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Corporate governance

Basic concept

We aim to realize sustainable growth and higher corporate value on a medium- to long-term basis under our vision of being “the customer’s most trusted partner for mutual growth, and always essential in an ever-changing world.” We believe that building and continuously strengthening our corporate governance system to support these aims is critical to ensuring the soundness, transparency, and efficiency of our management.

Besides enhancing audit and control functions through our Audit & Supervisory Board, we also appoint independent external directors of diverse backgrounds to constitute the majority of our board of directors for strong and transparent management oversight, in our efforts to lay the necessary groundwork for effective governance to protect shareholders and other stakeholders.

SATO’s corporate governance

1. Structure and operation of the board of directors

We adopt an audit & supervisory board system and an executive officer system that separate the managerial decision-making and oversight function (provided by directors) from the operational execution function (provided by executive officers) so as to clearly set out corresponding roles and responsibilities and expedite decisions on company management.

As of June 30, 2021, we have nine directors on our board, complying with the Articles of Incorporation, which limits the number of directors to no more than 12. Out of these nine directors, three are concurrently serving as executive officers, one as internal non-executive director, and the remaining five as external directors. External directors, who make up majority of the board, help ensure proper oversight of the executive management team with their independent perspectives.

The board of directors meets once a month in principle; it convened 13 times in total for FY 2020. Starting FY 2018, pre-working sessions have been held before each board meeting to explain important meeting agenda points and industry-specific sales measures to ensure external directors can take part in various discussions and deepen understanding of the company’s operations. This aims to aid in their duties and make board meetings more effective.

In January 2020, we changed how the board is chaired, switching from rotating chairmanship to electing a non-executive internal director who is familiar with internal issues. With the chair setting relevant and timely meeting agendas and driving collaboration between company executives and external directors, we believe the board now functions more competently and responsibly in making major business decisions and providing management oversight. More recently in April 2021, we decided to hand over the board chair to an external director instead to further enhance the board’s oversight function for stronger governance.

To adhere to the upcoming revisions to Japan’s Corporate Governance Code in FY 2021, our board must now focus more on conducting deliberation of important business matters and exercising oversight.

We now delegate greater corporate powers for decision making to our company executives, while our Senior Executive Management Meeting (chaired by a non-executive internal director) and Executive Officers Meeting make and execute business decisions respectively, to ensure we enforce strong risk management even as we accelerate the business.

In line with the above changes, the Business Risk Committee, advising and reporting directly to the board, has been replaced by a Business Review Committee newly established under the Senior Executive Management Meeting. This new committee shall examine and analyze the risks the company takes in its business (when making investments and loans, acquiring and disposing of stock and fixed assets, entering into business partnerships or important agreements, and buying or selling businesses) to improve the quality of deliberations for top-level decision making.

Framework

2. Evaluation of the board’s effectiveness

The company conducts yearly surveys to analyze and evaluate the effectiveness of our board of directors, verifying that corporate governance is functioning effectively and taking appropriate measures to sustainably increase corporate value.

Designed to identify progress in improving the board’s effectiveness, the FY 2020 survey consisted of 12 questions covering the following six topics upheld from the previous year, with reference to the Corporate Governance Code (CGC).

(1) Survey themes

Topics evaluated (corresponding CGC principles in parentheses)
  1. a.
    Composition of the board (4.6, 4.7, 4.8, 4.11)
  2. b.
    Roles/responsibilities of the board (4.1, 4.2, 4.3)
  3. c.
    Operations of the board (4.12)
  4. d.
    System to support the board (4.8, 4.10, 4.13)
  5. e.
    Relationship with shareholders (5.1, 5.2)
  6. f.
    Other matters pertaining to overall effectiveness (write-in question)

(2) Summary of results and areas for improvement

Directors and Audit & Supervisory Board members who answered the survey generally found the board to have functioned effectively in FY 2020, with adequate efforts being made to better its performance from the previous year. There are, however, areas for improvement, which we will address with speed.

