CORPORATE GOVERNANCE

n Interview With the Chairman

Tetsuro Higashi, Chairman of the Board

Question: Tokyo Electron was one of the first companies in Japan to introduce stronger systems ofcorporate governance. Can you describe the background to these measures?

Question: What did you place importance on
when you introduced corporate governance atTokyo Electron?
Answer: One of the key issues was how to deal with the realities

Answer: Since Tokyo Electron was established, the company hasof Japanese corporate culture and the management environment,

eagerly tried to learn the corporate cultures of Europe and theand ensure that management is emphasizing shareholder value. I

U.S., and has adopted their positive features in its management.

talked with a top executive in a U.S. corporation, whom I knew

When I took over as president, in 1996, the hubristic period ofwell, about this issue. He explained that one factor that helps toJapan’s boom years, in the late 1980s, had passed and the weak-ensure that shareholder value is emphasized is the fact that, in U.S.

nesses of Japanese corporations were being exposed, while U.S.

corporations, most members of the Board of Directors are outside

corporations were again reviving, demonstrating their global

directors. The “inside” directors are usually limited to just one orleadership. I was extremely interested in determining what madetwo individuals who have made their way through the ranks to

American corporations strong. In particular, I realized that the use

become CEO or CFO. Then, on the Board, they have various com-of ROE and ROA as key management benchmarks, and emphasis

mittees—the Nomination Committee, the Compensation Commit-

on free cash flow were central elements in maximizing corporate

tee, the Auditing Committee and so on. When I asked this U.S.

value among U.S. corporations. And I was also aware that they

executive whether he thought it would be possible to implement

fundamentally had a philosophy of “emphasizing shareholder

this sort of corporate governance structure in a Japanese company,

value,” and in order to fulfill this philosophy they made efforts to

he replied “Whether directors are taken from the company orstrengthen corporate governance. I decided that the management

brought in from outside is not an essential issue. The question is,of Tokyo Electron should try to capture this essential characteristic

either you want to make the Board’s operations easier for you, orand use it to establish a globally admired company.

you want to place greater importance on the transparency of theBoard’s operations in order to introduce differing opinions, eventhough you might face difficulties dealing with them. Which course
do you think will contribute to maximizing shareholder value? Thisis the point at which you should decide your course.” This then was
the answer I got from him. I concluded that there was no reason toblindly imitate the structure of a Western company. Rather, we
needed to adopt a system that is truly practical.

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Question: What are the distinguishing features ofTokyo Electron’s system of corporate governance?

shareholders. Therefore, it is the shareholders who should evaluate top executives’ performance from the standpoint of how wellthey can increase corporate value. As the direct representative ofAnswer: There are a number of features that stand out. First,

shareholders, the Compensation Committee takes on this duty,

we use a statutory auditor system; however, the Nomination

and based on the proposals of the Compensation Committee, theCommittee and Compensation Committee are incorporated into

Board of Directors finally decides the representatives’ compensa-

the Board of Directors. These committees make proposals to thetion. By disclosing these compensation amounts in a clear manner,

full Board, which considers them and makes a final decision. The

I think that the Compensation Committee and the Board of Direc-

representative directors (the chairman and the President & CEO)tors merely fulfill their representative roles to shareholders. Somedo not take part in either of these committees, since there is a risk

people think that it is sufficient to simply disclose the total amountthat their participation might result in an unbalanced power struc-paid to the directors, but since the top executives are the ones

ture in the committee and detract from fair decision-making pro-

who have the ultimate authority and responsibility, we believe thatcesses. We have also based the benchmarks for both shareholder

it is best to provide an individual breakdown of each one’s remu-dividends and management bonuses on net income for theneration. One of the most important issues in maintaining effec-

period, and have linked employee bonuses to operating income.

tive corporate governance, in my view, is to maintain a certain

In this way, we help to ensure that the goals of management andtension between those being evaluated and those making thethe employees are closely aligned to the interests of shareholders.

evaluation.

Thus, all three groups benefit to a similar degree from any
increase in corporate value. These incentives also ensure thatcountries and the society in which we operate benefit from Tokyo
Electron’s success, via increased tax revenues.

