Corporate governanceCorporate governance
Basic view on governance that will lead to sustainable growth for TEL
TEL declares in its medium-term vision that we are determined to become “a real global company generating high addedvalue and profits through innovative technologies and groundbreaking solutions with diverse integrated technologies.”
Given that over 80% of our sales now come from overseas, TEL regards building a governance system as essential to becoming a real global company that achieves sustainable growth.
To that end, TEL has built a framework to maximize the use of its worldwide resources and works to incorporate a wide
range of opinions. In addition to strengthening its management platform and technology base, TEL maintains a governancestructure that will enable it to attain world-class profitability.

The corporate governance framework
TEL 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.
Based on this organizational structure, TEL has also established systems that will facilitate growth-oriented governancedirected at sustainable growth for TEL including the following:
The Board of Directors, whose role is to make major operational decisions and play a supervisory role in the executionof those
The Nomination Committee and Compensation Committee to ensure fair, effective, and transparent management
The Corporate Senior Staff (CSS) to formulate and advance company strategy

Corporate Governance Framework, Internal Control System and Risk Management System
Shareholders' Meeting
Cooperate

Board ofDirectors

Audit & Supervisory Board

Compensation Committee Chief Business Ethics Director
Nomination Committee

Independent Auditors

Chief Internal Control Director
Chief CSR Promotion Director

Confirm the progress ofimprovements and give instructions

Representative Directors

Request for improvement/Report

Audit and
improvement reports

Request for improvement/ReportCompliance & Internal Control Executive Officer
CSR Promotion Executive Officer

CSS & Executive Officers

Internal Audit Dept.
(Global Audit Center)

Committees
Ethics Committee
Information Security Committee
Export Trade Control Committee
Request for

CSR Management Council
CSR Global Promotion Committee

Audit

improvement/
ReportRisk Management &Internal Control Function(General Affairs Dept.)
Request for improvement/Report

Monitoring

Administrative Depts.

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Cooperate

Check and balance

Business Depts.

Roles and responsibilities of the Board of Directors
The Board of Directors works to achieve sustainablegrowth and increase corporate value over the medium- tolong-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 vision2

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 widerange of opinions, and supervises management and operational execution based on active debate.
The Board of Directors respects opinions even when
they are minority or opposing viewpoints, including opinions voiced by outside directors; revises the conditions
for implementation or the content of proposals as necessary; and engages in extensive debate with the goal ofreaching decisions based on consensus. However, emphasis is placed on making necessary decisions quickly to
avoid missing opportunities.
In the TEL Board of Directors meetings, proactive, frankopinions are indeed continually presented, not only byinternal Corporate Directors, but also by independent
directors and Audit & Supervisory Board members, enabling active debates thereby.

The role of Executive Directors does not end with referring and explaining proposals as the representativeof each division. They also contribute to active debate,
proper decision-making, and supervision of execution
through objective, constructive opinions coming fromdifferent perspectives of each Corporate Director.

Policy on election of Independent Directors andAudit & Supervisory Board Members
By stating their unreserved opinions from an independent perspective, independent directors and outside Audit & Supervisory Board members guide Board of Directors debates in the proper direction for success in global
competition that does not follow the same line of discussion proposed by internal Corporate Directors.
To achieve our previously stated goals, independent directors and outside Audit & Supervisory Board members shallconsist of people who offer a good balance of the following
qualities:
Knowledge of global businessBroad insight into related industries
An extensive network of personal contacts
Objectivity from social, capital market,
and other perspectives
Knowledge of finance and accounting
Broad legal knowledge

View on overall balance of knowledge, experience, andskills in the Board of Directors, its diversity

The reason for Appointing the CEO, individual Corporate Directors and Audit & Supervisory Board members;
status of concurrent duties at other listed companies, arefound in the Appendix of the following document:

