Nippon Kayaku : Notice Corporate Governance Report

NOTICE: This is a translation of a document issued in Japanese and is made solely for the convenience of the foreign readers. In case of any discrepancy between the translation and the Japanese original, the latter shall prevail.

Corporate Governance Report

Last Update: November 29, 2018

Nippon Kayaku Co., Ltd.

Representative: Masanobu Suzuki, President

Contact: Hitoshi Kawamura

Director, General Manager of Legal & General Affairs Div.

Securities Code: 4272https://www.nipponkayaku.co.jp/english/

The corporate governance of Nippon Kayaku Co., Ltd. ("Nippon Kayaku") is described below.

I. Basic Views on Corporate Governance, Capital Structure, Corporate Profile and Other Basic Information

1. Basic Views

The corporate vision of the Nippon Kayaku Group is the KAYAKU Spirit: "Continuously providing society with the best products through ceaseless progress and the combined forces of our consciences." The mid-term business vision of the Nippon Kayaku Group is "continuing to provide the best products, technologies, and services that safeguard the life and health of consumers, and support a comfortable life." Under this vision, we have formulated a Mid-term CSR Action Plan and manage the company in a manner that fulfills our corporate social responsibilities to earn the trust of all of our stakeholders, based on the KAYAKU spirit. We regard continuous initiatives to implement the Mid-term CSR Action Plan as the "value creation process" for the Nippon Kayaku Group. We will achieve our business vision and contribute to a sustainable society and environment through practical implementation of this value creation process.

We recognize that fair and timely disclosure of information to all shareholders and investors and ensuring transparency in management are important to achieving this.

We believe that our management functions more effectively owing to the implementation of a corporate governance system that consists of consensus-based decision-making by a board of directors and an audit and supervisory board member system, and will also work to enhance and reinforce corporate governance in the future as an important task in managing operations.

[Reasons for Non-compliance with the Principles of Japan's Corporate Governance Code]

All principles are contained in the June 2018 revised version of the Corporate Governance Code 【Supplementary Principle 4-1-3: Role and Responsibilities of the Board of Directors (1)】

In the Nippon Kayaku Group, individuals who are deemed qualified as candidates to succeed in management positions are provided opportunities to acquire experience in participating in management through upper level management training, experience in multiple divisions, and participation in various management meetings, including the Board of Directors, Management Meeting, Management Strategy Meeting, and Executive Directors Meeting. Candidates to succeed the president and other upper level management are systematically chosen from among those individuals, based on the business principles and business strategy.

In the future, the Board of Directors will establish a system for properly managing operational status.

【Supplementary Principle 4-10-1: Use of Optional Approach】

Nippon Kayaku makes decisions on the nomination and remuneration of senior management and directors at a Board of Directors Meeting attended by the Outside Director(s) and Outside Audit & Supervisory Board Members, based on proposals from the president. We are considering approaches for obtaining appropriate contributions and advice from Independent Directors, including the establishment of optional advisory committees.

【Principle 4-11: Prerequisites for Ensuring the Effectiveness of Board of Directors and Audit & Supervisory Board Meetings】

We recognize that ensuring diversity of the Board of Directors and obtaining a broad range of opinions on management will result in stronger supervisory and decision-making functions for the Board of Directors.

In our process for selecting director candidates, we consider candidates based on the company's policy of selecting candidates without regard to gender or nationality. The result shows that we do not elect female directors. We will continue to work to ensure diversity in the Board of Directors in the future as well.

[Disclosure Based on the Principles of Japan's Corporate Governance Code]

【Principle 1-4: Cross-Shareholding】

• (1) Policy on Cross-shareholding

  Nippon Kayaku maintains cross-shareholdings to maintain and strengthen our business relationships with business partners from the perspective of increasing the value of our company over the medium to long-term.

  Each year we verify the significance of holding cross-shareholdings in individual companies at a Board of Directors meeting. Such decisions are based on the significance of shareholding from the medium to long-term perspective of increasing corporate value. We take market impact into consideration in selling cross-shareholdings in companies we have deemed unnecessary to continue holding.

• (2) Standards for Exercising Voting Rights on Cross-shareholdings

  When exercising voting rights, we vote to approve resolutions that will increase the value of the shares our company holds from the perspective of increasing the corporate value of the issuing company over the medium to long-term. We vote to oppose resolutions that will harm corporate value. We also engage in dialog with the issuing company regarding the contents of a resolution when necessary.