Question: What sort of management style do you
think Tokyo Electron should cultivate?
Answer: As the company man-Question: Since 1999, Tokyo Electron has been disclosing the individual compensation of representative directors. What was the basis for this move?

agement is entrusted to us by theshareholders, it is extremely important for us to strive to maximize
corporate value. But, I also haveAnswer: Corporate value is based on the value accumulated byanother point of view. I believe a

the company over a period of many years, as well as the com-

corporation is an organic living

pany’s potential to create additional value in the medium and long

structure which is formed by the company’s employees, and where

term. Ultimately, the corporate value is evaluated and expressed aseach member should be motivated and energetic in their work. If

an appropriate share price in the stock market. In the short term

the company fails to be an aggregation of employees who are full

there are a number of problems which interfere with share valua-of aspirations and vitality, then over the medium and long term ittions, but I believe that in the long term, and on the whole, sharewill never be able to maximize its corporate value. It might sound a

prices provide an accurate indication of corporate value. The

bit too idealistic, but I want employees and shareholders to sharequestion is, how does one go about evaluating the performancethe same dream, and management should always endeavor toof corporate top management, and who should be responsible forhelp everyone realize this. From this point of view, I will move backmaking this evaluation. Employees are evaluated by their immedi-

and forth between the employee’s focused standpoint and share-

ate superiors, but in the case of top management, it is the share-

holder’s broader standpoint. In this manner, I will do my best to

holders who are directly responsible. The company operations aresupport the new management team by providing appropriate

decided by top management, who are entrusted with this task byadvice in a timely manner.

Annual Report 2010

Tokyo Electron

19n Corporate Governance
Against a backdrop of ongoing business globalization, Tokyo
Electron maintains a management philosophy that puts emphasison maximizing corporate value and enhancing shareholder satisfaction. To this end, the Company is striving to strengthen corporate governance through a variety of measures. The Company isbuilding a highly effective corporate governance structure, andupgrading and strengthening its internal control systems and risk
management system. Efforts in this regard are founded on thefollowing three basic principles.
Tokyo Electron’s Basic Principles of Corporate Governance
1. Ensure the transparency and soundness of business operations
2. Facilitate quick decision-making and the efficient execution ofbusiness operations
3. Disclose information in a timely and suitable manner

The Corporate Governance Framework
Tokyo Electron uses the statutory auditor system based on the
Company Law, and furthermore has established its own Nomination Committee and Compensation Committee inside theBoard of Directors to increase the transparency and objectivityof management.
Also, Tokyo Electron has adopted the executive officer system toseparate the business execution function from the Board of Directors. Moreover, Tokyo Electron has been disclosing the individual
remunerations of representative directors since 1999 in recognitionof the importance of managerial transparency for shareholders.

The Board of Directors
The Board of Directors consists of 12 directors, two of whom areexternal directors.
In principle, the Board of Directors meets once a month, withadditional meetings if necessary. (During fiscal 2010, the Board of
Directors met on 12 occasions.) In order to ensure that the Company can respond quickly to changing business conditions, and to
more clearly define management accountability, the term of officefor directors is set at one year.
The Board of Directors has two committees: the Compensation
Committee and the Nomination Committee, whose activities areintended to improve corporate governance. The Compensation
Committee proposes the remuneration to be paid to representative directors at the Board meeting for approval. The Nomination
Committee nominates candidates for directors to be selected at
the annual shareholders’ meeting, and nominates a candidate for
CEO to be selected by the Board, which it submits at the Board
meeting for approval. Each of these committees is composed ofmembers of the Board of Directors, excluding the representative
directors (the Chairman and the President & CEO).
The Board of Statutory Auditors
The Company has four statutory auditors, two of whom are outside auditors. The statutory auditors not only attend meetings ofthe Board of Directors, the Management Meeting and otherimportant business meetings, but also conduct operations audits
and accounting audits, and evaluate risk management, in addition
to auditing the performance of duties by directors. During fiscal
2010, the board of statutory auditors met seven times.

