MEC : Governance Report

Note : This document has been translated from the Japanese original for reference purposes only. In the event of any discrepancy between this translated document and the Japanese original, the original shall prevail.

Corporate Governance

MEC COMPANY LTD.

Last updated: August 10, 2023

MEC COMPANY LTD.

CEO & President Kazuo MAEDA

Contact: Corporate Communication Office TEL [phone]

(Code: 4971)

https://www.mec-co.com/en/

The status of the Company's corporate governance is as follows.

I. Basic approach to corporate governance, and basic information on capital structure, corporate attributes and other matters

1. Basic Approach and Structure

The MEC Group believes that to maximize stakeholder return, continuous initiatives toward reinforcing corporate governance, thereby enhancing corporate value, are crucial. Specifically, we will promote initiatives for fair and transparent management, speedy and accurate information disclosure, and thorough accountability, and are acting in accordance with the concept of the Corporate Governance Code.

Under the policy of promoting diversity in management, we actively invite and appoint outside officers and women. We are also working on establishing rules to provide strict decision-making criteria in case management lacks independence.

Moreover, aiming to gain value from diversity, the Group has a policy to encourage the activities of diverse competent personnel. We will continue to support promotion of diverse personnel to executive or management positions and enhance various systems to enable all those who take childcare leave to return to work.

[Reasons for Not Implementing the Principles of the Corporate Governance Code]

(Updated)

[Supplemental Principle 2-4-1. Ensuring Diversity within the Company, Including the Promotion of Women's Initiatives Activities]

When recruiting managers and other core personnel, the Company recruits talented individuals without distinction as to whether they are women, non-Japanese, or mid-career hires. For this reason, no specific target figures have been set. Although the Company does not have a policy for human resource development and internal environment improvement, we have established a system to accept diverse human resources.

The following table shows the status of recruitment to management positions as of July 31, 2023.

Women: 16 (31.4%)

Foreigners: 0 (0%)

Mid-career hires: 40 (78.4%)

[Principle 4-2-2. Roles and Responsibilities of the Board of Directors (2)]

We position the MEC Group`s Charter of Corporate Behavior as the basic policy for our efforts in the area of sustainability.

In addition, we will provide effective supervision to ensure that the allocation of management resources and the implementation of strategies related to the business portfolio in accordance with the medium-term management plan contribute to the sustainable growth of the company.

[Disclosure Based on the Principles of the Corporate Governance Code]

(Updated)

[Principle 1-4. Strategically Held Shares]

The Company holds the minimum number of shares necessary, mainly for the purpose of improving its corporate value over the medium to long term. This is to be achieved by maintaining and developing business relationships with major business partners. If the Company does not have a strong rationale to hold shares, they will be sold after discussions between the two companies.

For shares held and for each individual stock, the Company comprehensively considers quantitative aspects such as trading performance with the Company and dividends, and qualitative aspects such as the viewpoint of long-term improvement of corporate value. The Company also comprehensively considers the risks associated with holding the shares. The Accounting and Finance Department analyzes whether or not it is suitable to hold the shares, and the results of the analysis are reported and verified at the Board of Directors' meeting at the end of each fiscal year. On the other hand, in order to promote the sustainable growth of investee companies from the viewpoint of shareholders, voting rights are exercised by determining how to handle proposals related to investment destinations after fully considering each proposal as a fair shareholder, and we never give people carte blanche to do as they please. We have developed this as our in-house basic policy. Also, every year we regularly analyze returns and risks for each stock holding to examine whether there is rationality in holding them from the viewpoint of long-term improvement of our corporate value. After consultation between the parties, we sell stocks that we deem to have less rationality.

[Principle 1-7. Related Party Transactions]

When performing transactions with directors and major shareholders, the Board of Directors Regulations and the Board of Directors Agenda Criteria stipulate that they are matters that require discussion by the Board of Directors, and the Board of Directors appropriately monitors and supervises them from an independent and objective standpoint.

[Principle 2-6. Functioning as a Corporate Pension Asset Owner]

The Company has subscribed to the defined-benefit corporate pension plan, and its operation status is monitored by the General Affairs Department and reported at the Board of Directors' meetings at appropriate times. Matters including the exercise of voting rights are entrusted to a corporate pension management company and hence there is no conflict of interest between the beneficiaries of the corporate pension and the Company.

In addition, we have introduced a defined-contribution corporate pension plan to create employee assets. (Adoption of DC Plan)

In addition to providing educational institutions regarding the selection of operating companies and investment products as well as educational institutions related to asset management for employees, we also explain the relevant matters to employees when they join the Company.

