Corporate Governance System

To ensure the performance of duties based on appropriate management decisions, the Company strengthens the monitoring functions of the Board of Directors, which deliberates matters mainly relating to the Company’s management foundation, such as its management philosophy and business plans, as well as important matters concerning business execution by tapping into the management experience and professional knowledge of outside directors and outside corporate auditors. This has resulted in the establishment of a framework in which each executive organization reports the progress of business execution on matters for which a management decision was made to the Corporate Executive Meeting, the Board of Directors, etc. on a timely basis. The Company has opted to be a company with a Board of Company Auditors to ensure such duties are executed in a legally compliant and smooth manner, by coordinating the audit functions of the corporate auditor, the business audits by the Internal Control Department, which is an internal audit function, and the supervisory functions of the Board of Directors. The Company has a framework that separates business management and business execution, under which the Board of Directors is responsible for developing the Group’s medium- to long-term plans and making management decisions in line therewith, while the Business Execution Framework that is mainly comprised of executive officers is responsible for business execution through rapid and flexible decision-making. The Board of Corporate Auditors and the Independent Accounting Auditors form the Audit Framework for overseeing management and auditing business execution. The Boards and the Frameworks form the structure that fulfills their respective roles and responsibilities from an independent perspective.

Aiming to strengthen the Board’s oversight of business execution, the Company appointed two outside directors for the first time in FY2009 and added one outside director after FY2012 and another after FY2022 to promote highly transparent and equitable management by drawing on perspectives from outside the Company. At present, the Company formed a team of six directors, including two female directors. The appointment of these outside directors (more than half of the six directors) is allowing the Company to maintain a system that ensures fair and efficient management. All four outside directors are independent appointments and understand corporate responsibility of the Company, contributing to increasing transparency in management.

The Board of Directors meets once a month, in principle, to make decisions on important matters that affect business and supervise business execution. In FY2022, the Board met 12 times and made decisions appropriately on important matters that required management decisions in accordance with the law and the Articles of Incorporation. The attendance rate of directors and corporate auditors was 100% for all Board meetings.

The Board of Directors is advised by the Nomination Advisory Committee (four outside directors, one inside director, and one outside corporate auditor) and the Compensation Advisory Committee (four outside directors, one inside director, and one standing corporate auditor), which are chaired by outside directors. To ensure management decisions are equitable, these committees carefully assess the aptitude of candidates for director positions, the impact directors have on business management, and the suitability of individuals for certain roles and their respective levels of remuneration.

To ensure directors and each organization in the Company conduct their duties in a legally compliant and appropriate manner, the Company has established systems to enable corporate auditors and the Internal Control Department, which is responsible for conducting internal audits, to carry out audits of business execution and exchange opinions with the representative directors as required. The Board of Corporate Auditors consists of two standing corporate auditors and three outside corporate auditors. Corporate auditors attend important meetings such as the Board of Directors and Corporate Executive Meeting, express necessary opinions, and conduct business audits and accounting audits in accordance with the “Code of Audit and Supervisory Board Member Auditing Standards” by directors and each person in charge of business execution regarding to verifying the legality and validity of our business. Corporate auditors receive reports from the Accounting Auditor on the details of the accounting audit and take measures such as exchanging opinions. Corporate auditors also regularly receive reports from the Internal Control Department on the content of internal audits and take measures such as exchanging opinions to ensure coordination among corporate auditors, the Accounting Auditor and the Internal Control Department.

In addition, the Company has concluded an audit contract under which Ernst & Young ShinNihon LLC serves as its external auditor for conducting accounting audits. The certified public accountants who are the employees who conduct accounting audits for the Company are Yasuhiro Kozaki and Naoki Nakazawa.

The Company has introduced an executive officer system to support dynamic and flexible business operations, enabling the Group to respond rapidly to significant changes in the operating environment. The Company has also established the Corporate Executive Meeting as a body to discuss business execution. It is composed of directors, standing corporate auditors and those responsible for business execution and meets every week in principle. The Corporate Executive Meeting is a forum for discussing issues related to business execution and important management matters.