a. Composition of the board
  • The board, comprised of an equal number of internal and external directors in FY 2020, is deemed to be highly effective in the oversight of senior management.
  • We have appointed a new female external director at our 71st Annual General Meeting of Shareholders held in June 2021, making external directors the majority on the board once again.
  • Our Nomination Advisory Committee (established in April 2021) will devote efforts to increasing diversity of gender and competency on the board, which has been identified as a top priority.
b. Roles/responsibilities of the board
  • Survey responses noted improvements in the preparation of meeting agendas and timely submission of matters for board approval, thanks to the efforts of the board chair and secretariat.
  • We aim to make board meeting agendas and deliberations more substantial. To that end, we have established advisory committees in April 2021 to review important matters on appointment/dismissal and remuneration of senior management. We have also delegated greater corporate powers for decision making to our representative directors and Senior Executive Management Meeting to let the board better focus on the deliberation of agendas that are fundamental to the company.
  • Given the importance of information sharing and the exchange of opinions, we will continue to create opportunities for two-way communication between executive officers and external directors/Audit & Supervisory Board members.
c. Operations of the board
  • Board members were able to actively exchange ideas at board meetings based on their respective expertise and experience, with improvements in the quality, volume and timely distribution of meeting materials.
  • There is room for improvement to submit meeting agendas with more planning and to handle agenda items of different importance levels differently, which we shall address to better the operation of board meetings.
d. System to support the board
  • Board members were given sufficient opportunities to seek clarifications and receive additional information via pre-working sessions and other information sharing channels, which led to active discussions at board meetings.
  • We will make sure the board receives review outcomes from advisory committees for nomination and remuneration, direct reports from our Auditor Office and other information as needed.
e. Relationship with shareholders
  • We have been engaging in dialogue with shareholders, primarily through our representative directors.
  • Our IR Office has been reporting shareholder feedback to board members every six months, and will continue to enable more in-depth sharing of their views and concerns at future board meetings.
f. Other matters pertaining to overall effectiveness
  • There is room for improvement in how we deliberate/discuss important matters of business execution, particularly those related to our business operations outside Japan.
  • We will get our executives to submit and provide explanation for necessary agendas in a timely manner to enable stronger board oversight.

In view of the above survey results and improvement areas, we will work to further enhance our board’s effectiveness to help us achieve stronger governance and greater corporate value on a sustainable basis.

3. Remuneration for board members and senior management

(1) Remuneration policy and procedures

The remuneration structure for board members is an extremely important element of corporate governance. Therefore, the company has laid down a policy for deciding remuneration using the calculation method as follows.

  1. a.
    Remuneration amount shall be set at a level capable of securing and retaining board members to make important management decisions and supervise business execution.
  2. b.
    The company shall establish a remuneration structure that contributes toward sustainable growth and greater medium- to long-term corporate value and resonates with the values of shareholders and other stakeholders.
  3. c.
    The board shall set out a logical, fair, and transparent procedure to determining remuneration that the company would comply with.

The maximum remuneration for board directors is ¥400 million per year (excluding employee wages for executive positions they hold in the company) as approved at the annual general meeting of shareholders held in June 1997.

On top of this amount, directors also receive performance-based stock compensation paid through a Board Incentive Plan (BIP) Trust as approved at the annual general meeting of shareholders held in June 2016.

For executive directors/officers, the board goes through the following steps to deliberate and determine their remuneration in a logical, fair, and transparent manner.

Revise basic/performance-based remuneration amount (tied to position) and payment coefficient

= Remuneration level and coefficient shall remain fixed unless there are major changes in conditions. (March 2019)

Draft performance evaluation for fiscal year ended

= The representative director(s) shall assess officers based on business and individual achievements, and his/her assessment be discussed among internal directors for evaluation across multiple dimensions. (Every May)

Approve evaluation and decide performance-based remuneration amount for each officer

= Remuneration shall be decided after checking and ensuring that there are no flaws in the evaluation outcomes and decision-making process. (Every May)

In April 2021, we established the Remuneration Advisory Committee as an advisory committee to the board of directors. Chaired by an independent external director, the committee, comprised in majority of external directors, shall be responsible for looking into all remuneration matters including the above procedure to provide advice and recommendations.