[Principle 3-1. Enhancement of Information Disclosure]

1. With its management philosophy of "Visionary Technology," "Reliable Quality" and "Meticulous Service" and its mission statement "Enjoy your work," the type of organization the Company aims to be are communicated through company briefings and the website. The management strategies and plans are also outlined in the Medium-term Management Plan "2030 Vision Phase 1" announced on February 14, 2022, with specific details of the initiatives in the "Issues to be addressed" and "Basic policy on control of the Company" in the Notice of Convocation, available on our website.
2. The MEC Group believes that to maximize stakeholder return, continuous initiatives toward reinforcing corporate governance, thereby enhancing corporate value, are crucial. Specifically, we place the ESG Committee (the majority of whose members are outside persons) at the center; promote initiatives for fair and transparent management, speedy and accurate information disclosure, and thorough accountability; and act in accordance with the concept of the Corporate Governance Code.
3. The remuneration for Directors (excluding Directors who are members of the Audit and Supervisory Committee and Outside Directors) consists of fixed monthly monetary remuneration, performance-linked remuneration, and fixed stock remuneration. Performance-linked remuneration includes performance-linked monetary remuneration linked to consolidated operating income and performance-linked stock remuneration as medium- to long-term remuneration, and our policy is to allocate weights according to each position. The remuneration of directors and outside directors who are Audit and Supervisory Committee members is only fixed monthly remuneration. As a procedure, the remuneration of directors (excluding directors who are Audit and Supervisory Committee members) is determined by a resolution of the Board of Directors based on the report of a majority of the Nomination and Remuneration Advisory Committee and based on the opinions of the Audit and Supervisory Committee. I have decided. The remuneration of directors who are Audit and Supervisory Committee members is determined by the Audit and Supervisory Committee based on the report of the majority of the Nomination and Remuneration Advisory Committee by independent outside members.
4. In addition to providing statutory qualification requirements, the Company elects Directors pursuant to the recommendations of the Nomination and Remuneration Advisory Committee from among those who meet the election criteria, and elects members of the Audit and Supervisory Committee based on the recommendations of the Audit and Supervisory Committee. Candidates are nominated by the Board of Directors. The election standards are as follows: 1. high level of ethics, integrity and values as a management expert, 2. practical insights and mature judgment, 3. very inquiring mind and mental independence, 4. extensive knowledge and experience in management decision-making, and 5. intention to maximize shareholder value. In addition, election criteria for Outside Officers are for them to be consistent with the independence requirement. Meanwhile, we have stipulated reasons for non-qualification under the Officers' Regulations and they can be dismissed by resolution at the General Meetings of Shareholders.
5. The reason for appointing Directors is explained in a short career summary of the candidates, shown in the "Reference Materials for the General Meeting of Shareholders" section of the convocation notice on our website.

[Principle 3-1-3. Enhancement of Information Disclosure]

1. Our company's sustainability initiatives
   The Company discloses its sustainability initiatives in its sustainability Report. https://www.mec-co.com/en/sustainability/report/
2. Investment in human capital and intellectual property, etc.
   The Company believes our employees are "one of the most important assets for sustainable growth through the realization of the Company's management strategy." With the goal of developing human resources to become autonomous human resources who embody the Company's motto, "Enjoy your work," we respect individuals and are promoting the creation of a rewarding work environment by providing opportunities for diverse human resources to play an active role. In order to ensure that our customers can safely use our products, we are striving to secure intellectual property rights as part of our measures to protect our technology.
3. Climate change issue
   In line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), we have considered various future scenarios, including a below 2°C scenario, and disclosed them on our website. https://www.mec-co.com/en/sustainability/esg/environment/tcfd/tcfd20230214.pdf

[Supplementary Principle 4-1-1. Roles and Responsibilities of the Board of Directors (1)]

The Company has established Board of Directors Agenda Criteria pertaining to matters to be resolved at the Board of Directors that must be held in accordance with laws and regulations and also matters of high importance pursuant to them. Furthermore, in order to improve the efficiency of management and make quick decisions, all or some of the important business execution decisions are delegated to the CEO & President. Management strategies and policies of management plans are discussed and resolved at the Board of Directors and delegated to the Company's management team involved in executing operations.

[Principle 4-9. Criteria for Independence and Qualification of Independent Outside Directors]

The Company has established strict criteria for use if Outside Directors have no independence from the Company. If a person applies to any of the below, we determine that they do not have independence.

1. Has work experience in an organization that is our major shareholder which holds 5% or more of the voting rights, or is a major shareholder.
2. Has work experience in the Company's main bank or major lender.
3. Has work experience in our major trading partner or an organization that we position as our major trading partner.
4. Has work experience in our audit corporation, law firm, or main securities firm.
5. There have been cases where compensation in the form of consulting fees, attorneys' fees and tax accountant remuneration has been paid by the Company in addition to executive compensation.
6. The corresponding period for 1 to 5 is within the past 5 years from the present time.
7. Person who is next of kin to a person listed in 1 to 6 above.
8. Person who is a close relative of someone who executes business, non-executive person who does not execute business, or employee at the Company or its subsidiaries or affiliates.

