Basic philosophy for corporate governance

SAN HOLDINGS positions the strengthening and improvement of corporate governance as one of the highest management priorities in order to maintain transparent management in line with basic management policies and constantly increase corporate value.

Corporate Governance System

The Board of Directors supervises how business operations are conducted, primarily by the executive officers. The Audit & Supervisory Board performs audits of the performance of individual directors and the decisions of the Board of Directors. In addition, there are financial audits and internal control audits by the independent auditor and the Internal Audit Office performs audits of business processes and internal controls.

To earn even greater trust of shareholders, investors and other stakeholders, SAN HOLDINGS has outside directors for the purpose of strengthening corporate governance through cooperation between outside directors, the Audit & Supervisory Board and other governance units. This makes possible supervision and audits that can even more closely linked to the management decision-making process.

The Management Committee meets every month to hold discussions about significant actions concerning the management of the SAN HOLDINGS Group. Discussions cover the establishment of business plans, changes to the group’s organizational structure, revisions to how businesses are conducted and other subjects involving management. The committee is chaired by the chairman and representative director and members are the full-time directors, full-time Audit & Supervisory Board members, executive officers with a rank of managing executive officer or higher, and other executive officers and others as needed.

Board of Directors

The Board of Directors consists of four directors, two independent outside directors, one Audit & Supervisory Board member and two independent outside Audit & Supervisory Board members. These individuals give the Board of Directors access to a broad and well-balanced range of backgrounds as well as the ability to hold discussions based on a sound awareness and understanding of social changes and management issues.

1. The Board of Directors has two categories of directors. One is internal directors (directors other than outside directors) who are very knowledgeable about the SAN HOLDINGS Group’s business operations. The other category is outside directors who have acquired management expertise through their experience at other companies. The combination of these two categories of directors enables the board to operate effectively and efficiently and provides for the effective oversight of how business operations are conducted.
2. Candidates for election as directors are selected after taking into consideration the discussions and recommendations of the Nomination Committee. This process is used to ensure that directors have the skills required to oversee the group in accordance with the corporate philosophy and to accomplish the goals of medium-term management plans. Selections of candidates have the goals of achieving balance in terms of knowledge, experience and skills and maintaining the proper number of directors for facilitating effective discussions of agenda items.
3. The Board of Directors consists of six directors, including two independent outside directors, and three Audit & Supervisory Board members, including two independent outside members. Board members supervise at a high level the determination of strategies and speedy and flexible management of business operations. The directors and Audit & Supervisory Board members collectively have the capabilities (experience, knowledge, professional skills) needed for the growth of corporate value.

Skill Matrix of Directors and Audit & Supervisory Board Members

* outside directors and Audit & Supervisory Board members

Note:

This table shows a maximum of three items concerning the knowledge and experience of these individuals and is not a list of all of their attributes.

Reason for selection as an outside director

Policy for determining remuneration for directors and other officers

1. Basic Policy

SAN HOLDINGS has established the following policy for the remuneration of directors in accordance with the Companies Act and the principles of the Corporate Governance Code.

• Remuneration is structured to increase the motivation of directors to accomplish the mission of the SAN HOLDINGS Group.
• Furthermore, remuneration reflects the goals of medium-term management plans, discourages directors from placing undue emphasis on short-term performance, and supports activities for achieving consistent medium to long-term growth.
• The levels and framework of remuneration are effective for attracting and retaining people with the skills required for the continuing success of the SAN HOLDINGS Group.
• Remuneration is determined in a transparent, fair and objective manner in order to fulfill the obligation to explain these decisions to shareholders, investors, employees and all other stakeholders.

2. Method for determining remuneration

The limit for total remuneration for directors and Audit & Supervisory Board members is established by a resolution approved by shareholders. After discussions by members of the Remuneration Committee, remuneration of individual directors is determined by the Board of Directors and remuneration of individual Audit & Supervisory Board members is determined by the mutual agreement of these individuals.
The purpose and composition of Remuneration Committee and policy for its activities are as follows.

(1) Purpose

Members of the Remuneration Committee discuss three subjects concerning the remuneration of directors and executive officers: (1) policies, (2) structure and (3) suitability of remuneration of individuals. Results of these discussions are submitted to the Board of Directors.

(2) Composition

The committee has two representative directors and two outside directors and is chaired by the Chairman and Representative Director.

(3) Activities

Meetings are held in accordance with a schedule established in advance. Agenda items and results of discussions are submitted to the Board of Directors in a timely and appropriate manner.

3. Framework for remuneration of directors and Audit & Supervisory Board members

The remuneration of directors and Audit & Supervisory Board members consists of fixed remuneration as basic remuneration and bonuses and stock remuneration as remuneration linked to results of operations. The ratio of these two categories of remuneration is set at a level to enable remuneration to function properly as an incentive. The following is a summary of the components of remuneration.