Diagram of the Corporate Governance Framework, Internal Control System and Risk Management System
Annual Shareholders’ Meeting
Board ofDirectors

Statutory Auditors

Compensation Committee
Nomination Committee
Chief Business Ethics Director
Chief Internal Control Director

Independent Auditors

Confirm the progress of improvements and give instructions
Request for improvement/Report

Representative Directors
Audit and improvement reports

Request for improvement/ReportCompliance & Internal Control Executive Officer

Executive Officers

Internal Audit Dept.
(Global Audit Center)

Committees Ethics Committee
Information Security Committee
Export Trade Control Committee
Request for improvement/Report

Audit

Risk Management & Internal Control Dept.
Request for improvement/
ReportMonitoring

Business Depts.

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Annual Report 2010

Check and balance

Administrative Depts.

The Executive Officer System
In order to further clarify the roles of the Board of Directors andexecutives in charge of business operations, Tokyo Electron has
adopted the executive officer system. This system promotes fast
decision-making and the quick establishment and execution ofbusiness strategies.
Remuneration for Directors, Executive Officers andStatutory Auditors
The Company and the Tokyo Electron Group (excluding listedcompanies) have introduced incentive systems, such as businessresults-based remuneration, and stock options linked to shareprices. Effective from fiscal 2006, the Company revised its executive remuneration system to link remuneration more closely tofinancial performance and shareholder value and also improve
management transparency and its competitive strength.
1. The remuneration for Company directors and executive officers
is composed of two elements: a fixed monthly salary, and anannual bonus which is linked to earnings performance.
2. The total amount of performance-linked remuneration (annual
bonuses) for directors and executive officers of the Group is set
at a maximum of 3% of consolidated net income. This remuneration is split between cash bonuses and stock-based remuneration (stock options), at a ratio of roughly two to one. The
stock-based remuneration takes the form of new stock warrant
contracts with an exercise price of one yen per share. This isbecause current securities and exchange regulations in Japan
make it difficult to introduce and implement direct share issuance, or the sort of transfer of restricted shares that are used incountries such as the United States. The restricted period on
exercising stock options is set at three years.
3. The earnings-linked remuneration (annual bonuses) of external
directors does not include stock options.
4. In order to ensure that statutory auditors maintain full independence from management pressures, the compensation of statutory auditors consists of a fixed monthly salary only.
5. Retirement allowances for directors, statutory auditors andexecutive officers were abolished at the end of fiscal 2005, aspart of the revisions to Tokyo Electron’s remuneration systemfor executives.
Remuneration linked to corporate performance comprises a relatively large share of executives’ total remuneration. The remuneration
system gives executives a strong incentive to improve the Company’s
earnings performance and elevate the share price, since they share inboth the benefits and the risks experienced by shareholders.

The Company is implementing practical measures in line withthe basic policy for internal control systems in the Tokyo ElectronGroup decided by the Board of Directors.
The Company is also implementing internal controls over financial
reporting based on the Financial Instruments and Exchange Law.
Internal Control Systems
To strengthen the internal control and risk management systemsof the entire Tokyo Electron Group more effectively, Tokyo Electron
appointed a Chief Internal Control Director and a Compliance &Internal Control Executive Officer. Under them, the Company
established the Risk Management & Internal Control Department,
which evaluates and analyzes the risks which could affect theGroup, and works to reduce risks by promoting the necessary
measures. Tokyo Electron has also established the Information
Security Committee and the Export Trade Control Committee tofurther strengthen the management of confidential informationand the export compliance system.
Internal Audit Department (Global Audit Center)
The Global Audit Center oversees the internal auditing activities ofthe entire Tokyo Electron Group. The Center is responsible for
auditing the business activities of the Group’s domestic and overseas bases, as well as their compliance and systems, and evaluating
the effectiveness of internal control systems. When necessary, theGlobal Audit Center also provides guidance to operating divisions.
Coordination Between Statutory Auditors and Internal
Audit Department
The statutory auditors coordinate with the department responsiblefor internal auditing activities primarily by attending the Global
Audit Center’s report meetings, which were held 13 times during
fiscal 2010.
Coordination Between Statutory Auditors and Independent
Auditors
The statutory auditors receive audit plans for the fiscal year fromthe independent auditors, as well as explanations regarding auditing methods and particular areas of focus, among other matters.
The independent auditors audit the year-end financial statements
and review the quarterly financial statements, and report theresults of their audits to the statutory auditors.
The Company provides KPMG AZSA & Co., its independent
auditor, with all necessary information and data to ensure that it
can conduct its audits during the fiscal year promptly and correctly.

