GOVERNANCE Corporate Governance Overview

Air Water believes that conducting fair corporate activities in compliance with social good sense and earning the trust of all stakeholders are indispensable for sustainable development of a company and maximization of its corporate value. To this end, we recognize that the top management priority is to enhance our internal control system, ensure compliance, strengthen risk management, and make constant efforts to improve governance. Some of the details of our efforts related to “Japan’s Corporate Governance Code” by Tokyo Stock Exchange (revised in June 2021) are disclosed in the Corporate Governance Report, which is available on our website.

AIR WATER INC. is a company with an Audit & Supervisory Board. The Board of Directors makes important management decisions and supervises the execution of business operations, while the Audit & Supervisory Board members audit director performance by attending meetings of the Board of Directors and other important meetings. The term of office of directors is set at one year in order to clarify the management responsibility of the directors for each fiscal year. In August 2022, we also established the Nomination and Compensation Committee with a majority of independent outside officers (directors and auditors). This aims to strengthen the independence, objectivity and accountability of the Board’s functions related to the nomination and compensation of directors and senior management.

We hold a Corporate Management Committee every month as a general rule, which mainly consists of internal directors and the heads of each business division. The committee is set to support accurate and prompt decision-making in our Group’s wide business fields. The Corporate Management Committee engages in preliminary deliberations on matters to be discussed at Board of Directors from wide and diverse perspectives, and also examines important matters on the execution of our Group’s business operations.

Regarding internal audits, the CSR Center Auditing Group, our internal auditing division, conducts regular audits of our Group’s compliance with laws, regulations, and internal rules, as well as the appropriateness and adequacy of business processes. It also monitors and supervises the establishment and operation of internal control systems to ensure the reliable and appropriate financial reporting. The roles include evaluating the effectiveness of those systems as the lead department, under the responsibility and direction of the Representative Director. Furthermore, CSR Center Compliance Group has been established, which specializes in management and control of compliance, safety/disaster prevention, environmental preservation, and quality assurance across the Air Water Group.

The Board of Directors makes decisions and reports on important matters related to the management and business execution of the Group, in addition to matters stipulated by law or the Articles of Incorporation, and fulfills functions related to the mutual supervision and monitoring of directors. In FY2022, 14 meetings were held.

The Board of Directors have organized a skill matrix based on the following seven areas of experience and skills to cover each function and business domain of the Company: (1) corporate management, (2) finance affairs and accounting, (3) risk management and legal, (4) business strategy and marketing, (5) technology and R&D, (6) human resources management, and (7) global. The criteria help make the appointment of the right person in the right position for accurate and prompt decision-making. The skill matrix for directors and auditors is presented below.

We have established the Nomination and Compensation Committee in August 2022, with a majority of independent outside directors, as a voluntary advisory body to the Board of Directors. The committee aims to strengthen the independence, objectivity, and accountability of the Board of Directors’ roles regarding the nomination and compensation of directors as well as senior management.

We strive to strengthen the management supervisory function by having at least one-third of the Board of Directors consist of outside directors and by receiving useful advice on the Company’s management from an objective outside perspective. In addition, the Chairperson of the Board of Directors asks outside directors for their questions and opinions on each agenda item in an effort to improve the quality of discussions.

After the Board of Directors meeting, we hold a free discussion-style meeting for directors and corporate auditors to exchange opinions and develop a wide range of discussions toward the sustainable growth of the Company.

In advance of the Board of Directors meetings, the Governance Office, the secretariat of the Board of Directors, distributes materials on agenda and matters to be reported to outside directors and corporate auditors, where the persons in charge of drafting proposals provide explanations and facilitate active discussions to promote understanding of the contents and enhance corporate value.

In order to improve the effectiveness of the Board of Directors as a whole, we conduct an annual survey for all directors and corporate auditors. The responses are analyzed and evaluated by an external third-party organization with respect to the effectiveness of the Board of Directors as a whole, and a summary of the results is disclosed.

The remuneration for directors consists of fixed basic remuneration, performance-linked remuneration, and stock-based remuneration (excluding outside directors), as resolved by the Board of Directors.

Non-monetary remuneration (stock-based remuneration) is in the form of restricted stock, and shares of Air Water common stock are granted after a certain period of transfer restriction, with the aim of promoting efforts to enhance corporate value over the medium to long term and further align values with shareholders. The standard ratio for each type of remuneration is 7:2:1 for basic remuneration, performance-linked remuneration, and non-monetary remuneration, respectively.

