[Translation]
Code of Audit and Supervisory Board Member Auditing Standards

Japan Audit & Supervisory Board
Members Association（＊）
Enacted on March 25, 1975
Revised on July 20, 1982
Revised on September 29, 1993
Revised on October 31, 1994
Revised on January 7, 2000
Revised on June 13, 2002
Revised on February 12, 2004
Revised on January 12, 2007
Revised on July 9, 2009
Revised on March 10, 2011
Revised on July 23, 2015
Revised on December 16, 2021
Final revision on August 1, 2022
(Notes)This translation is prepared only for reference purposes, and in the case of any matters fallingwithin the ambit of the Code of Audit and Supervisory Board Member Auditing Standards (the“Code”), reference should be made to the original Japanese text of the Code. The Code isintended solely as a best practice benchmark by which audit and supervisory board members(“ASBMs”) may perform their audit duties. It does not replace or supplement in any way
whatsoever the current legal regime applicable to ASBMs and does not give rise to duties for
ASBMs over and above those imposed by prevailing legal standards. Non-conformity with theCode would therefore not per se give rise to legal liability or a cause of action against the
ASBMs concerned. ASBMs are expected to prepare their own auditing standards applicable tothe company, to the best possible level, by reference to the Code. The same shall be applied toother rules or standards prepared or enacted by the Association, including the “Audit PracticeStandards for Internal Control Systems.”＊

N.B. “Japan Audit & Supervisory Board Members Association” is the English translation of the formalname of the Association. “Japan Audit & Supervisory Board Members Association” was formerlytranslated as “Japan Corporate Auditors Association” but was renamed in 2013 as a consequence of therevision of the recommended English translation of “Kansayaku” from “Corporate Auditor” to “Audit &Supervisory Board Member.” To avoid confusion, previously published portions have been updated touse the current translations of the Association’s name and “Kansayaku.”

1Revision of Code of Audit and Supervisory Board Member Auditing Standards

Japan Audit & Supervisory Board
Members Association
August 1, 2022
While most of the amendments under the “Act for the Partial Amendment of the Companies
Act” established on December 4, 2019 took effect from March 1, 2021, the parts relating to the“electronic provision of shareholders’ meeting materials” will take effect on September 1, 2022.
The Association examined those parts upon the previous revision of the Code (in 2021), but as
the legal provisions relating to that electronic provision were yet to take effect when theprevious revision was announced, corresponding provisions in the Code were separately statedat the end of the Code. For this revision, as the amended Companies Act is due to take effect,
corresponding provisions have been added to the Code, and revisions have been made inconsideration of the actual measures and the like anticipated to be taken by audit andsupervisory board members (Article 63).

2

Revision of Code of Audit and Supervisory Board Member Auditing Standards

Japan Audit & Supervisory Board
Members Association
December 16, 2021
I

Background

Since its establishment in March 1975, the Code has been revised numerous times; in the
February 2004 revision, the Code, including its structure, was revised in its entirety in order toclarify the roles and duties currently expected of audit and supervisory board members(“ASBMs”). Since then, while preserving the fundamental points of the 2004 revision, theCode has been revised several times to respond to various changes in the environment
surrounding ASBMs, such as the Companies Act being amended and the Corporate Governance
Code (the “Governance Code”) taking effect, and to developments in auditing practices.
Following the previous revision (in 2015), the amended Companies Act, amended Ordinancefor Enforcement of the Companies Act, etc. took effect in March 2021, and the Governance
Code was revised twice in 2018 and 2021, in addition to which the auditing standards forauditors have been revised several times, and each of these included new provisions related to
the responsibilities, etc. of ASBMs. The Association has decided to revise the Code at this timein order to respond to these environmental changes.
Many of the provisions reflected in this revision may significantly affect ASBM practices, andthere are many provisions that will need to be reviewed depending on practice trends moving
forward. Accordingly, the Association will consider reviewing the Code as appropriate.
II

Substance of the Revisions

1.

Upon this revision, revisions have been made simultaneously to the Code of Audit andSupervisory Board Member Auditing Standards, the Code of Audit Committee AuditingStandards, and the Code of Audit and Supervisory Committee Auditing and SupervisingStandards. When doing so, in addition to reflecting the various provisions stated above,an effort was made to once again examine the consistency of these documents, such as
differences in the structure of their provisions and the manner in which they are written.
Additionally, in the same way as the previous revision, supplementary notes separate
from the provisions of the Code are included in order to add explanations regarding thehandling of the relevant provisions of the amended Companies Act and the Governance
Code, etc. relating to the revisions.

2.

The main contents of the revisions are as follows.
(1)

Main revisions in consideration of amendments to the Companies Act, theOrdinance for Enforcement of the Companies Act, etc.
• Provisions were added regarding audits of matters such as the decision-making
process of the board of directors regarding policies on the determination of thecontents of individual director remuneration, etc. provided for in Article 361,
paragraph 7 of the Companies Act (Article 49). Additionally, provisions wereadded regarding audits of indemnity agreements provided for in Article 430-2 of
the Companies Act and insurance agreements executed for the benefit of
directors/ASBMs, etc. provided for in Article 430-3 of the Companies Act
3

(Article 27). Furthermore, provisions were added regarding procedures forconsent to judicial settlements provided for in Article 849-2 of the Companies
Act (Article 56).
• Other than the above, the Association examined responses to the electronic
provision of shareholders’ meeting materials provided for in Article 325-2 of theCompanies Act, but as the legal provisions relating to the matter are yet to takeeffect as of the announcement of this revision, provisions in the Code regarding
those systems are stated separately.
(2)

Main revisions in consideration of revisions to Governance Code• As part of the roles and responsibilities of ASBMs and the audit and supervisoryboard (“ASB”) in Principle 4.4, a reference was added regarding authority
pertaining to the appointment and dismissal of ASBMs and the determination of
remuneration of ASBMs. That authority itself was already provided for in the
Companies Act, and the matters stated in the provisions of the Codesummarizing best practices for ASBMs did not require any revision. However,in consideration of the intent behind the increased emphasis placed on that
authority, statements to the effect that it is important to ensure the independenceof ASBMs in order to ensure the reliability of audits have been made in the
supplementary notes (supplementary notes to Article 9 and Article 12).
• Provisions were added regarding measures to be taken in consideration of
Supplementary Principle 4.11.1 (disclosure of skills matrix, etc.) (Article 10,paragraph 6).
• Provisions were added regarding the participation of ASBMs in nomination andcompensation committees, etc. in consideration of Principle 4.10 and
Supplementary Principle 4.10.1 (Article 14, paragraph 3).
• ASBMs, etc. were added as parties that should engage in dialogue withshareholders and other stakeholders in Supplementary Principle 5.1.1. Upon theprevious revision of the Code, it was anticipated that the expectation for ASBMs,
etc. to engage in dialogue with shareholders and other stakeholders would
increase in the future, and provisions regarding responses to that situation were
included, but a statement to the effect that this intent has become more clear due
to the subsequent revision of the Governance Code has been added to the
supplementary notes (Article 15).
• Responses in consideration of Supplementary Principle 4.13.3 (establishment ofa system in which the internal audit division reports directly to the ASB) (Article
38, paragraph 5).

(3)Main revisions in consideration of revisions to auditing standards for auditors• Due to the revision of auditing standards for auditors, key audit matters (KAM)
are required to be stated in the audit reports of auditors under the Financial
Instruments and Exchange Act. As the Code mainly addresses the authorities
and responsibilities of ASBMs under the Companies Act, no reference is madeto KAM in the provisions, but a statement in regard to this has been made in the
supplementary notes (supplementary notes to Article 48).
• However, in regard to measures by auditors regarding statements in the parts ofdisclosed documents, including audited financial statements, other than thosefinancial statements and audit reports (“Other Statements”), in consideration of4the fact that the business report and supplementary schedules thereto constitute“Other Statements” under the Companies Act, provisions were revised and a
supplementary note was added regarding measures in regard thereto (Article 48,
paragraph 2).
(4)

Other revisions• Previously, the Code included provisions regarding specified ASBMs in various
places, but for consistency with the auditing standards for audit committees andaudit and supervisory committees, new provisions have been added to gather
together the matters concerning specified ASBMs (Article 11).
• In regard to Chapter VI (Operational Audits) of the Code, the matters statedtherein were changed during repeated revisions since the enactment of the Code,as a result of which differences, mainly in regard to structure, arose with theauditing standards for audit committees and audit and supervisory committees
that were enacted later. Therefore, the current revision work included areexamination of the structure of the provisions, as a result of which they weremade consistent (Article 22 to Article 24).
• Other differences regarding detailed wording were reexamined.

III

Companies to which the Code Applies

As with the previous revisions, the Code applies to large companies, as defined in the
Companies Act, and has been written mainly in consideration of listed companies. For
companies that are not large companies, it is desirable that ASBMs refer to the Code while
keeping in mind the company’s specific audit environment.

5

Revision of Code of Audit and Supervisory Board Member Auditing Standards

Japan Audit & Supervisory Board
Members Association
July 23, 2015
I

Background

Since its establishment in March 1975, the Code has been revised numerous times; in the
February 2004 revision, the Code aimed to set out not only responses to legal requirements, butalso “the audit practices that will be evaluated” and “the standards by which audit andsupervisory board members (“ASBMs”) will be held accountable,” in addition to which theCode established that the fundamental duties of ASBMs include “to prevent corporate
wrongdoing” and “to ensure and safeguard sound and continuous growth of their company”
and that the fundamental auditing view of ASBMs is towards “the establishment and operationof a good corporate governance system.” Following that, due to factors such as the Companies
Act, the Ordinance for Enforcement of the Companies Act, and the like taking effect in May
2006 and the “Final Report Regarding Findings of the Panel of Experts” (Japanese only) being
published in April 2010, the Code has been revised several times, but these fundamental pointsof the 2004 revision have been preserved.
Subsequently, the amended Companies Act, amended Ordinance for Enforcement of theCompanies Act, and the like took effect in May 2015, and the Corporate Governance Code (the“Governance Code”) took effect in June of that year. The Governance Code aims to improve
the supervisory functions of the board of directors and to ensure effective audits and seeks
positive and proactive behavior from ASBMs beyond their “defensive functions,” which fits
exactly with the fundamental duties and fundamental auditing view of ASBMs set out in the
February 2004 revision.
The Association has decided to revise the Code at this time in order to respond to these various
changes in the environment surrounding ASBMs that have occurred since March 2011.
As many of the matters reflected in this revision, due to the major amendment of the Companies
Act and the introduction of the Governance Code, may significantly affect ASBM practices,
there are many provisions that will need to be reviewed depending on practice trends moving
forward; accordingly, the Association will consider reviewing the Code as appropriate.
II

Substance of the Revisions

1.

The Code includes both provisions on legal duties under the Companies Act and otherlaws and regulations as well as provisions on conduct that is desirable in consideration ofgood corporate governance; it is necessary for each company to appropriately adjust thelatter type of provisions in consideration of its own environment when formulating its
own ASBM auditing standards. Therefore, in order to make the Code easier to use, theAssociation has altered the format to include the level of each provision andsupplementary notes.
(1)

The provisions have been categorized into levels according to their meanings, andstandard phrasing is used for each level to the extent possible. The meaning of eachlevel is stated at the start of the Code, and each provision’s level is indicated afterthat provision. Please note that the level categorization of the provisions is based
solely on the views of the Association and has not been confirmed by public or6

governmental agencies, and please make use of the levels as a reference whenestablishing or reviewing your company’s own ASBM auditing standards inconsideration of the company’s environment.
(2)

The newly added supplementary notes indicate the provisions of the amended
Companies Act relevant to the current revision of the Code and explain theapplication of the Governance Code. In particular, the Governance Code is notitself legally binding, unlike laws and regulations such as the Companies Act.
Instead, it utilizes a “principles-based approach” in which companies are expected
to understand the intent of the Governance Code’s principles and endeavor toachieve effective corporate governance in a way that suits the environment
surrounding the company; even if a company decides not to adopt the principles
and supplementary principles of the Governance Code due to the company’s
circumstances, it can explain those circumstances and the company’s measures in
response thereto (known as the “comply-or-explain approach”) and leave ultimate
evaluation to the market. Accordingly, it is not appropriate to make each principle
and supplementary principle a standard of conduct to be universally complied withlike the provisions of laws and regulations such as the Companies Act, and there
are instances in which it is not possible to adequately explain that in the main textof the Code; therefore, explanations have been added in the new supplementary
notes. Provisions that directly reflect Governance Code principles are in generalcategorized as level 4 under the system explained in (1) above due to thesecharacteristics of the Governance Code. The Association recognizes that someprovisions may not be suitable in light of the actual conditions of some companies
and has therefore made it possible to apply the provisions with some latitude(including not adopting them) in order to suit the circumstances and environmentof each company.

2.

The content of the Code has been revised to reflect the amendments to the Companies
Act, the Ordinance for Enforcement of the Companies Act, and the like as well as theprinciples of the Governance Code. Some of the principles of the Governance Code apply
directly to ASBMs. Even for many of the principles focused on management or the boardof directors, when ASBMs perform their audits, it is necessary for them to monitor andverify how management or the board of directors is addressing those principles.
Regarding this point, the current revision not only sets out a provision to respect the
principles of the Governance Code in general, but also includes provisions in response toprinciples that the Association believes deserve special consideration.

3.

The main contents of the revisions are as follows.
(1)

In consideration of the amendments to the Companies Act, the Ordinance for
Enforcement of the Companies Act, and the like, provisions have been added
regarding the determination of contents of proposals on the appointment, dismissal,
or non-reappointment of accounting auditors (Article 34). Additionally, matterswere added regarding systems to ensure the effectiveness of audits and othersystems to ensure the appropriateness of corporate affairs (Articles 17 through 20,
Article 24). Furthermore, provisions were added concerning the statement of
opinions in audit reports regarding conflict-of-interest transactions with parent
companies and the like, the expression of opinions regarding third-party allotments,
etc. resulting in a change of control, and multiple derivative lawsuits (Article 26,
Article 49, Article 55).

7

(2)

In consideration of General Principle 2, General Principle 4, and other principles of
the Governance Code, the contents of the provisions on responsibilities andattitudes of ASBMs have been expanded, and provisions have been added regarding
the role of ASBMs in bearing part of the company’s supervisory functions andregarding responses to the Governance Code (Article 2, Article 3, Article 13).
“Supervisory functions” here is a concept with a broader meaning than the“supervision of the execution of the duties of directors” by the board of directorsthat is prescribed in the Companies Act and refers to the overall supervisory
functions that are performed in cooperation between the board of directors and
ASBMs or the audit and supervisory board (“ASB”); the Association view audits
by ASBMs and the ASB as one part of this concept of supervision in the broad
sense. General Principle 4 of the Governance Code sets out three roles andresponsibilities as supervisory functions, some of which are to be performed by
ASBMs or the ASB (refer to General Principle 4). In addition to auditing whether
the board of directors is appropriately fulfilling those supervisory duties (refer toArticle 381, paragraph 1 of the Companies Act), another example of a means
through which ASBMs can be involved in these supervisory functions is byproactively expressing opinions regarding internal control systems, which serve asa foundation for appropriate risk-taking, from the initial establishment stages of
those systems. Additionally, depending on the circumstances of the company, it
may also be possible for ASBMs to proactively state their views in considerationof risk management, the rationality of business judgments, and the like not only inregard to individual matters, but also when formulating mid-term business plans.
However, these types of involvement should vary depending on the circumstancesof each company, and this was taken into account when determining the level
category. The concept of the broad sense of supervisory functions was discussed
in the Association’s news release titled “New Recommended English Translationfor ‘Kansayaku’ and ‘Kansayaku-kai’” (October 23, 2012); the Code has beenrevised in consideration of the same concept.
Provisions regarding participation in bodies such as optional advisory committees
have been added in Article 13, paragraph 3. This participation is not part of theinherent duties of ASBMs, and although the Association is not recommending that
ASBMs proactively participate in such bodies, we do not believe that there is any
issue in doing so to the extent that it does interfere with duties as ASBMs.

