TOKYO ELECTRON ANNUAL REPORT 2019

PAGE

8

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

Message from the Chairman of the Board

Steadily Enhancing
Board Effectiveness
Four years have passed since the introduction of Japan’s Corporate Governance Code, and governance reforms are
beginning to extend beyond form and into substance. Tokyo Electron has strengthened its corporate governance, as
this is the foundation supporting our efforts to attain world-class profitability and increase corporate value over the
short, medium and long terms. Using the Audit & Supervisory Board System, Tokyo Electron achieves an effectivebalance of aggressive management and careful oversight. We seek to continually enhance corporate governance,
adapting to the changing business environment and requirements of society.
In fiscal 2019, the year ended March 31, 2019, to further improve the effectiveness of our corporate governance andenhance our corporate value, we continued the practice inaugurated in fiscal 2018 of holding an off-site meeting as anopportunity for our directors and Audit & Supervisory Board members to discuss important matters other than Boardof Directors meeting agenda items. At this two-day meeting, we exchanged views on Tokyo Electron’s vision of
becoming a truly global company, renewing our shared understanding of the Company’s long-term direction in aneffort to make corporate governance more effective. In addition, the directors and Audit & Supervisory Board members
actively debated measures necessary to achieve the goals of the medium-term management plan as well as initiatives
related to ESG issues and the Sustainable Development Goals that will improve corporate value. We engaged in fruitful
discussion on how the Board of Directors and Audit & Supervisory Board, which oversee the execution of suchmeasures, can function best, including the optimal composition of internal and outside members. The meeting thus
enabled us to set a course to address a range of important issues.
We welcomed a new outside director in June 2019, the first woman to serve on the Board. As a result, six of 16 current
directors and Audit & Supervisory Board members are independent outside members. The new outside director, Ms.
Makiko Eda, brings global insight fostered by experience living overseas as well as many years of experience working inmarketing for a major American semiconductor manufacturer. As Chief Representative Officer at World Economic
Forum Japan, she possesses broad-ranging knowledge of sustainable global economic growth and related challenges. I
am sure that she will put her knowledge of the semiconductor industry, corporate management and economics togreat use at Tokyo Electron. Our other outside directors, Mr. Charles Ditmars Lake , who is an executive at an American
life insurance company, and Mr. Michio Sasaki, who served for many years as president of Keyence, a corporation wellknown for being highly profitable, also provide us with tremendous advice and suggestions based on their deep insight.
The diverse values and perspectives of all of our directors and Audit & Supervisory Board members contribute to highly
productive discussion, further enhancing the effectiveness of the Board of Directors.
As we enter a new era of IoT, AI and big data, the semiconductor and FPD markets continue to expand. As chairman, I
am working to ensure the Board of Directors can take decisive action and sustainably enhance corporate value in a
dynamic business environment.

Tetsuo Tsuneishi
Representative Director
Chairman of the Board

TOKYO ELECTRON ANNUAL REPORT 2019

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
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; a robust balance of knowledge, experienceand skills among both executive directors and independent
directors; and diversity, including gender and nationality.
The current Board of Directors consists of 11 directors,
including one woman and one foreign national, and Tokyo
Electron believes this to be the appropriate size, at present,to achieve a good balance 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 16 participants in the Board ofDoes Tokyo Electron have these major components of corporate governance?

(As of July 1, 2019)

Compensation Committee

Yes

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

Nomination Committee

Yes

Composed of directors or Audit & Supervisory
Board members, excluding the CEO and including atleast one outside director or Audit & Supervisory Board member

