TOKYO ELECTRON ANNUAL REPORT 2020

PAGE

9

CONTENTS

To Our Stakeholders

Business Overview
and Financial Highlights

Interview with the CEO

Review of Operations
and Business Outlook

Message from the Chairman of the Board

Corporate GovernanceCorporate Governance

Financial Section
Investor Information

Directors, Audit & Supervisory Board Members and Executive Officers

Corporate Governance
The Board of Directors respects minority or opposing viewpoints, including opinions voiced by outside directors; revises theconditions for implementation or the content of proposals as necessary; and engages in extensive debate with the goal of reachingdecisions based on consensus. However, emphasis is placed on
making necessary decisions quickly to avoid missing opportunities.

 Basic StanceIn an environment where over 80% of our sales come from overseas, Tokyo Electron regards maintaining governance as essential to
becoming a truly global company that achieves sustainable growth.
To that end, Tokyo Electron strives to build frameworks to maximize the use of its worldwide resources. In addition to strengthening its management platform and technology base, the Company
maintains a governance structure that will enable it to attainworld-class profitability.
Tokyo Electron uses the Audit & Supervisory Board System,
which consists of a Board of Directors and an Audit & Supervisory
Board. Effective governance is achieved based on the supervisionof management by the Audit & Supervisory Board.

Board Size and Independent Outside Directors
Tokyo Electron considers it essential to maintain a Board of
Directors with the appropriate size to ensure high quality, active
debate; a robust balance of knowledge, experience and skills
among both executive directors and independent outside directors; and diversity, including gender and nationality. The current
Board of Directors consists of 11 corporate directors, including one
woman and one foreign national, and Tokyo Electron believes thisto be the appropriate size, at present, to achieve a good balance interms of knowledge, experience and skills.
The active expression of opinions, not only by independent outside
directors, but also by Audit & Supervisory Board members, is the cornerstone that supports the sound decision making of the Board of
Directors. Currently, six out of the 16 participants in the Board of
Directors meetings, including the Audit & Supervisory Board members,
are outside members, consisting of three independent outside directors and three outside Audit & Supervisory Board members. Board of
Directors meetings currently achieve an appropriate sense of productive tension and constructive debate essential for making operational
decisions due to the combined presence of executive directors,
who are highly knowledgeable about Tokyo Electron’s businesses,
and outside members, who provide objectivity.

 Board of Directors
Roles and Responsibilities of the Board of Directors
The Board of Directors works to achieve sustainable growth andincrease corporate value over the medium to long term based on its
fiduciary responsibility to shareholders. The roles and responsibilitiesof the Board of Directors are as follows:(1) Establishing management strategy and vision(2) Making major operational decisions based on strategic direction(3) Engaging in constructive, open-minded debate
The Board of Directors seeks the active participation of thosepresent in discussions in order to obtain a wide range of opinions,and supervises management and operational execution based on
active debate.

Does Tokyo Electron have these major components of corporate governance?

(As of July, 2020)

Nomination Committee

Yes

Four corporate directors, including one outside director andexcluding the CEO

Compensation Committee

Yes

Four corporate directors, including two outside directors andexcluding representative directors
Chaired by an outside director

Outside Directors

Yes

Three of the 11 corporate directors are outside directors

Outside Audit & Supervisory Board Members

Yes

Three of the five Audit & Supervisory Board members areoutside members

Executive officer system

Yes

Adopted in 2003

Disclosure of individual remuneration of representative directors

Yes

Disclosed since 1999

Annual performance-linked compensation system

Yes

Cash bonuses and stock options for internal directors

Medium-term performance-linked compensation system

Yes

Stock-based compensation system for internal directors

Non-performance-linked compensation system

Yes

Stock-based compensation system for outside directors

Stock options system

Yes

Applies only to internal directors
Adopted as an annual performance-linked compensation system

