Corporate governance

Basic concept

We aim to realize sustainable growth and increase our 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 corporate governance to support these aims is critical to sound, transparent and efficient 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. External directors provide strong and transparent management oversight, as we lay the necessary groundwork for effective governance to generate value for shareholders and all stakeholders.

SATO's corporate governance

Board of directors
Evaluation of the board's effectiveness
Remuneration for board members and senior management
Appointment and dismissal of directors and representative directors
Independence criteria
Audit checks
Tax policy
Corporate governance report

1. Board of directors

In addition to the board, we have an Audit & Supervisory Board to enhance auditing controls. We also have an executive system in place to separate operational functions from managerial decision-making and oversight functions to enable quicker decisions.

As of June 30, 2024, we have eight directors, complying with our Articles of Incorporation, which limit the number of directors to no more than 12. Out of these eight, two are concurrently serving as executive officers, one as internal non-executive director, and the remaining five as external directors. External directors make up the majority of our board and help ensure proper oversight of the management team with their independent perspectives.

The board of directors meets once a month in principle; it convened 13 times in FY 2023. At board meetings, matters stipulated by law and the Articles of Incorporation as well as important company matters governed by board regulations are brought up for discussion and review in a planned and comprehensive manner. Since FY 2018, pre-meeting sessions have also been held to explain key agenda points and industry-specific sales strategies or engage non-executive directors in various discussions to deepen their understanding of the company's business and operations.

In January 2020, we changed how the board is chaired, electing a non-executive internal director familiar with internal affairs rather than having a rotating chairmanship. The intent of this change was for the board chair to set relevant and timely meeting agendas and drive collaboration between executives and external directors to help the board function more competently and responsibly in making major business decisions and providing management oversight. From April 2021, we elected an external director to chair the board to further enhance its oversight function and strengthen governance.
In line with revisions made to Japan's Corporate Governance Code (CGC) in FY 2021, our board sought to focus more on deliberating important company matters and exercising oversight by delegating more authority to the executive team. Accordingly, we make and execute business decisions in our Senior Executive Management Meeting (chaired by a non-executive internal director) and Executive Officers Meeting to improve our risk management capability even as we accelerate the business. As the company transitioned to the Tokyo Stock Exchange's new Prime Market segment and Japan's Ministry of Economy, Trade and Industry updated its Practical Guidelines for Corporate Guidance Systems in FY 2022, we made changes in FY 2023 that include delegating even more authority to the executive team by putting the Executive Officers Meeting in charge of top-level decision making, and establishing a new Business Strategy Meeting that includes our non-executive internal director as a member to set the direction for the company's medium- to long-term strategies and ensure proper decision-making in the executive team.

The Business Review Committee (established in April 2021) also began operating within the Executive Officers Meeting starting from FY 2023. This committee examines and analyzes risks the company takes in conducting business (when making investments and loans, acquiring and disposing of stock and fixed assets, entering into business partnerships or important agreements, and selling or buying businesses) to improve the quality of deliberations for top-level decision making.

Framework

2. Evaluation of the board's effectiveness

The company conducts annual surveys to analyze and evaluate the effectiveness of our board of directors, verifying that corporate governance is enabling sustainable creation of increased corporate value. The following summarizes our FY 2023 evaluation approach and results.

(1) Evaluation methodology

At our March 2024 board meeting, the secretariat explained the purpose and details of the FY 2023 evaluation survey before distributing it to the eight directors and three Audit & Supervisory Board members for their feedback.
With the survey responses that were collected anonymously, directors and Audit & Supervisory Board members exchanged opinions at a subsequent pre-meeting session. Results were finalized in May 2024 after the board checked the evaluation approach/process and reviewed areas for improvement.

(2) Survey format

Based on the previous year's survey, the FY 2023 survey consisted of 15 questions to assess progress in improving the board's effectiveness in seven categories drawn from Japan's Corporate Governance Code.

Areas evaluated (corresponding CGC principles in parentheses)

a.
Composition of the board (4.6, 4.7, 4.8, 4.11)
b.
Roles/responsibilities of the board (2.4, 4.1, 4.2, 4.3, 4.8, 4.10, 4.11, 4.13)
c.
Operations of the board (4.12)
d.
System to support the board (4.8, 4.10, 4.13)
e.
Relationship with shareholders (5.1, 5.2)
f.
Other matters pertaining to overall effectiveness (write-in question)
g.
Management with consciousness of cost of capital and share prices (write-in question)

(3) Summary of results and areas for improvement

Directors and Audit & Supervisory Board members generally found the board to have functioned effectively during FY 2023 and recent months, with adequate efforts being made to better its performance from the previous year. There are, however, areas for improvement, which we will work to address.