(3)

Additionally, in consideration of the general principles of the Governance Code andthe like, provisions have been added regarding ASBM training, involvement inselection policies for ASBM candidates, dialogue with shareholders and otherstakeholders, coordination with outside directors and the like, evaluation of theaudit performance of the ASB, and other matters (Article 3, Article 9, Article 14,
Article 16, Article 36).

(4)

In previous versions of the Code, the Japanese characters used for the term renkei(translated in previous revisions as “cooperation”) have carried a looser nuance of“connection” or “linking”; in this revision, different characters have been used forrenkei (which is now translated as “coordination”) and impart a stronger nuance of“coordination” and “cooperation.” The choice of the previous characters was madein consideration of the fact that one part of the duties of ASBMs is to audit whether
the audits carried out by accounting auditors or internal audit divisions and the likeare appropriate and reasonable from an independent position, and ASBMs therefore
perform audits not hand-in-hand with accounting auditors, internal audit divisions,8and the like, but simply in limited connection with them. Although the choice ofthe previous characters was based on careful consideration, and the intended
reasoning should be respected, the use of the previous characters may lead toconfusion in some situations, such as the Code using the previous characters whilethe “Joint Research Report Regarding Coordination Between Audit andSupervisory Board Members, Etc. and Accounting Auditors” (Japanese only),
prepared by the Association and the Japanese Institute of Certified Public
Accountants, uses the other characters in the same context. Because the meaningof the term can be sufficiently understood from the surrounding context, and inconsideration of the actual benefits and the possible confusion, the Association
decided to use only the current characters in this revision.
III

Companies to which the Code Applies

As with the previous revisions, the Code applies to large companies, as defined in the
Companies Act, and has been written mainly in consideration of listed companies. For
companies that are not large companies, it is desirable that ASBMs refer to the Code while
keeping in mind the company’s specific audit environment.

9

Revision of Code of Audit and Supervisory Board Member Auditing Standards

Japan Audit & Supervisory Board
Members Association
March 10, 2011
I

Background

The Code, including its structure, was revised in its entirety in February 2004 in order to
respond to changes in the domestic and international environments and to clarify the roles andduties currently expected of audit and supervisory board members (“ASBMs”). Following that,
due to the Companies Act, the Ordinance for Enforcement of the Companies Act, and the liketaking effect in May 2006, the Code was revised to reflect the Companies Act in January 2007
and July 2009. The Association has decided to revise the Code at this time in order to respondto various changes in the environment surrounding ASBMs that have occurred since theprevious revision and to reflect developments in auditing practices.
II

Substance of the Revisions

While various issues were being raised both domestically and internationally regarding
corporate governance in Japan, securities exchange listing rules were revised as part of an effort
to improve listing systems, and the Association set out best practices to serve as practicalguidelines for ASBM audits in the “Final Report Regarding Findings of the Panel of Experts”
published by the Association in April 2010. The Association believes it is desirable toimplement these best practices in day to day audit activities and has therefore made thenecessary revisions.
The substance and main contents of the revisions are as follows.
1.

Due to revisions to listing rules for the Tokyo Stock Exchange and other securities
exchanges, listed companies are required to have at least one independent
director/ASBM. Because outside ASBMs are often designated as independent
directors/ASBMs, provisions on independent directors/ASBMs have been added (Article
5, paragraph 4).

2.

In the “Final Report Regarding Findings of the Panel of Experts” prepared in April 2010,
best practices were set out regarding development of an ASBM audit environment,
auditing of internal control systems, auditing of third-party allotments, consent to audit
remuneration for accounting auditors, and consent to appointment proposals; the contentsof these best practices have been reflected in the relevant provisions of the Code (Article
5, paragraph 1 and Article 14, paragraph 3 regarding ensuring effectiveness of ASBM
audits; Article 29 and Article 32 regarding exercising the right to consent to determinationof accounting auditor remuneration and to appointment proposals; Article 44, paragraph
4 and others regarding strengthened cooperation with accounting auditors).

3.

In consideration of the prevalence of group management and the increasing importanceof maintaining the soundness of the corporate group (such as taking measures to prevent
significant damage to the company due to misconduct in subsidiaries), fundamental
provisions regarding ASBM audits in the corporate group have been included (Articles
22 and 35).

4.

The importance of ASBM audits to prevent corporate wrongdoing is increasing. In
particular, in consideration of preventing the spread of damage due to misconduct, the10

duty of accountability, and other matters, thorough and highly transparent responses aresought, and there are increasing instances of third-party committees being established.
Provisions regarding a basic view of the response of ASBMs to these circumstances havebeen added (Article 24).
(1)

Provisions have been added stating that, in cases of corporate wrongdoing, inconsideration of preventing the spread of damage and maintaining trust in thecompany, ASBMs must audit whether directors are responding appropriately andthoroughly in accordance with their duty of care (paragraph 1).

(2)

In cases of significant corporate wrongdoing, such as those involving directors, inorder to quickly restore trust in the company and prevent the spread of damage, itis necessary for companies to promptly take corrective actions, such as identifying
causes and preventing reoccurrence, for which transparency is ensured. In
consideration of the company’s corrective actions, it is important for ASBMs, as
non-executive officers, to exercise the authority to audit operations and other such
authorities granted to them under the Companies Act and thereby play a leadingrole in establishing a third-party committee with no conflicts of interest to
thoroughly examine matters such as the identification of causes and the preventionof reoccurrence. Additionally, when finding it necessary, ASBMs should deliberate
at meetings of the audit and supervisory board and examine the establishment of athird-party committee by an outside ASBMs or the like (paragraph 2).

(3)

Unless they are found to have clear interests in the corporate wrongdoing inquestion, it is desirable that ASBMs, as non-executive officers, serve as membersof the third-party committee and appropriately perform their duties, keeping in
mind their duty of care to the company. Additionally, whether or not they serve as
members of the committee, ASBMs will, taking care not to interfere with requests
to promptly identify causes, relationships with the relevant authorities, and othermatters, take such steps as receiving explanations regarding matters such as theprocess of the establishment of the third-party committee and the status of its
response measures (paragraph 3).

5.

Due to the increasing importance of appropriate disclosure for listed companies,
provisions have been added regarding ASBM audits of the appropriateness of corporate
information disclosure, including securities reports (Article 41).

6.

In consideration of factors such as ASBMs being required to express an opinion if a thirdparty allotment is carried out, provisions have been added regarding ASBM audits forthird-party allotments (Article 46).

7.

The term “development” is used in connection to internal control systems in Article 362,
paragraph 4, item 6 of the Companies Act, and it was defined in the previous revision of
the Code to include “operation”; however, it was pointed out to the Association that thismight cause misunderstanding in practice because “development and operation” is aphrase commonly used for internal controls of financial reporting. Accordingly,“development” has been replaced with “establishment and operation” where appropriate.

Other necessary revisions have been made, as well.
III

Status of the Code; Companies to which the Code Applies

Under the principle of “clarifying the roles and duties currently expected of ASBMs” that wasset out when the Code was established, the Code includes best practices to serve as practical11

guidelines for ASBMs in order to increase the effectiveness of ASBM audits. These bestpractices are not standards that must be followed without fail by ASBMs, so if ASBM auditing
activities do not conform to these practices, ASBMs will not be subject to automatic legal
liability; however, if the Code is adopted as-is to serve as the company’s own standards, or thecompany prepares its own ASBM auditing standards with the Code as a reference, it must be
noted that ASBMs will bear a duty to perform audits in accordance with those auditing
standards.
As with the previous revisions, the Code applies to large companies, as defined in the
Companies Act, and has been written mainly in consideration of listed companies. For
companies that are not large companies, it is desirable that ASBMs conduct audits in reference
to the Code while keeping in mind the company’s specific audit environment.

12

Revision of Code of Audit and Supervisory Board Member Auditing Standards

Japan Audit & Supervisory Board
Members Association
July 9, 2009
The “Ministerial Ordinance for Partial Amendment of the Ordinance for Enforcement of theCompanies Act and the Ordinance on Accounting of Companies, etc.” (Ministry of JusticeOrdinance No. 7 of 2009) took effect on April 1, 2009, and amended parts of the Ordinance for
Enforcement of the Companies Act and the Ordinance on Accounting of Companies.
Accordingly, the Association has decided to revise the Code of Audit and Supervisory Board
Member Auditing Standards.
The main contents of the revisions are as follows:(1) The necessary revisions were made to the Code’s provisions on disclosure of “basic
policies regarding those who control the company’s determination of its financial andbusiness policies” (commonly called takeover defense measures) in business reports
due to the disclosure requirements for those basic policies having been changed toonly include “a summary of the contents of the basic policy” and “a summary of thespecific contents of measures.”(2) In cases where there is a demand from shareholders to file a lawsuit pursuing theliability of directors, but a lawsuit is not filed, the above amendment clarified that inaddition to the determination of whether the parties subject to the demand had
responsibilities or duties, the reasons for that determination must also be submitted orprovided to the parties making the demand (as a “notice of reasons for not filinglawsuit”) when certain shareholders or the like so request; accordingly, the necessary
revisions were made to the Code.

13

Revision of Code of Audit and Supervisory Board Member Auditing Standards

Japan Audit & Supervisory Board
Members Association
January 12, 2007
I

Background

The Code, including its structure, was revised in its entirety in February 2004 (which revision
is herein referred to as the “2004 Code Revision”), in order to respond to changes in thedomestic and international environments, and to clarify the roles and duties currently expectedof audit and supervisory board members (“ASBMs”).
Thereafter, the Companies Act of Japan (Kaishahou) and the ministerial ordinances of the
Ministry of Justice thereof which took effect in May 2006 stipulated provisions, which werealready added to the Code at the time of the 2004 Code Revision, related to auditing theoperating effectiveness of internal control systems and the development of an environment for
ASBM audits, etc., and newly stipulated provisions related to the responsibilities, etc., of
ASBMs.
In order to respond to these changes of law after the 2004 Code Revision and environmental
changes, the Japan Audit & Supervisory Board Members Association has revised the Codeagain.
II

Substance of the Revisions

Taking into consideration the Companies Act of Japan and the ministerial ordinances of the
Ministry of Justice, we have decided that it is not necessary to change the underlying policy of
the Code. The preamble to the 2004 Code Revision has been kept intact. On the other hand,
we have made revisions to maintain specific and systematic guidelines for audit practices,similar to the previous Code. They are meant not only to address the legal requirements, butalso to clarify the audit practices that will be evaluated and to provide the standards by which
ASBMs will be held accountable.
In this revision of the Code, the points primarily taken into consideration are as follows:
The companies to which the Code applies shall be large-scale companies under the Companies
Act of Japan, as under the previous Code, and the revisions have been made mainly inconsideration of listed companies. If the companies are not large-scale companies, it isdesirable to conduct audits in reference to the Code while keeping in mind each company’s
audit environment and relevant differences from large companies.
1.

In the case of a large-scale company that maintains a board of directors, board of
directors’ resolutions with respect to the basic policies of its internal control systems are
required by the Companies Act of Japan. We have revised the Code, in accordance withthe provisions of the Companies Act of Japan, with respect to, among other things,
monitoring and verifying the contents of the board of directors’ resolutions and theoperating effectiveness of internal control systems developed by directors. With respect
to establishing a more concrete manner of auditing internal control systems, etc., we havedecided to enact “the audit practice standards for internal control systems” based on the
Code.

2.

“Systems to ensure the effectiveness of ASBM audit activities” have been identified aspart of the basic policy of internal control systems for which a board of directors’
resolution is required. Directors and the board of directors must be cognizant of
14

developing systems which are necessary for the performance of ASBM duties as requiredby law. Thus, we have specifically and systematically provided for the development of
an ASBM audit environment by creating a separate section in the revised Code.
3.

Matters concerning ASBMs that are required to be disclosed, such as matters pertaining
to candidates for ASBMs and the status of the performance of duties of outside ASBMs,
have been expanded by the Companies Act of Japan. Thus, we have made the required
revisions to the Code concerning the procedures and the criteria for selecting ASBM
candidates, in addition to the responsibilities, etc. of outside ASBMs.

4.

ASBMs shall be granted the power to consent to the determination of accounting auditors’
remuneration, etc., and the accounting auditors shall be obligated by law to provide the
ASBMs with a notice of “matters concerning the performance of the accounting auditors’
duties”. Thus, necessary provisions have been added to the Code in relation to the
responsibilities to be discharged by ASBMs in ensuring the appropriateness andreliability of accounting audits.

5.

ASBMs’ opinions shall be provided in the audit report if the “basic policies regarding
those who rule on the company’s determination of its financial and business policies” areincluded in a business report. Thus, a separate section addressing this issue has been
added to the Code and also refers to the responsibilities to be discharged by ASBMs in
ensuring the appropriateness of takeover defense measures.

6.

The Companies Act of Japan introduced a system that requires ASBMs to give notice of
their reasons for not filing a lawsuit pursuing the liability of a director; when demanded
to do so by shareholders or director(s), and thereby the appropriate decision-making of
ASBMs became more important. Thus, revisions have been made to the Code to address
ASBMs’ actions related to derivative lawsuits, etc.