Policy on election of Executive Directors

URL http://www.tel.com/ir/policy/cg/document/index_02.pdf

Executive Directors of TEL are required to have superior
executional abilities underpinned by experience, insight,
and a track record in management, high sensitivity to all
possible risks, being able to properly analyze and judge
matters, and frankly state the opinion that they believe
to be correct during debates.
Moreover, in electing Executive Directors, consideration
is given to achieving a balance of Corporate Directors who
are well-versed in each division of TEL, including:Sales and Service
Manufacturing
R&D
Corporate Administrationand other divisions, to the extent possible in order toensure constructive debate in Board of Directors meetings born out of a broad range of backgrounds andknowledge. The current Executive Directors have been
elected in a manner that has achieved such balance.
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Corporate governanceCorporate governanceSize of the Board of Directors, number of Independent Directors and criteria for independence
TEL 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 number of Corporate Directors shall therefore be the appropriate number
for the operating environment at the time, considering
a good balance in terms of knowledge, experience, andskills. There is a maximum of 18 directors established in
the Articles of Incorporation.
The current Board of Directors consists of 11 Corporate
Directors, and TEL believes this to be the appropriate,
well-balanced size at the present time.
Number of Independent Directors andcriteria for independence
TEL 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, 5 of the 16 participants in the Board of Directors
meetings, including the Audit & Supervisory Board members, are outside members, consisting of two independent
directors and three outside Audit & Supervisory Board
members. TEL believes that the current Board of Directors meetings achieve an appropriate sense of productive
tension and constructive debate due to the combinedpresence of executive directors, essential for making operational decisions, and outside members, who provide
objectivity. TEL actively considers candidates equippedwith the knowledge and character that TEL thinks willcontribute to sustainable growth for TEL for independent
directors and other outside members.
TEL also ensures the independence of independent
directors and independent Audit & Supervisory Board
members through separately specified independence
requirements for outside directors and outside Audit &Supervisory Board members, in addition to the requirements under the Japanese Companies Act.
Details on independence requirements for outside director and outside Audit & Supervisory Board members
can be found in the following document:
URL http://www.tel.com/ir/policy/cg/document/
index_03.pdf

Nomination of Corporate Directors and the CEO
TEL has established a Nomination Committee to ensure
fairness and efficiency in management. No Representative Directors, including the CEO, is a member of theNomination Committee. The authority to propose election or dismissal of the CEO or Corporate Directors is entrusted to a Nomination Committee member who is not
a Representative Director.
Ensuring the independence of theNomination Committee
The Nomination Committee shall consist of three ormore Corporate Directors or Audit & Supervisory Board
members. In order to ensure the independence of thosemembers, Representative Directors may not be electedto the Nomination Committee. Moreover, the Nomination Committee recommends Nomination Committee
members for the next period and the Board of Directors
elects the members based on those recommendations.
This method achieves a high degree of independence andfairness in the election of candidates and ensures the authority of the CEO and other Representative Directors
does not extend to the management of the Nomination
Committee.
The term of Nomination Committee members shall be
one year. Re-election up to a maximum of four years ispermitted.

Ensuring fairness in evaluation
TEL takes the following steps to ensure fair and highly
transparent evaluation of the executive management,
including the CEO.
1

Executive Directors bear the responsibility ofachieving performance goals for the division where
they are in charge based on the budget and Medium-Term Management Plan. The degree to whichthat is achieved is an important factor in personnel
evaluations for performance-linked compensation.

2

The formula for calculating the performance-linked
compensation of the CEO is determined by the
Board of Directors, based on the proposal of theCompensation Committee. It is decided fairly andin a highly transparent manner.

3

In nominating candidates for Executive Director, theNomination Committee will evaluate the appropriateness of the candidate based on past performance,
including an evaluation of performance on assigned
duties, and considering his or her personality, including the character and dignity, as a manager. They
then determine whether or not he or she is capableof shouldering those responsibilities.

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TOKYO ELECTRON Sustainability Report 2016

Compensation

On transactions among related parties

Policy on compensation
TEL aims to strengthen its global competitiveness andincrease management transparency by adopting a director and executive officer compensation system thatis closely linked to performance and shareholder value.
The compensation of directors and executive officers
comprises a fixed monthly wage and an annual performance-linked bonus.

TEL requires Corporate Directors or Audit & Supervisory
Board members to obtain the approval of the board
when engaging in transactions with TEL or transactions
that are in conflict with the interests of TEL and the Corporate Directors or Audit & Supervisory Board Members.
This includes engagement in competing business with
TEL. Moreover, after such transactions take place, a report must be presented to the board regarding material
matters concerning such transactions.
In addition, irrespective of whether a transaction is between a Corporate Director or Audit & Supervisory Board
member, or a relative of them and TEL, TEL undertakes
regular annual investigations.
Furthermore, in regard to transactions between TEL
and shareholders, there are no major shareholders (defined as a shareholder with at least 10% of voting rights)
in TEL. If a major shareholder emerges, TEL will undertake
procedures to ensure appropriateness of transactions
according to the previously stated policies.

