PAGETOKYO ELECTRON ANNUAL REPORT 201611

CONTENTS

To Our Stakeholders

Medium-term Management Plan
Interview with the CEO

Business Overview

Message from the Chairman of the Board

Corporate Governance

CSR Operations

Review of Operations
and Business Outlook

Financial Section

Sustainability

Corporate Data

Directors, Audit & Supervisory Board Members and Executive Officers

Corporate Governance
Basic stanceIn an environment where over 80% of our sales come fromoverseas, Tokyo Electron regards building governance as
essential to becoming a truly global company that achieves
sustainable growth.
To that end, Tokyo Electron has built a framework to maximize the use of its worldwide resources and works to incorporate a wide range of opinions. In addition to strengthening its
management platform and technology base, the Company
maintains a governance structure that will enable it to attainworld-class proﬁtability.
Tokyo Electron uses the Audit & Supervisory Board System,
which consists of a Board of Directors and an Audit &Supervisory Board. Effective governance is achieved based on
the supervision of management by the Audit & Supervisory
Board.

Board of Directors
1. Roles and responsibilities of the Board of Directors
The Board of Directors works to achieve sustainable growth andincrease corporate value over the medium- to long-term basedon its ﬁduciary responsibility to shareholders. The roles andresponsibilities of the Board of Directors are as follows:(1 ) Establishing management strategy and vision(2) Making major operational decisions based on
strategic direction(3) Engaging in constructive, open-minded debate

The Board of Directors seeks the active participation of
those present in discussions in order to obtain a widerange of opinions, and supervises management and operational execution based on active debate.
The Board of Directors respects opinions even when
they are minority or opposing viewpoints, including opinions voiced by outside directors; revises the conditions for
implementation or the content of proposals as necessary;and engages in extensive debate with the goal of reachingdecisions based on consensus. However, emphasis is placedon making necessary decisions quickly to avoid missing
opportunities.
2. Board size and independent outside directors
Tokyo Electron considers it essential to maintain a Board of
Directors with the appropriate size to ensure high quality,
active debate and the diversity expected of both executive
directors and independent directors. The current Board of
Directors consists of 11 directors, and Tokyo Electron
believes this to be the appropriate size, at present, toachieve a good balance in terms of knowledge, experienceand skills.
Tokyo Electron regards the active expression of opinions,
not only by independent directors, but also by Audit &Supervisory Board Members, as the cornerstone that supports the sound decision-making of the Board of Directors.
Currently, ﬁve out of the 16 participants in the Board of
Directors meetings, including the Audit & Supervisory
Board Members, are outside members, consisting of two

Does Tokyo Electron have these major components of corporate governance?

independent directors and three outside Audit &Supervisory Board Members. Tokyo Electron believes thatthe current Board of Directors meetings achieve an appropriate sense of productive tension and constructive debate
due to the combined presence of executive directors,
essential for making operational decisions, and outside
members, who provide objectivity.
3. Nominations for Director and CEO
Tokyo Electron has established a Nomination Committee toensure fairness and efficiency in management. The
Nomination Committee proposes director candidates tothe Board of Directors prior to their election at the General
Meeting of Shareholders and also nominates CEO candidates for appointment by the Board of Directors. No representative directors, including the CEO, are members of theNomination Committee, and the authority to propose election or dismissal of the CEO or directors is entrusted to a
Nomination Committee member.

Message from theOutside Directors

This year marks a new start for Tokyo Electron.
From my outside perspective, the Company’s transition to a neworganizational structure appears to be going extremely smoothly.
Tokyo Electron’s new president and CEO, Toshiki Kawai, has made agood start, thanks in part to the thoroughgoing efforts of Corporate
Advisor Tetsuro Higashi and Chairman Tetsuo Tsuneishi. While theplanned merger with Applied Materials last year ultimately did not workout, the process had the signiﬁcant positive effect of prompting deep
analysis of our competitor’s strengths and weaknesses.
Meeting evolving needs and engaging with new technologies is partof Tokyo Electron’s core mission. To survive and prosper, we must also
always maintain a global orientation. To this end, Tokyo Electron’s
employees must continue to commit fully to the Group’s Corporate
Principles and to achieving continuous growth to be even more global
and even more trusted.
Tokyo Electron’s new organization has not changed the transparent,
unrestrained nature of its Board of Directors’ meetings. I believe that
this level of sincerity and openness is the key to cultivating and maintaining highly effective corporate governance.
I hope to see Tokyo Electron reach new heights. I will do my part asbest I can to make that a reality.

