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Basic Views on Internal Control System and Progress of System Development

[As of July 29, 2019]

The Basic policy of corporate governance of the Company, is to maximize corporate value for all stakeholders, including shareholders, enhance efficiency and transparency of management. Pursuant to provisions of the Companies Act, the Company formulated the "Basic Policy on the Establishment of the Internal Control System" by resolution of the Board of Directors in May, 2006, which concerns "Systems necessary to ensure that the execution of the duties by the directors complies with the laws and regulations and the articles of incorporation, and other systems prescribed by the applicable Ordinance of the Ministry of Justice as systems necessary to ensure the properness of operations of a Stock Company."

The Board of Directors resolved at its meeting on March 25, 2019 to revise this basic policy.

Basic Policy on the Establishment of the Internal Control System

1. System to ensure that execution of duties by Directors and employees complies with laws and regulations and the Articles of Incorporation

  • In order to further raise the awareness about corporate ethics and compliance and exercise supervision across the corporate entities comprising the Company and its subsidiaries (hereinafter, the CRESCO Group), the Code of Conduct for Compliance Management shall be defined and standards for activities shall be made clear.
  • The Internal Control Committee shall be established with the President and Operating Officer serving as the chief executive to foster corporate ethics and compliance awareness of the CRESCO Group by establishing, reviewing, and disseminating the Code of Conduct for Compliance Management.
  • Upon instituting Compliance Regulations and establishing the post of the compliance supervisor, compliance education and training for officers and employees shall be regularly provided to ensure the enforcement of the “Code of Conduct for Compliance Management” and to strive for the early discovery of problems. Acts violating laws, regulations, the Articles of Incorporation, etc. shall be strictly punished.
  • A whistleblowing system in accordance with the Whistleblower Protection Act (Compliance Helpline) shall be established for the prevention and early discovery of acts violating laws or regulations as well as rapid and effective responses against them.
  • The Internal Audit Office under the direct jurisdiction of the Audit and Supervisory Committee shall conduct audit regarding issues in the internal system and day-to-day business activities as well as confirm and evaluate the operational status of regulations, the results of which it shall report to Full-time Audit and Supervisory Committee Members and the President and Operating Officer. The Internal Audit Office shall also hold regular meetings and try to exchange information with Accounting Auditors.
  • From the perspective of management transparency, compliance management, and compliance with laws and regulations, the Accounting & Finance Unit and the departments in charge of legal affairs, general affairs and human resources, etc. shall establish a system which enables seeking comments from attorneys-at-law, patent attorneys, certified public accountants, and other external specialists as required and receiving advice and guidance on various day-to-day issues as needed.
  • In regard to elimination of anti-social forces, a declaration is made in the Code of Conduct for Compliance Management that the Company "takes a resolute attitude against anti-social forces and groups that pose a threat to the order and safety of civil society" to enforce a firm attitude against anti-social forces and respond accordingly in cooperation with the police and other relevant external organizations.

2. System for storage and management of information regarding execution of duties by Directors

  • Directors shall appropriately store and manage (including disposal) minutes of the general meetings of shareholders, minutes of the Meetings of the Board of Directors, ringi approval documents, various contracts, and other information relating to the execution of their duties in accordance with relevant laws and regulations, the Articles of Incorporation, the Documentation Management Regulations, and other internal regulations.
  • Executive Directors shall promote effective information security measures and manage information appropriately and safely in order to ensure the prevention of unauthorized use and leakage of information.
  • The Directors shall establish a system where if a request is made by the Audit and Supervisory Committee or the Internal Audit Office to view information relating to execution of duties, the existence and storage condition of such information is immediately checked to allow viewing of information at any time.

3. Rules concerning management of risk of losses and other systems

  • In managing risk of losses, a department in charge of each area of business (hereinafter, "each responsible division") shall identify risks and periodically reviews the risks by category, take steps to implement preventive measures, and mitigate such risks.
  • The Directors and Executive Officers managing and supervising each responsible division shall establish and ensure the appropriateness of the risk management system through verifying individual cases specifically as necessary.
  • Each responsible division shall widely make known the Risk Management Regulations, other internal regulations, internal and external guidelines, etc. and shall establish a system for monitoring, supervising, and performing training.
  • The Internal Control Committee shall exhaustively and comprehensively control the risk management status of each responsible division in accordance with the Risk Management Regulations and other regulations relating to risk management.
  • The Group Business Promotion Unit shall coordinate with the Internal Control Committee to manage risks across the organization at the CRESCO Group, examine (including monitoring) the status of operation, and provide advice and guidance to each responsible division and the CRESCO Group as needed.
  • Beside auditing the risk management status of each responsible division as well as confirming and evaluating management measures, the Internal Audit Office shall subsequently confirm improvement and corrections to each responsible division and provide advice and guidance to them as needed.
  • The departments in charge of general affairs and human resources shall coordinate with each responsible division and establish a system for enabling speedy communication of information and immediate response in the event of a crisis.
  • In the event a critical matter arises, response headquarters shall be established with the President and Operating Officer as the head to appropriately grasp the status and take steps to quickly resolve the situation with support from external specialists.