Outside directors

Yes

Three of the 11 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

Directors meetings, including the Audit & Supervisory Board
members, are outside members, consisting of three independent directors and three outside Audit & Supervisory
Board members. Tokyo Electron believes that the current
Board of Directors meetings achieve an appropriate senseof productive tension and constructive debate essential formaking operational decisions due to the combined presenceof executive directors, who are highly knowledgeable about
Tokyo Electron’s businesses, and outside members, whoprovide 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 theBoard of Directors prior to their election at the General
Meeting of Shareholders and also nominates CEO candidates for appointment by the Board of Directors. The
Nomination Committee is composed of four directors andAudit & Supervisory Board members, including at least one
outside director or 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 the Nomination Committee.
In addition, to develop the next generation of management and executive human resources, the Nomination
Committee carefully surveys and analyzes the status of thesuccessor 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.
Director and CEO Compensation
Tokyo Electron’s compensation policy prioritizes the following considerations.
(1) Globally competitive compensation levels and systems that can secure excellent management humanresources(2) Strong correspondence with short-term performanceand medium- and long-term increases in corporate
value aimed at sustainable growth(3) Assuring transparency and fairness in the process ofdetermining compensation as well as the appropriateness of compensation
In line with this policy, Tokyo Electron has adopted a
director and executive officer compensation system that isclosely linked to performance and shareholder value. The

compensation of directors currently comprises a fixed basic
wage, annual performance-linked compensation and medium-term performance-linked compensation. Outside directors receive only a fixed basic wage and an annual
performance-linked cash bonus.
To ensure management transparency and fairness as wellas the appropriateness of compensation, Tokyo Electron
maintains a Compensation Committee, which comprises
three or more directors (excluding the representative directors) or Audit & Supervisory Board members and includes atleast one outside director. The Compensation Committee
utilizes advice from external experts and conducts an analysis of compensation at high-tech companies 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 that will be globally competitive and optimally suited to the Company as well as individual compensation amounts for the representative directors.
In principle, annual performance-linked compensationconsists of monetary compensation and stock option
share-based compensation; the ratio of these two components is roughly 1:1 for directors. Stock options are awarded
with the exercise price set at one yen per share, and athree-year vesting period from the date of allotment before
the options may be exercised.
In order to incentivize the CEO and other directors to
improve corporate performance, Tokyo Electron has designated the net income attributable to owners of the parent
and return on equity (ROE) for the current period, which areindicators related to profit, as the main benchmarks for calculating their annual performance-linked compensation.
The medium-term performance-linked compensation
utilizes performance shares (share-based compensation)with the aim of using shareholdings to align the perspectives of directors with those of shareholders and incentivize
directors to increase corporate value. The number of Tokyo
Electron shares issued to directors is calculated based oneach director’s position and duties and varies from 0% to150% according to the attainment of performance targets
over the relevant three-year term.
In the determination of medium-term performancelinked compensation, the operating margin is used as anindicator of profitability and ROE as an indicator of capitalefficiency to assess the attainment of performance targets
and appropriately link such compensation with mediumterm enhancement of corporate value.

TOKYO ELECTRON ANNUAL REPORT 2019

PAGE

10

CONTENTS

Business Overview
and Financial Highlights

To Our Stakeholders

Review of Operations
and Business Outlook

Interview with the CEO

Message from the Chairman of the Board

Corporate GovernanceCorporate Governance

Financial Section
Investor Information

Directors, Audit & Supervisory Board Members and Executive Officers

Corporate GovernanceEvaluation of the Effectiveness of the Board of Directors
To evaluate the Board of Directors, including theNomination Committee and Compensation Committee,
Tokyo Electron conducts a question-based survey of all
directors and Audit & Supervisory Board members as wellas interviews with some of these individuals.
In fiscal 2019, Tokyo Electron hired a third-party institution to provide advice on the drafting of the survey, holdthe interviews, and compile and analyze the results. Using
the compiled data and analysis, the outside directors andoutside Audit & Supervisory Board members held discussions of the Board of Director’s effectiveness. These findings
were then shared with and discussed by the entire Board of
Directors, which evaluated its effectiveness and disclosed asummary of the results.
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 and considered carefully. To complement Board of
Directors meetings, Tokyo Electron held an off-site meeting
focused on operational strategy, vision and governance.
Tokyo Electron thus believes that its Board of Directors isappropriately carrying out its role as defined in the
Corporate Governance Guidelines, namely (1) Establishingmanagement strategy and vision and (2) Making major
operational decisions based on strategic direction.

