Corporate Governance

Corporate Governance System

Tokyo Electron regards building corporate governance structures as important for achieving success in global competition, realizing sustainable growth. To that end, we have built a structure for utilizing to the maximum the worldwide resources we possess and have worked to incorporate a wide range of opinions to strengthen our management foundation and technology base, establishing a governance structure capable of ensuring that we attain global-level earnings power. We established the Corporate Governance Guidelines* and outlined the corporate governance structures that we have developed and reinforced ahead of other companies.

Further Development of Corporate Governance

We use the Audit & Supervisory Board System, which consists of a Board of Directors and an Audit & Supervisory Board, and have achieved effective governance based on the supervision of management by the Audit & Supervisory Board.

In April 2022, we transited to the Prime Market of the Tokyo Stock Exchange and took the following actions reinforcing corporate governance to respond to the expectations of capital markets including compliance with the Corporate Governance Code and to enhance corporate value even further.

 ①Changed the composition of the Board of Directors to three inside directors and three outside directors

 ②Appointed a majority of outside directors to the Nomination Committee and Compensation Committee,including their respective chairpersons

 ③Introduced a Corporate Officers system, under which corporate officers, as the highest decision-making body on the executive side of the Group,
  are responsible for the entire Group management and business execution

 ④Established the Corporate Officers Meeting and appropriately delegated authority from the Board of Directors to the executive side to conduct prompt
  decision-making and agile operational execution

 ⑤Corporate officers attend Board of Directors meetings and apply the details of Board deliberations to business execution in an appropriate and speedy
  manner

By establishing a Board of Directors that performs its supervisory functions and a robust business execution system in the semiconductor production equipment industry, where technological innovation is rapid and market changes are active, we will further promote growth-oriented group management on a global basis, expand short-, medium- and long-term profit and achieve continuous corporate value enhancement.

Changes in Corporate Governance (Since CY1998)

Outside Directors (ratio) Diversity (Female & Foreign Nationals) Corporate Directors & Executive Officers Director Compensation Nomination Committee Discretionary Committees Compensation Committee Evaluating the Effectiveness of the Board of Directors Sustainability related Disclosures

Corporate Governance Framework

Nomination Committee Composition One inside director and two outside directors
Chairperson Outside director
Number of Meetings 12 in FY2022
Deliberation Topics Appointment and dismissal of corporate directors and the CEO, candidates of independent outside directors, status of successor development, other topics
Compensation Committee Composition One inside director and two outside directors
Chairperson Outside director
Number of Meetings 10 in FY2022
Deliberation Topics Policies concerning determination of individual compensation for corporate directors and others and the details of compensation, compensation of individual remuneration, etc. of representative directors, other topics
Board of Directors Composition Three inside directors and three outside directors
Corporate officers also attend meetings to give explanations and reports, etc.
Chairperson Inside director (non-executive)
Number of Meetings 12 in FY2022
Audit & Supervisory Board Composition Two full-time Audit & Supervisory Board Members and three outside Audit & Supervisory Board members
Chairperson Full-time Audit & Supervisory Board member
Number of Meeting 9 in FY2022
Corporate Officers Meeting The highest decision-making body on the executive side; established in June 2022
Composition Six corporate officers
Inside directors who are not corporate officers and inside Audit & Supervisory Board members also participate
Chairperson CEO
Meeting Frequency Once a month in principle
CSS
(Corporate Senior Staff)
Reviews progress management and implementation of management plans from a global perspective
Composition Executive officers, management executives of overseas subsidiaries and others
Meeting Frequency Once a quarterly
Committees on the Executive Side Business Ethics Committee
  • Investigates the revision and revocation of the Code of Ethics and verifies the status of practice in accordance with the Code of Ethics
  • Proposes and supports training and educational programs relating to business ethics
Sustainability Committee
  • Sets sustainability goals (short-, medium-, and long-term) and implements measures to achieve them
  • Implements company-wide projects (the environment, human rights, RBA, etc.)
Risk Management Committee
  • Performs and shares information on company-wide risk management
  • Promotes initiatives to address individual risk items in collaboration with risk owners

Establishment of the Director Compensation System

Basic Policy on Director Compensation

The entire Group emphasizes the following points in its basic policies on compensation for corporate directors and Audit & Supervisory Board members.

