TOKYO ELECTRON ANNUAL REPORT 2018

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

Innovation Drives the Evolutionof Semiconductors

Corporate Governance

Message from the Chairman of the Board

Pursuing Effective Governance toIncrease Shareholder Value
Since the publication of Japan’s Corporate Governance Code and the Ito Review, interest has been steadily rising insuch topics as board composition and management effectiveness. Corporate governance is the foundation forrealizing Tokyo Electron’s goal of increasing corporate value over the short, medium and long terms. Since Tokyo
Electron’s initial listing on the Tokyo Stock Exchange in 1980, informed by Japanese and global standards, we haveconstantly pursued excellence in corporate governance.
Tokyo Electron uses the Audit & Supervisory Board System. This enables both quick decision making leveraging theinsight of our executive directors and effective oversight provided by our non-executive directors, outside directors
and the Audit & Supervisory Board. In this way, we achieve a healthy balance of aggressive management and careful
supervision in corporate governance.
New initiatives in fiscal 2018, the year ended March 31, 2018, included setting up a meeting to discuss Tokyo
Electron’s medium- to long-term growth strategies to complement the regular meetings of the Board of Directors.
At this meeting, internal and external directors and Audit & Supervisory Board members engaged in vigorous
discussion. Furthermore, we welcomed a new outside director in June 2018, bringing the total number of outside
directors and Audit & Supervisory Board members to six and further increasing the diversity of the Board of Directors.
The new outside director, Mr. Michio Sasaki, brings insight and management experience at Keyence, a corporation
well known for being highly profitable, and I am sure he will contribute greatly at Tokyo Electron. Through such efforts
to deepen and bring additional perspectives to the discussions held at Board of Directors meetings, we hope tocontinue to enhance the Board’s effectiveness. In addition, to solidify the Company’s foundation for growth, we havestrengthened our efforts to develop future leaders. Our Human Resource Department and the Nomination Committee
jointly formulate succession plans for the CEO and ranking executive officers, while the Board of Directors oversees theimplementation and examination of such plans.
To grow sustainably in the semiconductor and electronics industries, it is essential to rapidly develop innovativetechnologies and high-value-added products and to offer these to customers alongside high-quality service. The
production equipment market is approaching a new growth phase, reflecting the increased use of IoT technologies
and big data. As the chairman of the Board of Directors, I will continue working to build an effective corporate
governance system and ensure the Board operates effectively in order to further enhance shareholder value.

Tetsuo Tsuneishi
Chairman of the Board

Corporate Governance

Financial Section
Investor Information

Directors, Audit & Supervisory Board Members and Executive Officers

TOKYO ELECTRON ANNUAL REPORT 2018

PAGE

12

CONTENTS

To Our Stakeholders

Business Overview
and Financial Highlights

Review of Operations
and Business Outlook

Interview with the CEO

Innovation Drives the Evolutionof Semiconductors

Message from the Chairman of the Board

Corporate GovernanceCorporate Governance

Financial Section
Investor Information

Directors, Audit & Supervisory Board Members and Executive Officers

Corporate Governance
Basic StanceIn an environment where over 80% of our sales come fromoverseas, Tokyo Electron regards 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 thatwill enable it to attain world-class profitability.
Tokyo Electron uses the Audit & Supervisory Board
System, which consists of a Board of Directors and an Audit& Supervisory Board. Effective governance is achieved
based on the supervision of management by the Audit &Supervisory Board.

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

The Board of Directors seeks the active participation of
those present in discussions in order to obtain a wide range
of opinions, and supervises management and operational
execution based on active debate.
The Board of Directors respects minority or opposing
viewpoints, including opinions voiced by outside directors;
revises the conditions for implementation or the content ofproposals as necessary; and engages in extensive debatewith the goal of reaching decisions based on consensus.
However, emphasis is placed on making necessary decisions
quickly to avoid missing opportunities.
Board Size and Independent Outside Directors
Tokyo Electron considers it essential to maintain a Board of
Directors with the appropriate size to ensure high quality,
active debate and the diversity expected of both executive
directors and independent directors. The current Board of
Directors consists of 12 directors, and Tokyo Electron believes
this to be the appropriate size, at present, to achieve a goodbalance in terms of knowledge, experience and skills.
Tokyo Electron regards the active expression of opinions,
not only by independent directors, but also by Audit &Supervisory Board members, as the cornerstone that supports
the sound decision making of the Board of Directors. Currently,
six out of the 17 participants in the Board of Directors meetings, including the Audit & Supervisory Board members, areoutside members, consisting of three independent directors
and three outside Audit & Supervisory Board members.

