Corporate Governance System

Shionogi has adopted a Company with a Board of Auditors governance structure to support efficient management oversight. Under this system, the Group is working to strengthen the audit capabilities of its auditors and the monitoring functions of the Internal Control Department to ensure business execution is based on appropriate management decisions. In order to separate business management and business execution, the directors are responsible for making management decisions in line with the Group’s medium- and long-term plans, while the executive officers are responsible for implementing business strategy, resulting in business execution based on rapid and flexible decision-making. Half the Company’s directors are outside appointments, and we plan to enhance their supervisory functions further to reinforce management oversight.

In principle, the Board of Directors meets every month to make decisions on important matters that affect Shionogi’s business and to oversee business execution. Aiming to strengthen the board’s oversight of business execution, we appointed two outside directors in fiscal 2009 and added another outside director in fiscal 2012 to promote highly transparent and equitable management by drawing on perspectives from outside the Company. In fiscal 2015, we appointed our first female director to the board and increased the number of directors to six in order to strengthen management further and promote diversity. All three outside directors are independent appointments and are tasked with ensuring accountability and a high level of transparency in management.

The Board of Directors is advised by the Nomination Advisory Committee and the Compensation Advisory Committee, which are chaired by outside directors. To ensure that management decisions are equitable and well-informed, 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.

Attendance at meetings of the Board of Directors in fiscal 2018 was as follows.

Comprised of a majority of outside directors and chaired by an outside director, the Nomination Advisory Committee meets at least once a year to discuss director, corporate auditor and corporate officer candidates proposed by the Company, and assesses each proposal individually based on comprehensive evaluation of each candidate’s experience, knowledge, capabilities,

and so forth, in order to assess the suitability of candidates in a fair and equitable manner. Its conclusions are then reported to the Board of Directors.

(Meetings held in fiscal 2018: One)

Comprised of a majority of outside directors and chaired by an outside director, the Compensation Advisory Committee meets at least once a year to discuss the suitability of individuals for certain roles and their respective levels of remuneration, including base remuneration, performance-linked compensation, and stock compensation. Its conclusions are then reported to the Board of Directors.

(Meetings held in fiscal 2018: Two)

The following table summarizes the details of the members and achievements of the Nomination Advisory Committee and the Compensation Advisory Committee in fiscal 2018.

To ensure that the directors and each organization in the Company conduct their duties in a legally compliant and appropriate manner, the Company has established systems to enable members of the Board of 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 Auditors has five members, comprising two standing members and three outside members. All three outside members of the Board of Auditors are independent appointments.

The members of the Board of Auditors attend meetings of key management bodies, such as the Board of Directors and the Corporate Executive Meeting, providing their opinions as necessary. Also, in accordance with corporate auditing standards, members of the Board of Auditors conduct business and accounting audits to verify whether directors and corporate officers responsible for business execution are carrying out their duties in a legally compliant and appropriate manner.

Shionogi 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, auditors and the corporate officers 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.

Shionogi is committed to improving the Board of Directors’ effectiveness, and to that end the Board has been conducting a self-evaluation annually since fiscal 2016.The Board of Directors analyzed and evaluated its effectiveness in fiscal 2018 by conducting questionnaires and interviews of individual directors and corporate auditors, with a focus on “6. Directors and the Board, (1) Framework, (3) Roles and Responsibilities, and (6)

Operation” in the Basic Views and Guidelines on Corporate Governance set by the Company. The following is a summary of the results:

Based on the above, we conclude that the Board of Directors is operating appropriately and effectively. We will use the results of this self-evaluation as a basis for continuous improvements to make the Board of Directors even more effective.

Total director remuneration is determined within limits set by resolution of the General Meeting of Shareholders. It encompasses base monthly remuneration, performance-linked bonuses determined by results for the fiscal year and other factors, and restricted stock compensation (medium-term performance-linked and long-term) introduced in fiscal 2018. Outside directors only receive base remuneration.

 

Base monthly remuneration is determined according to the position and responsibilities of directors with due consideration for the operating environment and global trends. Bonuses are short-term incentives based on a calculation matrix linked to performance, including the achievement of profit targets in each fiscal year. Stock compensation is awarded based on a similar matrix of directors’ positions and roles. In particular, medium-term performance-linked compensation is aimed at encouraging directors to pursue continuous enhancement of corporate value by further increasing the linkage between director compensation and medium- and long-term business performance, while at the same time further promoting value sharing with shareholders.

 

Performance targets include net sales and operating income, driven mostly by new products and core businesses, as well as return on equity (ROE) and the growth rate of total shareholder return (TSR) relative to competitor companies. These indicators were determined after a comprehensive evaluation of factors such as quantitative targets in the medium-term business plan and operational issues, and are premised on the Company achieving the vision laid out in its medium-term business plan, which is to “grow sustainably as a drug discovery-based pharmaceutical company contributing to a more vigorous society through improved healthcare.”

 

Base remuneration accounted for approximately 75% of total remuneration in fiscal 2013, but less than 50% in the last fiscal year. We aim to further reduce the proportion of base remuneration to about 40%.

 

Total corporate auditors’ remuneration is determined within limits set by resolution of the General Meeting of Shareholders. It is made up entirely of base monthly remuneration.

 

Shionogi has established a Compensation Advisory Committee to support the Board of Directors in an advisory role. Chaired by an outside director and comprised of a majority of outside directors, this Committee deliberates thoroughly on the subject of directors’ remuneration.

*1 The amount of remuneration paid and persons remunerated include one corporate auditor who retired (deceased) on June 14, 2018.

*2 “Stock options” above is the relevant expense recognized for Fiscal 2018, although no new grants of stock options were made in Fiscal 2018.