Corporate Governance

Basic Policies
1. We shall respect the rights of shareholders, and ensure the equal and fair treatment of all shareholders.
2. We shall take the interests of shareholders and other stakeholders into consideration and endeavor to appropriately
cooperate with those stakeholders.
3. We shall disclose not only information in compliance with the relevant laws and regulations, but also actively provide
important and/or useful information to stakeholders to enable well-informed decision-making.
4. The Board of Directors shall be cognizant of its fiduciary responsibility and accountability to shareholders, and shallappropriately fulfill its roles and responsibilities in order to promote sustainable and stable corporate growth andincrease corporate value, profitability and capital efficiency.
5. We shall engage in constructive dialogue with shareholders, and make efforts to obtain their support regarding theCompany’s Business Policies and also reflect their opinions and concerns in efforts to improve management.

Basic Approach for Regaining Trust
We have established the Corporate Guiding Principles todemonstrate our values regarding appropriate cooperation withstakeholders, respect for their interests and sound business ethics.
We have inculcated these principles and make efforts to ensurethat compliance extends to the front lines of business activities
in Japan and overseas. For example, we hold briefings on the
Corporate Guiding Principles, conduct various types of complianceeducation, set compliance education as a requirement for
promotions, conduct in-person reviews of relevant employees,
and ensure that everyone in the Company is aware of thewhistleblowing system. Through these and other initiatives wehave endeavored to broadly instill a sense of urgency among
employees, making them keenly aware that the products andservices that we supply through our businesses are connected topeople’s safety, physical wellbeing and financial position, and thatthey are involved in quality management both directly andindirectly, and that laxity in any aspect of their work could impact
society at large. In addition, we have widely communicated our
Bad News First reporting system for identifying and resolving
issues when they are still minor. It calls for reporting any
workplace abnormalities whether favorable or unfavorable.
However, improper acts occurred. As announced on October 16,
2018, performance inspection data records were falsified forsome of the seismic isolation/mitigation oil dampers shipped
by KYB and a subsidiary. Products that did not conform toperformance evaluation standards approved by the Minister ofLand, Infrastructure, Transport and Tourism, and did not meetthe standards of our customers, were installed in buildings. In
addition, there were improper claims in connection with acontract with the Ministry of Defense for defense equipment.

Initiatives to Strengthen the KYB Group’s GovernanceInitiated in-person interviews
with relevant employees
FY2014

Established independence
standards for outside directors
and outside Audit & Supervisory
Board members

Appointed two independent
outside directors andestablished a discretionary
Nomination Committee
FY2015FY2016FY2017
Established a discretionary
Compensation Committee

Appointed one independent
outside director

FY2018FY2019Established the Special Audit
Committee on Wrongdoing Risk andthe Internal Control Department
Raised the ratio of independent
outside directors on the Board of
Directors to one-third

Non-Financial Corporate Governance Achievements

Corporate Guiding Principles
now available in 13 languages(Japanese, English, Chinese (simplified and traditional script
versions), Portuguese, Vietnamese, French, German, Czech,
Russian, Thai, Indonesian, Spanish (European and Latin
American versions), and Tagalog

Ratio of independent outside
directors on the Board of
Directors now one-third

Independence standards foroutside directors and outside
Audit & Supervisory Board
members formulated

KYB Group Report 202035

To prevent recurrence of the improper acts and demonstrate
our commitment to regaining trust, we revised our Corporate
Spirit by adding the item “Follow all rules and face all issues withhonesty,” and, based on the revised Corporate Spirit and Basic
Policies, we will work to strengthen and enhance corporate

governance. Having clearly codified the prevention of qualityrelated misconduct in our Corporate Guiding Principles, we will
deeply inculcate these principles in all of our people at the frontline of business operations in Japan and overseas, and will
resolutely ensure compliance.