Compensation Committee

Yes

Composed of directors, excluding representative
directors, or Audit & Supervisory Board Members

Nomination Committee

Yes

Composed of directors, excluding representative
directors, or Audit & Supervisory Board Members

Outside directors

Yes

Two of the 11 directors are outside directors

Outside Audit & Supervisory Board Members

Yes

Three of the ﬁve Audit & Supervisory Board Members
are outside Audit & Supervisory Board Members

Executive officer system

Yes

Disclosure of individual remuneration of representative directors

Yes

Performance-linked compensation system

Yes

Stock options system

Yes

Retirement allowance system for executives

No

Outside Director

Anti-takeover measures

No

Hiroshi Inoue

Disclosed since 1999

Does not apply to outside directors andAudit & Supervisory Board Members

4. Director and CEO compensation
Tokyo Electron aims to strengthen its global competitiveness and increase management transparency, adopting a
director and executive officer compensation system that isclosely linked to performance and shareholder value. The
compensation of directors and executive officers comprises
a ﬁxed monthly wage and an annual performance-linked
bonus.
The Compensation Committee, which comprises three ormore directors and includes at least one outside director,
performs an analysis of industry wage levels in and outside
Japan, accounting for both monetary and non-monetary
aspects of the total compensation package. Based on thiscomprehensive analysis, the committee proposes a policy
and system for director compensation to the Board of
Directors. The proposal includes speciﬁc amounts for individual compensation, including the CEO’s bonus.
In order to better link factors that increase corporate
value and shareholder value to compensation, Tokyo

PAGETOKYO ELECTRON ANNUAL REPORT 201612

CONTENTS

To Our Stakeholders

Medium-term Management Plan
Interview with the CEO

Business Overview

Message from the Chairman of the Board

Review of Operations
and Business Outlook

CSR Operations

Corporate Governance

Financial Section

Sustainability

Corporate Data

Directors, Audit & Supervisory Board Members and Executive Officers

Corporate GovernanceElectron has designated the net income attributable toowners of the parent and return on equity (ROE) for thecurrent period as the main calculation benchmarks in theperformance-linked compensation system for the CEO andother directors. These are adjusted, as necessary, forextraordinary income/losses and other special factors.
In principle, performance-linked compensation consistsof monetary compensation and share-based compensation; the composition is roughly 1:1 for directors, and single
year performance is appropriately reﬂected in the performance-linked compensation of the CEO and other directors. Share-based compensation is awarded in the form ofstock options with the exercise price set at one yen per
share, and the restriction that they may not be exercisedfor three years from the date of allotment.

members and includes three outside Audit & Supervisory
Board Members. Three members, including one outside
member, are full-time. The full-time Audit & Supervisory
Board Members collect information through onsite surveys,
and the board maintains appropriate coordination with theInternal Audit Department and the independent auditors aspart of a structure that enables Audit & Supervisory Board
Members to obtain all information necessary for audits.
Moreover, the composition of Audit & Supervisory Board
Members provides a good balance of knowledge requiredfor operational audits and accounting audits, including
ﬁnancial and accounting knowledge, legal knowledge, andaudit experience at other companies. Tokyo Electron thus
believes its Audit & Supervisory Board Members are able toperform their auditing functions effectively.

5. Evaluation of the effectiveness of the Board of Directors
Each year, based on an evaluation survey ﬁlled out by the
Board of Directors and Audit & Supervisory Board members, the Board of the Directors discusses, analyzes andevaluates its own effectiveness, and discloses a summary of
the results.

Internal Control System and Risk Management

Audit & Supervisory Board
The Audit & Supervisory Board currently consists of ﬁve

Basic StanceIn order to enhance the Tokyo Electron Group’s corporate
value and remain accountable for our actions to our stakeholders, we are making efforts to strengthen effective
internal control. This involves implementing practical measures that are in line with the Fundamental Policies concerning Internal Controls within the Tokyo Electron Group,
set out by Tokyo Electron’s Board of Directors. We are also

Corporate Governance Framework, Internal Control System and Risk Management System
Shareholders' Meeting
Compensation Committee

Board of Directors Nomination Committee

Chief Business Ethics Director
Chief Internal Control Director
Chief CSR Promotion Director

Audit & Supervisory Board

Representative Directors

Request for improvement/Report

Committees

Conﬁrm the progress ofimprovements and give instructions

CSS & Executive Officers

Internal Audit Dept.
(Global Audit Center)

Ethics Committee
Information Security Committee
Export Trade Control Committee

CSR Management Council
CSR Global Promotion Committee

Request for improvement/Report

Audit

Risk Management & Internal Control Function(General Affairs Dept.)
Request for improvement/Report

Monitoring

Administrative Depts.