15

Revision of Code of Audit and Supervisory Board Member Auditing Standards

Japan Audit & Supervisory Board
Members Association
Revised on February 12, 2004
I

Background

The Code was adopted by our association in March 1975 and then revised several times toincorporate the revisions to the Japanese Commercial Code (together with the Law for Special
Provisions for the Commercial Code concerning Audits, etc., of Kabushiki Kaisha 1 , andcollectively herein referred to as the “Japanese Corporations Law”). The Code has functioned
as a set of standards of conduct for audit and supervisory board members (“ASBMs”) in
performing their duties. The main contents of the Code are a philosophy of auditing for ASBMs
and provisions regarding certain basic matters required by law. However, given the dramaticchanges in recent years in the environment surrounding ASBM audits, it has become necessary
for the Code to be revised so that it provides sufficient standards of conduct for ASBMs toperform their expected duties.
In the legal sphere, the ASBMs’ functions were reinforced by the 2001 revision of the JapaneseCorporations Law in respect of corporate governance. Soon thereafter, the 2002 revision of theJapanese Corporations Law and related legislation introduced a new system of “a company withcommittees,” which provides an alternative governance system for large-scale companies. A
new era has thus been opened, where companies compete in quality of corporate governancesystems, including their audit systems. In addition, rapid progress is being made in the revisionof relevant laws, regulations and accounting standards to keep up with the globalization offinancial and capital markets, the move to consolidated management, and the accumulation of
judicial decisions concerning director liability in response to repeated corporate wrongdoing.
In order to respond to these changes in domestic and international environments, to clarify theroles and duties currently expected of ASBMs, and to present specific standards for theirconduct, we, Japan Audit & Supervisory Board Members Association, have reviewed andrevised the Code in its entirety, including its structure, by incorporating several studies and theopinions of our internal committees and study groups.
II

Essence of Revision

In this revision of the Code, we have aimed not only to address the audit philosophy and legal
requirements as with previous revisions of the Code, but also to provide specific and systematic
guidelines for audit practices and thereby clarify the audit practices that will be evaluated andto provide the standards by which ASBMs will be held accountable. Recognizing that the
ASBMs’ fundamental duties are to audit the directors’ performance of their duties from an
independent position and thus to prevent corporate wrongdoing and to ensure and safeguard
sound and continuous growth of their company, we have clarified that ASBMs shall performtheir duties with a view to the establishment and operation of a good corporate governancesystem.
The essence of the revision is as follows.

1

Translation note: “kabushiki kaisha” means joint stock corporation, the most typical type of limited
liability corporation under the Japanese Corporations Law.

16

1.

With respect to decision-making by the board of directors and other organizations, the socalled business judgment rule is being established through judicial decisions fordetermining directors’ fulfillment of the duty of care. In light of this, we have includedin the revised Code the audit of whether management decisions are reasonably made on
the basis of sufficient information and in accordance with an appropriate decision-making
process.

2.

With respect to individual director’s performance of their duties, it is being recognized,
particularly for large-scale publicly-held companies, that directors are required toestablish so-called internal control systems as part of their duty of care. In light of this,we have decided to include in the revised Code provisions concerning the audit of whether
internal control systems have been developed in a manner appropriate for the company’ssize, nature of business, and other relevant aspects of the company.

3.

While the previous Code already included items like preventive audits to avoid corporate
wrongdoing, internal controls, the relationship with accounting auditors (kaikeikansanin), etc., we have now identified more specific audit standards that recognize theimportance of development of the audit environment for ASBMs, taking into
consideration the points mentioned in paragraph 2, such as establishing systems to assist
ASBMs in performing their duties and a system of cooperation with the company’s
Internal Audit Division, etc. (defined in Article 32).

4.

While the ASBM system is based on individual independence (dokunin-sei) among
ASBMs, we have provided for strengthening the functions of the audit and supervisoryboard, its chairperson, outside ASBMs, etc., in order to improve their organizational
efficiency.

5.

In order to ensure the appropriateness, transparency and reliability of corporate
disclosure, provisions have been included with respect to, among other things, theASBMs’ monitoring of the independence of accounting auditors, and monitoring andverifying whether the company has established and is operating such financial reporting
systems as are necessary and adequate for the directors to prepare accurate financial
statements, accounting documents and related disclosures.

6.

Provisions have been added to reflect the 2001 revision of the Japanese Corporations Law
and related legislation in respect of corporate governance, under which ASBMs are
expected to fulfill specific roles in situations involving conflict of interest between
directors and the company, such as that consent of the ASBMs is required for exemption
or reduction of a director’s liability or for the company’s participation in a derivative
lawsuit to assist the defendant directors.

7.

In order to improve the transparency and ensure the reliability of ASBMs’ audit activities
and audit reports, provisions have also been added concerning ASBMs’ conduct of audit
reporting and disclosure as well as ASBMs’ duty to provide explanations to theshareholders.

III

Ensuring the Effectiveness of Audits by ASBMs

In order for ASBMs to effectively discharge their responsibilities under the Code, it isextremely critical for directors, particularly representative directors, to be fully aware of theimportance and usefulness of ASBM audits, and to be aware that directors are strongly required,as their own obligation, to develop an environment favorable to ASBM audits. ASBMs arestrongly required, not only by the company but also by society, to make efforts, as an17

independent organization playing a key role in corporate governance, to promote suchawareness.
IV

Companies to which the Code Applies

The Code has been prepared for large companies (including those deemed large-scalecompanies) as defined under the Japanese Corporations Law, and chiefly with publicly-heldcompanies in mind. For small or medium companies, it is desirable to conduct audits inreference to the Code while keeping in mind each company’s audit environment and relevant
differences from large-scale companies.

18

Code of Audit and Supervisory Board Member Auditing Standards
Note: Regarding Levels of Provisions
Lv.

Category

1

Legally mandated matters

Phrasing

In principle, “must” and “must not” areused.
However, the phrasing of laws andregulations is taken into consideration
in some cases.

2

Matters non-compliance with which may,in reasonable probability, constitute a
breach of the duty of care

In principle, “must” is used.

3

Matters non-compliance with which does
not automatically constitute a breach of the
duty of care but for which, depending on
the manner of non-compliance, a breach
may be recognizedIn principle, “will” is used.

4

Matters for which there is a moral
obligation to endeavor, matters that are
preferred or desirable, and matters that are
standards of conduct but do not fall underlevels 1 to 3 above (such as matters thatshould be considered or examined but for
which no specific behavioral guidelines areprovided)Appropriate phrasing is chosen inaccordance with the circumstances.

Matters that do not fall under levels 1 to 4
above, such as confirmation of rights

Appropriate phrasing is chosen inaccordance with the circumstances.

5“Should endeavor” is used for mattersfor which there is a moral obligation to
endeavor, and in principle, “should” isused for matters that are standards ofconduct but do not fall under levels 1 to
3 above.

Chapter I
Purpose of this Code
Article 1

Purpose1.

This Code of Audit and Supervisory Board Member Auditing Standards (this “Code”)
clarifies the responsibilities of audit and supervisory board members (“ASBMs”) and theattitudes they should have in discharging such responsibilities and sets out audit systems
for discharging such responsibilities as well as standards and behavioral guidelines for
conducting audits. [Lv. 5]

2.

ASBMs should act in accordance with this Code, taking into consideration the company’ssize, the nature of its business, various management risks surrounding the company, andother aspects related to the company’s particular audit environment, and should endeavor
to ensure the effectiveness of their audits. [Lv. 4]
19

Chapter II
Responsibilities and Attitudes of ASBMs
Article 2

ASBM Responsibilities

1.

ASBMs bear part of the supervisory functions of the company in cooperation with theboard of directors, and by auditing the directors’ performance of their duties as a statutory
independent organization entrusted by the shareholders, ASBMs are responsible forestablishing a good corporate governance system. A good corporate governance system
is one in which the company and its corporate group are able to consider the interests ofand endeavor to cooperate with various stakeholders, achieve sound and sustainablegrowth and the creation of mid- to long-term corporate value, and accommodate society’s
trust. [Lv. 3]

2.

Through fulfilling the responsibilities in the preceding paragraph, ASBMs should ensurethat the company’s decision-making is transparent and fair, endeavor to develop an
environment that enables timely and decisive decision-making by the company, andendeavor, without interpreting the scope of their functions too narrowly, to positively andproactively express their opinions to directors and employees. [Lv. 4]

3.

ASBMs must attend the board of directors’ meetings and other important meetings, verify
the contents of reports received from directors, employees, the accounting auditor, andother people in the company, conduct investigations with respect to the status of theoperations and financial status of the company, and take any necessary measures whenappropriate, including expressing suggestions, recommendations, or opinions to directors
and employees and seeking injunctions against directors’ acts. [Lv. 2]
Supplement to paragraph 1
The concept of “supervision” in this Code is not limited to “supervising theexecution of the duties of directors” as stipulated in Article 362, paragraph 2, item 2 of
the Companies Act; it includes the broader sense of overall supervisory functions incorporate governance. Supervisory functions in this broader sense are shared incooperation between the board of directors and ASBMs (or the audit and supervisoryboard), and “auditing” is considered part of those functions. (The concept of the broad
sense of supervisory functions was discussed in the Association’s news release titled“New Recommended English Translation for ‘Kansayaku’ and ‘Kansayaku-kai’”(October 23, 2012); statements in this Code are based on the same concept.)
Additionally, the cooperation with various stakeholders that is sought under the
Corporate Governance Code (in these supplements and references, the “GovernanceCode”) is to be carried out mainly by the board of directors and management; however,the ASBMs are required to support the board of directors and management in terms ofestablishing corporate governance systems.
Reference for paragraph 1
Governance Code, General Principles 2 and 4

20

Supplement to paragraph 2
As stated in Principle 4.4 of the Governance Code, in order to sufficiently fulfill
their roles and responsibilities, including so-called “defensive functions,” it is not
appropriate for ASBMs to interpret the scope of their functions too narrowly. Already,in many cases of actual practice, ASBMs are expressing their opinions at important
meetings, such as board of directors’ meetings and management committee meetings,
as well as in a variety of situations about a wide range of matters, not only from theperspective of potential breaches of laws, regulations, or articles of incorporation, butalso in consideration of risk management, the rationality of business judgments, andthe like. (For specific examples, please refer to the Association’s news release titled“Results of Survey in Advance of 77th National Audit & Supervisory Board Members
Conference” (October 8, 2013; Japanese only).) However, it must be noted that thesetypes of actions should be taken in consideration of the circumstances of each company
and are not uniformly required for all companies.
Article 3

ASBM Attitudes

1.

ASBMs must endeavor to preserve their own independent position and must maintain afair and impartial attitude and act based on their own convictions. [Lv. 2]

2.

ASBMs should continuously endeavor to cultivate their knowledge for such purposes asimproving the quality of their audits in order to appropriately fulfill the roles andresponsibilities expected of them as bearers of part of the company’s supervisory
functions, in addition to which they should endeavor to find opportunities to continually
update that knowledge after assuming office. [Lv. 4]

3.

In order to obtain the proper perspective for auditing, ASBMs should endeavor to acquirenecessary knowledge related to the company’s business, finances, organization, and thelike and to find opportunities to sufficiently understand the roles and responsibilities thatare required of ASBMs, in addition to which they should endeavor to deepen theirunderstanding of management issues from an overall managerial perspective, graspchanges in management conditions and the corporate environment, and positively andproactively express their opinions. [Lv. 4]

4.

ASBMs should continually strive to communicate with directors, executive officers,
employees, and other people in the company and its subsidiaries and should endeavor tocollect sufficient information and to develop the audit environment. [Lv. 4]

5.

In formulating audit opinions, ASBMs should endeavor to come to appropriate opinions
by diligently confirming the relevant facts, requesting attorneys’ and other outside
professionals’ opinions when finding it necessary, and seeking rational grounds for their
judgments. [Lv. 4]

6.

ASBMs must be careful to maintain the confidentiality of any information they obtain in
the course of performing their duties. [Lv. 2]

7.

ASBMs should endeavor to make the directors, including the representative directors,
fully understand and recognize that it is important and indispensable for the directors todevelop a favorable environment for ASBM audits in order to establish and operate agood corporate governance system that accommodates society’s trust and ensures thesound and sustainable growth of the company and its corporate group. [Lv. 4]21

Reference for paragraph 2
Governance Code, General Principle 4, Principle 4.4, and Supplementary
Principle 4.14.1
Supplement to paragraph 3“Positively and proactively express their opinions” means that ASBMs are
expected to express their opinions in consideration of risk management, the rationalityof business judgments, and the like without hesitation whenever they determine it
would be beneficial for the company, instead of limiting their remarks or waiting fortheir opinions to be asked for the reason that the matter should be left solely to
management.

Chapter III
ASBMs and the Audit and Supervisory Board
Article 4

Full-time ASBMs

1.

The audit and supervisory board (“ASB”) must appoint one or more full-time ASBMs(joukin no kansayaku) from among the ASBMs. [Lv. 1]

2.

Full-time ASBMs should keep in mind their particular role as full-time personnel andshould actively endeavor to develop the audit environment and to collect information
within the company [Lv. 4], and they will monitor and verify, on a daily basis, the statusof the establishment and operation of internal control systems. [Lv. 3]

3.

Full-time ASBMs should endeavor to share with other ASBMs information obtained in
the course of performing their duties. [Lv. 4]

Article 5

Outside ASBMs and Independent ASBMs

1.

Outside ASBMs (shagai-kansayaku) should keep in mind that their appointment isrequired by law in order to strengthen the level of independence and neutrality of the audit
system, should actively try to obtain information necessary for their audit, and should
endeavor to share that information obtained with other ASBMs and to develop the audit
environment in cooperation with other ASBMs. [Lv. 4] Additionally, outside ASBMs
should endeavor in cooperation with other ASBMs to share information with the Internal
Audit Division, Etc. (defined in Article 38, paragraph 1) and the accounting auditor. [Lv.
4]

2.

Because of their independence, the reasons for their appointment, and other related
matters, outside ASBMs will keep in mind that they are particularly expected to express
objective and neutral audit opinions and will actively, candidly, and directly posequestions and state their opinions to the representative directors and the board of directors.
[Lv. 3]

3.

Outside ASBMs, keeping in mind that the status of the performance of certain of theirduties specified by law and regulation is disclosed in the business report, must performtheir duties appropriately. [Lv. 2]
22

4.

Outside ASBMs designated as independent ASBMs will keep in mind that they areparticularly expected to act to ensure that managerial decision-making is fair andimpartial in consideration of the interests of general shareholders and, by extension, theinterests of the company (in this article, “Interests of General Shareholders”) and will
exchange opinions with other ASBMs, strive in cooperation with other ASBMs to
exchange information with the departments in charge of exchanging opinions withgeneral shareholders and other such matters, and, when finding it necessary, express theiropinions to the representative directors and the board of directors in consideration of theInterests of General Shareholders. [Lv. 3]

Article 6

Functions of the ASB

1.

The ASB is composed of all ASBMs. [Lv. 1]

2.

Given that the ASB is the only deliberative or decision-making organization for the
purpose of formulating opinions regarding audits, each ASBM will report the status of
performance of their duties to the ASB. [Lv. 3] Additionally, each ASBM should
endeavor to ensure the effectiveness of audits through the utilization of the ASB. [Lv. 4]
However, the ASB’s resolutions must not preclude any ASBM from exercising his or her
own powers. [Lv. 1]

3.

The ASB must express its opinions to the directors or the board of directors as necessary.
[Lv. 2]

4.

In addition to the matters that the directors and employees are statutorily required to reportto the ASB, the ASB will determine through deliberations with the relevant directors thescope of matters that the directors and employees are to report to the ASB and will
accordingly receive from them reports on such matters. [Lv. 3]

Article 7

Duties of ASB

The ASB must perform the following duties; however, the decision in item (iii) must notpreclude any ASBM from exercising his or her own powers: [Lv. 1](i)preparing audit reports;(ii)

appointing and removing full-time ASBMs;(iii) deciding audit policy, methods for investigating the status of the operations andfinances of the company, and other matters regarding the performance of ASBM
duties; and(iv) other duties provided for in laws, regulations, and the articles of incorporation.
Article 8

Operation of ASB

1.

