Internal Control System

At the Board of Directors meeting held on November 10, 2022, the Company revised and adopted the following basic policy on the internal control system.

1.Basic approach

Our basic management policy is taking on the further challenge of becoming a value-creating company by becoming a highly profitable company in an era of changes in the market environment and providing high-quality products and services through the people and technologies that we have amassed over many years. To put this policy into practice, we regard corporate governance rooted in shareholder interests as one of our most important management priorities. We implement measures to strengthen management oversight functions and work to reinforce compliance through the timely and appropriate disclosure of corporate information, the promotion of corporate ethics, and adherence to applicable laws and regulations.

2.Development of the internal control system framework

1. For internal controls, designated staff in the Operational Audit Office and the Accounting Department conduct internal audits based on an annual plan, enhancing the effectiveness of internal checks and balances.
2. The Operational Audit Office and the Accounting Department regularly audit the appropriateness, effectiveness, and regulatory and internal compliance of overall business activities, providing advice and recommendations to each department and promptly reporting findings to management.
3. For risk management, the Sustainability Promotion Committee receives reports from each department and plant as needed while working to monitor compliance and strengthen risk assessments.

The Company has established the following framework to ensure that the execution of duties by directors complies with laws and the articles of incorporation, and to ensure the appropriateness of operations across the company and the corporate group consisting of the company and its subsidiaries.

3.Framework to ensure that the execution of duties by directors complies with laws and the articles of incorporation, and to ensure the appropriateness of operations across the company and the corporate group consisting of the Company and its subsidiaries