Cooperate

Audit and
improvement reports

Request for improvement/ReportCompliance & Internal Control Executive Officer
CSR Promotion Executive Officer

Independent Auditors
Cooperate

Check and balance

annually evaluating our internal control over ﬁnancial
reporting based on the Financial Instruments and Exchange
Act of Japan.

Based on this reevaluation, the Group is redeﬁning material
risks and clarifying each risk owner to enhance the efficacy
of its risk management framework.

Risk Management System
To more effectively strengthen the internal control and risk
management systems of the entire Group, Tokyo Electron has
established a dedicated risk management and internal control
function within the General Affairs Department of the corporate headquarters. This function manages and reduces risks
through appropriate measures, such as by analyzing the risks
that could affect the Group, and instructing responsible
departments to conduct self-assessments of major identiﬁed
risks. The function also regularly reports the status of risk
management activities to the Audit & Supervisory Board
Members and the Board of Directors.
In ﬁscal 2016, the Group thoroughly reevaluated thematerial risks surrounding its operating environment inorder to improve the effectiveness of its risk management.

Auditing by the Internal Audit Department
The Global Audit Center of the corporate headquarters is
the Group’s internal audit department. This Center is
responsible for auditing business activities, compliance andsystems at domestic and overseas Group companies andbusiness units (BUs) in accordance with each ﬁscal year’s
auditing plan. The Center also annually evaluates the effectiveness of the Group’s internal control over ﬁnancial
reporting based on the Financial Instruments and Exchange
Act of Japan.
At operating divisions where issues have been identiﬁed
through audits and assessments, the Center monitors progress and provides necessary guidance for improvement.

Message from theOutside Directors

Tokyo Electron has a strong reputation among market participants as
an early adopter of robust corporate governance systems in line with
global best practices. At the same time, stakeholder expectations continue to evolve amid an increasingly competitive global environment
and what could be described as historic geoeconomical changes.
Corporate governance in Japan is in a period of historic transformation. The adoption of Japan’s Corporate Governance Code, StewardshipCode, and the new benchmark JPX-Nikkei 400 has led investors to focus
more and more on companies’ business strategies in the context of agreater emphasis on return on equity (ROE) and the role of independent outside directors. In this regard, an effectively functioning corporate governance system is critical to enhancing understanding of andconﬁdence in Tokyo Electron with its operations throughout the world.
I believe the role of an independent outside director is to pay close
attention to global trends and, in addition to providing an independentand objective point of view, proactively raise issues and ask questions
regarding matters of importance to the Company, including topics that
may be difficult to debate within the organization. I hope to contributeto enhancing Tokyo Electron’s corporate value by fulﬁlling my responsibilities as an independent outside director and helping to further foster
the Company’s culture that promotes free and open discussion.
Outside Director

Business Depts.

Charles Ditmars Lake IIPAGETOKYO ELECTRON ANNUAL REPORT 201613

CONTENTS

To Our Stakeholders

Medium-term Management Plan
Interview with the CEO

Business Overview

Message from the Chairman of the Board

Corporate Governance

CSR Operations

Review of Operations
and Business Outlook

Sustainability

Financial Section

Corporate Data

Directors, Audit & Supervisory Board Members and Executive Officers

Corporate GovernanceBusiness Continuity Management
Since 2012, the Group has been improving its BusinessContinuity Plan (BCP) for large-scale earthquakes. The BCP
is being updated at the headquarters, local offices andplants so that it will work effectively in the event of a disaster, facilitating early recovery and alternate production.
In ﬁscal 2016, the Group focused on revising the manuals
and plans, as well as on implementing BCP drills andemployee education.
In addition, emphasis has been placed on improving early
emergency response with top priority given to securing
employee safety, including stockpiling emergency supplies(including food and drinking water), and reinforcing essential infrastructure. As a result of these preparedness initiatives, we were able to smoothly implement the BCP to
respond quickly to the Kumamoto Earthquake in April 2016.
Information Security Management
To ensure appropriate management and safe and effective
use of information assets, the Group has established aframework for preventing information leakage under the
Tokyo Electron Group Information Security Policy and theRegulation for Management of Technical and BusinessInformation. These rules have been disseminated globally
throughout the Group companies and are updated whenever necessary.
In order to strengthen information security, the Group isenhancing training and education for all of its executives
and employees worldwide. These programs ensure thatthey can protect technical and business data and abide by
the IT security rules.
Additionally, we have established a system for reporting
both actual and potential cases (incidents) of information
leakage. Such reports are critical in making quick responses,
and their analysis can offer valuable insights into improving
Group-wide measures to prevent leakage.