When selecting candidates for such independent Outside Directors, it is determined in cooperation with other directors whether the candidate has the required knowledge, experience and ability to contribute to frank, lively and constructive studies which he or she can be expected to make as a member of the Board of Directors. This is done in the Nomination and Compensation Advisory Committee in the course of reviewing the structure or organizational design of bodies like the Board of Directors, and the result is reported to the Board of Directors.

[Principle 4-10-1. Use of Voluntary Mechanisms]

The Company's independent outside directors constitute a majority of the Board of Directors. The Company has also established the Nomination and Compensation Advisory Committee, in which the majority of the members are independent outside directors, to obtain appropriate involvement and advice from the independent outside directors in considering particularly important matters such as nominations and compensation. The structure, authority and roles of the members of the Nomination and Compensation Advisory Committee are disclosed in the Annual Securities Report.

[Supplementary Principle 4-11-1. Prerequisite for Securing Viability of the Board of Directors]

The Company has given a structure to the Board of Directors while comprehensively taking into account factors such as the environment surrounding the Company and its business characteristics, so that the members can conduct proper and agile decision-making and supervision. In addition, the Board of Directors is composed of members having a variety of knowledge and experience, regardless of their gender or whether they are from inside or outside the Company.

The basic approach is as follows.

1. Constantly have a number of Directors that is appropriate for the Company's scale.
2. The Board of Directors takes in the idea of reviewing the central concept of the management board and strengthening supervision, but on the other hand substantially revises the Operating Officer system.
3. The Company appoints Outside Directors who have the knowledge, experience and ability that are required in terms of the structure of the Board of Directors, in a number that constitutes half or a majority of the Board of Directors.

The Board of Directors is creating a skills matrix that lists the knowledge, experience, and capabilities of each director, which have been identified in light of the management strategy. This matrix will be included in the reference materials for the General Meeting of Shareholders.

[Supplementary Principle 4-11-2. Prerequisite for Securing Viability of the Board of Directors]

The number of Directors that can concurrently serve at other companies is decided regardless of whether the other companies are listed or unlisted, and regardless of whether they are Outside Officers or Inside Officers. Non-Executive Officers must serve at no more than four companies including the Company, in principle, and Executive Officers must serve at no more than two companies including the Company in principle.

The status of important concurrent posts by directors is disclosed each year in the notice of convocation of the General Meeting of Shareholders.

[Supplementary Principle 4-11-3. Prerequisite for Securing Viability of the Board of Directors]

Each year, the Company conducts an assessment questionnaire for all Directors to further ensure the effectiveness of the Board of Directors and improve its functionality, reporting the results to the Board of Directors to address areas for improvement in the future.

In FY2022, based on the assessment of the effectiveness of the Board of Directors, we promoted the effective operation of the Board of Directors by strengthening their key issues for deliberation and enhancing the exchange of views with Outside Directors and Executive Officers.

In addition, highly independent Outside Directors made active statements based on their expert knowledge, and constructive discussions were held. As a result, we assess that the Board of Directors is adequately fulfilling its supervisory function.

That said, we recognize that progress and progress reports on key issues, as well as further discussions, succession planning, and discussions on issues surrounding sustainability, should be further strengthened.

In the future, we will make improvements in these matters to further ensure the effectiveness of the Board of Directors and improve its functionality.

[Supplementary Principle 4-14-2. Training of Directors]

The Company's policy for training the Directors is as follows.

At the time of taking office, we have developed a training program that centers on the roles and responsibilities that a person is expected to play or fulfill as a Director.

We have developed a training program for officers after they have taken office, and it focuses on the training necessary to gather information such as changes in the environment surrounding the business or institutional changes.

In addition, we also have Outside Directors attend major conferences so that they can deepen their understanding of the Company's business and industry environment as soon as possible, regardless of the area they specialize in.

In addition to the above, Directors who are members of the Audit and Supervisory Committee become members of the Japan Audit & Supervisory Board Members Association and participate in various meetings and training and lecture programs. At the same time, they receive reports from

participating members of the Audit and Supervisory Committee on the content of the courses when they meet at the Audit and Supervisory Committee.

In addition to training that allows Directors to sufficiently fulfill their responsibilities, the Company also has training that incorporates its own specific programs, and is working to enhance the contents.