It is desirable that ASB meetings be held on a regular basis and that the dates and times
for the meetings for the year be fixed in advance, taking into consideration the scheduled
dates and times of the board of directors’ meetings, each ASBM’s availability to attend,
and other relevant factors. [Lv. 4] However, an ASB meeting will be held wheneverfound necessary. [Lv. 3]

2.

The chairperson of the ASB should be appointed by resolution from among the ASBMs.
[Lv. 4] The chairperson will convene and preside over ASB meetings and perform any
23other duties entrusted to the chairperson by the ASB. [Lv. 3] However, the chairperson
must not preclude any ASBM from exercising his or her own powers. [Lv. 1]
3.

When finding it necessary, the ASB will request directors, employees of the department
in charge of compliance, department in charge of risk management, accounting
department, financial department, and other departments that have responsibility forinternal control functions (the “Internal Control Division”), the accounting auditor, andother persons to attend meetings of the ASB and provide explanations. [Lv. 3]

4.

The ASB must deliberate based on each ASBM’s report and formulate an audit opinion.
[Lv. 2]

5.

The ASB must deliberate any matter for which its resolution is required based on adequate
materials. [Lv. 2]

6.

ASBMs must confirm that the outline and the results of the proceedings and other mattersprovided by any laws and regulations are appropriately stated in the minutes of ASB
meetings, and all attending ASBMs must affix to the minutes their respective signaturesor their respective names and seal impressions (including electronic signatures). [Lv. 1]

Article 9

Involvement in Procedure to Appoint ASBMs, etc.; Consent Procedures

1.

With respect to any proposal for the appointment of ASBMs to be submitted by the
directors to a shareholders’ meeting, the ASB must deliberate on whether to give its
consent to the proposal. [Lv. 1] In determining whether to give consent, the ASB willtake into consideration the selection criteria, etc. set forth in Article 10. [Lv. 3]

2.

It is desirable that the ASB have a prior opportunity to deliberate with the directors
regarding the candidates for ASBMs, the contents of the selection policy for ASBM
candidates, the procedures for deciding on a proposal for the appointment of ASBMs, thenecessity for an appointment of substitute ASBMs, and other relevant matters. [Lv. 4]

3.

When finding it necessary, the ASB will either demand that the directors include theappointment of ASBMs in the agenda of a shareholders’ meeting or will itself propose
candidates for ASBMs to be submitted by the directors to the shareholders’ meeting. [Lv.
3]

4.

ASBMs must, if they come to have an opinion regarding the appointment, dismissal, or
resignation of any ASBM, express that opinion at a shareholders’ meeting. [Lv. 2]

5.

Appointment of substitute ASBMs and other such matters will be conducted pursuant to
the procedures provided for in this article. [Lv. 3]

6.

ASBMs and the ASB will examine whether the matters relating to preventing andresponding to improper business execution disclosed in proposals to appoint outside
ASBMs are appropriately stated. [Lv. 3]
Supplement to Article 9
In the June 2021 revision to the Governance Code, as part of the roles andresponsibilities of ASBMs and the ASB in Principle 4.4, a reference was added
regarding authority pertaining to the appointment and dismissal of ASBMs and thedetermination of remuneration of ASBMs. This revision emphasizes ensuring theindependence of ASBMs in order to ensure the reliability of audits, and it is becoming
increasingly important to be actively involved in the appointment procedures, etc. set
out in this Article.
24Supplement to paragraph 2This refers to cases in which companies establish policies on nominating ASBM
candidates and the like; such policies are established with the involvement of the ASB,
not only by the board of directors.
Reference for paragraph 2
Governance Code, Principle 3.1(iv)-(v)Article 10 Criteria of Selection, etc. of Candidates for ASBMs

1.

The ASB should establish a specific policy for use in such situations as when giving
consent to proposals for the appointment of ASBMs, taking into consideration, among
other relevant factors, (i) the distinctions between full-time and part-time ASBMs andbetween inside and outside ASBMs together with the respective numbers thereof, (ii) theterm of office of incumbent ASBMs, (iii) specialized expertise, and (iv) possible
vacancies in office. [Lv. 4]

2.

When consenting to the selection of a candidate for ASBM and being involved in theselection policy for ASBM candidates, the ASB will carefully examine suitability to serve
as ASBM in light of whether the candidate can complete the term of office, whether the
candidate’s independence from the executives can be sufficiently ensured, whether the
candidate can maintain a fair and impartial attitude, and other relevant factors. [Lv. 3] It
is also desirable that persons with appropriate experience and abilities and with necessary
knowledge of financial, accounting, and legal matters be appointed as ASBMs and thatin particular, one or more persons with sufficient knowledge of financial and accounting
matters be appointed as ASBMs. [Lv. 4]

3.

When selecting candidates for outside ASBMs, the ASB should confirm that there will
be no difficulties as to their independence, taking into consideration factors such as theirrelationship with the company, its parent company, representative directors, otherdirectors, and key employees, and should also examine factors such as each candidate’s
availability to attend the board of directors’ meetings, ASB meetings, and other relevant
meetings. [Lv. 4]

4.

The ASB will ask the board of directors to express its views on the designation of
independent ASBMs and, as necessary, deliberate with the board of directors in regard
thereto. [Lv. 3]

5.

When selecting candidates for ASBMs and outside ASBMs, in addition to the matters set
forth in the preceding three paragraphs, the ASB will also examine statutorily required
matters to be stated in the reference documents for shareholders’ meetings with respect
to a proposal for the appointment of ASBMs. [Lv. 3]

6.

The ASB should examine whether appropriate disclosure is made regarding theknowledge, experience, abilities, and the like of each ASBM, including ASBM
candidates, based on the circumstances of the company and, when finding it necessary,
should express an opinion to the board of directors. [Lv. 4]25

Reference for paragraph 2
Governance Code, Principle 4.11
Supplement to paragraph 6This provision was added in consideration of Supplementary Principle 4.11.1 of
the Governance Code. In regard to the disclosure of the combination of skills, etc.,
such as the skills matrix, of directors required under that principle, in light of the intent
of the Governance Code, it may also be possible to include ASBMs in the scope of that
disclosure based on the circumstances of the company.
Article 11 Appointment of Specified ASBMs

1.

The ASB may by its resolution appoint, determine, or designate one or multiple ASBMs
to perform each of the following duties (“Specified ASBMs”): [Lv. 5](i)

ASBMs determined as ASBMs provided for in Article 132, paragraph 5, item 2(a)of the Ordinance for Enforcement of the Companies Act, Article 130, paragraph 5,
item 2(a) of the Ordinance on Accounting of Companies, and Article 132 of theOrdinance on Accounting of Companies;(ii)

ASBMs designated by the ASB to receive business reports and supplementaryschedules thereto from the directors who prepared them and to send them to theother ASBMs; and(iii) ASBMs designated by the ASB to receive accounting-related documents from thedirectors who prepared them pursuant to Article 125 of the Ordinance on
Accounting of Companies and to send them to the other ASBMs.
2.

When appointing, determining, or designating ASBMs under the preceding paragraph,
the ASB should take into consideration whether the ASBM is an inside or outside ASBM,
whether the ASBM is a full-time or part-time ASBM, whether the ASBM has specialized
expertise, and other such matters based on the details of the duties specified in the relevant
item above. [Lv. 4]

3.

When finding it necessary, ASBMs provided for in the items of paragraph 1 will performtheir duties through the Supporting Employees or the like provided for in Article 16 or
the Internal Audit Division, Etc. provided for in Article 38, paragraph 1. [Lv. 3]
Supplement to paragraph 1, items 2 and 3
Under laws and regulations, business reports, supplementary schedules thereto,and accounting-related documents are to be received from the directors who preparedthem by each ASBM, but in accordance with actual practices, receiving these
documents and sending them to the other ASBMs are included in the duties of Specified
ASBMs in this Code.

Article 12 Remuneration, etc. of ASBMs

1.

When there is neither a provision in the articles of incorporation nor any resolution of ashareholders’ meeting concerning the amount of remuneration, etc. to be received by each
ASBM, ASBMs must determine the amount of remuneration, etc. to be received by each26

ASBM through deliberation, taking into consideration the distinction between full-timeand part-time positions, the sharing of audit affairs among ASBMs, the contents and levelof the remuneration, etc. of directors, and other relevant factors. [Lv. 1]
2.

If ASBMs come to have an opinion on the remuneration, etc. of ASBMs, they will express
such opinion as necessary at a board of directors’ meeting or at a shareholders’ meeting.
[Lv. 3]
Supplement to Article 12
Please see the supplement to Article 9.

Article 13 Audit Expenses

1.

ASBMs may receive advance payment or reimbursement from the company for expenses
arising in connection to the performance of their duties. [Lv. 5]

2.

It is desirable for the ASB to formulate in advance a budget for expenses arising inconnection to the performance of ASBM duties based on the policy stated in Article 18,
paragraph 2, item 6. [Lv. 4] However, ASBMs have the right to demand reimbursementfrom the company for any expenses incurred in an emergency or on an extraordinary
basis, as well. [Lv. 5]

3.

ASBMs have the right to demand payment from the company for expenses incurred when
ASBMs receive, as necessary, advice from outside professionals. [Lv. 5]

4.

ASBMs have the right to demand payment from the company for expenses incurred when
ASBMs obtain training and the like suitable for acquiring, appropriately updating, orotherwise cultivating the knowledge necessary in order to deepen their understanding of
their roles and responsibilities. [Lv. 5]

5.

In incurring audit expenses, ASBMs should keep in mind the efficiency andappropriateness of each expenditure. [Lv. 4]
Supplement to paragraphs 3 and 4
The burden of expenses has been clarified, as well.
Reference for paragraphs 3 and 4
Governance Code, Supplementary Principle 4.13.2, Principle 4.14

Chapter IV
Measures Based on the Corporate Governance Code
Article 14 Measures Based on the Corporate Governance Code1.

ASBMs in companies to which the Corporate Governance Code applies should performtheir duties with sufficient understanding of the purpose and intent thereof. [Lv. 4]

2.

ASBMs and the ASB should monitor whether the following supervisory functions of theboard of directors are being appropriately exercised in order to promote the company’ssustainable growth and the increase of its corporate value over the mid to long term and27

to improve profitability, capital efficiency, and the like and should fulfill part of thesesupervisory functions within the scope of their own duties: [Lv. 4](i)setting the broad direction of corporate strategy and the like;(ii)

developing an environment where appropriate risk-taking by the representative
directors and other executive directors is supported; and(iii) effectively supervising the representative directors, other directors, and other suchpeople from an independent and objective standpoint.
3.

ASBMs should actively consider participating in nomination and compensationcommittees and the like if they are requested to do so in order to ensure independence.
[Lv. 4] If ASBMs participate in such committees, ASBMs will, keeping in mind their
duty of care to the company, make appropriate judgments in order to achieve thecompany’s sustainable growth and increased corporate value over the mid to long term.
[Lv. 3]
Supplement to paragraph 1
Because the content of the Governance Code aims to contribute to companies’
sustainable growth and increased corporate value over the mid to long term, Article 14,
paragraph 1 does not mean that companies to which the Governance Code does notdirectly apply should not take in its main points.
Supplement to paragraph 2
As set forth in Article 2, paragraph 1, ASBMs and the ASB bear part of thecompany’s supervisory functions (in the broad sense) in cooperation with the board of
directors; General Principle 4 of the Governance Code provides three roles andresponsibilities as examples of those supervisory functions, and ASBMs and the ASB
bear part of those roles and responsibilities. (Please refer to General Principle 4 of theGovernance Code.) In addition to auditing whether the board of directors isappropriately fulfilling those supervisory duties (refer to Article 381, paragraph 1 of
the Companies Act), another example of a means through which ASBMs can be
involved in these supervisory functions (in the broad sense) is by proactively
expressing opinions regarding internal control systems, which serve as a foundation for
appropriate risk-taking, from the initial establishment stages of those systems.
Additionally, depending on the circumstances of the company, it may also be possible
for ASBMs to proactively state their views in consideration of risk management, therationality of business judgments, and the like not only in regard to individual matters,
but also when formulating mid-term business plans. However, paragraph 2 is set atlevel 4 because the degree of these types of involvement should vary depending on thecircumstances of each company. Any measures to be taken by ASBMs should be
carried out in consideration of the roles and responsibilities set forth in Article 2.
Supplement to paragraph 3
Governance Code, Principle 4.10, Supplementary Principle 4.10.1.
If
independent outside directors do not make up half of the board of directors, in order tostrengthen the independence and objectivity of the functions of the board of directors,
as well as its accountability, regarding the nomination of senior management anddirectors (including succession planning), remuneration, and other such matters, it is28required to establish an independent nomination committee and compensationcommittee under the board of directors composed mainly of independent outside
directors, and from the perspective of strengthening independence, objectivity, andaccountability, it is possible to consider including ASBMs as constituent members
based on the circumstances of the company. Taking that into consideration, thisparagraph refers to measures in response to cases in which ASBMs are requested toparticipate in those committees.
Article 15 Constructive Dialogue with Shareholders

1.

When ASBMs engage in dialogue with shareholders with mid- to long-term perspectives
and other stakeholders, ASBMs should coordinate with related departments andappropriately engage in such dialogue to a reasonable extent so that it contributes to thecompany’s sustainable growth and increase of corporate value over the mid to long term.
[Lv. 4]

2.

The views and concerns of shareholders learned through the dialogue in the preceding
paragraph should be appropriately and effectively relayed to the representative directors,
other executive directors, the board of directors, and the ASB. [Lv. 4]
Supplement to Article 15
In regard to dialogue between ASBMs and shareholders and other stakeholders,Footnote 17 of Guidance 4-1 of the Stewardship Code and Supplementary Principle
5.1.1 of the Governance Code have been revised to add ASBMs as parties to engage insuch dialogue. This article sets out provisions regarding responses to cases in which
institutional investors are interested in matters relating to audits and expect to havedialogue with ASBMs. “Shareholders with mid- to long-term perspectives and otherstakeholders” means those who are not focused only on short-term interests and whoare able to “wait until the improvements of corporate governance are achieved” (Basic
Views Concerning the Corporate Governance Code (Draft), “Background,” section 8);
a typical example of this type of shareholder is an institutional investor or the like thathas adopted the Stewardship Code and has a deep understanding of and interest in themid- to long-term increase of the corporate value of the companies in which it invests
so as to secure long-term returns for its customers and beneficiaries. “Coordinate withrelated departments” is included because it is necessary for ASBMs, when engaging inshareholder dialogue, to coordinate sufficiently with IR and other related departments
and ensure that explanations are as consistent as possible across the company as awhole so that those explanations are easy to understand for shareholders and otherstakeholders.
Reference for Article 15
Governance Code, General Principle 529

Chapter V
Development of the ASBM Audit Environment
Article 16 Regular Meetings with the Representative Directors

ASBMs should hold meetings with the representative directors on a regular basis toconfirm the management policies of the representative directors and to exchange opinionswith the representative directors on any issues to be addressed by the company, the risks
surrounding the company, the status of the development of a favorable environment for
ASBM audits (such as the ensuring of sufficient employees to support ASBM duties(“Supporting Employees”) and establishment of systems for reporting to ASBMs),
priority audit issues, and any other relevant matters and should endeavor to deepen theirmutual understanding and trust with the representative directors. [Lv. 4]
Article 17 Coordination with Outside Directors, etc.