【Principle 1-7: Related Party Transactions】

Nippon Kayaku has specified in the Rules of the Board of Directors that Directors require prior approval of the Board of Directors when engaging in competitive transactions or personal transactions, and must also report the results of such transactions to the Board of Directors. In addition to this process, we also verify at the end of the fiscal year whether Directors and Audit & Supervisory Board Members themselves, or close relatives within two degrees of relationship have engaged in transactions with the Nippon Kayaku Group.

The Rules of the Board of Directors specify that approval of the Board of Directors is required for important transactions with main shareholders and affiliated companies.

【Principle 2-6: Fulfilling the Function of Corporate Pension Asset Owner】

We have established a system of management and manage terms-based defined benefit corporate pensions based on the laws and regulations governing defined benefit corporate pensions and the terms specified by our company.

• (1) To ensure proper management of pension assets and of conflicts of interest that arise between the defined benefit corporate pension plan beneficiaries and the company, we have established an Asset Management Committee that consists of members selected from our Finance and Accounting Division, Corporate Planning Division, Human Resources Management Division, and the Nippon Kayaku labor union. This committee convenes regularly.

• (2) The committee formulates the basic policy on management of pension assets and the composition of the pension asset portfolio to secure the funds to pay pension benefits over the long-term.

• (3) The Asset Management Committee retains and works together with external consultants to guarantee expertise and regularly revises the basic policy on management of pension assets and the composition of the pension asset portfolio. They also work together on monitoring and evaluating the management results, management policy, management structure, and other relevant aspects of the management firm.

【Principle 3-1: Full Disclosure】

• (1) Company Objectives (Business Principles, etc.), Business Strategies, and Business Plans

  Nippon Kayaku has set forth a corporate vision and formulates business strategy and mid-term business plan. These are disclosed on our corporate website.

  Corporate Vision:https://www.nipponkayaku.co.jp/english/company/vision/index.htmlManagement Policy (Business Strategy, Mid-term Business Plan, etc.)https://www.nipponkayaku.co.jp/english/ir/managementpolicy/index.html

• (2) Basic Views and Guidelines on Corporate Governance

  Please see "I-1. Basic Views" in this report for our basic views on corporate governance.

• (3) Board Policies and Procedures in Determining the Remuneration of Senior Management and Directors

  The policy and procedure for determining remuneration of Directors is described in "II-1. Matters Concerning Organizational Structure, Organizational Operation, etc. [Relating to Director Remuneration] Nature of Disclosure of the Policy for Determining the Amount of Remuneration and the Method for Calculating Remuneration." Please refer to this.

• (4) Board Policies and Procedures for the Appointment and Dismissal of Senior Management and Nomination of Candidates for Director and Audit & Supervisory Board Member

  We seek individuals possessing excellent character and insight both within and outside of the company as candidates for Director and Audit & Supervisory Board Member. We also consider elements such the size, balance of knowledge, experience, and skills of the Board of Directors as a whole, with the criteria of performance and management ability in operations overseen for individuals from inside the company and extensive knowledge and experience in the sectors they come from for individuals outside of the company, among other factors.

  Appointment of candidates is discussed and decided on at a Board of Directors meeting attended by Outside Directors and Outside Audit & Supervisory Board Members, based on proposals from the president.

Directors and Audit & Supervisory Board Members who possess the qualities and skills described above are responsible for demonstrating these in their work. Therefore, if a Director or Audit & Supervisory Board Member is found to be lacking these qualities and skills after sufficient discussion by the Board of Directors, the Board of Directors will put a resolution on dismissal before the Shareholders Meeting.

(5) Explanation of Individual Dismissals and Nominations Based on Provision (4), above

The reasons for nominating candidates for Director and Audit & Supervisory Board Member positions or for proposing dismissal of a Direct or Audit & Supervisory Board Member at the Shareholders Meeting are disclosed in the reference materials for the Shareholders Meeting.

【Supplementary Principle 4-1-1: Scope of Delegation to Management Personnel】

Matters to be referred to the Board of Directors are clearly set forth in the Rules of the Board of Directors, based on laws and regulations, the Articles of Incorporation, and other rules. We have also set forth the Rules on Duties and Authority, which clearly specify the scope of duties and authority that can be delegated to management personnel. The Board of Directors decides management policy, business strategy, and proposals, and other matters important to operational execution, and also requests reports to the Board of Directors on the status of operational execution to supervise whether the operations delegated to management have been executed properly.