[Principle 5-1. Policy on Constructive Dialog with Shareholders]

In response to applications from shareholders for dialogue (an interview), the Company has established the Corporate Communications Office (CC Office). The CC Office sets up a system that allows matters to be promptly reported to the Board of Directors. We have set the basic requirements of information as transparency, fairness, and business continuity. And based on the recognition that quick and accurate information disclosure is extremely important, all members of the Company are working together and with a sincere attitude to provide company information to all stakeholders. In particular, we are building good relationships with capital markets so that people can properly assess our enterprise value with information we disclose. The Company sees bi-directional communication as being a pillar of its organization. It places great importance on communication with active shareholders while sincerely and fairly disclosing information, so that all shareholders and investors can make investment decisions after obtaining a proper understanding of the business.

2. Capital Structure

	Foreign Shareholding Ratio	10% or more but less than 20%

[Status of Major Shareholders]

(Updated)

	Name / Company Name		Number of Shares		Percentage (%)
		Owned
	The Master Trust Bank of Japan (Trust Account)	2,982,700	15.79
	Custody Bank of Japan (Trust Account)		2,944,329	15.58
	Maeda Holdings		1,199,000	6.34
	Maeda Kazuo		726,900	3.84
	Maeda Kosaku		555,304	2.93
	MEC Trading-Partner Shareholding Association	554,400	2.93
	SUMITOMO LIFE INSURANCE COMPANY		546,900	2.89
	The Nomura Trust & Banking (Investment Trust Account)	543,100	2.87
	SMBC Nikko Securities Inc.		359,300	1.90
	HSBC-FUND SERVICES CLIENTS A／C 006	326,600	1.72
	Controlling Shareholder (except for	--------
	Parent Company)
	Parent Company	N/A

Supplementary Explanation (Updated)

1. The above-mentioned "Major Shareholders" are described based on the list of shareholders as of June 30, 2023.
2. With respect to the number of shares held by Custody Bank of Japan (Trust Account) mentioned above, the number of shares relating to the trust business is 164,329.
3. Although the Company holds 1,181,842 treasury shares, these shares are excluded from the above "Major Shareholders."
4. The shareholding ratio is calculated after deducting treasury shares.
5. A change shareholding report available for public inspection on June 7, 2023 states that Mizuho Bank, Ltd. and its joint holder Asset Management One Co., Ltd. holds 1,559,900 shares as of May 31, 2023. However, the Company could not confirm the number of shares actually owned as of June 30, 2023, so it is not included in the status of the above major shareholders.
6. A change shareholding report available for public inspection on June 21, 2023 states that Sumitomo Mitsui Trust Asset Management Co., Ltd. and its joint holder Nikko Asset Management Co., Ltd. holds 1,070,900 shares as of June 15, 2023. However, the Company could not confirm the number of shares actually owned as of June 30, 2023, so it is not included in the status of the above major shareholders.
7. A change report available for public inspection on July 5, 2023 states that JP Morgan Asset Management Co., Ltd. and four others owner holds 1,442,290 shares as of June 30, 2023. However, the Company could not confirm the number of shares actually owned as of June 30, 2023, so it is not included in the status of the above major shareholders.

3. Corporate Attributes

	Listed Stock Market and Market Section	Tokyo Stock Exchange Prime Market
	Fiscal Year-End	December
	Type of Business	Chemicals
	Number of Employees (consolidated) as of the End of the	100 or more but less than 500
	Previous Fiscal Year
	Net sales (consolidated) for the Previous Fiscal Year	10 billion yen or more and less than 100 billion yen
	Number of Consolidated Subsidiaries as of the End of the	Less than 10
	Previous Fiscal Year

1. Policy on Measures to Protect Minority Shareholders in Conducting Transactions with Controlling Shareholder
   --------
2. Other Special Circumstances which may have Material Impact on Corporate Governance

--------

II. Business Management Organization and Other Corporate Governance Systems regarding Decision-making, Execution of Business, and Oversight in Management

1. Organizational Composition and Operation

Organization FormCompany with audit and supervisory committee

[Directors]

	Maximum Number of Directors Stipulated	12
	in Articles of Incorporation
	Term of Office Stipulated in Articles of	1 year
	Incorporation
	Chairperson of the Board	President
	Number of Directors	7
	Appointment of Outside Directors	Appointed
	Number of Outside Directors	4
	Number of Independent Officers	4
	Designated from among Outside Directors

Directors' Relationship with the Company (1)

Name

Attribute

Relationship with the Company*

a

b

c

d

e

f

g

h

i

j

k

Toshihiko HOJO

From other companies

Mitsutoshi TAKAO

From other companies

Kaoru HASHIMOTO

Lawyer

Mitsuo HAYASHI

From other companies

• Categories for "Relationship with the Company"
• "○" when the Director presently falls or has recently fallen under the category; "△" when the Director fell under the category in the past
• "○" when the Director presently falls or has recently fallen under the category; "△" when the Director fell under the category in the past
  a Executive of the Company or its subsidiaries