TOKYO ELECTRON LIMITEDANNUAL REPORT 06

CORPORATE GOVERNANCE

Fundamental Policy Concerning Corporate
Governance
Reflecting the ongoing globalization of management practices, ourfundamental policy is to strictly observe standards for corporate
ethics and comply with laws and regulations. We are also dedicatedto establishing and reinforcing internal control and risk management systems, and to maintaining the transparency and objectivityof our business activities. The primary objective of this policy is toconduct management that prioritizes the creation of corporate
value for the benefit of shareholders and all other stakeholders.

Measures Concerning Corporate Governance
Framework
Tokyo Electron regards the strengthening of corporate governance as vital to increasing its corporate value and shareholder
satisfaction. For this purpose, we concentrate on three aspects ofcorporate governance: 1) ensuring the transparency and soundnessof business operations; 2) facilitating quick decision-making andthe efficient execution of business operations; and 3) building aneffective system for the timely and suitable disclosure of information.
The Corporate Governance Framework
Tokyo Electron has 11 directors, including two external directors.
We have adopted the statutory auditor system, as we believe thatstatutory auditors are an effective means of conducting management that reflects the interests of shareholders. Accordingly, wehave four statutory auditors, two of whom are from outside thecompany. In addition, we have separated the roles of the directors and the executive officers who oversee business operations.
Additionally, we have established two committees on the board ofdirectors. A Compensation Committee determines the remuneration paid to the Chairman & CEO and to the President & COO.
The Nomination Committee selects candidates for directorships
for submission to the annual shareholders’ meeting, and a candidate to be elected as president by the board of directors. Throughthese measures we constantly work to improve corporate governance. The Compensation Committee and the Nomination Committee both have three members each, excluding the Chairman &CEO and the President & COO.
Tokyo Electron discloses the remuneration paid to each of therepresentative directors, since the Company regards the transparency of management to its shareholders as essential from thestandpoint of an emphasis on shareholders. The annual meetingof the shareholders held in June 2002 reduced the term of officeof Tokyo Electron directors from two years to one, in order tospeed up responsiveness to the changing operating environment
and to establish a framework for clearly defining directors’ responsibilities. In April 2003, we adopted the executive officer system tofurther clarify the roles of the board of directors and executives incharge of business operations. This system facilitates the quick
establishment and execution of business strategies.
Internal Controls and Risk Management
All activities at Tokyo Electron are based on adherence to thehighest standards of corporate ethics and compliance with laws,
regulations and international rules. To oversee and ensure this, adirector has been appointed Chief Business Ethics Director. Ethicalstandards have been established and measures are taken to seethat these standards are strictly observed. Reflecting the fact that
we now place even greater importance on internal control and risk
management systems, we have upgraded the internal audit functionsof the Global Audit Center. We have also added crisis management
functions to the General Affairs Department, including measuresinvolving business risk and operational risk. This department isresponsible for establishing the necessary internal regulations for
managing each category of risk, as well as for activities for training
and raising employees’ awareness of risk management.
The Global Audit Center, an organization that reports directly to
the President, is responsible for conducting audits of the Group’s
domestic and overseas bases. The Group’s internal control
system works to ensure that the Group’s management and otherpolicies are shared, communicates information, evaluates risks
and the effectiveness of business activities based on risk evaluation, and, if necessary, provides guidance to operating divisions.
The Global Audit Center also reports the results of its audits tomanagement on a monthly basis, and holds meetings to promoteexchanges of information with the statutory auditors and to reportits findings.
Statutory auditors, most of whom are full time auditors, attend
meetings of the board of directors, Management Committee, andDiagram of the Corporate Governance,
Internal Control System and Risk Management System
Annual Shareholders’ Meeting
Board of Nomination Committee
Directors Compensation Committee
Chief Business Ethics Director

Statutory Auditors Independent Auditors

Confirm the progress of improvements and give instructions

ChairmanPresident

Audit and improvement reports

Request for improvement
ReportAudit

Executive Officers
ReportRequest forimprovement

Risk Management
Function
Monitoring

Monitoring
Check and balance

Business Depts.

18Internal Audit Dept.
(Global Audit Center)
Audit

AdministrativeDepts.

