees＝external

Shareholders
Appointment(1) Board of Directors(2) Directors(3) Nomination Committee(3) Remuneration Committee(3) Audit Committee
Audit as a part ofSupervisory Function
Executive Officers

Audit Committee Members

Collaboration
ManagementReportSupervisionInternal Auditors

AuditAudit(review of reasonableness,fairness and independence
from the management onthe audit conducted by theExternal Auditors)

External Auditors

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1 Corporate Governance in Japan (two different systems)
Features of the Companies with Three Committees(1) Board of Directors
The Board of Directors basically specializes in supervisory functions. It
delegates the management of the company to the executive officers.
(2) Directors
Each Director can act as a member of management as well as a member of theBoard of Directors if elected as an Executive Officer by the Board of Directors.
(3) Three Committees
The Three Committees are formed under the authorities of the Board ofDirectors. Members of each committee are appointed by the Board of
Directors from among the Directors. Majority of its members must be externalDirectors. Functions of each committee are as follows;
・“Nomination Committee”
to propose nomination and dismissal of the Directors at the shareholders meeting.
・“Remuneration Committee”
to determine the remuneration for each Director and Executive Officer.
・“Audit Committee”
to audit activities by management. Its major functions are “checking and monitoring
management activities, including abuse of power over the external auditors” and“reporting (with opinions) to the Board of Directors”.

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1 Corporate Governance in Japan (two different systems)
Under the Companies Act, private/closed or small or medium sized companies
are not required to form the A&S Board though one or more Members arerequired.

Why the new translation is considered to be appropriateeven if no Audit & Supervisory Board is formed• The term “Audit & Supervisory Board Members” is an English translation of Kansayaku,an organ of a Japanese company. Due to its uniqueness, Kansayaku is said to bedifficult for overseas people to understand. In order to ensure understanding byoverseas people on Kansayaku, we judged it best to focus on its supervisory functions tobe performed in collaboration with the Board of Directors.
• While there exist companies with Kansayaku which do not have a board, we do notthink it wise to prepare a different translation because Kansayaku has only one
common definition under the Companies Act. Kansayaku exercises its powers andauthority individually even if its board is formed. In addition, we should emphasize avirtual board consisting of the Board of Directors and Kansayaku, which performs
supervisory functions in collaboration with each other even if no board is actuallyformed. In this sense, we feel it better to use the word “board” even if no board is formed,
in order to facilitate understanding by overseas people.

82 Comparison of the Audit & Supervisory Board Members andthe Audit Committee
Commonality between the two bodies
Function : Audit and Supervising

Differences between the two bodies(1) Source of Authority
・The Members
The Members are appointed by the shareholders. The Members are independent of the Board of Directors
though they must collaborate with each other in performing supervisory functions.
・Audit Committee
Members are appointed by the Board of Directors from among the Directors. Audit Committee acts under
the control of the Board of Directors.

(2) Exercise of Power and Authority
・ The Members
Each Member is expected to perform its roles individually (not as a body). Although it would not prevent the Members
from consulting among them or acting jointly, their responsibility, legal effects of their activities shall be treated as several.
・Audit Committee
Each member has no individual power and authority. Powers and authority are given to the Committee as a body.

(3) Relationship with administrative sections, such as internal audit division
・ The Members
Although the Member(s) and respective administrative sections are expected to collaborate with each other,
the Member(s) has no authority to direct these sections because they are under the control of management.
・Audit Committee
Under the authority delegated by the Board of Directors, the committee has the authority to direct them.

93 Comparison of the Audit & Supervisory Board Members andthe Audit Committee Members
Audit & Supervisory BoardMembers

Audit Committee Members

Appointment

By the shareholders directly

By the Board of Directors

Responsibilities

Audit and Supervision on management
activities
Preparation of Audit Report to besubmitted to the shareholders

Audit and Supervision on management
activities
Preparation of Audit Report to besubmitted to the shareholders

Exercise of Power andAuthority

Each member/Individually

Not individual/As committee*

Voting at the Meetings ofthe Board of Directors

No (though members are required toattend and express their opinion atthe meeting)Yes

4 years

1 year (as director)

Full-time Member

Not required

Not required

External Member

Not required

Majority

No authority to direct(collaboration)

Authority to direct to such extent asdelegated by the Board of Directors

TermRelationshipwith administrative sections
such as internal audit division* except for preparation of audit report where each Member may express any individual opinion

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4 Who are “the Audit & Supervisory Board Members”?
The Members are;
• Appointed by the shareholders.
• Not allowed to be a Director of the company where they areappointed as a Member.

Types of the Members• Full-time/Standing
The Members who are normally stationed at the principal place of business ofthe company and spend main part of their working time to perform their duties
as Members. They can easily get information on the operation and affairs of
the company through constant contact with all relevant company sections.
• External
The Members who satisfy the prescribed requirements on independence fromthe management of the company. Neutral and fair assessment is expectedwithout being affected by the operations and affairs of the company.
➛ Existence of various types of Members enables supervision from different angles.