1.

If the company has appointed outside directors, the ASB should examine matters relating
to exchanging information and coordinating with the outside directors and endeavor toensure the effectiveness of audits. [Lv. 4] ASBMs and the ASB should endeavor to ensure
coordination with the outside directors so that the outside directors are able to strengthen
their capacity to collect information without affecting their independence. [Lv. 4]

2.

If a lead independent outside director has been selected, ASBMs and the ASB should
endeavor to ensure coordination with that director. [Lv. 4]

3.

In addition to the preceding two paragraphs, ASBMs should, through such means as
holding meetings on a regular basis, exchange opinions with the non-executive officers,
including outside directors, regarding issues to be addressed by the company, the risks
surrounding the company, priority audit issues, and any other relevant matters and should
endeavor to exchange information, develop a shared awareness, and deepen trust among
the non-executive officers. [Lv. 4]
Reference for paragraph 1
Governance Code, Supplementary Principle 4.4.1
Reference for paragraph 2
Governance Code, Supplementary Principle 4.8.2
Reference for paragraph 3
Governance Code, Supplementary Principle 4.8.1

Article 18 Systems to Ensure the Effectiveness of ASBM Audits

1.

ASBMs should endeavor to ensure the establishment of systems that will improve audit
effectiveness and facilitate the performance of audit duties. [Lv. 4]

30

2.

In order to ensure the establishment of the systems supporting ASBM audits mentioned
in the preceding paragraph, ASBMs will determine the contents of the following systems
and will request that directors or the board of directors develop such systems: [Lv. 3](i)the assignment of Supporting Employees and other matters relating to Supporting
Employees;(ii)matters relating to the independence of Supporting Employees from directors;(iii) matters relating to ensuring the effectiveness of instructions to Supporting
Employees;(iv) the following systems and any other systems relating to reports to be provided to
ASBMs:(v)(a)

systems for directors and employees to report to ASBMs; and(b)systems for directors, ASBMs, executive officers, and employees of thecompany’s subsidiaries, or anyone who receives a report from any of these,to report to ASBMs;

systems to ensure that any person who made a report in the preceding item does notreceive disadvantageous treatment due to having made that report;(vi) procedures for the advance payment or reimbursement of expenses arising inconnection to the performance of ASBM duties and any other matters relating topolicies on the handling of expenses or debts arising in connection to theperformance of ASBM duties; and(vii) any other systems to ensure the effectiveness of ASBM audits.
Article 19 Supporting Employees

1.

ASBMs should endeavor to strengthen the systems of Supporting Employees in order toensure the effectiveness of audits, taking into consideration the company’s size, the natureof its business, various management risks surrounding the company, and other aspects
related to the company’s particular circumstances. [Lv. 4]

2.

It is desirable that the duties of the secretariat of ASBMs and the ASB be performed by
employees who are dedicated exclusively to serving as Supporting Employees. However,
if it is difficult to assign employees as dedicated Supporting Employees, ASBMs or the
ASB should request the directors or the board of directors to, at the least, assign one ormore employees who have other duties to also serve as Supporting Employees. [Lv. 4]
Supplement to paragraph 2This clarifies that at the least, one or more employees who have other duties
should be assigned as Supporting Employees.

Article 20 Ensuring Supporting Employees’ Independence and the Effectiveness ofInstructions

1.

ASBMs should endeavor to ensure the independence of Supporting Employees from theexecutives. [Lv. 4]

31

2.

ASBMs will examine any matters necessary for ensuring the independence of Supporting
Employees and the effectiveness of instructions to Supporting Employees, such as
clarifying the following matters: [Lv. 3](i)Supporting Employees’ powers (such as investigative and information-collecting
powers, as well as authority to attend meetings as necessary as instructed by
ASBMs);(ii)

the organization to which Supporting Employees belong;(iii) rights of ASBMs to control and direct Supporting Employees;(iv) rights of ASBMs to consent to personnel changes, personnel evaluations, anddisciplinary actions in regard to Supporting Employees;(v)

ensuring an appropriate number of dedicated Supporting Employees or Supporting
Employees with other duties, each having the necessary knowledge and abilities,
and systems for Supporting Employees with other duties to engage in supporting
ASBMs;(vi) securing funds for the activities of Supporting Employees; and(vii) systems for the Internal Audit Division, Etc. to cooperate with Supporting
Employees.
Article 21 Systems for Reporting to ASBMs, etc.

1.

ASBMs should endeavor to strengthen the systems for directors and employees to report
to ASBMs (including systems for the directors, executive officers, ASBMs, andemployees of the company’s subsidiaries to report directly or indirectly to ASBMs) andother relevant systems relating to reports to be provided to ASBMs. [Lv. 4]

2.

ASBMs will request the directors to establish a system for immediately reporting to the
ASB if a director discovers any fact that is likely to cause the company significant
damage. [Lv. 3]

3.

In addition to the matters set forth in the preceding paragraph, ASBMs should deliberatewith directors and determine the matters that will be reported to ASBMs or the ASB on aregular basis and who will provide those reports. [Lv. 4] Additionally, when finding it
necessary, ASBMs will request the board of directors and related directors to implement
measures such as establishing or amending internal company rules or otherwise
developing internal systems. [Lv. 3] The same applies to matters to be reported
irregularly on an as-needed basis. [Lv. 3]

4.

If the company has an internal reporting system for whistleblowers, ASBMs must monitor
and verify whether that system effectively functions (both in the company and throughout
the corporate group) by confirming that material information is provided to ASBMs andthat it is ensured that any person who makes a whistleblowing report does not receive
disadvantageous treatment due to having made that report. [Lv. 2] Additionally, ASBMs
should endeavor to utilize information provided by the internal reporting system in
performing their audit duties. [Lv. 4]

5.

To ensure that a system of coordination with the company’s Internal Audit Division, Etc.
(defined in Article 38) is effectively established and operated, ASBMs will request that
directors or the board of directors support and develop such a system. [Lv. 3]

32

Supplement to paragraph 1“Indirectly” has been added here in consideration of the fact that reports fromsubsidiaries are not always made to the ASBMs of the parent company.
Reference for paragraph 4
Governance Code, Supplementary Principle 2.5.1

Chapter VI
Operational Audits
Article 22 Audit of Directors’ Performance of Duties

1.

ASBMs must audit the directors’ performance of their duties. [Lv. 1]

2.

When finding it necessary when performing their duties, ASBMs must take any necessary
measures when appropriate based on the situation, such as reporting, making proposals,
or expressing opinions to the board of directors or making suggestions or
recommendations to directors and the Internal Control Division. [Lv. 2]

3.

If ASBMs find that there is, in connection with the directors’ performance of their duties,
any misconduct or any material fact constituting a violation of any law, regulation, or thearticles of incorporation, ASBMs must state that misconduct or fact in the audit report.
[Lv. 1] In addition, if there are any matters considered appropriate in order to fulfill the
duty of accountability to shareholders, ASBMs will state such matters in the audit report.
[Lv. 3]

4.

The ASB must conduct deliberations based on the ASBM audit report of each ASBM,
formulate the audit opinion of the ASB, and state that opinion in the ASB audit report.
[Lv. 1]

Article 23 Audit of Executive Directors’ Performance of Duties

1.

If the board of directors has determined basic business policies, mid- to long-termbusiness plans, and the like, ASBMs must monitor and verify whether or not directors are
deciding on business execution soundly, fairly, appropriately, and efficiently and are
executing business in accordance with those policies, plans, and the like. [Lv. 2]

2.

With respect to the directors’ decisions on business execution and their execution ofbusiness, ASBMs must monitor and verify the directors’ performance of their legal duties,
including their duty of care and their duty of loyalty, by applying the following
considerations: [Lv. 2](i)There must be no material or careless error in understanding the relevant facts that
constituted the basis of the decision;(ii)

The decision-making process must be reasonable;(iii) The contents of a decision must not violate any law, regulation, or the articles ofincorporation;
33

(iv) The contents of a decision must not be obviously unreasonable as a decision ofordinary corporate management; and(v)
3.

A decision must be made in foremost consideration of the interests of the company,
not of the directors or third parties.

In order to fulfill the responsibilities under the preceding paragraph, ASBMs must
perform the following duties:(i)

ASBMs must take any necessary measures when appropriate based on the situation,such as making suggestions or recommendations to the directors, in case ASBMs
find (a) that any director has committed or is likely to commit an act outside thepurposes of the company or otherwise in violation of any law, regulation, or thearticles of incorporation, (b) any fact that is likely to cause the company significant
damage, a serious incident, or the like, or (c) any fact that is significantly
inappropriate for the corporate affairs of the company. [Lv. 2](ii)

Upon receipt of a report from a director, employee, or the like to the effect that thecompany is likely to suffer significant damage, ASBMs must conduct necessary
investigations and take any necessary measures when appropriate based on thesituation, such as reporting to the board of directors, providing suggestions to thedirectors, or convening a meeting of the ASB. [Lv. 2]

4.

With respect to the matters provided for in the items of the preceding paragraph, whenfinding it necessary, ASBMs must take any necessary measures when appropriate basedon the situation, such as convening a meeting of the board of directors or seeking an
injunction against directors’ acts. [Lv. 2]

5.

With respect to the matters provided for in the preceding two paragraphs, when finding it
particularly necessary due to an audit of the directors’ performance of their duties,
ASBMs or the ASB will express opinions to the board of directors, including opinions
regarding the dismissal of the representative directors. [Lv. 3]
Supplement to paragraph 1
This paragraph is set at level 2 (matters non-compliance with which may, inreasonable probability, constitute a breach of the duty of care), but the cases in which
non-compliance would be an issue are anticipated to be those in which ASBMs havefailed to perform the monitoring and verification provided for in this paragraph.
However, the cases in which a breach of the duty of care regarding the content of
ASBM audits may be considered are those in which ASBMs failed to perform
monitoring and verification by applying the considerations stated in paragraph 2.
Supplement to paragraph 5This paragraph states that when finding it particularly necessary, it may benecessary to consider expressing opinions, including opinions regarding the dismissalof the representative directors; it does not necessarily require that such measures betaken in advance even when there are other means available. In regard to actual
measures, it is important that first, measures for correction are taken not only by
ASBMs but also in coordination with outside directors, and if it is still found necessary
even then, the measures under this paragraph will likely be examined.

34

Article 24 Audit of Directors’ Reports to the Board of Directors, etc. and DecisionMaking of the Board of Directors

1.

ASBMs must monitor and verify the status of the directors’ performance of their duties
at meetings of the board of directors and the like. [Lv. 2]

2.

With respect to the decision-making performed at meetings of the board of directors andthe like, ASBMs must monitor and verify the directors’ performance of their legal duties,
including their duty of care and their duty of loyalty, by applying the considerations
provided for in Article 23, paragraph 2. [Lv. 2]

3.

ASBMs must confirm whether the representative directors and other executive directors
are reporting to the board of directors on the status of the performance of their duties in atimely and appropriate manner and must monitor and verify whether the board of directors
is appropriately performing its duty of supervision. [Lv. 2]

4.

When finding it necessary in regard to the matters provided for in the preceding threeparagraphs, ASBMs must take any necessary measures when appropriate based on thesituation, such as reporting, making proposals, or expressing opinions to the board of
directors, making suggestions or recommendations to directors, or seeking an injunction
against directors’ acts. [Lv. 2]

Article 25 Audit of Internal Control Systems

1.

With respect to the following systems (“Internal Control Systems”) of the company
developed based on board of directors’ resolutions, ASBMs must monitor and verify thecontents of such resolutions and the status of the Internal Control Systems established andoperated pursuant to such resolutions: [Lv. 1](i)systems to ensure that the performance of the duties of directors and employees
complies with all laws, regulations, and the articles of incorporation (in this article,“Legal Compliance Systems”);(ii)systems to retain and manage information related to the directors’ performance of
their duties;(iii) company rules and other systems relating to the management of the risk of loss (inthis article, “Risk of Loss Management Systems”);(iv) systems to ensure the efficiency of the directors’ performance of their duties;(v)

the following systems and other systems to ensure the appropriateness of corporate
affairs in the corporate group consisting of the company, its parent companies, andits subsidiaries:(a)systems relating to reports to the company regarding the performance of theduties of directors of subsidiaries;(b)company rules and other systems relating to the management of the risk ofloss of subsidiaries;(c)systems to ensure the efficiency of the performance of the duties of directorsof subsidiaries; and(d)systems to ensure that the performance of the duties of directors, executive
officers, and employees of subsidiaries conforms to laws, regulations, and thearticles of incorporation; and35

(vi) systems to ensure the effectiveness of ASBM audits set forth in Article 18,
paragraph 2.
2.

ASBMs must request on a regular basis that the representative directors and other related
directors report on the status of the establishment and operation of the Internal Control
Systems and must monitor and verify the status of the establishment and operation of theInternal Control Systems through, among other means, coordination with the company’s
Internal Audit Division, Etc., and through reports from the accounting auditor. [Lv. 2]
Additionally, if directors responsible for Legal Compliance Systems, Risk of Loss
Management Systems, and the like have been appointed, or if committees or the like
responsible for those systems have been established, ASBMs should endeavor to achieve
close coordination with those directors, committees, or the like by means such as regularly
receiving reports therefrom. [Lv. 4]

3.

With respect to the establishment and operation of the Internal Control Systems, including
systems to ensure the effectiveness of ASBM audits, when finding it necessary, ASBMs
will deliberate with the representative directors and other related directors. [Lv. 3]

4.

If ASBMs find that the board of directors, the representative directors, or related directors
and the like are neglecting the appropriate establishment and operation of Internal Control
Systems, ASBMs must promptly provide suggestions or recommendations for
improvement to the board of directors, the representative directors, or related directors
and the like. [Lv. 2]

5.

ASBMs must report the results of their audit regarding Internal Control Systems to the
ASB. [Lv. 2]

6.

If ASBMs find that the contents of board of directors’ resolutions regarding Internal
Control Systems are not appropriate, find that statements in business reports regarding
Internal Control Systems are significantly inappropriate, or find that there is any material
fact regarding the establishment and operation of the Internal Control Systems
constituting a breach of the directors’ duty of care, ASBMs must state so in the audit
report. [Lv. 1] In addition, if there are any matters considered appropriate in order tofulfill the duty of accountability to shareholders, ASBMs will state such matters in theaudit report. [Lv. 3]

7.

The ASB must conduct deliberations based on the ASBM audit report of each ASBM,
formulate the audit opinion of the ASB, and state that opinion in the ASB audit report.
[Lv. 1]

8.

Audits regarding Internal Control Systems will be governed by the “Audit PracticeStandards for Internal Control Systems” enacted separately in addition to this Code. [Lv.
5]

Article 26 Audits in Corporate Group1.

ASBMs of companies with subsidiaries must monitor and verify the directors’
performance of their duties relating to the administration of subsidiaries in considerationof consolidated group management. [Lv. 2]

2.