Overview of the Corporate Governance System
The corporate governance of KYB, which is structured as acompany with an Audit & Supervisory Board in accordance with
the Companies Act, centers on the Board of Directors and the
Audit & Supervisory Board and its individual members. In addition,
KYB has instituted an executive officer system to expedite decisionmaking and streamline business execution.
Three of the seven members of the Board of Directors are
independent outside directors, and two of the four members of
the Audit & Supervisory Board are independent outside members.
KYB believes it has strengthened independent and objective
management supervision by the Board of Directors because
one-third of the board consists of independent outside directors.
KYB determines whether outside directors and outside Audit &Supervisory Board members are independent based on KYB’s
independence standards, and only selects individuals who can be
independent of other members of management.
Furthermore, the Internal Control Department is the organization
responsible for overall planning and coordination of global governanceand compliance, and the J-SOX Correspondence Office within theInternal Control Department conducts evaluations based on Japan’s
Financial Instruments and Exchange Law (J-SOX). We have alsoestablished the Special Audit Committee on Wrongdoing Risk,
which is chaired by an outside director and has broad responsibility
for detecting signs of misconduct and situations that give rise to it.
▶ Please refer to the Corporate Governance section on our Company
website for details on independence standards.

https://www.kyb.co.jp/english/company/governance.html

Corporate Governance Structure
General Meeting of Shareholders
Elect/Dismiss

Elect/Dismiss
Consult

Special Audit Committee on Wrongdoing Risk

Board of Directors
ReportAudit & Supervisory Board

Accounting Auditor

Audit

Audit

Advisory Committees(Nomination, Compensation)

Representative Director,
President Executive Ofﬁcer

General Manager
CSR & Safety Control Division

Board of Executive Ofﬁcers,
Other Management Committees

Internal Control Department
J-SOX Correspondence Ofﬁce

Audit Department

Evaluation based on J-SOX

Audit

Responsible head ofﬁce departments, operational headquarters, Group companies, branches, representative ofﬁces

Evaluation of the Effectiveness of the Board of Directors
KYB defines the effectiveness of the Board of Directors as
fulfillment of its expected roles and functions to achieve sustainablegrowth of the Company and improve corporate value. Committed
to a highly effective Board of Directors, we analyze and evaluate
the effectiveness of the Board of Directors once a year.

36

KYB Group Report 2020

Based on the results of the FY2017 evaluation, in FY2018 KYB
fully verified the appropriateness of the agenda and the ease ofunderstanding of meeting materials in advance through channels
including the Council of General Managers and the Corporate
Strategy Council.

Corporate Governance

In FY2019, we administered written self-assessment

we need to address after obtaining third-party analysis andevaluation by external experts.

questionnaires for all directors and Audit & Supervisory Board
members. We used the questionnaire responses to identify issues

Questionnaire Methodology

2019 Results

Respondents: 10 respondents, comprising 6 directors(including 2 independent outside directors) and4 Audit & Supervisory Board members (including
1 independent member)
Survey period: September to November 2019
Methodology: External experts administered a self-assessment
questionnaire, analyzed and evaluated theresults, and interviewed officers

We have identified the following specific issues for resolution
in FY2020:
1) Further improve information sharing (between outside
directors and Audit & Supervisory Board members, andbetween the Board of Directors and the Nomination
Committee and the Compensation Committee)2) Improve the ease of understanding of meeting materials
for the Board of Directors

Key questionnaire items
1. Roles and responsibilities of the Board of Directors
2. Composition of the Board of Directors
3. Roles and qualities of Directors
4. Administration of the Board of Directors
5. Level of satisfaction among outside directors
Number of survey questions
66 (75 for outside directors)
Questionnaire methodology
Evaluation of the current situation: 4-level evaluation
Specific suggestions for improving the current situation: openended response

Future Actions
In order to strengthen the supervisory function of the Board of
Directors, the Board of Directors and Audit & Supervisory Board
members provided multiple opinions on matters to be discussed
at Board meetings and the composition of the Board of
Directors, and shared their awareness of issues. We willcontinue to discuss both internal and external issues in order toimprove effectiveness.