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

(As of July 1, 2018)

Compensation Committee

Yes

Composed of directors, including outside directors
and excluding representative directors, or
Audit & Supervisory Board members

Nomination Committee

Yes

Composed of directors, excluding the CEO, or
Audit & Supervisory Board members

Outside directors

Yes

Three of the 12 directors are outside directors

Outside Audit & Supervisory Board members

Yes

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

Executive officer system

Yes

Disclosure of individual remuneration of representative directors

Yes

Annual performance-linked compensation system

Yes

Medium-term performance-linked compensation scheme

Yes

Adopted in 2018

Stock options system

Yes

Does not apply to outside directors andAudit & Supervisory Board members

Retirement allowance system for executives

NoAnti-takeover measures

No

Disclosed since 1999

Tokyo Electron believes that the current Board of Directors
meetings achieve an appropriate sense of productive tension
and constructive debate due to the combined presence ofexecutive directors, essential for making operational decisions, and outside members, who provide objectivity.
Nominations for Director and CEO
Tokyo Electron has established a Nomination Committee toensure fairness and efficacy in management. The Nomination
Committee proposes director candidates to the Board of
Directors prior to their election at the General Meeting of
Shareholders and also nominates CEO candidates forappointment by the Board of Directors. The Nomination
Committee is composed of four directors and Audit &Supervisory Board members, including at least one outside
Audit & Supervisory Board member; the CEO is not a member of the committee. The authority to propose the election
or dismissal of the CEO or directors is entrusted to theNomination Committee.
Director and CEO Compensation
Tokyo Electron’s compensation policy prioritizes the following considerations.
(1) Globally competitive composition and levels ofcompensation(2) Correspondence with short-term performance, sustainable growth and medium- and long-term increases
in corporate value(3) Assuring management transparency and fairness aswell as the appropriateness of compensation
In line with this policy, Tokyo Electron has adopted a director and executive officer compensation system that is closely
linked to performance and shareholder value. The compensation of directors currently comprises a fixed basic wage
and an annual performance-linked bonus. However, to realize
further growth by better linking director compensation to
medium-term corporate performance, Tokyo Electron has
introduced a new, medium-term performance-linked compensation scheme from the year ending March 31, 2019.
To ensure management transparency and fairness as wellas the appropriateness of compensation, Tokyo Electron
maintains a Compensation Committee, which comprises
three or more directors and includes at least one outside
director. The Compensation Committee conducts an analysis
of industry compensation levels and systems in and outside

Japan. Based on this analysis, the committee proposes a
policy and system for the compensation of the Board of
Directors and executive officers as well as individual compensation amounts for the representative directors.
In order to better link factors that increase corporate
value and shareholder value to compensation, Tokyo
Electron has designated the net income attributable toowners of the parent and return on equity (ROE) for thecurrent period as the main calculation benchmarks in theannual performance-linked compensation system for the
CEO and other directors. These are adjusted, as necessary,for extraordinary income/losses and other special factors.
In principle, annual performance-linked compensationconsists of monetary compensation and share-based compensation (stock options); the ratio of these two components is roughly 1:1 for directors, and single year performanceis appropriately reflected in the performance-linked compensation of the CEO and other directors. Share-based
compensation is awarded in the form of stock options withthe exercise price set at one yen per share, and a three-year
vesting period from the date of allotment before theoptions may be exercised.
The medium-term performance-linked compensation
comprises share-based compensation (performance shares)
and is aimed at using shareholdings to align the perspectivesof directors with those of shareholders and incentivize
directors to increase corporate value. Medium-term
performance-linked compensation is based on reference
amounts calculated based on each director’s position andduties. Compensation payouts vary from 0% to 150% of saidreference amounts according to the attainment level of
performance targets over the relevant three-year term. The
operating margin, ROE and other performance indicators
are used to appropriately link medium-term enhancementof corporate value with director compensation amounts.
Evaluation of the Effectiveness of the Board of Directors
Each year, based on a question-based evaluation survey filled
out by the Board of Directors and Audit & Supervisory Board
members, the Board of the Directors analyzes and evaluates
its own effectiveness through discussions, mainly involving
the outside directors and outside Audit & Supervisory Board
members, as well as separate discussions involving the entire
Board of Directors. The board then discloses a summary of
the results.