 1. Levels and plans for compensation to secure highly competent management personnel with global competitiveness
 2. High linkage with business performance in the short term and medium-and-long term increase of corporate value aimed at sustainable growth
 3. Securement of transparency and fairness in the decision process of compensation and appropriateness of compensation

Role of the Compensation Committee

To secure transparency and fairness in management and the appropriateness of compensation, the Compensation Committee, which is chaired by an independent outside director, utilizes advice from an external expert who attends all meetings, compares compensation levels with companies in Japan and overseas and analyzes the latest trends and best practices in Japan and overseas (such as reflecting ESG in compensation). The committee then proposes to the Board of Directors a compensation system that is the most appropriate for the Group and individual compensation amounts for the representative directors based on the basic policies on compensation.

Overview of Compensation

The table below provides an overview of the composition of compensation and policies and decision-making for each type of compensation.

Type of Compensation Recipient Overview of Compensation
Inside Directors Outside Directors Audit & Supervisory Board Members
Fixed Basic Compensation
  • Determine within the limit of total fixed basic compensation, which has been resolved at the Meeting of Shareholders
  • For executive directors, amounts are determined according to the scale of job responsibilities by making reference to the job grade frameworks of external expert organizations
Annual Performance-linked Compensation Cash Bonuses
  • Amount is linked to business performance in the relevant fiscal year to raise awareness of enhancing performance in each fiscal year
  • Consists of cash bonuses and stock compensation-based stock options; the composition ratio is approximately 1:1
  • Specific amounts and the number of stock options granted are commensurate with the corporate business performance and the results of individual performance evaluations in the relevant fiscal year
  •   (Indicators of the corporate business performance)
      Net income attributable to owners of parent and
      consolidated ROE are adopted, and the results of
      comparisons of operating margin and operating
      margin growth ratio with competitors are reflected on
      the amount of payment
      (Individual performance evaluation items)
      Contribution to short- and medium-term management
      strategy targets including ESG
  • Profit-sharing type compensation paid commensurate with business performance in each fiscal year, therefore no policy is in place for the payout proportion of fixed basic compensation
  • Stock compensation-based stock options are subject to a three-year exercise restriction period to motivate recipients to share a shareholder perspective while contributing to increasing corporate value over the medium to long term
Stock Compensation-based Stock Options
Medium-term Performance-linked Compensation Performance Share (stock-based compensation)
  • Paid to motivate recipients to contribute to medium- to long-term business performance improvement
  • If the payout rate is 100%, the payment amount is set at about 30% to 100% of the fixed basic compensation, commensurate with the scale of job responsibilities
  • The number of shares delivered is determined depending on the level of achievement of performance goals for the covered period (three fiscal years)
  • Consolidated operating margin and consolidated ROE have been adopted as the indicators for evaluating business performance
Non-performance-linked Compensation Restricted Stock Units (stock-based compensation)
  • The remuneration system is designed to be more consistent with the expected role of giving advice to management from the perspective for increasing corporate value over the medium to long term
  • Standard amounts are set at about 50% to 60% of the fixed basic compensation to ensure an adequate balance between cash compensation and stock-based compensation
  • Provided in the form of share delivery after the covered period (three fiscal years) has pass

Advanced Initiatives Relating to Director Compensation

■Advanced Initiatives Relating to Director Compensation

We have established the Shareholding Guidelines (effective July 1, 2021) to further ensure that management’s interests align with those of stakeholders in pursuit of sustainable enhancement of corporate value. We have set targets for management to hold Company shares equal to the following within five years after the effective date of the guidelines or appointment.

Directors Goals
CEO


Fixed basic compensation (annual amount)
3 times
Inside Directors, Corporate Officers 2 times
Outside Directors 1 times
Executive Officers 1 times

■Clawback Policy

We have enacted a clawback policy (effective July 1, 2021) whereby we can demand a refund of annual performance-linked compensation and medium-term performance-linked compensation if financial figures are found to be in need of major correction due primarily to the willful misconduct of an executive director or corporate officer.