114 Who are “the Audit & Supervisory Board Members”?
Career Background
Company Related
3.4%(Vice) Chairman of theBoard of Directors/(Vice) President/ CEO

3.0%
Professor

8%
6.9%
OthersOthers

34.8%
Division GM

External

5.0%
Others

16.4%
Officer/ Employee of
Parent Company or a
Major Shareholder

15.2%(Senior) Executive Director

21.2%
Licensed Lawyer
19.8%
Director

16.5%
Operating Officer

3.4%
Counselor (ex senior officer)2.2%
Governmental Official

19.8%
Certified Public
Accountant/
Licensed Tax
Accountant

16.9%
Officer/ Employee of a
Customer or, a Companyor Financial Institution
which has business
relation with the Company

15.6%
Officer/ Employee of aCompany or Financial
Institution which has
no business relation
with the Company

Extract from the 13th Internet Survey by JASBA

125 Activities of the Audit & Supervisory Board Members
Among their powers, rights and obligations, the Members have the following as primary:(1) Research &Investigation(2) Actions on
operation of thecompany(3) Actions on
external auditors• Power to order officers and employees to report to them operations and affairs of the company.
• Power to investigate operations, financial status and affairs of the company.
• Power to investigate operations, financial status and affairs of subsidiaries.

• Obligation to attend and express their opinions at the meeting of the Board of Directors.
• Power to convene a meeting of the Board of Directors.
• Right to seek an injunction against an act by the Directors if certain requirements are satisfied.
• Power to order the external auditors to submit final/interim report on their audit.
• Right to consent to the Directors on submission to the shareholders meeting of their
proposal on appointment or removal of the external auditors.
• Right to consent to the Directors on fee for the external auditors.

(4) Reporting(5) Legal action
against Directors• Obligation to submit their audit report and perform supplemental explanation at theannual shareholders meeting.
• Obligation to investigate and report the result to the shareholders meeting if any
violation of laws and regulations or constituent documents, or any material injustice isfound in a proposal or its related materials to be submitted to the shareholders meeting.
• Obligation to examine and judge the reasonableness of a request by a shareholder totake legal action against a Director or Directors for his/her (their) breach of duty ofcare and/or fiduciary duty to the company and if such request is considered reasonable,
to take legal action against them as a representative of the company.

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5 Activities of the Audit & Supervisory Board Members
The Members conduct various activities to fulfill their duties and responsibilities.
(2) Communications
with the external auditors(1) Hearing
from directors, officers andemployees(3) Communications
with the internal auditors
and their staff

Meeting of the Members(7) Attending andexpressing opinions
at the meeting of the Boardof Directors• Preparation of Audit Report• Preparation of Audit Plan
• Examination of materials to besubmitted to the meetings of theBoard of Directors• Report from full time/standing
Members on their activities• Hearing from the external
auditors on their audit report(6) Inspectionof constituent documents andother important documents(4) On-site survey
at offices/factories etc of thecompany and its subsidiaries
and affiliates (includingoverseas)(5) Communications
with the Members/Audit
Committee Members ofsubsidiaries and affiliates

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5 Activities of the Audit & Supervisory Board Members
Typical Annual Action Plan of the Members is as follows;
Immediately after Annual Shareholders Meeting(Normally within 3 months after the end of each financial year of the company)• Preparation of annual audit plan
• Coordination of schedule with the sections concerned(including the external auditors)

During each financial year of the company• Hearing from the management of the company• On-site survey• Inspection of constituent documents and other important documents

End of each financial year of the company• Preparation of Audit Report• Examination of accounting documents and business report prepared by
the management of the company

At the Annual Shareholders Meeting
after the end of each financial year of the company• Report to the shareholders the result of the audit in writing which could be
supplemented verbally• Q&A Session

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6 Roles of the Audit & Supervisory Board Members forprevention and settlement of misconduct and wrongdoing
The Members shall contribute to prevention of occurrence of misconduct andwrongdoing through their ordinary audit and supervisory activities and shall timely
take appropriate actions in order to minimize damage to the company.

Ordinary Activities• Audit in accordance with
Annual Audit Plan etc

Occurrence ofmisconduct andwrongdoing

Damage to thecompany

Prevention ofmisconductandwrongdoing• Attendance at meetings of the Board of Directors
and identification of problems on the proposals
and other documents submitted at the meetings• On-site survey, inspection of constituent
documents and other important documents• Exchange of opinions with external auditors• Report to the shareholders result of audit

Minimizationof damage tothe company• Ensuring cooperation by third party experts(e.g. setting up of a committee for investigationin which they participate)• Advice at the meeting of the Board of Directors• Seeking an injunction against specificmisconduct and wrongdoing by the Directors• Legal action against Directors who have notexercised required duty of care or fiduciary
duty