Business execution involves four supervisory units – R&D, Healthcare Business, Supply and Corporate – and ten divisions – the Research Division, the Drug Development and Regulatory Science Division, and the Biopharmaceutical Research Division, which engage in research and development; the Pharmaceutical Commercial Division, which communicates information about drugs; the Integrated Disease Care Division, which collects and analyzes healthcare information to maximize the value of products and the Company; the Global Business Division, which is responsible for the strategic promotion of overseas business development and stable supply based on the supply strategy; the Corporate Strategy Division, which is responsible for formulating company-wide strategies for the optimal allocation and utilization of managerial resources; the Administration Division, which supports corporate activities in terms of personnel, organization, and laws and regulations; the DX Promotion Division, which aims to create healthcare solutions by building infrastructure for data utilization using IT and digital technology; and the Corporate Quality Assurance and Ethics & Compliance Management Division, which is responsible for assuring the quality of marketed products.

The Corporate Executive Meeting thoroughly deliberates on the execution of business, and the Board of Directors makes decisions on matters that affect management.

The Board of Directors analyzed and evaluated its effectiveness in FY2022 by conducting questionnaires and interviews of individual directors and corporate auditors by a third-party evaluation organization, with a focus on (1) Framework, (3) Roles and Responsibilities, and (6) Operation in “6. Directors and the Board” in the “Basic Views and Guidelines on Corporate Governance” set by the Company.

The following is a summary of the results:

1. Framework

We assess that the Board of Directors has currently secured the necessary framework from the standpoint of various attributes, including expertise and experience, and diversity. However, raised as a future challenge was the need to elect successor candidates and appoint female directors and directors with expertise in overseas business from the standpoint of further diversity and succession, in light of the expansion of and changes in the Company’s business.

The Board of Directors will continue to consider ways to develop the optimal framework for the Company while taking the Company’s business development into account.

2. Roles and Responsibilities

Regarding the reporting and supervision of the status of senior management development, reports were continuously provided at opinion exchange meetings with outside directors and the President, and meetings between associate corporate officers (senior management candidates) and outside directors were held three times under a new method developed in FY2021 to enhance the content of the meetings. In addition, activities related to compliance and sustainability were reported several times to the Board of Directors, who made resolutions on key matters.

Future challenges were raised, including the utilization of human capital in anticipation of their future growth, the enhancement of deliberations on the promotion of DX and the need for further enhancement of reporting on the progress of the medium-term business plan and reporting on non-financial information, such as risk management and sustainability.

The Board of Directors will continue to explore ways to improve its roles and responsibilities.

3. Operation

In order to further stimulate discussions at Board of Directors meetings, the Board of Directors has continued to provide periodic pre-briefings on the agendas of Board of Directors meetings and has reported on the progress of matters resolved at the meetings as appropriate. Also, a tour of the Shionogi Education and Training Center was conducted.

Opinions expressed about future challenges included increasing information provided and considering a support system for the Board of Directors to further enhance discussions.

The Board of Directors will continue to explore ways to improve its operation.

Based on the above, we assess that the Company’s Board of Directors has been operated appropriately and its effectiveness has been secured. We will use the results of this self-evaluation as a basis for making continuous improvements to make the Board of Directors even more effective.

Remuneration for directors is determined within the total amount of remuneration set by resolution of the General Meeting of Shareholders. This is comprised of monthly fixed base remuneration, bonuses determined by results and other factors for each fiscal year, and restricted stock compensation introduced in FY2018 (consisting of medium-term performance-linked compensation and long-term stock-based compensation). Outside directors only receive base remuneration.

Base remuneration is determined based on the base remuneration table according to the position and role of directors with due consideration of the management environment and global trends.