Internal Control and Risk Management System

Compliance

In order to enhance corporate value and ensure that all businessactivities are carried out responsibly and in the interests of all
stakeholders, Tokyo Electron is taking steps to strengthen its internal control systems and make them more effective.

Trust is the cornerstone of Tokyo Electron’s business foundation.
The fundamental requirements for maintaining trust are rigorous
conformity to ethical standards and compliance with the law, by
individual employees and by each of our organizations. In line with

Annual Report 2010

Tokyo Electron

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the basic policy for internal control systems in the Tokyo ElectronGroup, all Group employees are required to maintain high standards of ethics and to act with a clear awareness of compliance.
Ethical Standards, Chief Business Ethics Director and Ethics
Committee
In 1998, the Company formulated the“Tokyo Electron Code of Ethics” (revised inJune 2007) to establish uniform standards togovern all of its global business activities. In
the same year, the Company appointed a
Chief Business Ethics Director and established the Ethics Committee, which is
responsible for promoting business ethics
Tokyo Electron Codeawareness throughout the Company. Theof Ethics
Tokyo Electron Code of Ethics prescribes acommon code of behavior for all employeesof Tokyo Electron and the Group, and the Company distributes it
to all Group employees, including those overseas.
Compliance/Internal Control Executive Officer
Since April 2009, Tokyo Electron has appointed a Compliance/
Internal Control Executive Officer from among the executive officers to raise awareness of compliance across the Group, andfurther improve its implementation.
Framework for Thorough Implementation of ComplianceTokyo Electron has drawn up compliance regulations setting out
basic compliance-related requirements in line with its code of
ethics. The compliance regulations are intended to ensure that allindividuals who take part in business activities for the Group
clearly understand the pertinent laws, regulations, international
standards and internal company rules, and continuously apply
these rules in all of their activities. The Company also conducts
web-based training programs for employees, makes informationon compliance issues available to employees via the Company
intranet, and takes other steps to promote broad awareness ofcompliance throughout the Company.
Internal Reporting System: Hotline
In the event that an employee becomes aware of any activity
which may violate laws, regulations or principles of businessethics, the Company operates an internal reporting system(Hotline) that employees may use to report their concerns.
Strict confidentiality is maintained to protect the whistleblower, and ensure that they are not subject to any disadvantage or repercussions.

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Disclosure Policy
Tokyo Electron is committed to disclosing information about theCompany in a fair, prompt and accurate manner, to ensure that all
stakeholders, including shareholders and other investors, canobtain an accurate, in-depth understanding of the Company andits activities, and evaluate the Company’s corporate value appropriately. The Company also solicits feedback from its stakeholders
as part of its information disclosure activities, and uses the feedback as a point of reference to guide corporate management.
Information Disclosure Standards
Tokyo Electron complies fully with the Financial Instruments andExchange Law, and the Tokyo Stock Exchange’s listing regulations
pertaining to marketable securities.
Furthermore, even when the information is not subject to thelisting regulations pertaining to marketable securities, the Company discloses the information proactively, in a fair, prompt andaccurate manner if the information is deemed useful in providing
stakeholders with an accurate understanding of the Company.
Disclosure Practices
If it is subject to the marketable securities listing regulations(material information), Tokyo Electron will release information
simultaneously in a press release and via the Tokyo Stock
Exchange’s “Timely Disclosure Network” (TDnet), and will post the
information on its website as soon as possible, following theofficial announcement. Even when it does not fall into the category of “material information,” the Company will voluntarily
disclose information which may be of interest to stakeholders, in afair, accurate, and easy-to-understand manner, either on its website or in printed form, through various means of communication.
Tokyo Electron conducts meetings to discuss its financial resultswith securities analysts and investors; these meetings are also
open to members of the press. The Company makes audio recordings of its fiscal year-end and mid-term financial results meetings,
and posts these recordings on the Company’s website. All of the
documents distributed at its quarterly financial results meetings
are also posted on the website.
To ensure that foreign investors have fair and equal access tothe information, the Company strives to disclose all information
simultaneously in Japanese and English. However, due to the timerequired for translation, there may be cases where the posting ofEnglish information to the website is delayed slightly.