(2) Composition of remuneration

Remuneration for the company’s directors consists of basic compensation (fixed monetary sum), performance-based monetary compensation, and performance-based stock compensation. The weighting of each component is decided by considering balance with overall remuneration amount and position of officer, whereby those in higher positions receive a larger ratio of performance-based compensation.

Performance-based monetary compensation depends on business achievement that is being measured by the company’s degree of accomplishment of its consolidated operating income target because operating income is considered to be a direct product of business activities. It is also dependent on individual achievement, whereby each officer is evaluated by their contributions to the company’s medium- and long-term growth. Performance-based stock compensation, on the other hand, takes into account the company’s degree of accomplishment of its consolidated operating income target and consolidated ROIC target (metric used for determining capital efficiency).

The above does not apply to non-executive directors (including external directors), who shall only receive basic/fixed compensation due to the nature of their oversight role. Audit & Supervisory Board members shall also only receive basic/fixed compensation of an amount decided with their consent, in order to ensure their independence and objectivity.

4. Appointment and dismissal of directors and representative directors

(1) Policy

We select, via a transparent process, candidates who are able to actively contribute to the board’s decision-making and managerial oversight functions with their extensive experience/expertise and excellent character/discernment.

In April 2021, we established the Nomination Advisory Committee as an advisory committee to the board of directors. Chaired by an independent external director, the committee, comprised in majority of external directors, functions to not only propose the appointment and dismissal of individual candidates, but also look into the board’s composition and overall operation (including decision making on appointment policies or standards/processes and succession planning) to provide advice and recommendations.

(2) Criteria

Appointment/selection criteria are as follows.

a. Internal directors

Candidates need to be executive officers who possess the following experience, skills and attributes.

  • Strategic judgment from a medium- to long-term perspective (ability to get to the essence of matters, think critically, have foresight and decisiveness).
  • Leadership qualities to unite the organization by proposing and implementing radical changes (ability to lead collaboration, innovation and talent development toward results).
  • High ethical standards and accountability toward the company and society (integrity, acumen, alignment with corporate values, and impartiality).
  • Strong sense of independence and awareness of problems (pertaining to market, business, company resources and self-improvement).
  • Sufficient industry experience/knowledge and abundant mental/physical strength (track record and personal health).

Candidates for representative director must, in addition to the above, have an outstanding track record of delivering successful results.

b. External directors

Candidates need to meet the following requirements, and be chosen from diverse fields of specialization (such as business management, academia, law or finance).

  • Able to get to the essence of matters and raise issues to management in a rigorous manner.
  • Able to place priority on attending the company’s board meetings and committing to board duties.

(3) Appointment process

When consulted by the board of directors, the Nomination Advisory Committee engages in discussions to prepare and submit a candidate list based on the above criteria. The board shall deliberate on the committee’s recommendations to select director candidates or appoint representative directors and executive directors.

(4) Dismissal process

If there is objective evidence or other reasons to suggest that representative directors are deviating materially from the appointment/selection criteria, the Nomination Advisory Committee will discuss their dismissal and present its recommendations when consulted by the board of directors. Dismissal shall be granted upon deliberation and approval of the board.

If directors are deemed to not fully meet the criteria, the board will not nominate them for election or reelection at the next general meeting of shareholders.

5. Audit checks

(1) By Audit & Supervisory Board

The company has an Audit & Supervisory Board, which consists of four members (including two external members). Audit & Supervisory Board members attend board of directors meetings to ensure that the conduct of all directors is compliant with laws/regulations and the Articles of Incorporation while also attending other important in-house meetings such as the Senior Executive Management Meeting where they audit/supervise different decision-making processes and resolutions reached, expressing their opinions when necessary.