【Principle 4-9: Independence Standards and Qualification for Independent Directors】

Nippon Kayaku has set for the following independence standards of outside officers (Outside Directors and Outside Audit & Supervisory Board Members). The outside officer concerned is judged to be independent of the company if he or she does not constitute any of the following:

• (1) A supplier who sees Nippon Kayaku and important subsidiaries of Nippon Kayaku (hereafter, "the Nippon Kayaku Group") as a main customer, or a person who is an executive director, executive officer, or other employee of the parent company or main subsidiaries of that supplier (hereafter, "executive")

• (2) A main customer of Nippon Kayaku or an executive at that customer

• (3) An executive at a main financial institution from which the company borrows or the parent or a subsidiary of that financial institution

• (4) An attorney, certified public accountant (CPA), licensed tax accountant or other consultant who has received funds or other assets exceeding a certain amount, other than officer remuneration, from the Nippon Kayaku Group (the person affiliated with the group when the entity receiving the assets is a corporation, association, or other group)

• (5) A person who has received donations or aid exceeding a certain amount from Nippon Kayaku (an executive of the group when the entity receiving the donation or aid is a corporation, association, or other group)

• (6) A main shareholder of the Nippon Kayaku Group or an executive of that shareholder

• (7) A company that has accepted directors from the Nippon Kayaku Group or an executive of the parent company or a subsidiary of that company

• (8) A person who constituted (1) through (7), above, in the past five years

• (9) The spouse or close relatives within two degrees of relationship of that person when the person who

constitutes (1) through (8), above, is a person in an important position

(10) The spouse or close relatives within two degrees of relationship of the person when the person is a director, executive officer, or manager of Nippon Kayaku or a subsidiary of Nippon Kayaku (Notes)

• 1. "Important subsidiaries of Nippon Kayaku" in (1) refer to subsidiaries that comprise 20% or more of any one of Nippon Kayaku's (non-consolidated) sales, total assets, income, or borrowings in the most recent fiscal year.

  "A supplier who sees the Nippon Kayaku Group as a main customer" refers to a "supplier who received payment of 2% or more of that entity's annual consolidated sales for the most recent fiscal year from the Nippon Kayaku Group."

• 2. "A main customer of Nippon Kayaku" in (2) refers to "a customer who paid Nippon Kayaku 2% or more of Nippon Kayaku's annual consolidated sales for the most recent fiscal year."

• 3. "Main financial institution" in (3) refers to "an entity that lends an amount equaling 2% or more of Nippon Kayaku's consolidated assets for the most recent fiscal year to Nippon Kayaku

• 4. "A certain amount" in (4) and (5) refers to "10 million yen a year."

• 5. "Main shareholder" in (6) refers to a shareholder who holds 10% or more of the voting rights (including both direct and indirect ownership).

• 6. "A person in an important position" in (9) refers to employees who are directors (excluding outside directors), executive officers, persons responsible for operational execution, or upper level management of department manager or above, as well as attorneys affiliated with the law firm; CPAs affiliated with the accounting firm; trustees, directors, auditors, or other officers affiliated with a foundation, incorporated organization, educational corporation or other corporation; and other persons reasonably and objectively judged to be of similar importance.

【Supplementary Principle 4-11-1: Views on the Composition of the Board of Directors】

Nippon Kayaku has set the maximum number of Directors at 10 to achieve effective execution of roles and responsibilities and facilitate rapid decision-making in management by the Board of Directors. In addition to requiring a certain number of people who are well-versed in the business of our company and its issues, we also think it important to ensure diversity in the knowledge, experience, and skills of Board of Directors members in order to ensure the independence and objectivity of the Board of Directors.

【Supplementary Principle 4-11-2: Status of Concurrent Postings of Directors and Audit & Supervisory Board Members】

Nippon Kayaku discloses the status of concurrent positions that Directors and Audit & Supervisory Board Members hold as officers in other listed companies in business reports, reference documents for the Shareholders Meeting, and securities reports on an annual basis.

【Supplementary Principle 4-11-3: Analysis and Evaluation of the Effectiveness of the Board of Directors as a Whole】

We distributed a survey on the effectiveness of the Board of Directors to all Directors and Audit & Supervisory Board Members and analyzed the compiled results to evaluate it. This analysis confirmed that the Board of Directors is generally effective in fulfilling its role and responsibilities. However, it also revealed that there are issues with some facets of the structure and management that should be addressed. We will also continue efforts to improve the effectiveness of the Board of Directors in the future.