Shareholder Measures
Tokyo Electron mails a Notice of Annual General Meeting of
Shareholders to shareholders more than three weeks inadvance of the meeting, as one of its measures to vitalize thesemeetings and to promote smooth and efficient voting. It also
sets the date of the Company’s meeting to avoid days on which
many such meetings are concentrated. In addition, shareholders

are free to cast their votes via the Internet. Moreover, Tokyo
Electron participates in the web-based voting platform for
institutional investors operated by Investor Communications
Japan Inc. (ICJ). To supplement the above shareholder meetingrelated initiatives, Tokyo Electron’s website carries notices,
resolutions and presentation materials of shareholders’ meetings.
An English version of the Notice of Annual General Meeting of
Shareholders is also provided.

Tokyo Electron is a constituentof the FTSE4Good Global Index.

Since September 2003, Tokyo Electron has been chosen for the FTSE4Good Global
Index, which is a CSR index provided by the FTSE Group. The FTSE Group is a world
leading index firm, a joint venture between the Financial Times newspaper and theLondon Stock Exchange.

Does Tokyo Electron have these major components of corporate governance?
Nomination Committee
Compensation Committee
External directors
Outside auditors
Executive officer system
Disclosure of individual remunerations of representative directors
Performance-linked compensation system
Stock options system
Directors’ retirement benefits system
Anti-takeover measures

Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
No

Composed of directors excluding representative directors (Chairman/CEO)
Composed of directors excluding representative directors (Chairman/CEO)Two of the directors are external directors
Two of the statutory auditors are outside auditors
Disclosed since 1999
Does not apply to external directors and auditors

n Message From External Directors
External Director

External Director

Hiroshi Inoue

Masahiro Sakane

Chairman of the Board,
Tokyo Broadcasting System Holdings, Inc.

Chairman of the Board, Komatsu Ltd.

External Director since 2006

External Director since 2008

I was appointed as an external director of Tokyo Electron in 2006.
Since my background is in broadcasting, the culture of Tokyo Electron
is completely new for me. I have developed a very strong respect forthe management style of Tokyo Electron, its strong corporate governance and its dedication to constantly enhancing the value provided
to all of its stakeholders. One of the things that I find most attractive
about Tokyo Electron’s corporate culture is its dynamism. Though thecompany is almost 50 years old, it retains a youthfulness and openness that I really admire. The intense and wide-ranging deliberations
that take place at Board of Directors meetings are a far cry from therestrained and opaque style that is sometimes found in other companies. So long as it maintains this character, I believe that management decisions will continue to lead the company to a brighter
future. I believe that I can also contribute to further enhancing thecorporate value of Tokyo Electron.

I have always believed that the objective of corporate governanceshould be “to constantly seek ways to perpetuate growth in corporate value.” I think that “corporate value” can be defined as thesum of all the trust earned from stakeholders and from society, andthe trust is earned not only by a company fulfilling its promises, butalso by it providing full disclosure of information. And I also thinkthat the source of corporate value is derived from customers. I havebeen an external director of Tokyo Electron for two years now, andthe impression I receive from the Board meetings I attend suggeststhat at Tokyo Electron fair and transparent management, whichshould be the basis for “earning trust”, has been fully established.
Indeed, I have learned a lot from the example set by Tokyo Electron,
but I also think that I can contribute to the company in many
respects. I take pride in the measures that have been taken to promote good corporate governance at Komatsu. While Tokyo Electron
has given me opportunities to expand my horizons, I believe that I
have experiences that can be instructive to the company, particularly
in terms of overseeing a global corporate operation and “creating
value through global competitiveness.”

Annual Report 2010

Tokyo Electron

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