Takeover Defense Measures
Countermeasures to Large-Scale Purchase of the Company’s
Shares (Takeover Defense Measures) is a KYB initiative to increase
corporate value and thus ensure the common interests ofshareholders for the medium and long term. The 97th Ordinary

General Meeting of Shareholders on June 25, 2019 approveda resolution to renew this initiative until the end of the 100th
Ordinary General Meeting of Shareholders scheduled forJune 2022.

Officer Compensation
Compensation Structure
Officer compensation consists of fixed monthly compensation (basic compensation) according to position and responsibilities, andperformance-linked compensation (bonus) that varies depending on the Company’s business results. Outside directors and Audit &Supervisory Board members only receive fixed compensation according to their respective roles, and in view of their independence do notreceive performance-linked compensation.
Type ofCompensation

Maximum Total Compensation

Date of Resolution of the General
Meeting of Shareholders

Calculation Process

Directors¥30 million per month(¥360 million per year)

June 27, 1997
75th Ordinary General Meetingof Shareholders

Consultation with
Compensation Committee

Audit & Supervisory
Board members¥8 million per month(¥96 million per year)

June 24, 2011
89th Ordinary General Meetingof Shareholders—

Directors (Excluding
outside directors)

40% or less of total compensation(Fixed compensation +Performance-linked compensation)

Approval annually by resolution
at the Ordinary General Meetingof Shareholders

Consultation with
Compensation Committee

Eligible Officers

Fixed
compensation

Performancelinked
compensation

Note: The limit on total ﬁxed remuneration for directors does not include salary for employees concurrently serving as directors.

KYB Group Report 202037

Corporate GovernanceCompensation Decisions
For director compensation, the discretionary Compensation
Committee composed of representative directors and outside
directors verifies the propriety of the criteria for calculating fixedand performance-linked compensation and reports the proprietyof criteria to the Board of Directors.
Fixed compensation for directors is determined by resolutionof the Board of Directors upon receiving the report from theCompensation Committee, within the limit on totalcompensation decided at the Ordinary General Meeting of
Shareholders. Payment of performance-linked compensation for
directors (excluding outside directors) is approved annually by
resolution at the Ordinary General Meeting of Shareholders.
Fixed remuneration for Audit & Supervisory Board members isdetermined in consultation with Audit & Supervisory Board
members, within the limit on total compensation decided at theGeneral Meeting of Shareholders.

Calculation and Determination of Performance-Linked Compensation to Be Paid
1. Criteria and Business Results That Serve as the Basisfor Calculation
Performance-linked compensation is calculated according to thedegree of achievement in the preceding fiscal year (the “basefiscal year”) of the consolidated performance forecast according to
the following calculation criteria (four items).
Calculation Criteria

TargetResult20,60017,575(fixed compensation + performance-linked compensation) of
directors (excluding outside directors) shall not exceed 40%.
The total amount to be paid is calculated by multiplying the
maximum amount payable by a payout ratio derived from thenumber of calculation criteria targets in 1. that were achieved.
Performance-linked compensation is not paid in the case of aloss attributable to owners of the parent.

5.02

4.61

Profit (loss) attributable to owners of
the parent (Millions of yen)Calculation
Criteria
Targets
Achieved

14,000(61,879)

Payout ratio

Profit (loss) margin attributable toowners of the parent (%)

3.41(16.22)

Segment profit (Millions of yen)Segment profit margin (%)

Note: The targets are the consolidated ﬁnancial results forecast for the base ﬁscal year
(FY2019, or the ﬁscal year ended March 2020) described in the ﬁnancial
statements at the end of the ﬁscal year prior to the base ﬁscal year (FY2018, or
the ﬁscal year ended March 2019). The ﬁrst consolidated performance forecast
will be the baseline if the announcement of results for the recently ended ﬁscal
year does not include a consolidated performance forecast.