TOKYO ELECTRON ANNUAL REPORT 2018

PAGE

13

CONTENTS

Business Overview
and Financial Highlights

To Our Stakeholders

Review of Operations
and Business Outlook

Interview with the CEO

Innovation Drives the Evolutionof Semiconductors

Message from the Chairman of the Board

Corporate GovernanceCorporate Governance

Financial Section
Investor Information

Directors, Audit & Supervisory Board Members and Executive Officers

Corporate Governance
At meetings of the Board of Directors, directors and Audit& Supervisory Board members actively engage in discussion
based on their diverse viewpoints and experiences. Important
items are examined in terms of risk, openly debated andconsidered carefully. In fiscal 2018, to complement Board of
Directors meetings, Tokyo Electron held an off-site meeting
focused on operational strategy and vision. Turning to theBoard’s internal committees, the Nomination Committee
reported on initiatives based on succession plans, and theCompensation Committee made proposals to better linkcompensation with medium-term performance. Tokyo
Electron thus believes that its Board of Directors is appropriately carrying out its role as defined in the Corporate
Governance Guidelines, namely (1) Establishing management
strategy and vision and (2) Making major operational decisions based on strategic direction. Accordingly, Tokyo
Electron believes that the Board of Directors, including theNomination Committee and Compensation Committee, isfunctioning effectively.
Going forward, to deepen its discussions of Tokyo Electron’s
medium- and long-term vision and growth strategy, in
addition to items for resolution and reports, the Board of
Directors will continue working to enrich the items broughtup for discussion at its meetings. Furthermore, by providing
ample opportunities for discussion and debate in which
outside directors and outside Audit & Supervisory Board

members are the main participants, Tokyo Electron will
strive to ensure appropriate, meaningful decision making
based on highly diverse views. In addition, the Board of
Directors will continue to consider its composition, including
the ratio of outside members and diversity, such as that ofgender and nationality.

Audit & Supervisory Board
The Audit & Supervisory Board currently consists of fivemembers and includes three outside Audit & Supervisory
Board 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 andthe 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 requiredfor operational audits and accounting audits, including
financial and accounting knowledge, legal knowledge, andaudit experience at other companies. Tokyo Electron thus
believes its Audit & Supervisory Board members are able toperform their auditing functions effectively.

Corporate Governance Framework, Internal Control System and Risk Management System(As of July 1, 2018)

Shareholders’ Meeting
Appointment or Dismissal

Appointment or Dismissal

Board of Directors
Nomination Committee
Compensation Committee

Chief Business Ethics Director
Chief Internal Control Director
Chief CSR Director

Business Execution

Audit

Audit & Supervisory Board
Audit

Cooperate

CSS & Executive Oﬃcers

Audit

Internal Audit Dept.
(Global Audit Center)• Ethics Committee• Information Security Committee• Export Trade Control Committee• CSR Management Council
Audit

Risk Management Function (General Affairs Dept.)
Compliance Function (Legal Dept.)
Monitoring

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

Basic StanceIn order to enhance the Tokyo Electron Group’s corporate
value and remain accountable for our actions to our stakeholders, we are making efforts to strengthen effective internal control. This involves implementing practical measuresthat are in line with the Fundamental Policies concerning
Internal Controls within the Tokyo Electron Group, set out
by Tokyo Electron’s Board of Directors. We also annually
evaluate our internal control over financial reporting basedon the Financial Instruments and Exchange Act of Japan.
Risk Management System
To more effectively strengthen the internal control and risk
management systems of the entire Group, Tokyo Electron
has established a dedicated risk management unit within the
General Affairs Department of the corporate headquarters.
This unit analyzes the risks faced by the Group and identifies
material risks. It then monitors the management of suchrisks while supporting and implementing risk management
activities. The unit also regularly reports the status of risk
management activities to the Audit & Supervisory Board
members and the Board of Directors.
In fiscal 2018, the Group reassessed the material risks in
its operating environment. For each risk determined to bematerial, the status of risk management at the responsible
divisions was reconfirmed. Going forward, the Group willcontinue these initiatives to enhance the efficacy of its risk
management framework.