Retirement allowance system for executives

No

Discontinued after fiscal 2006

Anti-takeover measures

No

Nominations for Corporate Director and CEO
Tokyo Electron has established a Nomination Committee to ensure
fairness and efficacy in management. The Nomination Committee has
the authority to propose the appointment and removal of corporate directors or the CEO and proposes corporate director candidates to the Board of Directors prior to their election at theGeneral Meeting of Shareholders and also nominates CEO candidates for appointment by the Board of Directors. The Nomination
Committee is composed of four corporate directors, including one
outside director; the CEO is not a member of the committee.
In addition, to develop the next generation of management andexecutive human resources, the Nomination Committee carefully
surveys and analyzes the status of the successor pool, then reports
to the Board of Directors, which provides appropriate supervision
to ensure that adequate time and resources are being devoted to
implementing the successor development plan.
Corporate Director and CEO Compensation
Tokyo Electron’s compensation policy prioritizes the following
considerations.
(1) Globally competitive compensation levels and systems thatcan secure excellent management human resources(2) S trong correspondence with short-term performance andmedium- and long-term increases in corporate value aimed
at sustainable growth(3) Assuring transparency and fairness in the process of determining compensation as well as the appropriateness ofcompensation
In line with this policy, Tokyo Electron maintains a
Compensation Committee to ensure management transparency
and fairness as well as the appropriateness of compensation andhas adopted a director compensation system that is closely linked
to performance and shareholder value.
The Compensation Committee is composed of four corporate
directors, including two outside directors and excluding the representative directors. From fiscal 2020, the committee is chaired by anoutside director. The Compensation Committee utilizes advice fromexternal experts and conducts an analysis and comparison of compensation and related factors at companies in similar industries inand outside Japan. Based on this analysis, the committee proposes
to the Board of Directors a policy and system for the compensationof the corporate directors and executive officers that will be globallycompetitive and optimally suited to the Company as well as individual compensation amounts for the representative directors.
The compensation of corporate directors (excluding the outside
directors) comprises fixed basic compensation, annual performancelinked compensation and medium-term performance-linked­compensation.
In principle, annual performance-linked compensation consistsof cash bonuses and stock compensation-based stock options; theratio of these two components is roughly 1:1. Stock compensationbased stock options are awarded with the exercise price set at one
yen per share, and a three-year exercise restriction period fromthe date of allotment of rights before the options may be exercised.
In order to incentivize the improvement of corporate performance,
Tokyo Electron has designated net income attributable to owners of
the parent and return on equity (ROE) as the main benchmarks forcalculating annual performance-linked compensation.
The medium-term performance-linked compensation utilizes
performance shares (share-based compensation) with the aim ofusing shareholdings to align the perspectives of corporate directors with those of shareholders and incentivize corporate directors
to increase corporate value. The number of Tokyo Electron sharesissued to corporate directors varies according to the payout rate
based on the responsibilities and level of performance goal
achievement over the relevant three-year term. The operating
margin and ROE are used as indicators to assess the attainment of
performance targets and appropriately link compensation with themedium-term enhancement of corporate value.
The compensation of outside directors comprises fixed basic
compensation and non-performance-linked stock-based compensation. Non-performance-linked stock-based compensation was
adopted from fiscal 2020 to create a compensation system better
suited to the outside directors’ role of providing advice aimed atenhancing corporate value over the medium to long term in addition to management supervision. Under this system, stock is granted after the expiration of the applicable period of three fiscal years.
Evaluation of the Effectiveness of the Board of Directors
To evaluate the effectiveness of the Board of Directors, including
the Nomination Committee and Compensation Committee, Tokyo
Electron conducts a question-based survey of all corporate directors and Audit & Supervisory Board members as well as individualinterviews with some of them.
In fiscal 2020, Tokyo Electron again hired a third-party institution to provide advice on the selection of the items to be evaluated, hold the interviews, and compile and analyze the results. Using
the compiled data and analysis, the outside directors and outside
Audit & Supervisory Board members held discussions of the Boardof Director’s effectiveness. These findings were then shared withand discussed by the entire Board of Directors, which deliberated
and comprehensively evaluated its effectiveness and disclosed
a summary of the results.
At meetings of the Board of Directors, corporate directors andAudit & Supervisory Board members actively engage in discussion
based on their diverse viewpoints and experiences. Each matter isreviewed and deliberated in depth, leading to effective policy andconclusions from the perspective of sustainably increasing corporate value. The evaluation found that positive initiatives andimprovements were moving forward. For example, the diversity of