a. Composition of the board	With external directors having comprised the majority in FY 2023, the board was deemed to be highly effective in the oversight of senior management.
b. Roles/responsibilities of the board	Survey responses suggested that meeting agendas were deliberated duly with diverse and active board participation. To ensure effective oversight, we have appointed external directors to chair the board and its advisory committees for nomination and remuneration since April 2021. Having given our representative director and the Executive Officers Meeting a bigger role in managerial decision-making in April 2023, we plan to hold more pre-meeting sessions and other discussion sessions involving external directors and Audit & Supervisory Board members to pick up more governance-level agendas for more substantial deliberations and outcomes.
c. Operations of the board	Board members were provided information in certain volume and quality, with sufficient time for decision-making. We will make improvements to address comments citing the need to distribute meeting materials earlier and in more concise forms.
d. System to support the board	Board members were given sufficient opportunities to seek clarifications and receive additional information concerning meeting materials, leading to quality discussions at board meetings. There was a suggestion to combine the board's two advisory committees into one given that they handle nomination and remuneration matters which are interrelated. We shall consider this for FY 2024.
e. Relationship with shareholders	Shareholders' opinions, including critical ones, were being reported to the board every six months. We will continue to add more specificity and explore the possibility of increasing the reporting frequency.
f. Other matters pertaining to overall effectiveness g. Management with consciousness of cost of capital and share prices	It was noted that our corporate governance is evolving, with the board increasingly taking in feedback from external directors and Audit & Supervisory Board members. We received suggestions to further improve the board's effectiveness through more interactions outside board meetings and are planning more pre-meeting/discussion sessions as mentioned earlier. There was a shared understanding that companies listed on the Prime market must be conscious of the cost of capital in management and that the board must continue enhancing its business oversight function to that end. We will use board meetings to review measures such as setting capital efficiency targets.

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. The company adopts the following policy with the board's approval.

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.
b.
Remuneration structure shall be geared toward the company's sustainable growth and greater medium- to long-term corporate value, and resonate with the values of shareholders and other stakeholders.
c.
The board shall comply with the remuneration determination process set out by its advisory committee for accountability, fairness and transparency.

The maximum remuneration for board directors is JPY 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.

Internal directors also receive performance-based stock compensation paid through a Board Incentive Plan (BIP) Trust (since 2016), which does not count toward the annual maximum remuneration amount. This was approved at the shareholders meeting held in June 2021.

For executive directors/officers, the board's advisory committee sets out the following process to enable fair and transparent deliberations and review individual remuneration from multiple angles, including its consistency with the company's remuneration policy. The board is required to follow this process as part of the remuneration policy.

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. (February 2022)

↓

Conduct performance evaluation for most recent fiscal year

= 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)

The board's advisory committee looks into not only the above process but also all other matters related to remuneration. In FY 2023, the committee held five meetings in total.

(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. The above does not apply to non-executive directors, who shall only receive fixed compensation and non-performance stock compensation, and Audit & Supervisory Board members, who shall only receive fixed compensation of an amount that is decided with their consensus to ensure their independence and objectivity.
Performance-based monetary compensation is dependent on the achievement of individual objectives, serving as a reward and penalty mechanism for motivating officers to contribute to the company's growth through their respective roles and responsibilities. Performance-based stock compensation, on the other hand, depends on business achievement that is measured by the company's degree of accomplishment of its consolidated operating income target and consolidated ROIC target. This ensures we consider not only immediate results but also alignment with shareholder interests and the company's capital efficiency for medium- and long-term growth.

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.

We have a Nomination & Remuneration Advisory Committee (as of June 2024; was formerly established as two separate committees in April 2021) that is chaired by an independent external director and comprised in majority of external directors. The committee functions to not only propose 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 reports 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 must meet the following requirements and be chosen from diverse fields of specialization (such as business management, academia, law or finance). External directors should comprise at least half of the board for governance reasons.

Ability to get to the essence of matters and raise issues to management in a rigorous manner.
Ability to attend board meetings and commit to board duties.

(3) Appointment process

When consulted by the board of directors, the Nomination & Remuneration 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 and other directors are deviating materially from the appointment/selection criteria, the Nomination & Remuneration 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 deemed not fully meeting criteria, directors will not be nominated by the board for election or reelection at the next general meeting of shareholders.

5. Independence criteria

Our external directors and Audit & Supervisory Board members are deemed independent only if not affiliated in any of the following ways.