Independent Auditors

Cooperate

Representative Directors

Internal Control & Compliance Executive Oﬃcer

Appointment
or Dismissal

Internal Control System and Risk Management

Auditing by the Internal Audit Department
The Global Audit Center of the corporate headquarters is
the Group’s internal audit department. This Center is
responsible for auditing business activities, compliance andsystems at domestic and overseas Group companies andbusiness units (BUs) in accordance with each fiscal year’s
auditing plan. In addition, the Group’s internal control overfinancial reporting based on the Financial Instruments andExchange Act of Japan was evaluated as effective by the
independent auditors in fiscal 2018.
At operating divisions where issues have been identified
through audits and assessments, the Global Audit Center
monitors progress and provides necessary guidance for
improvement.

Business Continuity Plans (BCPs)
The Tokyo Electron Group began building business continuity
plans in 2003. After the Great East Japan Earthquake, theGroup completely reworked these plans to be more effective
and include provisions for restoring operations after crises,
focusing on major business sites. As examples of specificinitiatives, the Group has put considerable effort into suchpreparations for disasters as stockpiling emergency supplies(including food and drinking water), reinforcing essential
infrastructure, rebuilding the safety confirmation system,
creating manuals, and implementing drills and employee
training. Furthermore, to meet its responsibilities as an
equipment manufacturer, the Group pursues ongoing
efforts to improve its BCPs, including taking steps to facilitate
early recovery and alternate production.
When the Kumamoto Earthquake struck in April 2016, theGroup was able to respond with speed and precision basedon the BCP it had prepared. In addition, since fiscal 2018, theGroup has been advancing seismic reinforcement construction at its major business sites.
Information Security Management
To ensure the appropriate management of information
assets, the Group has an information management framework centered on its Information Security Committee,
which is composed of representatives from departments
across the Group.
Rules concerning the handling and protection of suchsensitive information as trade secrets and personal information are formulated based on the Information Security
Committee’s policy and applied throughout the Group. An
e-learning system is used to educate and promote awareness of these rules among Group employees and executives.
Additionally, the Group has a reporting system for bothactual and potential cases (jointly referred to as “incidents”)
of information leakage. Reported incidents are quickly settled
and then analyzed. Based on such analyses, recurrence prevention measures are implemented throughout the Group.
In order to mitigate emerging cyber security threats, theGroup examines and undertakes rational countermeasures
as necessary. The Group also has in place systems to detecttargeted threats that utilize social engineering as well as asupervisory framework to prevent damage.

TOKYO ELECTRON ANNUAL REPORT 2018

PAGE

14

CONTENTS

To Our Stakeholders

Business Overview
and Financial Highlights

Interview with the CEO

Review of Operations
and Business Outlook

Innovation Drives the Evolutionof Semiconductors

Message from the Chairman of the Board

Corporate GovernanceCorporate Governance

Financial Section
Investor Information

Directors, Audit & Supervisory Board Members and Executive Officers

Corporate GovernanceBusiness Ethics and Compliance
Basic Stance
Stakeholder trust is the cornerstone of business activities. In
order to maintain trust, it is necessary to continuously act inrigorous conformity to business ethics and compliance. Inline with the Fundamental Policies concerning Internal
Controls within the Tokyo Electron Group, all Group executives and employees are required to maintain high standardsof ethics and to act with a clear awareness of compliance.
Business Ethics
In 1998, Tokyo Electron formulated the Code of Ethics of theTokyo Electron Group as a set of uniform standards to govern
all of its global business activities. In the same year, theCompany appointed a Chief Business Ethics Director andestablished the Ethics Committee, which is responsible forpromoting business ethics awareness throughout the Tokyo
Electron Group. The Ethics Committee comprises the Chief
Business Ethics Director, the Ethics Committee Chairman,
and presidents of major Group companies in and outside
Japan. The members meet semiannually, report on ethicsrelated issues facing each company, and discuss measures
to further improve ethical behavior and compliance.
The Code of Ethics is reviewed in response to changes in the
expectations of society. In January 2015, an anti-corruption
statement was added to its introduction based on Principle
10 of the United Nations Global Compact, which concerns
working against corruption including extortion and bribery.
In August 2016, the Group revised the Code of Ethics in lightof social changes and the Code of Conduct of the RBA®1.
The Tokyo Electron Group’s Code of Ethics and related
explanations and Q&A sections are published in Japanese,
English, Korean and Chinese and disclosed on the intranet
to enable all Group executives and employees, including
those overseas, to view them at any time. The Code of
Ethics is also publicly accessible from the corporate website.
1 RBA is a registered trademark of the Responsible Business Alliance.