The remuneration for outside directors and corporate auditors is limited to basic remuneration only.

We recognize that one of the key roles role of the Board of Directors is to select and train candidates for the next generation of the management team and to develop a succession plan for them. Succession planning is not a short-term initiative, but a long-term, ongoing process. We believe that thickening the ranks of not only the CEO but also the next generation of management personnel will contribute to the enhancement of corporate value over the medium to long term. Based on such view, we hold extensive discussions through the Nomination and Compensation Committee and other committees.

We hold cross shareholdings for the purpose of maintaining relationships with business partners, expanding transactions, and creating business opportunities. Regarding the new acquisition or continued holding of cross shareholdings, decisions are based on whether our relationship with the company in question (i.e. business transactions, tie-ups, collaborations, etc.) can help to raise the corporate value of the Group over the medium to long term.

The Board of Directors closely examines each individual cross shareholding every year to review whether the benefits and risks of the holding worth capital costs and whether such holding is aligned with our goal of improving corporate value over the medium to long term. Shareholdings that are deemed insignificant or unreasonable are reexamined and sold or reduced as necessary.

AIR WATER INC. is the parent company of Kawamoto Corporation, a listed company. The listing of the subsidiary can provide the subsidiary with advantages such as securing the trust of business partners, while expanding group synergies for both companies. The synergies include cultivating new customers through Air Water’s nationwide sales network of medical-related companies, mutual cooperation in developing advanced medical hygiene materials products and higher value-added services, and expanding product lineups through the subsidiary’s supply of hygiene materials, medical supplies, and nursing care products to the parent. We believe that parent-subsidiary listing is an effective option when it is possible to maximize the corporate value of the entire group including subsidiaries, on the premise that the subsidiary’s unique corporate culture and management autonomy are maintained and the rights of minority shareholders are respected.

Our Group’s business is diverse. We have established a cross-company risk management system to accurately and promptly grasp the overall picture of risks, including from a global perspective, and to mitigate such risks.

1. The CSR Center Compliance Group, which is under the direct control of the representative director, is in charge of managing risks related to compliance, safety and safety services, environmental preservation, and quality assurance, which are considered particularly important risks in the Group’s business activities, across the entire Group.
2. For individual risks related to information security, quality control, intellectual property, business contracts, etc., we establish departments in charge of each risk and have them prepare internal rules, manuals, and training sessions, as well as manage such risks in the Group through preliminary inspections and approval systems.
3. Risk Management Examination Meeting is regularly held by the Compliance Group as its secretariat to monitor the status of risk management and to promote the strengthening of risk management within the Group.
4. For overseas business, we manage our global risks across the company by cooperating with the Global Management Office, newly established under the Global Business Unit for monitoring their businesses.

As an organizational system for compliance management, we have established the CSR Center Compliance Group, a dedicated department responsible for the integrated management of compliance issues in the Group under the direct control of the representative director. A responsible person is appointed there from among directors, executive officers and board members. Furthermore, each business group has set a department responsible for compliance that works closely with the CSR Center Compliance Group to strengthen our compliance system for Air Water and its group companies.

The Air Water Group Code of Ethical Conduct provides all officers and employees of Air Water and its group companies with guidelines to help them act in strict conformance with the laws and regulations and behave in an ethical manner. In addition, we created a Compliance Handbook, which breaks down the code and gives examples of violations in an easy-to-understand manner, and distribute it to all employees in the Group to raise their awareness of the Code.

We have established the Compliance Committee as a consultative body in which relevant divisions get together and discuss compliance issues. The Committee considers specific measures concerning the policies and instructions on compliance given by the representative director, and other issues, and also discusses ways to deal with compliance violations if they occur. In FY2022, the Committee met twice to discuss important compliance matters within the Group.

We have established an internal reporting system to enhance the effectiveness of compliance. Anyone who becomes aware of a violation or potential violation of laws, regulations, and internal rules may file a report. We provide internal and external contact points for whistleblowers and stipulate that whistleblowers will not be subjected to any unfair treatment. The contact information for the “hotline” of such whistleblower system is displayed on a Compliance Posters placed at all business locations to ensure that each and every employee of the Group is fully aware of the system.

In FY2022, there were 33 whistleblowing cases, none of which had a material impact on our business.