ASBMs should endeavor to perform their duties and to develop the audit environment of
the entire corporate group while taking into consideration the significance of the damage
that would be caused to the company by an incident of misconduct or a similar event36

within a subsidiary and being mindful of whether Internal Control Systems areappropriately established and operated in the company and its subsidiaries. [Lv. 4]
3.

If the company has a significant affiliated company, audits will be performed inaccordance with the preceding two paragraphs in consideration of the significance of that
affiliated company. [Lv. 3]

4.

ASBMs of companies with a parent company, etc. must audit the directors’ performanceof their duties in consideration of protecting the interests of minority shareholders. [Lv.
2]

Article 27 Audit of Competitive Transactions, Conflict-of-Interest Transactions, etc.

1.

With respect to the following transactions or matters, ASBMs must monitor and verify
whether there exists any fact constituting a breach of directors’ duties: [Lv. 2](i)any competitive transaction;(ii)

any transaction involving a conflict of interest;(iii) the company’s provision, without compensation, of any economic benefit(including the provision of any economic benefit in exchange for extremely low
compensation);(iv) any irregular transactions with a parent company, etc., a subsidiary, or ashareholder, etc.;(v)

the procedures for the company’s acquisition or disposal of its own shares as wellas the cancellation of shares;(vi) agreements for limiting liability provided for in Article 427 of the Companies Act;(vii) indemnity agreements provided for in Article 430-2 of the Companies Act; and(viii) insurance agreements executed for the benefit of directors/ASBMs, etc. provided
for in Article 430-3 of the Companies Act.
2.

With respect to any matter set forth in the items of the preceding paragraph, ASBMs musttake all necessary measures when appropriate based on the situation, such as making
suggestions or recommendations to the directors, convening a board of directors meeting,or seeking an injunction against directors’ acts, if ASBMs find any fact that constitutes
or is likely to constitute a breach of any duty of a director. [Lv. 2]

3.

In regard to transactions with parent companies, etc. that are required to be stated infinancial statement notes, ASBMs must state their opinions in the ASBM audit report
regarding the appropriateness of the board of directors’ judgment of whether thosetransactions harm the interests of the company and regarding the appropriateness of thereasons for that judgment stated in the business report. [Lv. 1]

4.

With respect to any material or abnormal transactions or matters other than those set forthin the items of paragraph 1, ASBMs will keep in mind whether there exists any fact
constituting a violation of any law, regulation, or the articles of incorporation [Lv. 3] andmust make suggestions or recommendations to the directors in order to prevent theoccurrence of any material damage. [Lv. 2]

37

Supplement to paragraph 1, reference for items 6 to 8
This revision was made in consideration of the fact that provisions were added to
the Companies Act regarding indemnity agreements and agreements relating todirectors and officers liability insurance (D&O insurance). Additionally, together withthe provisions for those agreements, a similar provision was added regarding
agreements for limiting liability.
Supplement to paragraph 3
If, in response to Principle 1.7 of the Governance Code, the board of directors
establishes procedures for appropriate examination of transactions between relatedparties according to the importance and characteristics of the transactions to ensure thatthe transactions do not harm the interests of the company or the common interests ofthe shareholders, and the board conducts supervision in consideration of those
procedures, then ASBMs will likely in the same manner audit the status of the boardof directors’ performance of those duties.
Article 28 Responses to Corporate Wrongdoing; Third-Party Committee

1.

If corporate wrongdoing (meaning an act in violation of laws, regulations, or the articles
of incorporation or another improper or inappropriate act that leads to public criticism;
the same applies below in this article) occurs, ASBMs should immediately request reports
from the directors and other relevant parties, should request as necessary that an
investigation committee be established and receive explanations from that committee, andshould endeavor to understand the facts of the corporate wrongdoing. [Lv. 4]
Additionally, ASBMs must monitor and verify the status of the response of directors andthe investigation committee in regard to matters such as identifying causes, preventing
the spread of damage, promptly resolving the issue, preventing reoccurrence, and publicly
disclosing information. [Lv. 2]

2.

If ASBMs find that the response of directors stated in the preceding paragraph is not
appropriate in consideration of factors such as independence, neutrality, or transparency,
ASBMs will, after deliberations by the ASB, take appropriate measures, such asrecommending to the directors that they establish a third-party committee by requesting
external, independent attorneys and other such persons to examine matters such as theidentification of causes and measures to prevent reoccurrence of the corporate
wrongdoing (in this article, a “Third-Party Committee”) or, as necessary, establishing a
Third-Party Committee by themselves requesting external, independent attorneys andother such persons to examine such matters. [Lv. 3]

3.

It is desirable that ASBMs, excluding those found to have a clear interest in the corporate
wrongdoing, serve as members of the Third-Party Committee [Lv. 4]; even if they do not,ASBMs will, unless doing so is found inappropriate in consideration of matters such as
requests to promptly identify causes and relationships with relevant authorities, request
explanations from the Third-Party Committee regarding the process of the establishmentof the Third-Party Committee, the status of its response measures, and other such mattersand, as necessary, request the Third-Party Committee to attend ASB meetings. [Lv. 3] If
ASBMs serve as members of the Third-Party Committee, they will, keeping in mind their
duty of care to the company, appropriately perform their duties as members in cooperation
with the attorneys and other such persons also serving as members. [Lv. 3]
38

Article 29 Audit of Business Reports, etc.

1.

ASBMs must formulate their own audit opinions on whether business reports andsupplementary schedules thereto (“Business Reports, Etc.”) for a given business year
provide appropriate statements by monitoring and verifying the directors’ performanceof their duties throughout the business year. [Lv. 1]

2.

ASBMs must receive a Business Report, Etc. for each business year from the directors
who performed duties relating to the preparation of the Business Report, Etc. and audit
whether the Business Report, Etc. accurately presents the status of the company inaccordance with laws, regulations, and the articles of incorporation. [Lv. 1]

3.

Based on the preceding two paragraphs, ASBMs must state their opinions in ASBM audit
reports on whether the Business Report, Etc. accurately presents the status of the company
in accordance with laws, regulations, and the articles of incorporation. [Lv. 1]

4.

Based on the ASBM audit report by each ASBM, the ASB must state its opinion in the
ASB audit report on whether the Business Report, Etc. accurately presents the status of
the company in accordance with laws, regulations, and the articles of incorporation. [Lv.
1]

5.

In auditing Business Reports, Etc., ASBMs and the ASB will coordinate with theaccounting auditor as necessary. [Lv. 3]

Article 30 Status of Performance of Duties of Outside ASBMs in the Business Report

Of the matters concerning company directors/ASBMs and matters concerning outside
directors/ASBMs, etc. that are disclosed in the business report, ASBMs and the ASB mustverify whether the status of the performance of duties of outside ASBMs and othermatters concerning ASBMs are stated appropriately. [Lv. 2]

Chapter VII
Accounting Audits
Article 31 Accounting Audits

1.

ASBMs and the ASB must formulate their own audit opinions on the appropriateness ofthe methods and the results of the accounting auditor’s audits regarding whether theaccounting-related documents (meaning accounting documents, supplementary schedules
thereto, consolidated accounting documents, and other documents set forth in Article 2,paragraph 3, item 3 of the Ordinance on Accounting of Companies; the same applies
below) for a given business year appropriately indicate the status of the assets and the
profits and losses of the company by monitoring and verifying the performance of duties
of directors through the business year. [Lv. 1]

2.

In order to ensure the appropriateness and reliability of accounting audits, ASBMs mustmonitor and verify whether the accounting auditor maintains an independent position anda fair and impartial attitude and conducts appropriate audits as a professional. [Lv. 2]

39

Article 32 Confirmation of Systems to Ensure the Appropriate Performance of the Dutiesof the Accounting Auditor

In order to ensure the appropriate performance of the accounting auditor’s duties, ASBMs
must receive notices on the following matters from the accounting auditor and request an
explanation from time to time to confirm whether the accounting auditor is following thestandards for quality control necessary to appropriately perform their duties: [Lv. 2](i)matters relating to the accounting auditor’s independence and other matters relating
to its compliance with laws, regulations, and the accounting auditor’s audit rules;(ii)

matters relating to policies on the acceptance and continuation of contracts foraudits, services similar to audits, and other services related to either; and(iii) other matters relating to systems to ensure the appropriate performance of theaccounting auditor’s duties.
Article 33 Audit of Accounting Policies, etc.

1.

ASBMs must, by requesting the opinion of the accounting auditor, verify whether theaccounting policies (meaning the principles and procedures of accounting, methods ofdisplaying accounting information, and other matters that form the basis of theaccounting-related documents’ preparation; the same applies below in this article) areappropriate in light of the status of the company’s assets, possible impact upon
accounting-related documents, applicable accounting standards, fair accounting
practices, and other relevant factors. [Lv. 2] When finding it necessary, ASBMs will
provide suggestions or recommendations to the directors. [Lv. 3]

2.

If the company intends to modify any of its accounting policies, ASBMs and the ASB
must, prior to such modification, request that the directors report the reason for and impact
of such modification, request the opinion of the accounting auditor with respect to theappropriateness of such modification, and decide on the appropriateness of suchmodification. [Lv. 2]

Article 34 Audit of Accounting-Related Documents

1.

ASBMs must receive accounting-related documents for each business year from thedirectors who performed duties relating to the preparation of accounting-related
documents. [Lv. 1] ASBMs will request explanations from the directors, employees, andother people in the company on important matters and confirm those matters. [Lv. 3]

2.

ASBMs must receive an accounting audit report and audit-related materials for theaccounting-related documents for each business year from the accounting auditor. [Lv. 1]
ASBMs will request explanations from the accounting auditor for important mattersrelated to the accounting audit and examine the accounting audit report. [Lv. 3] If, after
such an examination, ASBMs determine that the methods or results of the accounting
auditor’s audits are inappropriate, ASBMs must conduct audits on their own and state
their determinations of inappropriateness and the reasons therefor in the ASBM audit
reports. [Lv. 1]

3.

Based on the ASBM audit report of each ASBM, the ASB must deliberate on theappropriateness of the methods used in the accounting auditor’s audits and the results
thereof and formulate its own audit opinion. [Lv. 1] If, after such deliberation, the ASB
determines that the methods or results of the audit by the accounting auditor are40

inappropriate, the ASB must state such determination of inappropriateness and thereasons therefor in the ASB audit report. [Lv. 1]
Article 35 Procedures for Appointment of Accounting Auditor, etc.

1.

The ASB must establish policies for deciding to dismiss or to not reappoint an accounting
auditor. [Lv. 2]

2.

The ASB will examine, for each accounting period, the appropriateness of reappointing
the accounting auditor after obtaining necessary materials and receiving reports from thedirectors, relevant internal departments, and the accounting auditor. [Lv. 3]

3.

In determining the appropriateness of reappointing the account auditor, the ASB will,taking into consideration the examination in the preceding paragraph, confirm theappropriateness of matters such as the status of the accounting auditor’s performance ofits duties (including the status of the performance of duties in previous business years),
the accounting auditor’s audit systems, its independence, and its expertise. [Lv. 3]

4.

If the ASB determines that it is inappropriate to reappoint the accounting auditor, it must
promptly examine a new accounting auditor candidate. [Lv. 2] When doing so, the ASB
will obtain necessary materials and receive reports from the directors and relevant internal
departments, confirm the matters set forth in Article 32, and carefully examine thecandidate’s independence, past performance record, and other such matters; additionally,
the ASB will hold meetings with the candidate regarding matters such as audit plans,
auditing systems, and level of audit remuneration. [Lv. 3]

5.

In accordance with the confirmation and policies set forth in the preceding fourparagraphs, the ASB must determine the contents of proposals regarding the appointment,
dismissal, or non-reappointment of the accounting auditor that will be submitted to theshareholders’ meeting. [Lv. 1]

6.

In regard to proposals to appoint an accounting auditor, the ASB must confirm whether
the reasons that the candidate was selected as an accounting auditor candidate areappropriately stated in the reference documents for the shareholders’ meeting. [Lv. 2]
Supplement to paragraph 1
Article 126, item 4 of the Ordinance for Enforcement of the Companies Act
provides that policies for deciding to dismiss or to not reappoint an accounting auditor
are to be stated in the business report; however, even if statements in the business reportfall under the responsibility of directors, it is necessary for ASBMs to establish suchpolicies because ASBMs have the authority and responsibility for determining thecontents of proposals regarding the appointment, dismissal, or non-reappointment ofaccounting auditors.

Article 36 Consent Procedures for Remuneration, etc. of the Accounting Auditor

1.

In each case where the company enters into an audit agreement with an accounting
auditor, ASBMs will obtain necessary materials and receive reports from directors,
relevant internal departments, and the accounting auditor, confirm the status of delegationof non-audit services and the appropriateness of the amount of remuneration for thoseservices, and verify whether the contents of the audit agreement, such as the amount of
remuneration, etc. for the accounting auditor and the person in charge of conducting theaudit, are appropriate. [Lv. 3]
41

2.

When determining whether to consent to the amount of remuneration, etc. for theaccounting auditor, the ASB will, taking into consideration the verification in thepreceding paragraph, confirm the appropriateness of matters such as the contents of audit
plans of the accounting auditor, the status of the accounting auditor’s performance of its
duties (including the status of the performance of duties in previous business years), andthe basis for calculating the remuneration estimates. [Lv. 3]

3.

The ASB must confirm whether the reasons for its consent to the amount of remuneration,etc. for the accounting auditor are appropriately stated in the business report. [Lv. 2]

Chapter VIII
Method of Audit, etc.
Article 37 Audit Plan and Sharing of Audit Affairs among ASBMs

1.

The ASB will formulate its audit policies while taking into consideration the status of theestablishment and operation of Internal Control Systems and necessary factors such asimportance and timeliness; in addition, it will appropriately choose the matters to beaudited, the audit methods, and the timing of the audit and will prepare an audit plan. [Lv.
3] The audit plan will be prepared in consideration of the results of an analysis andevaluation of the effectiveness of the ASB as a whole, and important audit matters will
be designated as priority audit items in the plan. [Lv. 3]

2.

In preparing an audit plan, the ASB will, from time to time, deliberate or exchange
opinions with the accounting auditor and the company’s Internal Audit Division, Etc. inorder to ensure the efficient conduct of ASBM audits. [Lv. 3]

3.

The ASB will determine the sharing of audit affairs among ASBMs in order to conduct asystematic and efficient audit. [Lv. 3]

4.

The determinations of the ASB regarding the sharing of audit affairs provided for in thepreceding paragraph must not preclude any ASBM from exercising his or her own
powers. [Lv. 1]

5.

The ASB should explain its audit policies and audit plan to the representative directors
and the board of directors. [Lv. 4]

6.

The audit policies and the audit plan will be modified from time to time as necessary. [Lv.
3]
Supplement to paragraph 1
In practice, when formulating the audit plan for each year, there are many
examples of companies identifying points for improvement, setting priority tasks forthe next term, and selecting on-site audit locations based on the previous year’s audit
plan and an analysis and evaluation of performance and including such matters in theaudit plan. It is also desirable to conduct performance evaluations for each ASBM, but
including that in this Code would diverge greatly from actual practice, so it is not
mentioned in this article. Additionally, whether or not to disclose the evaluation results
is left to the discretion of the company and is therefore not mentioned in this Code.