Role of the Compensation Committee
The Compensation Committee, which comprises threeor more directors, including at least one outside director, performs an analysis of industry wage levels insideand outside of Japan, accounting for both monetary andnon-monetary aspects of the total compensation package. Based on this comprehensive analysis, the committee proposes a policy and system for director compensation to the Board of Directors. The proposal includes
specific amounts for individual compensation, including
the CEO’s bonus.
Formula for calculating compensation
In order to better link factors that increase corporate andshareholder value to compensation, TEL has designatedthe actual net income attributable to owners of the parent company and ROE (Return on Equity) for the current
period as the main calculation benchmarks in the performance-linked compensation system for the CEO andother Corporate Directors. These are adjusted, as necessary, for extraordinary income/losses and other special
factors.
In principle, performance-linked compensation consists of monetary compensation and share-based compensation. The composition is roughly 1:1 for Corporate
Directors, and single year performance is appropriatelyreflected in the performance-linked compensation of the
CEO and other Corporate Directors. Share-based compensation is awarded in the form of stock options withthe exercise price set at one yen per share, and the restriction that they may not be exercised for three years
from the date of allotment.

Composition and roles of the Audit &Supervisory Board
Composition of the Audit & Supervisory Board
The Audit & Supervisory Board currently consists of fivemembers and includes three outside Audit & Supervisory
Board members. Three members, including one outside
member, are full-time. The full-time Audit & Supervisory
Board members collect information through onsite surveys, and the board maintains appropriate coordination
with the Internal Audit Department and the independent
auditors as part of a structure that enables Audit & Supervisory Board members to obtain all information necessary for audits.
Moreover, the composition of Audit & Supervisory
Board members provides a good balance of knowledge
required for operational audits and accounting audits, including financial and accounting knowledge, legal knowledge, and audit experience at other companies. TEL thus
believes its Audit & Supervisory Board members are able
to perform the auditing functions effectively.

Evaluating the effectiveness of the Boardof Directors
Based on an evaluation survey filled out by the Board of
Directors and Audit & Supervisory Board members, theBoard of Directors discusses, analyzes, and evaluates its
own effectiveness, and discloses a summary of the results from the end of the current fiscal year.
URL http://www.tel.com/news/2016/0512_006.htm

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Corporate governanceInternal control and risk management
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 measures that are in linewith the Fundamental Policies concerning Internal Controls within the Tokyo Electron Group, set out by Tokyo Electron’s
Board of Directors. We are also annually evaluating our internal control over financial reporting based on the Financial Instruments and Exchange Act of Japan.

Risk management system46

To more effectively strengthen the internal control andrisk management systems of the entire Group, Tokyo
Electron has established a dedicated risk management
and internal control function within the General Affairs
Department of the corporate headquarters. This function
manages and reduces risks through appropriate measures, such as by analyzing the risks that could affect theGroup, and instructing responsible departments to conduct self-assessments of major identified risks. The function also regularly reports the status of risk management
activities to the Audit & Supervisory Board Members andthe Board of Directors.
In fiscal year 2016, the Group thoroughly reevaluatedthe material risks surrounding its operating environment
in order to improve the effectiveness of its risk management. Based on this reevaluation, the Group is redefining
material risks and clarifying each risk owner to enhancethe efficacy of its risk management framework.

Business continuity management
Since 2012, the Group has been improving its Business Continuity Plan (BCP) for large-scale earthquakes. The BCP is being updated at the headquarters, local offices and plants so that it will work
effectively in the event of a disaster, facilitating earlyrecovery and alternate production.
In fiscal year 2016, the Group focused on revising
the manuals and plans, as well as on implementing
BCP drills and employee education.
In addition, emphasis has been placed on improving early emergency response with top priority given to securing employee safety, including stockpiling emergency supplies (including food and drinking
water), and reinforcing essential infrastructure.
As a result of these preparedness initiatives, wewere able to smoothly implement the BCP to respond quickly to the Kumamoto Earthquake in April
2016.

Auditing by internal audit department

Information security management

The Global Audit Center of the corporate headquarters
is the Group’s internal audit department. This Center is
responsible for auditing business activities, complianceand systems at domestic and overseas Group companies
and business units (BUs) in accordance with each fiscal
year’s auditing plan. The Center also annually evaluates
the effectiveness of the Group’s internal control over financial reporting based on the Financial Instruments andExchange Act of Japan.
At operating divisions where issues have been identified through audits and assessments, the Center monitors progress and provides necessary guidance for improvement.