Bonuses are paid as cash remuneration, which reflects performance indicators (core operating profit excluding sales of assets, etc., consolidated profit and other total performance evaluation as directors) to heighten the awareness of improving performance for each fiscal year. As short-term incentives, they are determined based on the calculation table according to performance such as achievement of targeted profits and other factors in each fiscal year and paid in June of each year.

Stock-based compensation is granted in July of each year based on the grant table according to the position and role of directors. For medium-term performance-linked stock compensation in particular, performance is evaluated based on the status of achievement in FY2022 for the portion to be granted for the three years between FY2020 and FY2022 from the period of STS2030 Phase 1 (FY2020 to FY2024), using revenue, overseas net sales, core operating profit, ROE and the ranking in total shareholder return (TSR) among 12 competitors, including the Company (relative TSR), as quantitative indicators and taking into consideration the status of ESG, compliance and development associated with COVID-19. Thus, the ratio of lifting the transfer restriction (100% to 0%) is determined. In addition, when lifting the transfer restriction, 50% of the amount of stock-based compensation, translated into the share price at the time of lifting, is paid as monetary compensation.

The Compensation Advisory Committee discusses the ratio of remuneration by type for executive directors in consideration of remuneration levels using companies that have a similar business size to the Company and are included among the relevant business types and categories as the benchmark, and the Board of Directors, in respect of the recommendations given by the Compensation Advisory Committee, determines the details of the remuneration system, etc. so that the ratio of remuneration by type is in line with the recommendations. The policy for determination thereof is as described in “Policy for Determination of Details of Individual Remuneration, etc. for Directors.” In addition, pursuant to the resolution at the Board of Directors meeting held on February 22, 2021, it is considered appropriate that base remuneration and individual bonus amount, etc. are evaluated and determined by a person who bears the ultimate management responsibility, and thus, such evaluation and determination are entrusted to Isao Teshirogi, Representative Director, President and CEO. The Compensation Advisory Committee deliberates the policy and criteria for the entrustment and provides the Board of Directors with the results as recommendations for their resolution, and Isao Teshirogi, Representative Director, President and CEO, to whom such determination is entrusted, shall make decisions in accordance with said recommendations and the abovementioned resolution by the Board of Directors.

Following revisions in FY2021 to the medium-term performance-linked, stock-based remuneration table so as to place more emphasis on performance and on the standpoint of shareholders, the system is designed so that the targeted ratio for each type of remuneration, etc. will be base remuneration: performance-linked remuneration, etc.: non-monetary remuneration, etc. = roughly 1:1:1 on the premise that all KPIs are achieved.

(Note) Performance-linked remuneration, etc. comprises director and corporate auditor bonuses, and non-monetary remuneration, etc. comprises restricted stock.

As a result, the ratio of base remuneration in total remuneration in FY2022 is about 33%, due in part to the achievement status of the profit target and the impact of share prices on stock-based compensation.

Remuneration for corporate auditor is determined within the total amount of remuneration set by resolution of the General Meeting of Shareholders. This encompasses the monthly fixed base remuneration.

As an advisory body to the Board of Directors, the Company's Compensation Advisory Committee consists of six members, a majority of whom are outside directors, and is chaired by an outside director. The Committee duly considers director and corporate auditor remuneration. It also discusses various issues concerning remuneration, etc. for directors and executive officers, verifies the levels of remuneration, etc. every year and deliberates the remuneration system, performance evaluation system, etc. for the following fiscal year.

Remuneration for directors of the Company is based on a remuneration system linked with shareholder interest so that it fully functions as an incentive for a sustainable increase in corporate value, and it is the Company’s basic policy to determine remuneration for each director at a proper level according to their job responsibilities. More specifically, remuneration for executive directors shall comprise base remuneration as fixed remuneration, performance-linked remuneration, etc. (bonuses as monetary remuneration) and stock-based compensation, and remuneration paid to outside directors who undertake supervisory functions shall only be base remuneration in light of their duties.

Base remuneration for directors of the Company shall be monthly fixed remuneration and determined based on the base remuneration table established according to their rank and job responsibilities and taking into consideration the Company’s business results, employees’ salary levels and levels at other companies.