(1)
Involved in the day-to-day operations (e.g., as employee, executive officer, internal director or full-time Audit & Supervisory Board member) at SATO Holdings Corporation or its subsidiaries (the “SATO Group”) currently or within the past ten years.
(2)
Owns 10% or more of SATO Holdings Corporation's total voting rights directly or indirectly or is involved in the day-to-day operations at a third party that holds 10% voting rights.
(3)
Involved in the day-to-day operations at a major customer or lender^*1 of the SATO Group.
(4)
Involved in the day-to-day operations of a major supplier or borrower^*2 of the SATO Group.
(5)
Represents or works for SATO Holdings Corporation's' audit firm.
(6)
Receives significant payment^*3 other than compensation for board service from the SATO Group for provision of professional services (e.g., legal, accounting or consulting) or belongs to any corporation/organization that receives such payments.
(7)
Receives charitable contributions from the SATO Group in an amount of or exceeding 10 million yen per year or 2% of total annual revenues or is involved in the day-to-day operations at any corporation/organization that receives such contributions.
(8)
Is the spouse or immediate family of someone who is related to SATO in any of the ways described in (2) to (7) above and assumes a key position^*4.
(9)
Is the spouse or immediate family of someone who assumes a key position^*4 in the SATO Group.
(10)
Is affiliated to SATO in any of the ways described in (2) to (9) above currently or within the past three years.

*1Pays or finances the SATO Group in an amount of or exceeding 2% of SATO's consolidated gross revenues or total consolidated assets, respectively.
*2Is paid or financed by the SATO Group in an amount of or exceeding 2% of its consolidated gross revenues or total consolidated assets, respectively.
*3Of or exceeding 10 million yen for individuals, or 2% of the receiving corporation/organization's total annual revenues.
*4Internal director, full-time Audit & Supervisory Board member, executive officer, general manager or equivalent positions.

6. Audit checks

(1) By Audit & Supervisory Board

The company has an Audit & Supervisory Board comprising one full-time and two external members. Although there is only one full-time member, we have established a dedicated office and assigned qualified personnel to assist him in his duties, providing a framework that lets him work closely with our internal auditors to gather/analyze information from across the organization for reporting to external members on this board. The two external members, on the other hand, provide suggestions on our audit activities, leveraging their respective legal and accounting expertise.

Audit & Supervisory Board members attend board of directors meetings to check business decisions and the effectiveness of internal controls, expressing their opinions when necessary. Members regularly receive explanations on audit plans from the company's audit firm and engage in direct communication and information sharing with the firm through its quarterly and year-end auditor's reports. For key audit matters (KAM) identified by the audit firm, the Audit & Supervisory Board will verify their reasoning and follow up on them regularly, sharing information accordingly. It also checks the audit firm's work for appropriateness and legal compliance to assess the firm for its performance.

The full-time member attends the Business Strategy Meeting, Executive Officers Meeting and other important in-house meetings, where he audits/supervises different decision-making processes and resolutions reached, expressing his opinions when necessary. He also exchanges information with internal directors regularly to understand our business environment and challenges and provide advice accordingly.

Under the oversight of the Audit & Supervisory Board, he undertakes a wide range of other activities, including verifying the readiness/operation of internal controls, examining the financial reporting system and reviewing various resolution/report documents. He also goes on site visits to understand on-site information from department managers/heads and provide advice while reporting his work outcomes to the Audit & Supervisory Board. In addition, he collaborates with the audit firm to receive quarterly audit/review reports, exchange opinions and gather information every month to create an environment conducive to proper auditing. He also constantly exchanges opinions with our internal audit department, from which he receives audit results and internal control evaluations concerning financial reporting that help him perform his duties in an effective and thorough manner. His office (established in FY 2023) provides support by reporting on in-house regulations and ongoing resolutions, and works with the internal audit department to check the readiness/operation of internal controls and compliance systems at our overseas offices to identify any areas of improvement.

(2) By internal audit department

Our internal audit department of seven members is primarily responsible for reviewing business structure and operations and evaluating internal controls over financial reporting in accordance with Japan's Financial Instruments and Exchange Act (J-SOX). For J-SOX compliance, we evaluate company-level controls over book closing for not just the headquarters office in Japan but also two other group companies in Japan and 17 subsidiaries overseas. In FY 2023, we also expanded the evaluation scope of process-level controls (related to IT systems) to cover our China subsidiary, on top of our Japan and USA subsidiaries and Malaysia factory.

Under close collaboration with our Group CEO and full-time Audit & Supervisory Board member, the department conducts site visits and remote auditing for Japan and overseas offices identified via the risk-based approach to prepare and submit reports to internal board members. Based on the reports, the Group CEO will instruct relevant managers/departments to take action on those areas needing improvement and report back accordingly. The full-time Audit & Supervisory Board member will also share these internal audit findings with external members on the same board.

(3) By independent auditor

The company receives accounting audits from professional services firm KPMG Azsa 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.

7. 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.