Accordingly, Tokyo Electron believes that the Board of
Directors, including the Nomination Committee andCompensation Committee, is functioning effectively.
Going forward, the Board of Directors will strive to increase
its diversity, including gender and nationality, and create
more opportunities to discuss Tokyo Electron’s medium- andlong-term vision and growth strategy. The Board will also
examine ways to reinforce Group governance systems,
including those overseas, and the proper division of roles andauthority between the Board of Directors and executive bodies. Furthermore, the Board regards the effective operation of
the successor development plan and provision of value tosociety in areas related to ESG issues and the United Nations’Sustainable Development Goals (SDGs) as important management priorities that it will continue to discuss.

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.

Corporate Governance Framework, Internal Control System and Risk Management System(As of July 1, 2019)

Shareholders’ Meeting
Appointment or Dismissal

Board of Directors
Nomination Committee

Compensation Committee

Appointment
or Dismissal

Appointment or Dismissal

Audit

Audit & Supervisory Board
Audit

Cooperate

Cooperate

Independent Auditors
Cooperate

Business Execution
Representative Directors
Audit

CSS & Executive Officers

Internal Control Executive Officers
Risk Management Executive Officers
Compliance Executive Officers
Committees• Ethics Committee• Information Security Committee• Export Trade Control Committee
Department in Charge• Risk Management (General Affairs Dept.)• Compliance (Compliance Dept.)

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

Internal Audit Dept.
(Global Audit Center)

Audit

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.

Risk Management
Approach to Risk Management
Reflecting changes in society and the business environment,
the risks facing businesses are growing increasingly complex
and diverse. Tokyo Electron considers understanding andappropriately addressing the risks that it may face in its
businesses, as well as their impacts, to be a crucial factor tosustainable corporate growth.
Risk Management System
In order to promote more effective risk management, Tokyo
Electron carries out enterprise risk management through abody established within the General Affairs Department at
its headquarters. This body supervises risk management,
analyzing a wide range of risks arising in business activities(such as compliance risk, human resource and labor risk, andbusiness continuity risks) to identify key risks. It then monitors the management of these risks by the respective
departments responsible and supports their risk management activities. The status of these activities is regularly
reported to the Board of Directors and the Audit &Supervisory Board.
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, theCenter then gives instructions for making improvements asneeded, follows up on progress toward these improvements and provides support. The Group’s internal control
over financial reporting in fiscal 2019 was evaluated as
effective by the independent auditors.
Risk Management Initiatives
Each year, we set priority management targets and strive to
steadily reduce risk. In fiscal 2019, we reinforced measuresin the following areas.

Compliance
We appointed people responsible for compliance at key
overseas bases and established a system whereby theyreport the progress of compliance-related activities to theGroup headquarters each month. In addition, compliancerisk audits are conducted through systematic visits to overseas subsidiaries.
Business Continuity Plans (BCPs)
Tokyo Electron is improving its plans based on lessons frompast disasters and is surveying the earthquake risks at its
overseas locations. We are also working, on an ongoing basis,to establish alternate production structures within our network and to develop multiple sources of important parts.
Mental Health, Long Work Hours, and Harassment
Tokyo Electron carries out mental health-related measures
based on employee stress checks and multiple seminars
aimed at helping managers look after their employees. In
addition, we have introduced a mechanism to monitor
excessive work hours that lead to health risks. Tokyo
Electron also holds harassment prevention seminars led bylawyers. The Ethics Committee Chairman and Human
Resource Department provide messaging about changing
mindsets and behaviors.
Management of Confidential Information
The Human Resources Department and the Intellectual
Property Department cooperate to strengthen measures toprevent leaks of confidential information, particularly targeting employees who leave the Company to ensure theproper return and destruction of confidential information.
We also take thoroughgoing steps to ensure that midcareer hires do not divulge confidential information about
their previous employers. We use a combination of industry-leading security systems, provide security training for
employees, and work to protect our information from thesabotage of our servers or computers as well as data theft,
data manipulation and other forms of cyber attack. The
information security environment, including cyber attack
methods, is changing constantly. To stay ahead of thesechanges, Tokyo Electron is constantly gathering informationand formulating and implementing necessary countermeasures on a global basis.