TOKYO ELECTRON ANNUAL REPORT 2020

PAGE

10

CONTENTS

Business Overview
and Financial Highlights

To Our Stakeholders

Interview with the CEO

Review of Operations
and Business Outlook

Message from the Chairman of the Board

Corporate GovernanceCorporate Governance

Financial Section
Investor Information

Directors, Audit & Supervisory Board Members and Executive Officers

Corporate Governancethe Board of Directors is advancing in terms of gender, the Boardof Directors discusses the appropriate ratio of outside directors,
and matters that are important in the medium and long term are
discussed at off-site meetings. These matters include management strategy, risk management, Group governance and corporatesocial responsibility (CSR).
Tokyo Electron thus concludes that in general its Board of
Directors is effectively ensuring that the key roles of the Board of
Directors are being fulfilled, namely (1) Establishing management
strategy and vision and (2) Making major operational decisions
based on strategic direction, as prescribed in the Tokyo Electron
Corporate Governance Guidelines. In addition, Tokyo Electron recognizes that the Board of Directors, including the Nomination
Committee and Compensation Committee, is functioning effectively.
Based on the results of this evaluation, the Board of Directors
will strive to secure ample opportunities and time for enhancing
discussion of medium- and long-term management strategy whileworking to further reinforce risk management and Group governance. In addition, the Board of Directors will review the composition of the Nomination Committee to enhance its objectivity andexamine how the committee relates to the board. It will also work
to reinforce dialog with stakeholders with greater awareness ofenvironment, social and governance (ESG) issues and the United
Nations’ Sustainable Development Goals (SDGs).

 Audit & Supervisory Board Risk Management

The Audit & Supervisory Board currently consists of five members
and includes three outside members. Two members are full-time.
The full-time Audit & Supervisory Board members collect information through onsite surveys, and the board maintains appropriate
coordination with the Internal Audit Department and the independent auditors as part of a structure that enables Audit &Supervisory Board members to obtain all information necessary
for audits.
Moreover, the composition of Audit & Supervisory Board members provides a good balance of knowledge required for operational audits and accounting audits, including financial andaccounting knowledge, legal knowledge, and audit experience atother companies. Tokyo Electron thus believes its Audit &Supervisory Board members are able to perform their auditing
functions effectively.
Tokyo Electron’s full-time Audit & Supervisory Board members
concurrently serve as Audit & Supervisory Board members of key
subsidiaries, enhancing audit effectiveness. In addition, all of Tokyo
Electron’s Audit & Supervisory Board members, the Audit &Supervisory Board members of its subsidiaries, the head of theInternal Audit Department, and the head of the Risk Management
Department hold Group Audit & Supervisory Board member
meetings to share information and exchange opinions. In theseways, Tokyo Electron maintains a Group-wide audit system.

Corporate Governance Framework, Internal Control System and Risk Management System(As of July, 2020)

Shareholders’ Meeting
Appointment or Dismissal of
Corporate Directors

Management &Supervision

Nomination Committee

ReportAudit

Corporate Senior Staff (CSS)

Audit & Supervisory Board

Cooperate

Appointment
or Dismissal

Independent Auditors

ReportProposal & Report

Business
Execution

Audit

Board of Directors
Compensation Committee

Appointment or Dismissal of
Audit & Supervisory Board members

Supervision/
Appointment or Dismissal

President & CEO (Representative Director)

Audit

Cooperate

Global Audit Center

Cooperate

Business Execution Meeting
Internal Control Executive Officer
Risk Management Executive Officer
Compliance Executive Officer
Ethics Committee