1. Framework to ensure that the execution of duties by directors, executive officers, and employees of the company and its subsidiaries complies with laws and the articles of incorporation
   • The Board of Directors establishes the Corporate Philosophy, the Nippon Chemical Employee Code of Conduct, and the Code of Ethics, which apply to all directors, executive officers, and employees, to ensure that they comply with laws, the articles of incorporation, and internal regulations, and carry out their duties with integrity.
   • The Nippon Chemical Employee Code of Conduct is distributed to all directors, executive officers, and employees to promote awareness of legal compliance. The Operational Audit Office compiles recommendations for improvement and guidance through operational audits and reports these to the Corporate Management Committee for corrective action.
   • An Ethics Committee, composed of representatives from each department, is established as the organization overseeing overall compliance, and it promotes the development, maintenance, and improvement of the internal control system.
   • To promote compliance, contact points are established within the Operational Audit Office and the General Affairs and Human Resources Department in accordance with the Code of Ethics. Compliance audits are conducted, and the results are reported periodically to the Board of Directors and the Audit and Supervisory Committee.
   • Regulations governing the internal reporting system have been established and the system is operated to ensure appropriate responses when directors, executive officers, or employees discover legal violations or other conduct of questionable legality.
   • The Company maintains a policy of having no relationships whatsoever with antisocial forces that threaten social order or sound corporate activities, including any business dealings. Any unreasonable demands from such forces are addressed firmly and systematically in accordance with applicable laws and internal regulations.
   • A Nomination and Remuneration Committee, with a majority of its members being independent outside directors, has been established as an advisory body to the Board of Directors to enhance the transparency and objectivity of decisions regarding the nomination and compensation of directors and senior executive officers.
2. Framework for the retention and management of information related to the execution of duties by directors, and for reporting by directors, executive officers, and employees of the Company’s subsidiaries to the company regarding matters related to the execution of their duties
   • Records and documents related to the execution of duties and decision-making by directors are appropriately managed in accordance with applicable laws and the Document Management Regulations, including provisions for retention and disposal. Related regulations are reviewed and revised as needed.
   • Directors, Audit and Supervisory Committee members, and the accounting auditor have access to this information and these documents at all times.
   • Group companies are managed in accordance with the Affiliated Company Management Regulations, and subsidiaries report important matters to the company in accordance with the Affiliated Company Operating Standards.
3. Regulations and other frameworks for managing risks of loss at the Company and its subsidiaries
   • Risk Management Regulations have been established, and a risk management framework is in place in accordance with these regulations.
   • In the event of an unforeseen situation, the Sustainability Promotion Committee deliberates and makes decisions, which are communicated by each division head to the relevant departments and plants. Each department and plant responds promptly to prevent damage from spreading and to minimize losses.
4. Framework to ensure the efficient execution of duties by directors of the Company and its subsidiaries
   • Regular Board of Directors meetings are held once a month to make decisions on important matters related to management policy and strategy and to oversee the execution of duties by directors.
   • To further strengthen the functions of the Board of Directors and improve management efficiency, extraordinary Board meetings are convened as needed to enable agile decision-making on fundamental and important matters related to business execution.
   • The Board of Directors formulates medium-term business plans and annual budgets, sets business objectives, and monitors their progress.
   • For business execution based on Board decisions, the Regulations on Organizational Operations, the Accounting Regulations, and the Approval Request Regulations define the responsibilities and procedures for the execution of duties by directors, ensuring efficient operations. These regulations are reviewed and revised as needed.
5. Framework to ensure the appropriateness of operations within the corporate group consisting of the Company and its subsidiaries
   • A management framework for subsidiaries is established based on the Affiliated Company Management Regulations and the Affiliated Company Operating Standards, and a system is in place for regularly reporting the financial performance and business activities of subsidiaries to the company’s Board of Directors.
   • Officers of the Company are appointed as directors of subsidiaries to enable oversight of the appropriateness of subsidiary operations.
   • The Company’s Operational Audit Office conducts internal audits on a regular basis or as needed, and a system is in place for reporting audit results to the Representative Director and President, the Audit and Supervisory Committee, and the relevant departments.
6. Framework for appointing employees to assist the Audit and Supervisory Committee in its duties, the independence of such employees from directors (excluding directors who are Audit and Supervisory Committee members), and measures to ensure the effectiveness of instructions given by the Audit and Supervisory Committee to such employees
   • When requested by the Audit and Supervisory Committee, employees to assist the committee are appointed from the Operational Audit Office.
   • The appointment or transfer of Operational Audit Office staff assisting the Audit and Supervisory Committee requires the prior consent of the committee.
   • The Audit and Supervisory Committee holds authority to direct the duties of Operational Audit Office staff assigned to assist the committee.
7. Framework for reporting to the Audit and Supervisory Committee by directors (excluding directors who are Audit and Supervisory Committee members), executive officers, and employees of the Company, as well as directors, executive officers, employees, and auditors of the company’s subsidiaries, or persons who have received reports from any of these individuals, and other matters related to reporting to the Audit and Supervisory Committee
   • Directors (excluding directors who are Audit and Supervisory Committee members), executive officers, and employees of the Company, as well as directors, executive officers, employees, and auditors of the company’s subsidiaries, or persons who have received reports from any of these individuals, shall promptly report to the Audit and Supervisory Committee any matters that violate laws or the articles of incorporation, matters that may cause significant damage to the Company or its subsidiaries, and other important matters related to management, accounting, risk and compliance, and the department responsible for disciplinary actions.
   • Audit and Supervisory Committee members may attend the Corporate Management Committee, the Ethics Committee, and other important meetings to understand key decision-making processes and the status of business execution such as Board of Directors meeting. They may also review important approval requests and other key documents related to business execution and, when necessary, request explanations from directors, executive officers, or employees.
8. Framework to ensure that persons who report to the Audit and Supervisory Committee are not subjected to adverse treatment as a result of making such reports
   • The Company does not subject any officers or employees of the company or its subsidiaries to adverse treatment for having made a report to the Audit and Supervisory Committee.
9. Policy regarding the procedures for advance payment or reimbursement of expenses incurred in the execution of duties by Audit and Supervisory Committee members (limited to duties related to the execution of the Audit and Supervisory Committee’s functions), and other policies for the handling of expenses or liabilities incurred in the execution of such duties
   • Audit and Supervisory Committee members may request reimbursement from the Company for expenses necessary for the execution of their duties (limited to duties related to the execution of the Audit and Supervisory Committee’s functions).
10. Other frameworks to ensure the effective conduct of audits by the Audit and Supervisory Committee
    • The Audit and Supervisory Committee, the accounting auditor, and the Operational Audit Office work in coordination on audit activities. Directors and employees provide support to ensure that audits are conducted efficiently.

4.Basic approach to the exclusion of antisocial forces and the status of related measures

The Company has declared the following commitment to the exclusion of antisocial forces and has communicated this to all employees of Nippon Chemical Industrial. To fulfill our social responsibility as a company, we respond with confidence and resolve, guided by the firm conviction that the Company as a whole will never accede to unreasonable demands from antisocial forces.  We recognize that issues involving organized crime and similar groups are critical matters affecting the very survival of the Company, requiring the commitment of management and all employees alike. We maintain close contact with the police, legal counsel, and other relevant parties on a regular basis, and we act in accordance with the law and the rules of society in a manner that everyone can endorse.