(1) Basic remuneration

The annual limit for total basic remuneration of directors is established by a resolution approved by shareholders: a maximum of ¥350 million for directors and ¥50 million for Audit & Supervisory Board members. Remuneration for individuals is based on their management positions and roles. Remuneration Committee members take into consideration the businesses overseen by each director, their roles involving fiscal year plans, and comparisons with remuneration at other companies. The company’s current financial condition is another consideration. Following discussions by the committee, remuneration is determined by the Board of Directors. Basic remuneration for directors is a fixed monthly payment that, as a rule, is paid on the same day as the monthly salary payment date for employees.

(2) Bonuses (Performance-linked remuneration)

Total bonus payments to directors are limited to not more than 3% of the consolidated ordinary profit in the fiscal year prior to the bonus payment date. This limit cannot be more than ¥100 million. Bonuses for individual directors are discussed by the Remuneration Committee based on contributions to business operations and the Board of Directors makes final decisions. Bonuses can be between 0% and 200% depending on the degree to which an individual has achieved targets for results of operations and personal performance. In accordance with the basic policy for remuneration as mentioned in 1. Basic Policy, bonuses for representative directors are based on the company’s results of operations and bonuses for other directors are based on the degree to which targets were achieved by using an appropriate weighting of results of operations and personal performance.
We have established a hurdle rate table for four key performance indicators: (1) consolidated operating revenue (20%), (2) consolidated operating profit (40%), (3) return on assets (20%) and (4) economic value added (EVA) spread (20%). Accomplishment ratios are determined by using the following time frames: (1) comparison with prior-year performance, (2) comparison with the fiscal year plan, (3) comparison with a medium-term plan, and (4) the three-year rate of growth. However, due to the nature of the EVA spread, the level of results of operations is used rather than an achievement ratio time span. Assessments of the performance of individuals (other than the representative directors) are based on the achievement ratios for management by objectives (MBO). Bonuses for directors are paid on the day of the annual shareholders meeting.
Outside directors and Audit & Supervisory Board members do not receive bonuses because of the characteristics of their roles and responsibilities.

(3) Stock remuneration (non-monetary remuneration)

For total stock remuneration for directors, the limits for a fiscal year are ¥100 million for monetary remuneration claims distributed for receiving restricted stock and 320,000 shares of restricted stock granted (after the October 1, 2023 stock split). The number of shares granted is based on the positions and roles of each director and this stock is distributed once every year. If there is a significant financial statement revision, financial loss or other similar event, the stock remuneration program has a provision allowing for malus (reduction or forfeiture of remuneration during the stock restriction period) and clawbacks (return of remuneration after the stock restriction period ends).
The number of shares of restricted stock for each executive position remains the same during the medium-term plan (June 2022 to June 30, 2025). This rule will be reexamined for each subsequent plan to reflect changes in society, management strategies, the remuneration policy and other items. Revisions, if any, will be determined by the Board of Directors after discussions by the Remuneration Committee.
Outside directors and Audit & Supervisory Board members do not receive stock compensation because of the characteristics of their roles and responsibilities.

(4) Composition of remuneration

The guideline ratios for the composition of basic remuneration, bonuses and stock remuneration are as follows. These ratios are not fixed because of changes in remuneration linked to results of operations.
Guideline ratios for remuneration for directors: (1) Basic remuneration 68%, (2) Bonus 17%, (3) Stock compensation 15%
Basic remuneration is 100% of the remuneration of outside directors and Audit & Supervisory Board members because of the characteristics of their roles and responsibilities.

4. Total remuneration for directors and Audit & Supervisory Board members, remuneration in each category, and number of these directors and members (FY3/23)

Notes

1. Total remuneration for FY3/23 includes remuneration for a director whose term of office ended at the close of the annual shareholders meeting on June 24, 2022 and was not reelected.
2. Major performance indicators used for performance-linked remuneration in FY3/23 are consolidated operating revenue of ¥21,663 million and consolidated operating profit of ¥3,868 million.

Audit & Supervisory Board

The SAN HOLDINGS Group uses the audit & supervisory board member governance system. The Audit & Supervisory Board has three members including two outside audit & supervisory board members. The audit & supervisory board members attend meetings of the Board of Directors and other important meetings and perform other activities to monitor the performance of the directors’ duties.

Reason for selection as an outside audit & supervisory board member

Cross-shareholdings

SAN HOLDINGS owns the stock of business partners in order to maintain and strengthen important business relationships as the funeral market in Japan continues to change. The purpose of these holdings is to contribute to the medium to long-term growth of the SAN HOLDINGS Group’s corporate value.

Policy for constructive dialogues with shareholders

SAN HOLDINGS has the following framework and policy for maintaining constructive dialogues with shareholders.