Approach to Risk Management
Reflecting changes in society and the business environment, therisks facing businesses are growing increasingly complex anddiverse. Tokyo Electron considers understanding and appropriately
addressing the risks that it may face in its businesses, as well as
their impacts, to be essential to its sustainable growth.
Risk Management System and Initiatives
In order to promote more effective risk management, Tokyo
Electron carries out enterprise risk management1 through a bodyestablished within the General Affairs Department at its headquarters. This body works with the respective departments responsible
for each operation to identify a wide range of risks arising in­corporate activities (such as compliance risk, human resource andlabor risk, and business continuity risk). It then classifies risks withhigh impact and probability as key risks within the Tokyo ElectronGroup. The body also formulates and executes measures to minimize these key risks, monitors the effect of said measures, works
to understand the status of risk control and implements the PDCA
cycle for risk management. In fiscal 2020, in addition to these
activities, the body conducted interviews with the responsible
departments at the corporate headquarters, and Japanese andoverseas subsidiaries to understand the status of risk management. From fiscal 2021 onward, it also plans to enhance the various functions and systems of risk management and internal audits
to further promote highly effective risk management activities.
The status of these activities is regularly reported to the Board of
Directors and the Audit & Supervisory Board.
1 Enterprise risk management: Group-wide systems and processes related to risk management activities

Auditing by the Internal Audit Department
The Global Audit Center serves as the internal audit department
for the entire Group and implements audits based on the audit
plan. Based on the results of these audits, it provides instructions
for making improvements as needed, confirms the progress ofthese improvements, and provides any necessary support. The
Group’s internal control over financial reporting in fiscal 2020 was
also evaluated as effective by the independent auditors.

Audit
Audit

Risk Management Initiatives
Each year, Tokyo Electron identifies key risks for the Group andsteadily works to reduce those risks. In fiscal 2020, we reinforced
measures in the following areas.

Risk Management Committee
Information Security Committee
Export Trade Control Committee

Business Execution Organization(All Divisions/All TEL Group Companies)

Research and Development
To maintain a competitive advantage and continue growing inmarkets where technological innovation is rapid, it is important forbusinesses to continuously create innovation and to provide highvalue-added products and services. While actively investing inresearch and development of leading-edge technologies toenhance its own research and development capabilities, Tokyo
Electron is also focusing on collaboration with Japanese and international consortiums. In addition, we are sharing technology roadmaps with our customers and collaborating with them in the earlystages of development to ensure our research and development
activities properly reflect future needs. Going forward, we will­continue to drive technological development for the next generation through a Group-wide development structure for collaboration between the Development & Production Divisions andBusiness Divisions.
Supply Chain Management
For manufacturers of semiconductor and flat panel display production equipment, implementation of sustainable supply chain
management is an essential part of such activities as development, production and providing services. To prepare for disruptions to the procurement of important parts or production due toearthquakes or other natural disasters, Tokyo Electron works, on
an ongoing basis, to establish alternative production structures
within its network and to develop a multisource system for important parts. In addition to formulating business continuity plans(BCPs) and holding regular drills, we are building seismically isolated production buildings, adopting appropriate inventory controls,
and taking other steps to establish stable product supply systems.
Information Security
With information security becoming increasingly important as
more and more of society is data-driven, it is equally importantthat companies work to improve their information literacy andbuild robust information infrastructure. Tokyo Electron is focusing
on information security risk from the two perspectives of cyber­security and confidential information management. To improvecybersecurity, we use a combination of industry-leading security
systems, provide security training for employees, and work to protect our information from the sabotage of our servers or computers as well as data theft, data manipulation and other forms ofcyberattack. The information security environment, including
cyberattack methods, is continually changing. Tokyo Electron isalways working to stay ahead of these changes and formulating
and implementing the necessary countermeasures on a global
basis. To improve confidential information management, our
Human Resources Department and Intellectual Property Department
work in close collaboration to strengthen measures to prevent leaks ofconfidential information, particularly targeting employees who retireor resign to ensure proper management of confidential information,
including the return and destruction of data.

TOKYO ELECTRON ANNUAL REPORT 2020

PAGE

11

CONTENTS

To Our Stakeholders

Business Overview
and Financial Highlights

Interview with the CEO

Review of Operations
and Business Outlook

Message from the Chairman of the Board

Financial Section
Investor Information

Corporate GovernanceCorporate GovernanceDirectors, Audit & Supervisory Board Members and Executive Officers

 Promoting Dialog with Investors

Shareholders’ Meeting
Tokyo Electron schedules its shareholders’ meeting to avoid dayson which many such meetings are concentrated as part of its
measures to vitalize these meetings and to promote smooth andefficient voting. The Company also mails a Notice of Annual
General Meeting of Shareholders to shareholders more than three
weeks in advance of the meeting and discloses notices on its
website before they are mailed, striving to provide shareholders
with information as early as possible. Shareholders are free to casttheir votes via the internet, and Tokyo Electron participates in the
web based voting platform for institutional investors operated by
ICJ, Inc.
To supplement the above shareholder meeting-related initiatives, Tokyo Electron’s website carries the resolutions, voting
results and presentation materials of shareholders’ meetings.