The amount of compensation subject to refund is the excess portion of the performance-linked compensation received in the fiscal year in which such misconduct was found as well as the three preceding fiscal years.

Evaluating the Effectiveness of the Board of Directors

Overview of Evaluations of Effectiveness

To further enhance our governance and the effectiveness of the Board of Directors, we have conducted annual evaluations of the effectiveness of the Board since fiscal year 2016 and have disclosed summaries of the results. Since fiscal year 2019, we have used external experts as a third-party organization to verify the status of initiatives relating to issues identified in the preceding fiscal year, identify future issues and work toward continuous improvement.

■Evaluation of the Effectiveness of the Board of Directors for FY2022

  Scope of Evaluation: Board of Directors Overall (including details of the activities of the Nomination Committee and Compensation Committee)

  Process

Deliberations at internal meetings Meetings for exchanges of opinions by outside directors and outside Audit & Supervisory Board members Survey administered to all corporate directors and Audit & Supervisory Board members Interviews of all corporate directors and Audit & Supervisory Board members by external experts

  Evaluation Items: The main evaluation items for evaluating effectiveness are as follows.

  • Overall effectiveness of Governance System and the Board of Directors
  •   -Roles and functions of the Board of Directors
      -Size and composition of the Board of Directors
      -Operational status of the Board of Directors
  • Composition, roles and operational status of the Nomination Committee
  • Composition, roles and operational status of the Compensation Committee
  • Further support to outside directors
  • Roles of Audit & Supervisory Board members
  • Relationship with investors and shareholders

■FY2022 Initiatives

  • Reinforcement of continuous deliberation concerning medium- to long-term management strategies
    • Two off-site meetings were held for in-depth discussions on growth strategies, Medium-term Management Plan, the future governance system and other issues.
  • Promoting diversity and developing and appointing global human resources
    • Initiatives and the status of disclosure regarding human capital are reported to the Board of Directors, and with respect to diversity, the Board discusses, sets and discloses targets for the ratio of female managers and implement specific measures
  • Reinforcement of the internal audit system and collaboration between the Internal Audit Department and the Board of Directors
    • The status of implementation of internal audits is reported to the Board of Directors. Also, risk-based audits are conducted pursuant to the audit map.
  • Enhancement of information sharing by the Nomination Committee and the Compensation Committee with the Board of Directors
    • The status of activities of the Compensation Committee, discussion points concerning review of compensation systems, the status of progress of successor development plan and other matters are reported to the Board of Directors

■Overview of FY2022 Evaluation Results

We recognize that the Board of Directors appropriately performs its roles and obligations, generally with a high level of effectiveness, and the Board, including the Nomination Committee and the Compensation Committee, functions effectively (the analysis and evaluation by external experts resulted in a similarly high evaluation).

■Future Initiatives

Based on the results of the most recent evaluation, we will continuously take action regarding the following items and work to enhance effectiveness even further.

(1)Measures to enhance the effectiveness of the Board of Directors in the 60th fiscal year
  • Conduct appropriate operations of the newly established Corporate Officers Meeting to ensure effectiveness
(2)Continuous deliberation by the Board of Directors to achieve growth over the medium to long term and continuously enhance corporate value
  • After clarifying specific timeframes (short-, medium- and long-term), organize targets and strategic themes and risk issues (deepen discussion relating to medium- to long-term growth strategies)
  • Continuously address diversity and inclusion
(3)Investigate optimal information sharing among members of the Board of Directors and with the voluntary committees
  • Ideal state of information sharing on the activities of the Nomination Committee with the Board of Directors
  • Establish venues for exchanges of opinions among outside directors and outside Audit & Supervisory Board members