TOKYO ELECTRON ANNUAL REPORT 2019

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

Corporate GovernanceCorporate Governance

Financial Section
Investor Information

Directors, Audit & Supervisory Board Members and Executive Officers

Corporate GovernanceComplianceApproach to Compliance
Stakeholder trust is essential to business activities. In order tomaintain this trust, it is essential to continuously ensure compliance and enhance corporate ethics. The Fundamental Policies
concerning Internal Controls within the Tokyo Electron Groupand the Code of Ethics of the Tokyo Electron Group (Code of
Ethics) stipulate that all Group executives and employees mustcomply with laws and regulations and act with high ethicalstandards and a strong awareness of compliance.
Compliance Systems and Initiatives
Compliance System
Tokyo Electron has built a structure to implement its compliance program globally. Under the head of the Legal,
Compliance Division, compliance representatives havebeen newly appointed at major overseas bases to create asystem for direct reporting through the chain of commandto the Legal, Compliance Division. The Company has
restructured its compliance system. Specifically, compliancerelated issues are immediately reported by the head of theLegal, Compliance Division to the CEO, Board of Directors,
and the Audit & Supervisory Board so that they can beaddressed quickly and effectively.
Corporate Ethics
Tokyo Electron has established the Code of Ethics as a standard of conduct by which employees and executives should
abide. To ensure awareness of this code, we distribute it in
the form of booklets in Japanese and four other languages
to all employees. Tokyo Electron revises its Code of Ethics asneeded, in response to changes to external and internal
conditions. In addition, an Ethics Committee has been
established to support and supervise the activities of Group
companies in Japan and overseas aimed at more effectively
promoting and raising awareness of compliance and corporate ethics. Furthermore, directors and senior executives
sign an oath to uphold the Code of Ethics and comply withcorruption-related laws every year.

Compliance Regulations
Based on its Code of Ethics, each Group company in Japanand abroad has established its own compliance regulations
to ensure that every individual taking part in the businessactivities of the Group clearly understands the pertinentlaws, regulations and internal company rules, and consistently applies these in all of their activities.
Compliance Education
Tokyo Electron conducts online education and face-to-facetraining on topics including corporate ethics and the basics
of compliance, export compliance, insider trading prevention, the Act for Subcontracting, and the prevention ofharassment. Depending on the topic, this education is
implemented for specific levels or across the board. We also
implement ongoing testing to check the degree of understanding among employees. From fiscal 2020, we will
deploy a more comprehensive, systematic education program, advancing multilingual support in an effort to foster
compliance awareness and reinforce behavior-oriented
awareness-building activities among all Group employees.
Internal Reporting System
As a means for employees to provide information outside
the chain of command about behavior that may be in­violation of laws or corporate ethics, we have established ahotline (organized around the tenets of confidentiality,­anonymity, and prohibition of retribution) to receive internal reports. In addition, we established an external contact
point for employees and another contact point specificallyfor suppliers and third parties. Each overseas location has its
own internal reporting hotline, and we are building a unified
internal reporting system for all overseas bases.
As a result of these initiatives, in fiscal 2019 there were noreports 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 business or local communities.

Promoting Dialog with Investors
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 withinvestors through direct dialog.
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.
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 2019, following from the previous fiscal year, Tokyo Electron was again selected as a constituent stock underindices including DJSI1 Asia Pacific 2018, FTSE4Good,2 FTSE Blossom Japan Index, MSCI World ESG Leaders Index,3 andMSCI Japan ESG Select Leaders Index.4
1	DJSI (Dow Jones Sustainability Index): 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 UK-based FTSE Group3	MSCI World ESG Leaders Index: Companies that have high ESG performance are selected from the MSCI Global Sustainability Index, an ESG investment index developed by Morgan Stanley CapitalInternational (MSCI)
4	MSCI Japan ESG Select Leaders Index: The MSCI Japan ESG Select Leaders Index is an index constructed from companies that have high ESG performance selected from its parent index (MSCI Japan IMI
Top 500 Index: Top 500 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.

For details on Tokyo Electron’s ESG-related initiatives, please refer to our Sustainability Report 2019.