Basic Policy on Internal Control System

1. Basic Views on Internal Control System and the Progress of System Development

The following is an overview of the Company’s basic policy on the development of systems to ensure the appropriateness of its operations (hereinafter, “internal control system”).

(1) System to ensure that the execution of duties by Directors complies with laws and regulations as well as the Articles of Incorporation

- The Company follows the Code of Ethics and Compliance Rules as a code of conduct for Directors and employees, and strives for compliance with these rules.

- The appropriate operation of the Board of Directors is ensured by the Regulations of the Board of Directors. Its meetings are held once a month in principle, and other meetings, including written resolutions, are held as needed. The Board of Directors strives to prevent violations of laws and regulations as well as the Articles of Incorporation by facilitating communication among Directors, mutually supervising business execution, and hearing opinions of certified public accountants, lawyers, and others, as necessary. In addition, the Company is a company with a board of corporate auditors, and audits on the execution of duties by the Directors are conducted in accordance with the Regulations of the Board of Corporate Auditors, striving to strengthen the supervision of management functions. If a Director discovers a violation of laws and regulations or the Articles of Incorporation by another Director, he or she shall immediately report the violation to the Board of Directors and Corporate Auditors, and take corrective measures.

- With regard to antisocial forces, the Code of Ethics prohibits any relationship with antisocial forces and groups that pose a threat to the order and safety of citizens’ lives and that may interfere with economic activities.
In addition, the Code of Ethics stipulates that no action that would facilitate their activities shall be taken. Furthermore, the Company is a member of the Council for Prevention of Special Violence, and collects related information from the competent police departments and the administrator of the shareholders registry, etc.,
in an effort to prepare for unforeseen circumstances and keep abreast of the latest trends.

(2) System for preservation and management of information concerning the execution of duties by Directors

With respect to the retention and management of information concerning the execution of duties by Directors, the Company strives to appropriately and smoothly protect, manage, and utilize all information of the Company in accordance with the Basic Rules for Information Management. In addition, appropriate and reliable retention and management are carried out in accordance with the Document Management Regulations, Digital Information Management Regulations, and Regulation on Internal Approval, which are subordinate regulations of the Basic Rules for Information Management. Statutorily stored documents are maintained in an accessible condition for the period of time specified by laws and regulations as well as the Document Management Regulations.

(3) Rules and other systems concerning risk management

- In accordance with the Risk Management Regulations, each responsible department identifies, assesses, and evaluates the potential risks with regard to risk cases (including affiliates) related to management, quality, legal, accidents, disasters, earthquakes, wind and flood damage, human rights, individuals, the environment,
IT information, finance, and overseas/country risks that the Company faces on a daily basis, formulates appropriate measures, and reports regularly to the Corporate Planning Department in accordance with the prescribed reporting line, if reporting or deliberation on a case is deemed necessary.

- Each risk case reported to the Corporate Planning Department that is determined to require deliberation is reported at the Management Committee, which consists of the President, Representative Directors, and those appointed by the President, twice a year, for comprehensive consideration of countermeasures. In particular, important matters are reported to the Board of Directors.

- In the event that the Company takes emergency action in response to a crisis involving the Company’s management (including affiliates) or officers and employees, the Company responds to the crisis and prevents its expansion in accordance with the Crisis Management Regulations. As part of its organizational response,
the Company establishes a special task force headed by a Representative Director, and puts in place a system to prevent damage from escalating by taking prompt action under an organization that includes external advisors, as necessary.

- For emergency situations, especially natural disasters such as earthquakes, where business continuity is threatened, a business continuity plan (BCP) that incorporates measures for recovery from the time of occurrence has been formulated.