4. System to ensure efficient execution of duties by Directors

  • In order to ensure efficient decision-making by the Board of Directors and Directors, an Executive Officer System shall be introduced to clarify the responsibilities for the execution of business and to execute business efficiently in accordance with the Executive Officer Regulations, the Regulations for Management of Organization and Duties, and other internal regulations.
  • The Directors and Executive Officers managing and supervising each responsible division shall make decisions on specific measures to be implemented by each responsible division and on the system of efficiently executing business operations including the allocation of authority. They shall report monthly business performance and results to the Director in charge of finance and accounting, and the Board of Directors by utilizing information systems.
  • The Board of Directors shall, in order to materialize the management plan (including a manpower plan), set operating targets and budgets based on such plan for each responsible division in each period. The status of progress shall be confirmed by the Management Committees composed of Executive Officers and those above Executive Officers as well as the Board of Directors.
  • The Board of Managing Directors is established as an organ to support speedy, accurate management decisions and shall periodically meet to study and report management issues.
  • The Audit and Supervisory Committee shall conduct audits to determine whether the system to ensure efficient execution of duties by Directors is appropriately established and operated by taking into account the audits performed by the Internal Audit Office.
  • The department in charge of information systems shall put in place internal information systems relating to the overall IT control to provide effective communication functions and secure information security.

5. System to ensure properness of operations at the CRESCO Group composed of the Company and its subsidiaries

  • The Code of Conduct for Compliance Management shall be made widely known in close coordination with each subsidiary belonging to (hereinafter, "each Group company") of the CRESCO Group, and a compliance promotion manager shall be assigned at each Group company as part of the efforts to secure the properness of operations of the corporate group.
  • Directors and/or Auditors shall be dispatched to each Group company as required to improve the soundness and efficiency of the management of the CRESCO Group.
  • While respecting the autonomy of each Group company, matters to be approved by and reported to the Company specified by the Subsidiaries and Associates Management Regulations shall be clarified, and their execution status shall be monitored. Each Group company shall obtain approval from the Company prior to making an organizational decision on matters specified in the Subsidiaries and Associates Management Regulations and report to the Company about matters specified therein.
  • Pursuant to regulations and other rules specified by themselves, each Group company shall establish a system that immediately reports to the Company a violation of laws, regulations, and other regulations found in each Group company.
  • The Group Business Promotion Unit shall coordinate with the Internal Control Committee to establish a system for the efficient and proper execution, in each Group company, of : consultations among Group companies on internal control for business execution including risk management, sharing of information, communication of instructions and requests, whistleblowing and consultation system, education and training pertaining to compliance promotion, etc.
  • The Internal Audit Office shall conduct investigations and audits from an independent perspective and report the audit results to Full-time Audit and Supervisory Committee Members and the President and Operating Officer of the Company. It shall also send copies of such parts of the report as specified by Full-time Audit and Supervisory Committee Members to Representative Directors of the each Group company and indicate measures for improvement and advice regarding those measures as needed.
  • The Group Business Promotion Unit and the Internal Audit Office shall foresee any risk of losses in each Group company through investigations and audits, or if detecting such risk, shall immediately report the details of the risk of losses, the magnitude of losses, the impact on management and other findings to Full-time Audit and Supervisory Committee Members and the President and Operating Officer of the Company as well as to Representative Directors of the CRESCO Group companies.

6. System concerning employees who assist Audit and Supervisory Committee Members in their duties (hereinafter, the Audit and Supervisory Committee Staff) and matters regarding the securement of the independence of such employees from Directors and the effectiveness of instructions to such employees

  • When the Audit and Supervisory Committee requires Audit and Supervisory Committee Staff, members of the department in charge of legal affairs as an organ to assist the duties of the Audit and Supervisory Committee shall concurrently serve as the Audit and Supervisory Committee Staff.
  • Any appointment, transfer and disciplinary action of the Audit and Supervisory Committee Staff require the prior consent of the Audit and Supervisory Committee.
  • The Audit and Supervisory Committee Staff shall follow the instructions of the Audit and Supervisory Committee in assisting the duties of the Audit and Supervisory Committee and shall have the authority to perform the examination (including monitoring) necessary for the duties. In addition, the Audit and Supervisory Committee Staff shall, when receiving instruction on its duties from the Audit and Supervisory Committee, carry out the assigned operations by giving priority to such operations over other operations and shall not receive instructions or orders from Directors who are not Audit and Supervisory Committee Members regarding the assigned operations.