Members undertake a wide range of other activities, including verifying the readiness/operation of internal controls, examining the financial reporting system, reviewing various report materials, and checking the independence and audit quality of the company’s statutory auditor (audit firm). In addition, they work with the audit firm to receive quarterly audit/review reports, exchange opinions and gather information as required to create an environment conducive to proper auditing. They also work with our Auditor Office to regularly receive internal audit results and internal control evaluations concerning financial reporting to perform assessments across multiple dimensions.

(2) Audit & Supervisory Board meetings

At Audit & Supervisory Board meetings, deliberations primarily focus on the Japan headquarters’ governance of its overseas subsidiaries or merged/acquired businesses with regard to their startup operations or level of integration with corporate strategies. In these instances, the Audit & Supervisory Board analyzes quantitative and qualitative information that it receives from overseas headquarters and finance & accounting departments to check for proper handling of issues. If there are areas for improvement, the board provides feedback to the management team and requests the company’s executives to take actions accordingly.

(3) Activities of full-time Audit & Supervisory Board members

Full-time Audit & Supervisory Board members help the board function effectively by conducting audit activities on subjects with accurate, on-site information and sharing necessary reports with external members on the same board for them to provide opinions for discussion based on their respective professional knowledge and objective perspectives. They contribute to the sound and sustainable development of the company in partnership with our statutory auditor and Auditor Office.

(4) By internal audit department

Our Auditor Office is responsible for performing internal audits to provide objective, independent reviews for assurance and advisory oversight. Based on internal audit plans set at the beginning of the fiscal year, the office audits operations at our business locations in Japan and overseas to evaluate their various management activities related to governance, risk management and control processes to identify areas of possible improvement. The office submits its reports to the president who then instructs relevant managers/departments to make improvements and report back accordingly. It also shares these internal audit results with the Audit & Supervisory Board at the same time.

With the COVID-19 pandemic affecting travel to our global locations and imposing restrictions on internal audit activities in the past fiscal year, the Auditor Office is now shifting to remote auditing and trialing new software in efforts to upkeep and improve its audit quality.

(5) By statutory auditor

The company has been receiving accounting audits from professional services firm PricewaterhouseCoopers Aarata LLC, in compliance with provisions of the Companies Act and Financial Instruments and Exchange Act. There exist no material relationships of interest between the company and the audit firm or its personnel conducting our accounting audits that need to be reported under the Certified Public Accountants Act.

As the term of service of the said firm expires, we have appointed a new statutory auditor, KPMG Azsa LLC, at our 71st Annual General Meeting of Shareholders held in June 2021.

6. Tax policy

We have formulated this tax policy to guide our internal practices and ensure tax compliance.

Basic policy

Our vision is “to be the customer’s most trusted partner for mutual growth, and always essential in an ever-changing world.” In other words, we aim to maximize sustainable company value with the trust of our customers and other stakeholders.

To achieve our vision, we must have in place the necessary systems/operations for proper tax compliance and raise awareness among all employees to ensure we adhere to tax laws and regulations in all countries we operate.

(1) Legal compliance

We comply with the local and International tax laws and standards applicable in each country to ensure that we conduct all business activities in a proper and compliant manner.

(2) Tax risk management

We give due consideration to tax compliance risks in advance and seek professional advice where necessary, minimizing any uncertainties in meeting our taxation obligations to ensure that we maximize sustainable company value with the trust of our stakeholders.

(3) Preventing of tax evasion

We engage in tax planning to ensure the company is properly taxed, tax information is reported and taxes are paid to the appropriate authorities in each country. This allows us to maximize sustainable company value with the trust of our stakeholders.
The company does not engage in tax planning for intentional tax avoidance that involves shifting profits to low-tax countries where we do not generate economic benefits.

(4) Relationship with tax authorities

We make all efforts possible to provide related information to taxing authorities in each country in a timely, compliant and professional manner, as required.

Corporate governance report

The latest corporate governance report can be found here.

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