(4) System to ensure that Directors efficiently execute their duties

- In order to ensure that Directors efficiently execute their duties, the Company holds regular meetings of the Board of Directors once a month, as well as extraordinary meetings as necessary, to decide on important matters and mutually supervise the status of business execution by Directors. In addition, important matters regarding items such as management policies and strategies are discussed in advance at the Management Committee, and the Board of Directors makes executive decisions after these deliberations. The Company has adopted a corporate officer system to promote the separation of oversight and execution, as well as to enhance the oversight function of the Board of Directors over business execution and speed up its decision-making process.

- For the execution of business based on the decisions of the Board of Directors, the Regulation on Job Responsibility and Authority and the Allotment of Job Duties set forth the details of each responsible party, their responsibilities, and execution procedures.

- The Board of Directors has established the Regulation on Internal Approval in advance, and efficient operations are carried out through delegation of authority for matters that do not require resolution by the Board of Directors.

(5) System to ensure that the execution of duties by employees complies with laws and regulations as well as the Articles of Incorporation

- The Company has established the Code of Ethics as the code of conduct for compliance, and has established the Compliance Rules to ensure compliance with the letter and spirit of all laws and international rules, regardless of whether in Japan or overseas. The Board of Directors establishes and maintains a compliance system, and works to achieve and ensure compliance. In order to promote this system, the Company has established a Compliance Committee that oversees the entire Group, chaired by a Representative Director, and Compliance Subcommittees chaired by officers in charge of each section as a subordinate structure, to enhance the promotion system. In addition, in order to reinforce and thoroughly instill environmental compliance,
the Company promotes ongoing environmental protection activities in accordance with the Environmental Management Regulations.

- The Company has established the Sankyu Hotline, which is an internal reporting system for the Company and the Group, in order to prevent expansion of damage caused by legal violations.

- In order to ensure thorough compliance, training sessions are held for each officer, position, and job title.

- With regard to the internal audit, the Internal Audit Department audits the business, accounting, etc. of business sections and subsidiaries based on the annual internal audit plan, in accordance with the Audit Regulations. The results of the internal audit are reported to the Corporate Auditors, facilitating cooperation with the Corporate Auditors. In addition, the Internal Audit Department has been placed under the direct control of the President, in an effort to further enhance audits.

- In the event of amendments or changes to laws and regulations, mainly the Legal Department and General Affairs & Corporate Social Responsibility Department implement necessary measures regarding contents that are relevant to the Company, including the new creation and revision of regulations, internal announcements, and internal training to ensure thorough implementation.

- In order to ensure the reliability of financial reporting based on the Financial Instruments and Exchange Act, the Company has established the Basic Policy for Internal Control, as well as the Internal Control Regulations based on this Basic Policy, to clarify the system of internal control in relation to financial reporting, and to ensure proper operation by defining basic items such as the system, the person in charge, and the details of implementation.

(6) System to ensure the appropriateness of business conducted by the corporate group comprising the Company, its parent company, and subsidiaries

- In order to ensure the appropriateness of business for the Group as a whole, the Company and its affiliates cooperate with each other in accordance with the Regulations on Affiliate Management and Operations, thereby demonstrating their collective strength. In terms of management control, a basic policy for group management has been established, and the Company implements a thorough system for approval of and reporting to the Company, in accordance with the Regulations on Affiliate Management and Operations. Monitoring is also carried out, as necessary. In addition, meetings of the presidents of affiliates are held to exchange information and share information.

- The Company has established a coordination system with its subsidiaries, including information and personnel exchanges with the subsidiaries.

- A person in charge (including the Chief Compliance Officer) at the Company, who believes that a subsidiary has disobeyed the Company’s management control and management guidance, violated laws and regulations, or has any other compliance issues, shall promptly report to the relevant department and request corrections, while reporting to the Compliance Committee and the Corporate Auditors (of the subsidiary and the Company). In addition, the Corporate Auditors of both parties will express their opinions, and request for formulation of improvement measures as necessary.