Main Topics for the Board of Directors and Off-site Meetings in FY2022

CEO
  • Reports on status of business execution by CEO (each meeting)
  • Sharing of CEO missions
Medium- to long-term growth strategies
  • Market environments over the medium to long term and our growth plans
  • New Medium-term Management Plan and future growth strategies
  • Expansion and reinforcement of development and production facilities in Japan and overseas
  • Business innovation projects
Risks
  • Improvement of risk management processes
  • Legal affairs and compliance
  • Procurement risks
Governance
  • Future governance system and decision-making processes
  • Action policies concerning sustainability and diversity
  • Reports on investment in human capital and intellectual property activities
  • Reports on internal audits
  • Status of investment targets and cross-shareholdings and status of IR activities
  • Status of the activities of the Compensation Committee
  • Status of progress of successor development plan
  • Closed session on evaluation of representative directors (corporate directors, excluding representative directors, and Audit & Supervisory Board members; once a year)

Skills Matrix

We define Product Competitiveness, Customer Responsiveness, Higher Productivity and Management Foundation, which supports our overall business activities, as material issues.

We will address priority themes relating to each material issue and achieve expansion of medium- to long-term profit and continuous corporate value enhancement by each corporate director and Audit & Supervisory Board member demonstrating their skills in global business, governance, sustainability and in particular, the areas listed below.

Expected Skills Corporate Management Semiconductor/ FPD Manufacturing/ Development Sales/ Marketing Finance, Accounting/ Engagement with Capital Markets Legal Affairs/ Risk Management

Definition of Expected Skills

  • Corporate Management
    • Experience of corporate management (experience serving as a representative director or chairperson/president)
  • Semiconductor/FPD
    • Knowledge of semiconductor/FPD-related industries
  • Manufacturing/Development
    • Knowledge/experience in manufacturing and development at Tokyo Electron and other manufacturers
  • Sales/Marketing
    • Knowledge/experience in sales and marketing at Tokyo Electron and other manufacturers
  • Finance, Accounting/Engagement with Capital Markets
    • Knowledge in financial accounting and M&A, or knowledge/experience in engagement with capital markets
  • Legal Affairs/Risk Management
    • Knowledge in legal affairs, compliance and risk management

Diversity of Board Members

Expected Skills of Corporate Directors and Audit & Supervisory Board Members

Expected Skills of Corporate Directors and Audit & Supervisory Board Members

Independence and Diversity of Corporate Directors

Independence and Diversity of Corporate Directors

Change in Independent Outside Directors

Change in Independent Outside Directors

Engagement with Capital Markets

Our management actively engages in investor relations (IR) and shareholder relations (SR) activities to contribute to our sustainable growth and increase corporate value over the medium to long term.

For IR activities, in addition to quarterly earnings conferences, the CEO and each company's executive appear at Medium-term Management Plan announcement and IR Day events to share our business strategies and growth story. Simultaneous interpretation and subtitles are used to broadcast briefings in Japanese and English in an effort to provide fair disclosures to overseas investors. The IR Department, which was established under the direct control of the CEO, also supplements explanations as appropriate through individual interviews and regularly reports opinions from investors to management and the Board of Directors so that feedback can be of use in management. In addition, we actively participate in IR and ESG conferences in Japan and overseas and encourage dialogue with capital markets through the cooperation of company executives and the IR Department to gain a deeper understanding of the Group. In fiscal year 2022, we received a Best IR Award from Japan Investor Relations Association and were selected as a "Most Honored Company" by Institutional Investor magazine in the U.S. for the seventh consecutive years.

As a part of our SR activities, company executives play a central role in constructive dialogue with our major investors and proxy advisory firms. In addition to explaining the Shareholders’ Meeting agenda in advance, we engage in repeated dialogue throughout the year on a wide range of topics including corporate governance, our policies about sustainability-related initiatives, the environment, human rights, and diversity and deepen mutual understanding.

To encourage active discussion and facilitate smooth and efficient voting at Shareholders’ Meetings, we send convocation notices at an early stage, and also post notices in both Japanese and English on our website prior to sending notices and take other measures to provide information to shareholders in a timely manner. In addition, we analyze the results of the exercise of voting rights, report to the Board of Directors, and use the results to further enhance engagement with investors.