Business Ethics and Compliance
Basic Stance
Stakeholder trust is the cornerstone of business activities. In
order to maintain trust, it is necessary to continuously act inrigorous conformity to business ethics and compliance. Inline with the Fundamental Policies concerning Internal
Controls within the Tokyo Electron Group, all Group execu-

tives and employees are required to maintain high standardsof ethics and to act with a clear awareness of compliance.

and internal company rules, and consistently apply theserules in all of their activities.

Business Ethics
In 1998, Tokyo Electron formulated the Code of Ethics of theTokyo Electron Group to establish uniform standards to govern all of its global business activities. In the same year, theCompany appointed a Chief Business Ethics Director andestablished the Ethics Committee, which is responsible forpromoting business ethics awareness throughout the Tokyo
Electron Group. The Ethics Committee comprises the Chief
Business Ethics Director, the Ethics Committee Chairman,
and presidents of major Group companies in and outside
Japan. The members meet semiannually, report on ethicsrelated issues facing each company, and discuss measures tofurther improve ethical behavior and compliance.
The Code of Ethics is reviewed in response to changes inthe expectations of society. In January 2015, an anti-corruption statement was added to its introduction based on
Principle 10 of the UN Global Compact, which concerns
working against corruption including extortion and bribery. In
ﬁscal 2016, the Group reviewed its Code of Ethics in responseto the Code of Conduct of the EICC®*, an electronic industry
CSR consortium that the Group joined in June 2015.
The Tokyo Electron Group’s Code of Ethics and its Q&A
section are published in Japanese, English, Korean andChinese and disclosed on the intranet to enable all Group
executives and employees, including those overseas, to view
them at any time. The Code of Ethics is also publicly accessible from the corporate website.

Compliance Education
Through the Group’s e-learning system, we provide standard web-based training programs covering the basics ofcompliance, export-related compliance, protection of personal information, the Act for Subcontracting and othertopics. All executives and employees are required to complete this training. In addition, other web-based programs
tailored to speciﬁc positions and job roles are also available,
including those on insider trading and the Social Security
and Tax Number System.
We also have a quiz-based business ethics compliance education course for all Group executives and employees from ﬁscal
2014. Updated yearly, the quiz is intended to maintain compliance awareness throughout the Group and disseminate thelatest information.
In addition to these web-based courses, we organized

http://www.tel.com/environment/corp_governance/compliance/ethical.htm* EICC is a registered trademark of Electronic Industry Citizenship Coalition Incorporated.

Compliance System
Tokyo Electron has appointed a Compliance & Internal
Control Executive Officer from among its executive officers
to raise awareness of compliance across the Group and further improve Group-wide compliance. The Company has
also drawn up the Compliance Regulations, setting out
basic compliance-related requirements in line with theCode of Ethics. The Compliance Regulations are intended toensure that all individuals who take part in the businessactivities of the Tokyo Electron Group clearly understandthe pertinent laws and regulations, international standards

in-house seminars in ﬁscal 2016 for Corporate Directors anddomestic Group company presidents on the subjects ofcompliance and internal control.
Internal Reporting System
The Tokyo Electron Group has an internal reporting systemthat employees can use to report any activity suspected ofbeing in breach of laws, regulations or business ethics principles. An ethics hotline and a compliance hotline havebeen established to receive reports from all Group companies, and each overseas location also has its own reporting
system. In all instances, the system ensures that whistleblowers remain anonymous and are protected from any
disadvantage or repercussions.
There were no reports or cases of non-compliance withlaws, regulations, or principles of ethics in ﬁscal 2016 that
could have had a material impact on the Group’s businessor local communities.

I have closely followed the semiconductor production equipment industry
over the eight years I have served as an outside director on Tokyo Electron’s
Board of Directors. I am now certain that the Company’s greatest strength
stems from the firm trust customers place in Tokyo Electron.
To me, corporate management means working with customers to increasebusiness value and generate higher returns and then fairly distributing these
returns to stakeholders, including shareholders and employees.
With the popularization of the internet of things, semiconductor applications are on the verge of enormous change and expansion, deeply altering
the market landscape. Applications that used to target customers in relaOutside Director
tively specialized fields, such as niche products or control technologies, are
Masahiro Sakane
now beginning to expand in scope. They are finding uses across extremely
broad areas, spanning not just supply chains, but entire value chains.
As such, this is a time of great opportunity for Tokyo Electron. By capitalizing
on its strengths and working with customers to stay ahead of the curve as markets evolve, I hope to see Tokyo Electron markedly increase its corporate value.
Although I will leave the Board of Directors in June
2016, I am confident that Tokyo Electron will continue
producing results that meet the expectations of its
shareholders and other stakeholders. I would like tothank all of the Company’s stakeholders for your support over these eight years, and I look forward to seeing
the great things to come for Tokyo Electron.
Outside Director

Masahiro Sakane

Message from theOutside Directors