- A person in charge (including the Chief Compliance Officer), who believes that the Company’s management control and management guidance have violated laws and regulations or have any other compliance issues, shall promptly report to the Compliance Committee and the Corporate Auditors (of the Company and the subsidiary) and request corrections. In addition, the Corporate Auditors of both parties will express their opinions, and request for formulation of improvement measures as necessary.

- The Company has positioned the internal reporting system as a system that covers the entire Group, and operates it appropriately.

(7) Matters related to employees placed to assist Corporate Auditors’ duties upon their request

In the event that the Board of Corporate Auditors requests the assignment of employees to assist them, the selection of such employees shall be made after consultation with the Board of Corporate Auditors, and the assignment shall be made with the consent of the Board of Corporate Auditors.

(8) Matters related to ensuring the independence of the employees in the preceding item from Directors and the effectiveness of instructions to such employees

In the event that employees are assigned to assist the Board of Corporate Auditors, the execution of their duties shall be subject to the instructions of the Corporate Auditors, in order to ensure their independence from Directors. In addition, personnel transfers, evaluations, disciplinary actions, etc., pertaining to such employees must be approved by the Board of Corporate Auditors.

(9) System for reporting to the Board of Corporate Auditors

- System for Directors and employees of the Company to report to Corporate Auditors

• a. Directors and employees shall report to Corporate Auditors on any important matters that may affect the Company’s business or business performance on each occasion, and must make further reports if requested by the Corporate Auditors.
• b. Corporate Auditors attend meetings of the Board of Directors and the Management Committee, as well as other important meetings, receive reports from Directors, Corporate Officers, and employees, and investigate the status of the Company’s business and assets, as necessary. In addition, Corporate Auditors are able to take necessary measures in a timely manner, such as presenting opinions, including advice and recommendations, to the Directors, etc., and prohibiting Directors from committing violations.
• c. Violations of laws and regulations as well as other compliance issues obtained through the internal reporting system shall be reported to the Corporate Auditors.

- System for Directors and employees of subsidiaries to report to the Corporate Auditors of the Company Directors and employees of subsidiaries or any person who received reports from such persons shall report to Corporate Auditors on any important matters that may affect the business or business performance of subsidiaries on each occasion, and must make further reports if requested by the Corporate Auditors.

(10) System to ensure that the person who made the report referred to in the previous item will not be treated disadvantageously for the reason of making the said report

No disadvantageous treatment shall be given to a whistleblower or any person who reports to a Corporate Auditor for making such a report.

(11) Matters relating to procedures for prepayment or reimbursement of expenses incurred in the performance of duties by Corporate Auditors, and matters relating to policies for the treatment of other expenses or liabilities incurred in the performance of such duties

Corporate Auditors shall be entitled to receive prepayments or reimbursement from the Company for expenses incurred in the performance of their duties. In addition, Corporate Auditors may charge the Company for the cost of receiving external professional advice as necessary.

(12) Other systems to ensure that audits by Corporate Auditors are conducted effectively

- The results of internal audits conducted by the Internal Audit Department shall be reported to the Corporate Auditors to enhance the effectiveness of the audits by the Corporate Auditors, and the Corporate Auditors shall ensure the effectiveness of the audits by hearing the opinions of external experts, such as certified public accountants and lawyers, as necessary.

- Corporate Auditors will meet regularly with the Representative Directors to confirm their management policies, exchange opinions on issues to be addressed by the Company, risks surrounding the Company, and other important auditing issues, and strive to deepen the mutual understanding and trust with the Representative Directors.

2. Basic Views on Eliminating Antisocial Forces

With regard to antisocial forces, the Code of Ethics prohibits any relationship with antisocial forces and groups that pose a threat to the order and safety of citizens’ lives and that may interfere with economic activities. In addition, the Code of Ethics stipulates that no action that would facilitate their activities shall be taken. Furthermore, the Company is a member of the Council for Prevention of Special Violence, and collects related information from the competent police departments and the administrator of the shareholders registry, etc., in an effort to prepare for unforeseen circumstances and keep abreast of the latest trends.