Performance-linked remuneration, etc. shall be cash remuneration that reflects performance indicators (KPIs) to heighten the awareness of improving performance for each fiscal year, and paid as a bonus June of each year in an amount calculated according to the degree of achievement against targeted figures for consolidated operating profit and consolidated profit of each fiscal year. The performance indicators to be targeted and the figures thereof shall be set at the time of formulating the Medium-Term Business Plan so that they are in line with the Plan, and reviewed as necessary to accommodate environmental changes taking into account recommendations given by the Compensation Advisory Committee.

Non-monetary remuneration, etc. shall be restricted stock and consist of two parts: the long-term stock-based compensation system which requires being employed by the Company; and the medium-term performance-linked stock-based compensation that is linked to performance. For the long-term stock-based compensation system, the number of shares to be granted shall be determined based on the stock-based compensation table established, according to rank and job responsibility, by the Board of Directors after deliberation by the Compensation Advisory Committee.

With respect to the medium-term performance-linked stock-based compensation, the number of shares to be granted shall be determined based on the stock-based compensation table established, according to rank and job responsibility, by the Board of Directors after deliberation by the Compensation Advisory Committee. Restricted stock shall be granted in July of each year, and performance shall be evaluated based on the status of achievement in FY2022 for the portion to be granted for three years between FY2020 and FY2022 from the period of STS2030 Phase 1 (FY2020 to FY2024) to determine the ratio of lifting the transfer restriction (100% to 0%). In addition, when lifting the transfer restriction, 50% of the amount of stock-based compensation, translated into the share price at the time of lifting, shall be paid as monetary compensation. Using revenue, overseas net sales, core operating profit, ROE and the ranking in total shareholder return (TSR) among 12 competitors including the Company (relative TSR) as quantitative indicators, performance evaluation is determined by the Board of Directors, after deliberation on the overall evaluation by the Compensation Advisory Committee, in consideration of the status of ESG, compliance and development associated with COVID-19.

The Compensation Advisory Committee discusses the ratio of remuneration by type for executive directors in consideration of remuneration levels using companies that have a similar business size to the Company and are among the relevant business types and categories as the benchmark. The Board of Directors (representative directors who are entrusted pursuant to Item 5), in respect of recommendations given by the Compensation Advisory Committee, determines the details of the remuneration system, etc. so that the ratio of remuneration by type is in line with the recommendations, and also the amounts of individual remuneration, ensuring consistency with the purposes of the recommendations.

The targeted ratio for each type of remuneration, etc. is set as base remuneration : performance-linked remuneration, etc. : non-monetary remuneration, etc. = 1:1:1 (if all KPIs are achieved).

(Note) Performance-linked remuneration, etc. comprises director and executive director bonuses and non-monetary remuneration, etc. comprises restricted stock.

The specific details of the remuneration amount for each individual shall be entrusted to representative directors pursuant to a resolution at the Board of Directors, and the details of the authority shall be evaluation and allocation of bonuses taking into account the amount of base remuneration for each director based on the base remuneration table and results of the business of which the director is in charge.

The Compensation Advisory Committee deliberates the policy and criteria for the entrustment to representative directors and provides the Board of Directors with the results as recommendations for their resolution, and representative directors who are entrusted as described above shall make determinations in accordance with said recommendations and resolutions by the Board of Directors.

The amount of stock to be allotted to individual directors as stock-based compensation based on the stock-based compensation table shall be resolved by the Board of Directors taking into account recommendations given by the Compensation Advisory Committee.

The Compensation Advisory Committee consists of six members, a majority of whom are outside directors, and is chaired by an outside director. In addition to the foregoing, the Compensation Advisory Committee discusses various issues concerning remuneration, etc. for directors and executive officers, verifies the levels of remuneration, etc. every year and deliberates the remuneration system, performance evaluation system, etc. for the following fiscal year.

For details on corporate governance, please refer to the “Corporate Governance Report”.