 The Code of Ethics of the Tokyo Electron Group
www.tel.com/about/compliance

Compliance System
Tokyo Electron has appointed an Internal Control &Compliance Executive Officer from among its executive
officers to raise awareness of compliance across the Groupand further improve Group-wide compliance. Each Group
company has also drawn up its own compliance regulations,setting out basic compliance-related requirements in linewith the Code of Ethics. The compliance regulations areintended to ensure that all individuals who take part in thebusiness activities of the Tokyo Electron Group clearly
understand the pertinent laws and regulations, international
standards and internal company rules, and consistently
apply these rules in all of their activities.

from business partners. In all instances, the system ensuresthat whistleblowers remain anonymous and are protectedfrom any disadvantage or repercussions.
There were no reports or cases of non-compliance withlaws, regulations, or principles of ethics in fiscal 2018 that
could have had a material impact on the Group’s businessor local communities.

Compliance Education
Through the Group’s e-learning system, we provide webbased training programs covering the basics of compliance,
export-related compliance, protection of personal information, the Act for Subcontracting and other topics. All executives and employees are required to complete these
programs. In addition, other web-based programs tailoredto specific positions and job roles are also available, including
those on insider trading and the Social Security and Tax
Number System.

Basic StanceTokyo Electron endeavors to provide opportunities for constructive dialog with growing numbers of investors aroundthe world to contribute to the Company’s sustainablegrowth and increase corporate value over the medium andlong term. Furthermore, to the extent that this is reasonable
and possible, the Company places emphasis on having the
Chairman of the Board and CEO communicate with investors through direct dialog.

We also have an online quiz-based business ethics andcompliance education course, launched in fiscal 2014, for all
Group executives and employees. Updated yearly, the quiz is
intended to maintain compliance awareness throughout theGroup and disseminate the latest information.
Furthermore, in fiscal 2018, we implemented a test to
check employee understanding of compliance, including
anti-corruption and anti-bribery issues, in response toincreased enforcement of anti-corruption law around theworld. To deepen understanding of these topics, we held inperson training for department vice presidents and similarlevel managers that focused on preventing corruption andbribes to foreign government officials as well as in-person
training for Corporate Directors and executive officers that
focused on the management of overseas subsidiaries.

IR Activities
Striving to maintain dialog with investors, Tokyo Electron
maintains a dedicated Investor Relations Department under
the direct control of the CEO. The Chairman of the Board
and CEO serve as spokespersons for the Company at such
events as earnings release conferences and medium-term
management plan briefings for securities analysts and institutional investors, IR conferences in and outside Japan, andindividual meetings.

Internal Reporting System
The Tokyo Electron Group has an internal reporting systemthat employees can use to report any activity suspected ofbeing in breach of laws, regulations or business ethics. An
ethics hotline and a compliance hotline have been established to receive reports from all Group companies, andeach overseas location also has its own reporting system. In
fiscal 2018, to further facilitate reporting, the Group set up an
external reporting hotline as well as hotlines for reporting

Promoting Dialog with Investors

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.
Shareholders’ Meeting
Tokyo Electron schedules its shareholders’ meeting to avoid
days on which many such meetings are concentrated aspart of its measures to vitalize these meetings and to promote smooth and efficient voting. The Company also mailsa Notice of Annual General Meeting of Shareholders toshareholders more than three weeks in advance of themeeting and discloses notices on its website before they
are mailed, striving to provide shareholders with information as early as possible. Shareholders are free to cast theirvotes 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.
 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.
In fiscal 2018, Tokyo Electron was once again selected for inclusion in the DJSI1 Asia Pacific 2017, the FTSE4Good2 Global
Index and MSCI World ESG Leaders Index. The Company was also selected for the FTSE Blossom Japan Index and MSCIJapan ESG Select Leaders Index, two ESG indices selected by Japan’s Government Pension Investment Fund (GPIF).
1 DJSI (Dow Jones Sustainability Indices): ESG investment indices developed by U.S.-based S&P Dow Jones Indices LLC and Switzerland-based RobecoSAM AG. The Asia Pacific index covers
companies in that region.
2 FTSE4Good: An index related to environmental performance and corporate social responsibility developed by the U.K.-based FTSE GroupFor details on Tokyo Electron’s ESG-related initiatives, please refer to our Sustainability Report 2018.