7. System for reporting by Directors and employees to the Audit and Supervisory Committee and system for reporting by Directors of subsidiaries, etc., to the Audit and Supervisory Committee

  • In order to ensure effective implementation of duties by the Audit and Supervisory Committee, Directors, Executive Officers and employees shall report, in addition to matters legally required, such matters that can significantly influence business operations of the CRESCO Group and the status and results of business execution to the Audit and Supervisory Committee.
  • Directors and Executive Officers shall, when detecting any fact that poses a risk of causing considerable damage to the company, immediately report the matter to the Audit and Supervisory Committee.
  • The Internal Audit Office and the department in charge of legal affairs shall report the status of internal audits and examinations (including monitoring) performed and the status of reporting through the Compliance Helpline, etc., and details thereof to the Audit and Supervisory Committee.
  • Officers, Executive Officers and employees of each company of the CRESCO Group shall promptly provide reports when requested by the Audit and Supervisory Committee to report matters concerning execution of operations.
  • Officers, Executive Officers and employees of each company of the CRESCO Group shall immediately report to the Audit and Supervisory Committee when detecting a violation of laws and regulations, etc., or a fact that poses a risk of causing considerable damage to the companies of the Group.
  • The Internal Audit Office and the department in charge of legal affairs shall report periodically and timely the status of internal audits, compliance, risk management, etc., at each company of the CRESCO Group to the Audit and Supervisory Committee.
  • Reports to the Audit and Supervisory Committee shall basically be made in good faith and without omission and shall be made whenever necessary and without delay in addition to the periodical reports made. When requested by the Audit and Supervisory Committee, reports shall be made promptly.

8. System to ensure that persons reporting to the Audit and Supervisory Committee are not treated unfairly due to the reporting made

  • The Company prohibits unfavorable treatment of officers, Executive Officers and employees of the CRESCO Group who have reported to the Audit and Supervisory Committee due to the reporting made.
  • The department in charge of legal affairs strives to raise awareness among Directors, Executive Officers and employees, through providing the opportunity for them to receive education and training regarding how to prevent situations where persons are dissuaded from reporting to the Audit and Supervisory Committee or the Compliance Helpline over concerns of receiving unfavorable treatment.
  • The Company ensures to make the prohibition of unfair treatment described in (1) widely known to each company of the CRESCO Group.

9. Matters concerning the policy on procedures for the handling of expenses or liabilities arising from the execution of duties of the Audit and Supervisory Committee Members, such as the prepayment or repayment of expenses arising from the execution of such duties, etc.

When the Audit and Supervisory Committee Members requests prepayment or repayment, etc., of expenses arising in connection with the execution of duties, the Company shall promptly handle the request except when recognizing that the expenses or liabilities relating to the request are not required for the execution of duties by the Audit and Supervisory Committee Members.

10. Other systems to ensure efficient execution of audits by the Audit and Supervisory Committee

  • Each Audit and Supervisory Committee Member may participate in meetings held within and outside the company if it is necessary to do so for carrying out his/her duties.
  • The Audit and Supervisory Committee may periodically hold meetings for exchanging opinions with the Representative Directors, the department in charge of legal affairs, the Internal Audit Office and the Accounting Auditors, respectively.
  • The Internal Audit Office shall conduct operational audits of the effectiveness of the internal control system and overall operations based on the internal audit plan and shall report the audit results in writing and verbally to Full-time Audit and Supervisory Committee Members, the Audit and Supervisory Committee, and the President and Operating Officer.
  • In order to ensure proper execution of duties by the Audit and Supervisory Committee, Directors and Executive Officers of the CRESCO Group shall assist in properly securing communication and mutual understanding, information collection, etc.
  • Directors and Executive Officers of the CRESCO Group shall cooperate in important examinations of business partners recognized to be necessary by the Audit and Supervisory Committee.
  • The Audit and Supervisory Committee shall, when recognizing the need to do so for executing its duties, establish an environment and system in which the Committee can promote coordination with attorneys-at-law, patent attorneys, certified public accountants and other external specialists.

11. System necessary for ensuring appropriateness and reliability of financial reporting relating to the CRESCO Group

  • For the purpose of ensuring appropriateness and reliability of financial reporting, an internal control system associated with financial reporting shall be established.
  • In order to properly implement the internal control reporting system defined in the Financial Instruments and Exchange Act as part of the internal controls associated with financial reporting, special units (Internal Audit Office, Internal Control Committee, Process Leaders Committee, etc.) shall be put in place within the company and a system shall be established to continuously perform self-assessments and third-party assessments and make improvements and corrections through identifying and recording the status of company-wide internal controls and business processes, etc. of important operating locations.
  • In order to ensure proper and timely financial reporting, the Company shall appoint a department responsible for IR and shall establish a system to disclose financial statements upon discussion, examination and verification in accordance with the rules relating to information disclosure.
  • The Director in charge of accounting and finance shall also provide guidance to each company of the CRESCO Group companies to ensure that the system associated with financial reporting is properly established and operated.
  • The Director in charge of accounting and finance shall periodically report the results of assessments and improvements of the CRESCO Group to the Board of Directors.