1. The director responsible for investor relations oversees all activities involving dialogues with shareholders. The general managers of the Corporate Planning, General Affairs and Accounting Divisions, who are all senior executives, assist with these activities.
2. The personnel responsible for public relations and investor relations in the Corporate Planning Division ensures that all information requiring disclosure is announced promptly by working with the General Affairs Division, Accounting Division and other related departments. Preparations are made for upcoming announcements and other information involving disclosures is shared.
3. SAN HOLDINGS conducts meetings for announcing financial results and information meetings for shareholders, meets with investors, and performs other activities.
4. The personnel responsible for investor relations in the Corporate Planning Division promptly pass on opinions and responses received through dialogues with shareholders and institutional investors to the director responsible for investor relations and other senior executives.
5. Individuals who participate in dialogues with shareholders and other investors receive training concerning the management of insider information. In addition, individuals who receive significant information that has not been disclosed must sign a confidentiality agreement in advance with SAN HOLDINGS.

Takeover defense plan

At the 93th General Meeting of Shareholders held on June 24, 2022, shareholders approved an extension of Countermeasures for Large-scale Purchases of SAN HOLDINGS Stock (takeover defense plan).
The takeover defense plan will expire at the close of the General Meeting of Shareholders for the last fiscal year that ends within the three-year period beginning at the end of the June 24, 2022 shareholders meeting.
More information about this plan is in a press release dated May 12, 2022 that is posted on the SAN HOLDINGS website. (URL: https://www.san-hd.co.jp/files/news/management/20220512_5.pdf )

Internal controls

1. Basic stance regarding internal controls and status of internal controls

The establishment of a sound system of internal controls to be the organizational base and framework is essential for the reliability of financial reports as well as for ensuring that business operations are conducted in a manner that is ethical, legal, effective and efficient. On May 18, 2006, the Board of Directors approved a basic policy for the establishment of an internal control system. On March 22, 2012 and October 21, 2015, the Board of Directors approved revisions to this policy, which is as follows.

(1) Framework for ensuring that the operation of the Board of Directors and business activities of employees comply with laws and regulations and the Articles of Incorporation (Article 362, Paragraph 4-6 of the Companies Act, Article 100, Paragraph 1-4 and 1-5(d) of the Companies Act Enforcement Regulations)
SAN HOLDINGS has outside directors to strengthen the oversight of operational decisions of the Board of Directors and the performance of the directors. The SAN HOLDINGS Compliance Code of Conduct and Standards of Conduct provide guidelines for ensuring that the group’s directors and employees comply with laws, regulations and the Articles of Incorporation as well as with generally accepted social standards. In addition, the Compliance Committee is responsible for maintaining and upgrading the framework for compliance. There is a Help Line that allows employees to submit internally or externally of problems involving compliance. This reporting system further strengthens the framework for compliance.
SAN HOLDINGS rejects all relationships with anti-social activities and organizations. There are measures to prevent any activities by these organizations for improper monetary gains and activities in accordance with organized crime elimination provisions based on these provisions established by all prefectures of Japan. These actions are specified in the SAN HOLDINGS Code of Conduct and Standards of Conduct and implemented accordingly.

(2) Framework for retention and management of information about the performance of directors (Companies Act Enforcement Regulations, Article 100, Paragraph 1-1)
Information about the performance of the directors is properly recorded, stored, managed and discarded in accordance with internal regulations. The directors and Audit & Supervisory Board members can view documents and other items containing this information at any time. The Board of Directors discusses the need for the timely disclosure of corporate information and the information to be disclosed in order to disclose information in a timely and appropriate manner.

(3) Rules and frameworks for management of risks that may cause losses (Companies Act Enforcement Regulations, Article 100, Paragraph 1-2, 1-5(b))
All companies of the SAN HOLDINGS Group are involved with measures to identify sources of risk and prepare documents that list these risk factors and measures to reduce vulnerability to these risks.
The Risk Management Committee establishes rules for risk management, holds discussions about the group’s risk management framework, risk management activities and other subjects. This committee also examines and implements measures involving a broad range of risk factors involving business operations.

(4) Framework for ensuring that SAN HOLDINGS Group directors perform their duties efficiently (Companies Act Enforcement Regulations, Article 100, Paragraph 1-3, 1-5(c))
SAN HOLDINGS has established management systems, including the following systems, and uses these systems to ensure that directors perform their duties efficiently.
There are clearly defined rules for the directors concerning the assignment of duties and method for making decisions. Units for holding discussions have been established to facilitate the inclusion of many viewpoints for making decisions about significant items.
The Board of Directors establishes medium-term management plans, fiscal year targets and budgets for all business units based on a medium-term plan and fiscal year plan, and oversees monthly and quarterly performance.