42

Reference for paragraph 1
Governance Code, Supplementary Principle 4.11.3
Article 38 Systematic and Efficient Audits through Coordination with Internal Audit
Division, etc.

1.

In performing investigations into the status of the operations and finances of the company
or other audit duties, ASBMs should endeavor to conduct systematic and efficient audits
by maintaining close coordination with the company’s internal audit division and otherdepartments that hold jurisdiction over the monitoring functions in the Internal Control
Systems (collectively, the “Internal Audit Division, Etc.”). [Lv. 4]

2.

ASBMs will receive reports on a regular basis from the company’s Internal Audit
Division, Etc. related to its audit plan and the results of its audits and will request, as
necessary, that the company’s Internal Audit Division, Etc. conduct investigations. [Lv.
3] ASBMs will effectively utilize the results of the audits of the Internal Audit Division,
Etc. for ASBM audits of the Internal Control Systems. [Lv. 3]

3.

ASBMs will receive reports regularly and whenever needed and will request explanations
as necessary concerning the establishment and operation of Internal Control Systems
from the Internal Control Division and any other departments found necessary by ASBMs
in addition to the directors. [Lv. 3]

4.

After receiving the reports from each ASBM, the ASB will examine the matters to besuggested or recommended to the directors or the board of directors. [Lv. 3] However, adetermination of the ASB must not preclude any ASBM from exercising his or her own
powers. [Lv. 1]

5.

The ASB will make requests and recommendations to the board of directors or the
directors regarding the development of systems as necessary so that the system of
coordination with the Internal Audit Division, Etc. provided for in this article and thesystem for reporting to the ASB, etc. provided for in Article 21 are effectively establishedand operated. [Lv. 3]
Supplement to paragraph 5This revision was made in consideration of Supplementary Principle 4.13.3 of
the Governance Code.

Article 39 Method of Audits in Corporate Group1.

In regard to the status of the administration of subsidiaries, ASBMs will receive reports
and explanations from directors, employees, and other such persons and inspect therelevant materials. [Lv. 3]

2.

In performing their duties, ASBMs should endeavor to actively communicate andexchange information with, among others, the ASBMs, Internal Audit Division, Etc., andaccounting auditors of the company’s parent companies and subsidiaries. [Lv. 4]

3.

When finding it necessary for the purpose of auditing the directors’ performance of theirduties, ASBMs will request that subsidiaries report on their business or will investigate
the status of their operations and finances. [Lv. 3]

43

4.

If the company has a significant affiliated company, audits should be performed inaccordance with paragraph 1 and 2 in consideration of the significance of that affiliatedcompany. [Lv. 4]

Article 40 Attendance and Statement of Opinions at Board of Directors’ Meetings

1.

ASBMs must attend board of directors’ meetings and, when finding it necessary, state
their opinions at the meetings. [Lv. 1]

2.

If ASBMs find that directors have engaged or are likely to engage in misconduct, that
there are facts constituting a violation of any law, regulation, or the articles ofincorporation, or that there are other significantly inappropriate facts, ASBMs must reportthat finding to the board of directors without delay. [Lv. 1]

3.

When finding it necessary, in order to make a report to the board of directors mentioned
in the preceding paragraph, ASBMs will demand the convocation of a board of directors’
meeting. [Lv. 3] If a convocation notice is not dispatched within a certain period fromsuch demand, ASBMs will themselves convene a board of directors’ meeting. [Lv. 3]

4.

ASBMs must confirm that the outline and the results of the proceedings and other mattersprovided by any laws and regulations are appropriately stated in the minutes of board of
directors’ meetings, and all attending ASBMs must affix to the minutes their respective
signatures or their respective names and seal impressions (including electronic
signatures). [Lv. 1]

Article 41 Written Resolutions of the Board of Directors

When directors intend to omit resolution proceedings under the provisions of laws andregulations on matters that are to be resolved by the board of directors, ASBMs will
examine the content (including the omission of the board of directors’ resolution
proceedings) and, when finding it necessary, make an objection. [Lv. 3]
Article 42 Attendance and Statement of Opinions at Board of Directors’ Meetings
Formed by Special Directors

1.

When the board of directors stipulates that resolutions of the board can be made by special
directors (tokubetsu-torishimariyaku), the ASB may by resolution appoint in advance an
ASBM to attend board of directors’ meetings formed by special directors. [Lv. 5]
However, it must not preclude any other ASBMs from attending board of directors’
meetings formed by special directors. [Lv. 1]

2.

All ASBMs present at board of directors’ meetings formed by special directors must,when finding it necessary, state their opinions at the meeting. [Lv. 1]

3.

All ASBMs present at a board of directors’ meeting formed by special directors must
confirm that the outline and the results of the proceedings and other matters provided byany laws and regulations are appropriately stated in the minutes of such meeting and must
affix to the minutes their respective signatures or their respective names and seal
impressions (including electronic signatures). [Lv. 1]

4.

ASBMs present at a board of directors’ meeting formed by special directors must reporton the agenda items of the meeting and other relevant matters to the other ASBMs. [Lv.
2]
44

Article 43 Attendance at Important Meetings, etc.

1.

In order to understand important decision-making processes and the status of theperformance of directors’ duties, ASBMs will attend meetings not only of the board of
directors but also of the management committee, executive committee, risk management
committee, compliance committee, and other important meetings or committees [Lv. 3]
and, when finding it necessary, will state their opinions at such meetings. [Lv. 3]

2.

With respect to the meetings to be attended by ASBMs set forth in the preceding
paragraph, ASBMs will make necessary requests to directors and other relevant officers
in order to ensure ASBMs have the opportunity to attend such meetings and to receive
sufficient explanations of relevant matters prior to attending. [Lv. 3]

3.

ASBMs not attending a meeting or committee mentioned in paragraph 1 will receive areport and explanation of the agenda items from other ASBMs, directors, or employees
who attended such meeting or committee and will inspect the relevant materials. [Lv. 3]

Article 44 Audit of Document/Information Management

1.

ASBMs will inspect material internal documents circulated for approval and othermaterial documents relating to business execution and, when finding it necessary, will
request explanations from directors or employees or state their opinions to suchindividuals. [Lv. 3]

2.

ASBMs will investigate whether certain documents and company rules, material records,
and other material information are appropriately maintained, retained, and managed and,
when finding it necessary, will request explanations from directors or employees or state
their opinions to such individuals. [Lv. 3]

Article 45 Audit of Statutory Disclosure Information, etc.

1.

In regard to systems to ensure that securities reports and other information the company
is required to disclose under laws, regulations, and the like that significantly affects thecompany (in this article, “Statutory Disclosure Information, Etc.”) do not contain any
material errors or significantly misleading statements, ASBMs will, in accordance with
Article 25, monitor and verify the preparation of Statutory Disclosure Information, Etc.
and the establishment and operation of disclosure systems. [Lv. 3]

2.

ASBMs will monitor and verify whether the directors adequately disclose information ina timely and appropriate manner with respect to occurrences or circumstances affecting
the company’s status as a going concern, material accidents or disasters, material
litigation, and any other matters that may materially affect the soundness of the company.
[Lv. 3]

Article 46 Investigation, etc. of Directors and Employees

1.

ASBMs must, when finding it necessary, request reports on business from directors andemployees or investigate the status of the operations and finances of the company. [Lv.
2]

45

2.

ASBMs will, as necessary, conduct investigations through methods such as hearings andon-site audits, fully confirm the facts, and seek rational grounds for formulating audit
opinions. [Lv. 3]

Article 47 Investigation of Company Assets

ASBMs should endeavor to ascertain the current status and actual value of the company’s
assets, including matters such as the status of the acquisition, holding, and disposal ofmaterial company assets and the management status of the assets and liabilities of thecompany. [Lv. 4]
Article 48 Coordination with the Accounting Auditor

1.

In addition to holding meetings with the accounting auditor on a regular basis andrequesting the accounting auditor to attend ASB meetings as necessary, ASBMs and the
ASB should endeavor to develop systems to maintain close coordination with theaccounting auditor and enable effective and efficient audits through such methods asreceiving reports from the accounting auditor on its audit whenever needed and in a timely
manner and actively exchanging opinions and information. [Lv. 4]

2.

ASBMs and the ASB will receive an outline of the audit plan and an explanation of thepriority audit items and other such matters from the accounting auditor and will exchange
opinions on such matters with the accounting auditor [Lv. 3], in addition to which ASBMs
and the ASB should endeavor to confirm and coordinate schedules relating to matterssuch as the confirmation of the contents of business reports and supplementary schedules
thereto. [Lv. 4]

3.

ASBMs should endeavor to share with the accounting auditor information that ASBMs
acquire in the course of operational audits through such methods as providing theaccounting auditor with information useful to the accounting auditor’s audits orinformation on matters that may affect the accounting auditor’s audits. [Lv. 4]

4.

ASBMs may attend the accounting auditor’s on-site audits and its audit presentations asnecessary and may, from time to time, request a report from the accounting auditor on theprocess of its audits. [Lv. 5]

5.

If ASBMs receive an accounting auditor’s report or the like to the effect that there exists,in connection with the directors’ performance of their duties, any misconduct or any
material fact constituting a violation of any law, regulation, or the articles of incorporation(including facts that may affect the ensuring of the appropriateness of financial andaccounting documents), ASBMs must, upon deliberations of the ASB, conduct any
necessary investigation and take any necessary measure in a timely manner, including
making reports to the board of directors or providing suggestions or recommendations to
the directors. [Lv. 2]
Supplement to Article 48
The revision of the auditing standards for auditors has made it necessary to state
key auditing matters (KAM) in audit reports of auditors under the Financial Instruments
and Exchange Act, but stating KAM in audit reports of accounting auditors under theCompanies Act is optional. The accounting auditor under the Companies Act and theauditor under the Financial Instruments and Exchange Act are usually the same, and inpractice, audits under the Companies Act and audits under the Financial Instruments
46

and Exchange Act, as well as coordination with ASBMs, etc. in both, are conducted as
one audit. Additionally, KAM do not drastically change the existing communication
between ASBMs, etc. and the (accounting) auditor, and communication regarding
KAM can be considered to be included in the coordination stated in this article. For
these reasons, this Code does not refer to KAM.
Supplement to paragraphs 1 and 3
Receiving reports and exchanging opinions has been separated from theprovision of information to the accounting auditor, which has been set out in paragraph3.
Supplement to paragraph 2
In regard to measures by auditors regarding statements in the parts of disclosed
documents, including audited financial statements, other than those financial
statements and audit reports (“Other Statements”), in addition to reading the Other
Statements and identifying material differences with the financial statements aspreviously required, the revision of the auditing standards for auditors also requires
comparing the Other Statements to the knowledge gained through audits, paying
attention to signs of material errors in the Other Statements, and constantly making
reports regarding the Other Statements under independent sections given headings inaudit reports. In audits under the Companies Act, as business reports and supplemental
schedules thereto constitute Other Statements, in addition to coordinating the timing ofobtaining those documents and confirming their contents at an early state by receiving
drafts, it will be even more important to maintain communication at all times, such ascommunication regarding the coordination of schedules, including the audit report
dates of ASBMs, etc. and the accounting auditor.
Article 49 Audit of Policies on Determination of Contents of Individual Director
Remuneration, etc.

If the board of directors is required to determine policies regarding the determination of
remuneration, etc. for individual directors provided for in Article 361, paragraph 7 of theCompanies Act, ASBMs must monitor and verify whether the process, procedures, andthe like of determining those policies are appropriately conducted in accordance with laws
and regulations. [Lv. 2]
Reference for Article 49
This revision was made in consideration of Article 361, paragraph 7 of theCompanies Act. Companies with audit and supervisory boards that are publiccompanies and large companies and are required to submit securities reports under
Article 24, paragraph 1 of the Financial Instruments and Exchange Act are required todetermine these policies.

47

Chapter IX
Basic Policies Regarding the Company’s Control, etc.; Third-Party Allotments, etc.
Article 50 Basic Policies Regarding the Company’s Control, etc.

1.

2.

If the company establishes a basic policy regarding those who control the company’s
determination of its financial and business policies (in this article, a “Basic Policy”),
ASBMs must examine the following matters and state their opinions in the audit reports,
keeping in mind the status of deliberations of the board of directors and other committees
and meetings: [Lv. 1](i)a summary of the contents of the Basic Policy; and(ii)

a summary of the specific contents of the following measures:(a)the effective utilization of the company’s assets, the formation of an
appropriate corporate group, and other special measures contributing to theachievement of the Basic Policy; and(b)measures for preventing control of the company’s determination of its
financial and business policies by those who are inappropriate in light of the
Basic Policy (in this article, “Takeover Defense Measures”).

ASBMs must examine the determinations of the board of directors as to whether they fallunder the following requirements of each measure set forth in item (ii) of the preceding
paragraph and the reason for such determinations, keeping in mind the status of
deliberations of the board of directors and other committees and meetings, and must state
their opinions in the audit reports as to whether: [Lv. 1](i)such measures are in line with the Basic Policy;(ii)such measures do not impair the common interests of the company’s shareholders;and(iii) such measures are not for the purpose of maintaining the status of the company’s
directors.
3.

If an ASBM assumes membership in a committee to make certain determinations
regarding whether to trigger Takeover Defense Measures, that ASBM will appropriately
make such determination to promote the maximum interests of the company, keeping in
mind his or her duty of care to the company. [Lv. 3]

Article 51 Audit of Third-Party Allotments, etc.

In addition to the audits set out in Article 23 and in Article 45, paragraph 1, when thecompany issues shares for subscription or share options for subscription (in this article,“Shares for Subscription, Etc.”):(i)

If the company conducts an issuance of shares for subscription in which there is achange in the controlling shareholder and through which the subscriber of the
Shares for Subscription, Etc. (or its subsidiaries) will come to hold a majority of thevoting rights of all shareholders, ASBMs must express their opinion regarding thatissuance of Shares for Subscription, Etc. [Lv. 1](ii)

If the company conducts a third-party allotment of shares or share options(including bonds with share options), ASBMs will examine matters related to48

whether the allotment constitutes an issue at discount and express their opinions as
required by laws, regulations, the listing rules of financial instruments exchanges,
and the like. [Lv. 3](iii) Regarding large-scale third-party allotments (meaning situations in which the ratioof voting right dilution in the most recent six months caused by third-party
allotments is 25% or more or situations in which third-party allotments create acontrolling shareholder; the same applies below in this article) conducted without aresolution of the shareholders’ meeting, ASBMs will examine matters such aswhether the purpose of the allotment is to maintain the status of the company’s
directors and will, as necessary, provide suggestions or recommendations to thedirectors. [Lv. 3] If ASBMs express third-party opinions as people independent
from the large-scale third-party allotment, they will appropriately perform theirduties, keeping in mind their duty of care to the company. [Lv. 3]

Chapter X
Responses to Derivative Lawsuits, etc.
Article 52 Representation in Lawsuits between Directors and the Company

If a lawsuit is filed by the company against a director or by a director against the company,
ASBMs must represent the company. [Lv. 1]
Article 53 Consent to Partial Exemption of Directors, etc. from Liability

1.