Corporate Governance ComplianceApproach to Compliance
Stakeholder trust is essential to business activities. In order tomaintain this trust, it is essential to continuously ensure complianceand enhance corporate ethics. The Code of Ethics of the Tokyo
Electron Group establishes the “appropriate actions to be taken” in
conducting business operations in an honest and fair manner inaccordance with the laws and regulations of the countries andregions in which the Tokyo Electron Group operates as well as withinternal regulations and rules, and stipulates that all executives andemployees must understand and apply the Code of Ethics.
Compliance System
In order to strengthen our compliance system and to ensure efficacy, people responsible for compliance (Regional ComplianceControllers) have been appointed at key overseas sites, creatinga system for direct reporting to the newly established Chief
Compliance Officer and Compliance Department. The primary roleof the Compliance Department is to formulate and review practical compliance programs for the Tokyo Electron Group, establish
and implement corporate ethics, plan and implement educationand training, and establish and operate internal reporting systems.
Compliance Initiatives
Corporate Ethics
In addition to establishing the Code of Ethics as common andminimum standards of conduct by which all executives andemployees should abide, we have also established a Business
Ethics Committee for the purpose of promoting and raising awareness of compliance and corporate ethics more effectively within
the Tokyo Electron Group. We have also set up the Disciplinary
Committee as a subordinate organization of the Business Ethics
Committee for the purpose of ensuring that reasonable andappropriate punishments are imposed and proper procedures­followed when taking disciplinary action.
To ensure awareness of the Code of Ethics, we arrange to translate it into five languages for local use, including Japanese, and distribute it in the form of a booklet to all executives and employees.
In fiscal 2021, the Code of Ethics will be revised. In addition toreflecting standards required as a global company, we will add anumber of new provisions on such important issues as personal
data protection, information security and money laundering. The
revisions, including changes to the booklet design and adoption ofa bullet point format, will be made in pursuit of clarity and usability.
We strive to further strengthen compliance and corporate ethics byannually obtaining confirmation from all executives and employeesthat they understand and comply with the Code of Ethics.
Global Policies on Anti-Bribery and Competition Laws
In fiscal 2021, we will establish common global policies on antibribery and competition laws. Under our anti-bribery policy, we

will review our standards concerning gifts, entertainment anddonations, and we will thoroughly enforce a process requiring preapproval if undertaking conduct outside these standards. As forour policy on competition laws, we will compile different types ofviolations in an easy-to-understand format, based on applicablelaws and regulations in the countries and regions in which we
operate.
Compliance Training
We conduct online and face-to-face training adapted to different
levels for all employees.1 In fiscal 2021, we will deploy a more comprehensive and systematic training program and advance multilingual support to reinforce efforts to foster compliance awarenessand behavior-oriented awareness-building activities in the Tokyo
Electron Group.
1 T raining and seminar topics include basics of corporate ethics and compliance, anticorruption,
export compliance, insider trading prevention, the Act for Subcontracting and the prevention ofharassment. Some training is limited to certain employees.