2. Calculation of Amount to Be Paid
Total performance-linked compensation is limited to 1.0% of
profit attributable to owners of the parent. Moreover, the ratioof performance-linked compensation to total compensation

4

3

2

1

0

Loss
Attributableto Owners of
the Parent

100％

80％

60％

40％

20％

0%

3. Determination of Amount to Be Paid according to Position
The amount of performance-linked compensation to be paid toindividual directors (excluding outside directors) is calculated basedon proportional distribution of the total amount to be paid in 2. toeach director according to the following payment points for eachposition. Amounts are rounded down to the nearest ¥100,000.

Position

Chairman

Payment points

8

SeniorVice
Vice
Managing
President
ChairmanPresident Executive
Officer

7

10

6

5

Total Compensation for Each Officer Category, Total Compensation by Type, and Number of Eligible Officers
Compensation by Category (Millions of yen)

Total Compensation(Millions of yen)Fixed Compensation

Performance-linked
Compensation

Directors(Excluding outside directors)

155

155

—

6

Outside directors

16

16

—

2

Audit & Supervisory Board members(Excluding outside members)

44

44

—

2

Outside Audit & Supervisory
Board members

45

45

—

3

Category

Number of Eligible
Officers

Notes: 1. Total compensation for directors (excluding outside directors) does not include salary for employees concurrently serving as directors.
2. The above data includes two directors and one Audit & Supervisory Board member who retired at the conclusion of the 97th Ordinary General Meeting of Shareholders on
June 25, 2019.
3. KYB abolished the retirement beneﬁts system for directors at the conclusion of the 89th Ordinary General Meeting of Shareholders on June 24, 2011, but the payment of
retirement beneﬁts according to tenure as of the close of that meeting was also approved. Based on this approval, in addition to total compensation shown above, thefollowing retirement beneﬁts for directors (excluding outside directors) were paid for FY2019.
¥44.8 million (two directors)
Note: This amount includes the payment of ¥41.0 million to two directors, which was disclosed in previous years as allowance for retirement beneﬁts.
4. FY2019 retirement beneﬁts for directors did not increase because the retirement beneﬁt system for directors was abolished as described above.

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KYB Group Report 2020

Internal Control and ComplianceInternal Control System
Basic Policy
The Board of Directors of the Company ensures effective corporate governance by adhering to the Basic Policy for Internal Control
System1 in accordance with the Companies Act, and by implementing various measures including a risk management system, a Groupmanagement system and an internal compliance system. The KYB Group also maintains and assesses the implementation of internal
control over financial reporting using the procedures stipulated by the Financial Instruments and Exchange Act. In this way, the KYBGroup ensures reliable financial reporting and appropriate information disclosure through internal control reports.

Key Points for Internal Control
1

KYB Group Risk Management

The Risk Management Committee reports to the Board of Directors. Based on the Risk Management
Rules, it designates responsible departments to conduct risk management activities for major risks suchas quality problems and occupational accidents during the fiscal year.

2

KYB Group Information
Protection

Based on the Basic Policy for Information Security, KYB shall implement a system to protect information
assets and take measures against the risk of information leaks and information system failures causedby cyberattacks.

3

Rigorous Application of Internal
Regulations during Emergencies

We inform all employees of Group companies of their reporting obligations to ensure rigorous reporting
under internal reporting rules that include the Rule of Prompt Report2 and Bad News First system, whichcalls for employees of Group companies to immediately notify the Company should they become awareof a potentially serious problem.

4

Review to Improve theEffectiveness of the
Whistleblowing System

We carefully explain the internal reporting system to indirectly related departments and frontline
workers. We have also made whistleblowing compulsory for improper acts related to product quality
and safety.

Notes: 1. Please refer to the Company website for additional details.
https://www.kyb.co.jp/english/company/governance.html
2. A core component of the KYB Group’s crisis management system, in which department heads and production base managers promptly and accurately report important
information to the president of the Company.