ASBMs will deliberate at ASB meetings when giving the following consents: [Lv. 3](i)consent to submit to the shareholders’ meeting a proposal concerning the partial
exemption of a director from liability;(ii)

consent to submit to the shareholders’ meeting a proposal concerning theamendment of the articles of incorporation to provide that directors may be partiallyexempted from liability by a board of directors’ resolution;(iii) consent to submit to the board of directors a proposal concerning the partial
exemption of a director from liability based on the provisions of the articles ofincorporation; and(iv) consent to submit to the shareholders’ meeting a proposal concerning theamendment of the articles of incorporation to provide that the company may enter
into an agreement with an outside director or other non-executive director for hisor her partial exemption from liability.
2.

ASBMs will decide whether to give consent mentioned in any item of the preceding
paragraph by thoroughly examining and, as necessary, requesting outside professionals’
opinions regarding, (i) for proposals for an amendment of the articles of incorporation,
the appropriateness of such amendment, the appropriateness of the reason for the
proposal, and other relevant factors, and (ii) for proposals for the partial exemption of
liability, the reason for the exemption, the results of investigations by ASBMs, thecontents of any relevant court judgments, and other relevant factors. [Lv. 3]

49

3.

ASBMs will prepare and keep records concerning the process and results of theinvestigations and deliberations made by ASBMs to determine whether to give consent
under any item of paragraph 1. [Lv. 3]

4.

When a proposal for the partial exemption from liability of an accounting auditor underlaws and regulations (including proposals for an agreement for limiting liability) is
submitted to the shareholders’ meeting or the board of directors, ASBMs and the ASB
should follow the provisions of this article. [Lv. 4]

5.

If ASBMs come to have an opinion regarding the partial exemption from liability of
ASBMs or other such matters, they will, as necessary, express their opinions at board of
directors’ meetings and the like. [Lv. 3]

Article 54 Receipt of Demand to File a Derivative Lawsuit; Notice of Reasons for Not
Filing Lawsuit

1.

If any ASBM receives a demand from shareholders to file a lawsuit to pursue the liabilityof directors, such ASBM must promptly provide the other ASBMs with notice of suchdemand, and an ASB meeting must be convened to thoroughly deliberate on the response
to such demand and to determine whether to file a lawsuit. [Lv. 1]

2.

In determining whether to file a lawsuit mentioned in the preceding paragraph, ASBMs
will in a timely manner make any necessary investigation, including requesting status
reports or opinions from the directors to be sued and from any relevant departments ofthe company, collecting relevant materials, and requesting the opinions of outside
professionals. [Lv. 3]

3.

ASBMs will provide notice of the results of any determination made under paragraph 1
to the board of directors and to the directors to be sued. [Lv. 3]

4.

In cases where a lawsuit to pursue the liability of directors is not filed as a result of thedetermination under paragraph 1, if the shareholders who demanded the filing of thelawsuit or the directors whose liability was to be pursued request, ASBMs must submit
to them without delay documents stating the following matters and must provide noticeof the reasons for not filing the lawsuit; [Lv. 1] in this case, ASBMs will consider thecontents of that notice through deliberations of the ASB after requesting the opinions ofoutside professionals: [Lv. 3](i)the contents of investigations conducted by ASBMs (including materials that wereused as the basis for the determination of the following item);(ii)

determination as to whether the directors to be sued had a responsibility or duty andthe reasons for that determination; and(iii) if determining that the directors to be sued had a responsibility or duty, the reason
for not filing a lawsuit pursuing their liability.
5.

ASBMs will prepare and keep records concerning the process and results of theinvestigations and deliberations made to determine whether to file a lawsuit. [Lv. 3]

Article 55 Consent to Participation in a Derivative Lawsuit

1.

When consenting to the company’s participation in a derivative lawsuit to assist thedefendant directors, ASBMs will conduct deliberations at an ASB meeting. [Lv. 3]

50

2.

In determining whether to consent to the participation mentioned in the preceding
paragraph, the ASBMs will request status reports or opinions from the representative
directors, from the defendant directors, from related directors, and from any relevant
departments of the company and will request opinions of outside professionals, asnecessary. [Lv. 3] ASBMs will prepare and keep records concerning the process andresults of the investigations and deliberations conducted for the determination as towhether to consent to the participation. [Lv. 3]

Article 56 Settlements in Lawsuits Pursuing Liability in Which the Company is thePlaintiff

1.

When consenting to a settlement in a lawsuit by the company pursuing the liability of
directors or the like, ASBMs will conduct deliberations at an ASB meeting. [Lv. 3]

2.

In determining whether to consent to the settlement mentioned in the preceding
paragraph, the ASBMs will request status reports or opinions from the representative
directors, from the defendant directors, from related directors, and from any relevant
departments of the company and will request opinions of outside professionals, asnecessary. [Lv. 3] ASBMs will prepare and keep records concerning the process andresults of the investigations and deliberations conducted for the determination as towhether to consent to the settlement. [Lv. 3]
Reference for Article 56
This revision was made in consideration of Article 849-2 of the Companies Act.

Article 57 Determining Objections to Settlements in Derivative Lawsuits

1.

In cases of derivative lawsuits where the court has given notice and issued demand to theeffect that the plaintiff shareholders and the defendant directors are to settle the case incourt, ASBMs must, at an ASB meeting, etc., promptly and thoroughly deliberate on the
response to such notice and demand and determine whether to object to the settlement.
[Lv. 2]2.

In determining the appropriateness of the judicial settlement mentioned in the preceding
paragraph, ASBMs will request status reports or opinions from the representative
directors, from the defendant directors, from related directors, and from any relevant
departments of the company and will request opinions of outside professionals, asnecessary. [Lv. 3] ASBMs will prepare and keep records concerning the process andresults of the investigations and deliberations conducted for the determination as to theappropriateness of the judicial settlement. [Lv. 3]

Article 58 Handling of Multiple Derivative Lawsuits, etc.

1.

ASBMs of ultimate, wholly-owning parent companies (meaning companies that havesubsidiaries that are subject to the system of lawsuits to pursue specific liability(commonly called the multiple derivative lawsuit system) (such subsidiaries, “WhollyOwned Subsidiaries” in this article); the same applies below in this article) will respondto lawsuits to pursue specific liability against directors or liquidators of a Wholly-Owned
Subsidiary (in this article, “Wholly-Owned Subsidiary Directors, Etc.”) in accordancewith the provisions of this chapter, keeping in mind the following:
51

(i)

If the ultimate, wholly-owning parent company receives a notice from a WhollyOwned Subsidiary to the effect that the Wholly-Owned Subsidiary has received
notice of action from the shareholders of the ultimate, wholly-owning parent
company regarding the filing of a lawsuit to pursue specific liability against
Wholly-Owned Subsidiary Directors, Etc., then ASBMs of the ultimate, whollyowning parent company must represent the ultimate, wholly-owning parent
company. [Lv. 1](ii)

If the ultimate, wholly-owning parent company conducts a lawsuit to pursue
specific liability against Wholly-Owned Subsidiary Directors, Etc., then ASBMs of
the ultimate, wholly-owning parent company must represent the ultimate, whollyowning parent company. [Lv. 1](iii) If the ultimate, wholly-owning parent company participates in a lawsuit to pursue
specific liability to assist the defending Wholly-Owned Subsidiary Directors, Etc.,
then ASBMs of the ultimate, wholly-owning parent company must determine
whether or not to consent to that participation. [Lv. 1]
2.

If a Wholly-Owned Subsidiary receives a demand to file a lawsuit to pursue specificliability against Wholly-Owned Subsidiary Directors, Etc. from the shareholders of theultimate, wholly-owning parent company, then ASBMs of the Wholly-Owned Subsidiarymust represent the Wholly-Owned Subsidiary. [Lv. 1]
Supplement to Article 58
In the case of a filing against subsidiary directors/ASBMs of actions such as (i)multiple derivative lawsuits or (ii) derivative lawsuits by parent company shareholders
when there has been a share exchange, etc., parent company ASBMs should respondto the lawsuit while keeping in mind that they themselves may be subject to certain
liabilities, as well.

Chapter XI
Reports on Audits
Article 59 Report and Explanation of the Contents of Audits, etc.

In order to ensure the transparency and reliability of audit activities and audit results,
ASBMs must be aware that explaining, as necessary, the status of the performance of
their duties and the contents of their audits is an important responsibility of ASBMs. [Lv.
2]
Article 60 Preparation of Audit Records

ASBMs must prepare and keep audit records. [Lv. 2] Audit records will record themethods and results of ASBM audits as well as the processes, reasons, and other relevant
matters leading to the formulation of ASBM audit opinions. [Lv. 3]

52

Article 61 Reporting to the Representative Directors and the Board of Directors

1.

ASBMs and the ASB will regularly report matters such as the status of their activities tothe representative directors and the board of directors. [Lv. 3]

2.

ASBMs and the ASB will report to the representative directors, the board of directors,
and other related directors the process and results of audits regarding the priority audit
items and of investigations, etc. specially made for that period and, when finding it
necessary, will provide suggestions or recommendations and take appropriate measures
based on the situation. [Lv. 3]

Article 62 Preparation and Notice of Audit Reports

1.

ASBMs must prepare ASBM audit reports and submit them to the ASB. [Lv. 1]

2.

The ASB must prepare an accurate and clear ASB audit report through deliberations basedon the ASBM audit report prepared by each ASBM. [Lv. 1]

3.

The ASB will confirm, with respect to Business Reports, Etc., accounting-related
documents, or other documents received from the directors who performed duties relating
to the preparation of Business Reports, Etc. and accounting-related documents, whether
all matters required by law and other matters to be disclosed have been appropriately
stated in such documents, and the ASB will, as necessary, request explanations from thedirectors, state their opinions, or request modifications. [Lv. 3]

4.

ASBMs will state in audit reports whether or not the contents of board of directors’
resolutions regarding the Internal Control Systems provided for in Article 25, paragraph
1 are appropriate. [Lv. 3] Additionally, if there are any matters to be commented onregarding the Internal Control Systems established and operated pursuant to thoseresolutions, ASBMs will state the details of those matters in audit reports. [Lv. 3]

5

In preparing the ASB audit report, the ASB will confirm whether there has been any act
by a director that is in violation of any law, regulation, or the articles of incorporation,
any subsequent events, or any other relevant matters and will, keeping in mind the matterslisted in Article 45, paragraph 2, examine whether there is any matter that should be statedin its ASB audit report. [Lv. 3]

6.

In cases where the contents of an ASBM’s own audit report are different from the contentsof the ASB audit report, that ASBM will append a note with the contents of his or her
own ASBM audit report to the ASB audit report. [Lv. 3]

7.

Each ASBM will affix his or her signature or his or her name and seal impression(including his or her electronic signature) on his or her own ASBM audit report and the
ASB audit report. [Lv. 3] Additionally, full-time ASBMs and outside ASBMs should
state their positions as such. [Lv. 4] The date of preparation must be stated on the ASB
audit report. [Lv. 1]

8.

The Specified ASBMs must provide notice of (i) the contents of the ASB audit reportconcerning the Business Report, Etc. and of the ASB audit report concerning accountingrelated documents to the specified directors and (ii) the contents of the ASB audit reportconcerning accounting-related documents to the accounting auditor. [Lv. 1] However, incases where the audit report concerning the Business Report, Etc. and the audit reportconcerning accounting-related documents are both prepared together as one audit report,
ASBMs must provide notice of the contents of such audit report to the accounting auditor.
[Lv. 1]53

9.

In the preceding paragraph, the Specified ASBMs should, as necessary, (i) agree with thespecified directors on and determine the date to provide notice of the contents of the ASB
audit report concerning the Business Report, Etc. to the specified directors and (ii) agreewith the specified directors and the accounting auditor on and determine (a) the date toprovide notice of the contents of the accounting audit report concerning accountingrelated documents to the Specified ASBMs and (b) the date to provide notice of thecontents of the ASB audit report concerning accounting-related documents to thespecified directors and the accounting auditor. [Lv. 4]

Article 63 Disclosure by Electronic Provision of Shareholders’ Meeting Materials

1.

In cases where a company has provisions in its articles of incorporation to the effect that
pursuant to Article 325-5, paragraph 3 of the Companies Act, all or some of the mattersfor electronic provision provided for in ministerial ordinances of the Ministry of Justice
are not required to be stated in documents stating the matters for electronic provision,then when directors intend to take such measures, namely to omit all or some of suchmatters from the documents, under the articles of incorporation, ASBMs will examine
whether such measures should be taken and, when finding it necessary, make anobjection. [Lv. 3]

2.

In cases where the measures mentioned in the preceding paragraph under the provisions
in the articles of incorporation are taken, ASBMs may demand that directors give notice
to shareholders who receive documents stating the matters for electronic provision thatthe matters stated in the documents stating the matters for electronic provision are part ofthe matters stated or recorded in the business report, accounting documents, or
consolidated accounting documents that were audited when preparing the audit report.
[Lv. 5]
Reference for Article 63This revision was made in consideration of the introduction of rules for electronic
provision of shareholders’ meeting materials in the Companies Act.

Article 64 Disclosure by Deemed Provision1.

In cases where a company has provisions in its articles of incorporation to the effect that
it will take measures under the deemed provision rules provided for in Article 94,
paragraph 1 of the Ordinance for Enforcement of the Companies Act, Article 133,
paragraph 3 of the Ordinance for Enforcement of the Companies Act, Article 133,
paragraph 4 of the Ordinance on Accounting of Companies, and Article 134, paragraph 4of the Ordinance on Accounting of Companies, then when directors intend to take suchmeasures, ASBMs will examine whether such measures should be taken and, whenfinding it necessary, make an objection. [Lv. 3]

2.

In cases where the measures mentioned in the preceding paragraph under the provisions
in the articles of incorporation are taken, ASBMs may demand that directors give notice
to shareholders that the business report, accounting documents, or consolidated
accounting documents actually provided to shareholders are a part of such documents thatwere audited when preparing the audit report. [Lv. 5]54

Article 65 Reporting and Explanation at Shareholders’ Meeting, etc.

1.

With respect to proposals, documents, electronic or magnetic records, and other materials
to be submitted to a shareholders’ meeting, ASBMs must investigate whether there are
any matters that are in violation of any law, regulation, or the articles of incorporation orthat are otherwise significantly inappropriate and, if such a matter is found, must report
the results of the investigation at a shareholders’ meeting. [Lv. 1] At the shareholders’meeting, ASBMs should state their own opinions, as necessary, for the purpose ofdischarging their responsibility of accountability. [Lv. 4]

2.

ASBMs will provide explanations on questions by shareholders at shareholders’ meetingsin accordance with the management of the proceedings by the chairperson of theshareholders’ meeting. [Lv. 3]

3.

ASBMs will confirm that the outline and results of the proceedings and other mattersprovided by laws and regulations are appropriately stated in the minutes of shareholders’meetings. [Lv. 3]

Supplementary Provisions

In this Code, the term “state” includes “recording” in electronic or magnetic records unlesscontrary to the context. The various documents mentioned in this Code include those preparedin the form of electronic or magnetic records.
End

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