(5) Framework for ensuring proper business operations of the SAN HOLDINGS Group (Companies Act, Article 362, Paragraph 4-6, Companies Act Enforcement Regulations, Article 100, Paragraph 1-5(a)(d))

1. SAN HOLDINGS has a director in charge of internal controls for the entire group for the purpose of maintaining a sound system of internal controls. There is a framework to facilitate discussions and information sharing about internal controls by SAN HOLDINGS and all group companies, the efficient submission of instructions and requests, and other activities.
2. The directors and executive officers of the SAN HOLDINGS Group have the authority and responsibility to establish and implement internal controls to ensure that business operations are conducted properly.
3. The internal audit department of SAN HOLDINGS performs internal audits of group companies and reports audit results to the director in charge of audits (mentioned in item a.) and managers involved with the audit (mentioned in item b). This director then submits instructions for improving internal controls as needed and provides support and advice for making these improvements.

(6) Information concerning employees assigned to assist Audit & Supervisory Board members (when requested) (Companies Act Enforcement Regulations, Article 100, Paragraph 3-1) and ensuring their independence from directors and the effectiveness of instructions given to these employees (Companies Act Enforcement Regulations, Article 100, Paragraph 3-2/3)
SAN HOLDINGS provides the Audit & Supervisory Board members with employees to assist with auditing procedures as needed. These employees are selected by incorporating the opinions of the directors and Audit & Supervisory Board members.
When one or more employees are appointed to assist the Audit & Supervisory Board members, these employees are no longer part of the corporate chain of command. These employees follow the instructions of the Audit & Supervisory Board members and the prior consent of these members is required for the selection of employees who provide assistance.

(7) Framework for reports by directors and employees of SAN HOLDINGS and directors, Audit & Supervisory Board members and employees of subsidiaries to SAN HOLDINGS Audit & Supervisory Board members (Companies Act Enforcement Regulations, Article 100, Paragraph 3-4/5)

Directors and employees of the SAN HOLDINGS Group are required to report promptly information about the following items that have a significant effect on the group. Reports are submitted after consulting the Audit & Supervisory Board and taking into account legal matters. Reports use the method determined by discussions of the Board of Directors and Audit & Supervisory Board. There is a system to protect group directors and employees who submit a report to an Audit & Supervisory Board member from any negative consequences associated with submitting the report.

• Items reported to and discussed by the Management Committee
• Items that may cause significant losses at the SAN HOLDINGS Group
• Important items concerning the group’s management (every month)
• Important items concerning internal audits and risk management
• Significant violations of laws and regulations and the Articles of Incorporation
• Reports received using the internal reporting system
• Other important items concerning compliance

(8) Procedure for advance payment or repayment of expenses for performance of duties by Audit & Supervisory Board members and policy for handling of other expenses and other amounts due concerning these duties (Companies Act Enforcement Regulations, Article 100, Paragraph 3-6)

SAN HOLDINGS promptly pays for expenses as requested by Audit & Supervisory Board members concerning ordinary auditing duties. SAN HOLDINGS also pays expenses other than for ordinary audits, such as for urgent audits and the use of external professional services, except when the activities of the Audit & Supervisory Board members are determined to be unnecessary.

(9) Other frameworks for ensuring that other audits by Audit & Supervisory Board members are performed effectively (Companies Act Enforcement Regulations, Article 100, Paragraph 3-7)

SAN HOLDINGS has a framework for facilitating periodic exchanges of opinions concerning management issues and other significant matters involving business operations by Audit & Supervisory Board members and the representative directors and directors. In addition, in accordance with Audit & Supervisory Board audit standards, there is a framework for enabling Audit & Supervisory Board members to perform audits effectively. The Audit & Supervisory Board receives reports about planned internal audits performed by the Internal Audit Office and holds periodic meetings with the independent auditor. This ensures that audits by Audit & Supervisory Board members are efficient and effective.

2. Basic stance concerning elimination of anti-social forces

(1) No relationships with anti-social forces

All companies in the SAN HOLDINGS Group refuse to have any relationship whatsoever with individuals or organizations that have a negative effect on social order and sound business activities.
Most importantly, individuals in management positions at group companies must conduct business operations properly without any fear of anti-social forces.
Group companies firmly reject any threats from organized crime and other sources for the purpose of illegally receiving payments. Resistance is performed as an organization and never on the basis of individual employees.
Furthermore, group companies use the assistance of the police, attorneys and others in order to work with communities in order to eliminate threats from organized crime.

(2) Prohibition of business with anti-social forces

In accordance with the anti-social force elimination ordinances of Japan’s prefectures, all SAN HOLDINGS Group companies have rules for the elimination of these forces and receive the agreement of customers concerning these rules.
If a group company discovers that a customer is an anti-social force, the relationship with the customer is immediately terminated, authorities are notified and other actions are taken as needed.