Internal Control System
Managing Executives Organization

Independent ofManaging
Executives

Impartial Organization
Supervise

ReportSpecial Audit Committee
on Wrongdoing Risk

EntrustChair: Outside director

KYB President Executive Ofﬁcer(Supported by external attorneys)

Risk and compliance management
Board of Executive Ofﬁcers

Risk Management Committee
Departments withhead ofﬁce functions

Chief Compliance Ofﬁcer(In the future, we will consider
expanding and transitioning to a
standing Compliance Committee)
Support asneededLegal Affairs Department

Business operations

Internal Control Department

Identiﬁcation, evaluation andmanagement of risks

Each headquarters or division
Key compliance personnel

Overall planning and coordinationof corporate governance and compliance
Enhance support
for targeted
expansion

Non-compliancerisk

Quality Control Department
ReportGroup companies
Compliance ofﬁcer

Outside Directors and Outside Membersof the Audit and Supervisory Board

Board of Directors

Audit Department
Wrongdoing risk
investigation

Request for investigation
Support as needed

External investigative
companyKYB Group Report 202039

Internal Control and Compliance

Compliance
Basic Policy
We regard compliance as adherence to the laws, orders andrules of society at large, as well as to the Company’s Articles ofIncorporation, rules and agreements associated with businessactivities, in addition to corporate ethics that promote soundbusiness activities.
1. We have developed the Corporate
Guiding Principles as rules for the
execution of business activities byofficers and employees, and arefocusing on initiatives including
establishing legal compliance andcorporate ethics. In response to theimproper acts related to the damper
Publicity poster for the
problem, we revised our Corporate
whistleblowing system
Spirit and Corporate Guiding
Principles in October 2019 to clearlystate that quality fraud will never recur.

2. We are implementing compliance education through training
sessions by job title and section.
3. We have established communication channels to management
by using the Rule of Prompt Report and Suggestion Box as asystem for the Company and all Group companies to identify
company risks in a prompt manner. We have also establishedand are operating contact points for whistleblowers.

A meeting of compliance officers andkey compliance people in Japan

A gathering of employees forCompliance Improvement Week

Key Points for Compliance1

Fostering Compliance
Awareness in the KYB GroupTo improve compliance awareness, officers of the Company and Group companies regularly attend
lectures on compliance awareness at training sessions for senior management. We also foster
compliance awareness for employees of the Company and the Group through e-learning, lecturetranscripts and videos.

2

Education and Training to Raise
Awareness of Social Responsibility

We will systematize repeated top-down education on corporate ethics. We are also proactively
reviewing the content of teaching materials to incorporate multiple case studies that lead to change in
the awareness of all executives and employees, including frontline employees.

3

Emphasize the Importance ofCompliance Regularly

Top management of the Company communicates internally through channels including speeches inJanuary, April and October.

4

Personnel Evaluations andRelated Measures

Personnel evaluations include a system for evaluating attitudes among employees, managers andexecutive officers toward compliance initiatives, such as compliance with laws and internal rules.

5

Organizational Upgrade

We have established compliance officers and key compliance people at Group companies andCompany business units. They manage and lead the compliance activities of the company or business
unit to which they belong to facilitate compliance activities.

Initiatives to Prevent Recurrenceof Antitrust Violations

We are working on the following measures to prevent violations of antitrust laws based on lessons
learned from violations in the United States.
1) Establishing an anti-monopoly compliance policy2) Securing written pledges from sales personnel that they will not violate antitrust laws
3) Formulating rules for contact with competitors
4) Conducting educational activities related to antitrust laws5) Conducting in-person interviews with sales personnel

7

Initiatives to Prevent Briberyrelated Violations

We are working on the following measures to prevent violations of bribery-related laws and regulations.
1) Establishing an anti-bribery policy
2) Establishing internal regulations3) Conducting educational activities related to bribery-related laws4) Conducting in-person interviews with sales personnel

8

Initiatives to Raise Awareness ofthe Whistleblowing System

We have complemented internal contact points with external contact points for reporting fromoutside the Group in order to detect corporate scandals early and prevent them from occurring.
Regarding the whistleblowing system, we also provide e-learning education and posters to Company
and Group employees. The publicity posters are available in Japanese, Tagalog and Portuguese.

640

KYB Group Report 2020