Audit
Audit

TOKYO ELECTRON LIMITED

all other important meetings, and conduct operations audits,accounting audits and risk evaluation, in addition to auditing theperformance of duties by directors.
Tokyo Electron has engaged KPMG AZSA & Co. as its independent auditor. The Company provides this independent auditor
with all required information and data to ensure that it canconduct its audits with speed and precision. The names of thecertified public accountants and the number of years they havecontinuously audited the Company’s financial statements are as
follows: Tsutomu Takahashi (one year) and Kentaro Onishi (twoyears). Five certified public accountants, six junior CPAs and one
other person assisted the above auditors during their audit.
Responsibilities of External Directors andExternal Statutory Auditors
External director Hiroshi Inoue is the President of Tokyo Broadcasting System, Inc. He was elected as an external director with
the intent of obtaining his objective opinion on decisions of theboard of directors, in light of his experience and insight as acorporate manager.
External director Yasuhiro Tsunemi was involved in researchstudies of society, technology and the economy as chief
researcher of a private-sector think tank. With his wide-ranging
insight, he was elected as an external director to objectively
secure the effectiveness of the decisions of the board of directors.
External statutory auditor Togo Tajika has extensive experiencein overseas operations, having worked overseas for anothercorporation. He was elected as an external statutory auditor tobring an objective eye to the effectiveness of audits.
External statutory auditor Hiroshi Maeda is an attorney in the
Nishimura & Partners law firm. He was also elected as anexternal statutory auditor to bring an objective eye to the effectiveness of audits.

Remuneration for Directors, Executive Officers andStatutory Auditors
The Company and its subsidiaries (excluding listed companies)
have introduced incentive systems, such as business resultsbased remuneration, and stock options linked to share prices.
Effective from fiscal 2006, the Company revised its executive
remuneration system to link remuneration more closely to consolidated net income and shareholder value and also improve
management transparency and its competitive strength.
Under the new system, retirement allowances for directors,
statutory auditors and executive officers, part of their fixed remuneration, were abolished at the end of fiscal 2005. In addition, executive
remuneration will be more closely linked to consolidated results andstock prices by clearly tying the portion of remuneration that is linked
to business performance to consolidated net income. The new19

ANNUAL REPORT 06

system consists of fixed monthly remuneration, annual cash bonuses
linked to business performance, and stock options.
Part of the remuneration for directors and executive officers of
the Company and its subsidiaries is linked to operating results,
with an upper limit of 3% of consolidated net income. The remuneration is split between annual cash bonuses and stock optionbased remuneration at a ratio of almost two to one. We believethat this system incentivizes officers to improve the Company’sperformance and share price because they share with shareholders the risk of a decrease as well as the benefits of higher earnings and a higher share price.
The Company discloses remuneration paid to each of therepresentative directors and the aggregate remuneration paid to
directors and statutory auditors in its business report. Moreover,
the aggregate remuneration paid to internal and external directors
and internal and external statutory auditors, respectively, isdisclosed in the securities report.
Remuneration for directors and statutory auditors
Amount paid to internal directors
Amount paid to external directors
Amount paid to internal statutory auditors
Amount paid to external statutory auditors¥360 million¥10 million¥51 million¥26 million

Note: The above amounts do not include annual bonuses and retirement allowances
paid to directors.

Remuneration for auditing
Amount paid for audit¥49 million

Note: The above amount is paid in accordance with an audit contract between the Company and KPMG AZSA & Co.

Shareholder Measures
Tokyo Electron mails a “Notice of Annual General Meeting ofShareholders” to shareholders more than three weeks in advanceof the meeting, as one of its measures to vitalize these meetings
and to promote smooth and efficient voting. It also sets the dateof the Company’s meeting to avoid days on which many suchmeetings are concentrated. Shareholders are also free to casttheir votes via the Internet. Tokyo Electron also participates in theweb-based voting platform for institutional investors operated byInvestor Communications Japan Inc. (ICJ). To supplement theabove shareholder meeting-related initiatives, Tokyo Electron’s
web site carries notices, resolutions and presentation materials ofshareholders’ meetings. An English version of the “Notice ofAnnual General Meeting of Shareholders” is also provided.
Tokyo Electron holds quarterly results presentation meetings foranalysts and institutional investors as a part of its IR program.
The presentation materials used in these meetings can be viewed
on the Company’s web site. The Company backs up these
activities by holding IR road shows three or four times a year.
These road shows, led by the director responsible for IR, areprovided for the convenience of overseas investors.