To ensure appropriate management and safe and effective use of information assets, the Group has establisheda framework for preventing information leakage under
the Tokyo Electron Group Information Security Policy
and the Regulation for Management of Technical andBusiness Information. These rules have been disseminatedglobally throughout the Group companies and are updated whenever necessary.
In order to strengthen information security, the Groupis enhancing training and education for all of its executives and employees worldwide. These programs ensurethat they can protect technical and business data andabide by the IT security rules.
Additionally, we have established a system for reporting both actual and potential cases (incidents) of information leakage. Such reports are critical in making quick
responses, and their analysis can offer valuable insights
into improving Group-wide measures to prevent leakage.

TOKYO ELECTRON Sustainability Report 2016

Compliance
Basic stance
Stakeholder trust is the cornerstone of business activities. In order to maintain trust, it is necessary to continuously
act in rigorous conformity to business ethics and compliance. In line 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.
Theme

Goals for fiscal year 2016

Results for fiscal year 2016

Review the current management
system.
●Formulate an improvement plan basedon the review.
●

Ethics and compliancemanagement

Rework and reinforce themanagement system.

TEL’s Code of Ethics

Make the Code of Ethics conform more to socialchanges.

●●

Check conformity with the EICC Codeof Conduct.
Review TEL’s Code of Ethics.

Business ethics
In 1998, Tokyo Electron formulated the Code of Ethics of
the Tokyo Electron Group to establish uniform standards
to govern all of its global business activities. In the same
year, TEL appointed a Chief Business Ethics Director andestablished the Ethics Committee, which is responsible
for promoting business ethics awareness throughout theTokyo Electron Group. The Ethics Committee comprises
the Chief Business Ethics Director, the Ethics Committee
Chairman, and presidents of major Group companies inand outside Japan. The members meet semiannually, report on ethics related issues facing each company, anddiscuss measures to further improve ethical behavior andcompliance.
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 UN Global Compact, which
concerns working against corruption including extortionand bribery. In fi scal 2016, the Group reviewed its Code of
Ethics in response to the Code of Conduct of the EICC, anelectronic industry CSR consortium that the Group joinedin June 2015.
The Tokyo Electron Group’s Code of Ethics and its Q&A
section are published in Japanese, English, Korean andChinese and disclosed on the intranet to enable all Group
executives and employees, including those overseas, toview them at any time. The Code of Ethics is also publicly
accessible from the corporate website.
URL http://www.tel.com/environment/corp_governance/compliance/ethical.htm

Compliance system
Tokyo Electron has appointed a Compliance & Internal
Control Executive Officer from among its executive officers to raise awareness of compliance across the Groupand further improve Group-wide compliance. TEL has
also drawn up the Compliance Regulations, setting out
basic compliance-related requirements in line with theCode of Ethics. The Compliance Regulations are intended●●

Conducted a review of the current management system,and enhanced cooperation between the Ethics Committee and the compliance department.
Checked conformity with the EICC Code of Conduct, andbegan a partial revision of TEL’s Code of Ethics to increase conformity with the EICC Code of Conduct.

to ensure that all individuals who take part in the business 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.

Compliance education
Through the Group’s e-learning system, we provide standard web-based training programs covering the basics ofcompliance, export-related compliance, protection of personal information, the Act for Subcontracting and othertopics. All executives and employees are required to complete this training. In addition, other web-based programs
tailored to specific positions and job roles are also available,
including those on insider trading and the Social Security
and Tax Number System.
We also have a quiz-based business ethics complianceeducation course for all Group executives and employees.
Updated yearly, the quiz is intended to maintain compliance awareness throughout the Group and disseminate
the latest information.
In addition to these web-based courses, we organizedin-house seminars in fiscal year 2016 for Corporate Directors and domestic Group company presidents on the subjects of compliance and internal control.

Internal reporting system
The Tokyo Electron Group has an internal reporting system that employees can use to report any activity suspected of being in breach of laws, regulations or business ethics principles. An ethics hotline and a compliancehotline have been established to receive reports from all
Group companies, and each overseas location also has its
own reporting system. In all instances, the system ensures that whistleblowers remain anonymous and areprotected from any disadvantage or repercussions.
There were no reports or cases of non-compliancewith laws, regulations, or principles of ethics in fiscal
year 2016 that could have had a material impact on theGroup’s business or local communities.
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