Internal Reporting System
As a means for employees to provide information and seek redress
outside the chain of command about behavior that is, or may be, inviolation of laws, regulations or corporate ethics, we have established internal reporting mechanisms that ensure confidentiality,
anonymity and the prohibition of retribution. Apart from an internal point of contact that can also be accessed by suppliers, ourreporting mechanisms include an external point of contact at alaw firm that can be contacted directly. In March 2020, we
enhanced the internal reporting system, and renamed Tokyo
Electron Group Ethics & Compliance Hotline—a global common
point of contact that uses a third-party system—thereby ensuring
a greater level of confidentiality and anonymity. This hotline canbe accessed via phone or a dedicated website 24 hours a day, 365
days a year, and accommodates all languages used by employees.
In the event of a report or request for advice, the Tokyo ElectronGroup undertakes an investigation in accordance with internal
regulations. If, as a result, a compliance violation is found, a disciplinary action is imposed in accordance with the Rules of
Employment.2 Preventive measures and corrective measures, suchas improvements to the workplace environment, are also implemented as necessary.
In fiscal 2020, a total of 64 cases were received via internalreporting mechanisms (excluding overseas subsidiaries), primarily
concerning harassment, attendance management and work environment. Among these, there were no reports or cases of noncompliance with laws, regulations, or the Code of Ethics that could
have had a material impact on the Tokyo Electron Group’s businessor local communities.
2 A leniency system has been introduced whereby any disciplinary action may be reduced or
exempted in the event the employee involved in a compliance violation has made a report orsought advice on his/her own volition.

Basic StanceTokyo Electron endeavors to provide opportunities for constructive dialog with as many investors around the world as possible tocontribute to the Company’s sustainable growth and increase corporate value over the medium and long term. Furthermore, to theextent that this is reasonable and possible, the Company placesemphasis on having the Chairman of the Board and CEO communicate with investors through direct dialog.
IR Activities
Striving to maintain dialog with investors, Tokyo Electron maintains a dedicated Investor Relations Department under the directcontrol of the CEO. The Chairman of the Board and CEO serve as
spokespersons for the Company at such events as earnings
release conferences for securities analysts and institutional investors, IR conferences in and outside Japan, and individual meetings.
The spokespersons for the IR Department hold individual meetings with investors and periodically relay the opinions of investors
at these events to the Chairman of the Board and CEO so that
feedback can be of use in management.

 For more details on our corporate governance, please refer to the Tokyo Electron
Corporate Governance Guidelines.
www.tel.com/about/cg/

Third-Party Recognition
Tokyo Electron has been selected for inclusion in world-leading environmental, social and governance (ESG) investment indices, including DJSI1 Asia Pacific 2019, FTSE4Good Index,2 FTSE Blossom Japan Index,3 MSCI World ESG Leaders
Indexes,4 MSCI Japan ESG Select Leaders Index,5 and MSCI Japan Empowering Women Index (WIN).6
Furthermore, for a second consecutive year, Tokyo Electron was recognized as a White 500 company under the2020 Certified Health & Productivity Management Outstanding Organization Recognition Program7 administeredjointly by the Ministry of Economy, Trade and Industry and the Nippon Kenko Kaigi. This year, the recognition was given
not only to Tokyo Electron, but shared with all its domestic Group companies.
8

1 DJSI (Dow Jones Sustainability Indices): ESG investment indices operated by U.S.-based S&P Dow Jones Indices LLC. The DSJI Asia Pacific covers companies in that region.
2 FTSE4Good Index: An index related to environmental performance and corporate social responsibility developed by the UK-based FTSE Russell
3 FTSE Blossom Japan Index: An index that reflects the performance of Japanese companies that have demonstrated strong ESG practices
4 	MSCI World ESG Leaders Indexes: Companies that have high ESG performance are selected from the MSCI Global Sustainability Index, an ESG investment index developed by Morgan Stanley CapitalInternational (MSCI)
5 	MSCI Japan ESG Select Leaders Index: An index featuring companies with high ESG performance selected from its parent index (MSCI Japan IMI Top 700 Index: Top 700 securities based on free
float-adjusted market capitalization). The index targets 50% of the free float-adjusted market capitalization within each GICS® sector of the parent index.
6 	MSCI Japan Empowering Women Index (WIN): An index developed by MSCI featuring companies with excellent gender diversity selected from its parent index (MSCI Japan IMI Top 700 Index).
7 	White 500: A system for recognizing companies implementing especially outstanding health and productivity management based on initiatives to address local health issues or the health promotion initiatives of Nippon Kenko Kaigi. Based on the results of the Survey on Health and Productivity Management, the top 500 companies in the large enterprise category are designated as theWhite 500.
8 	Please check the link for the logo’s disclaimer. www.tel.com/csr/review/

For details on Tokyo Electron’s ESG-related initiatives, please refer to our Sustainability Report 2020.