Corporate Governance System

[As of December 26, 2023]

In June 2015, the Company transitioned from a company with a board of auditors to a company with an audit and supervisory committee in order to achieve both a management characterized by greater transparency and enhanced agility and to enhance corporate governance. Following the transition to a company with an audit and supervisory committee, the three (3) Directors serving on the Audit and Supervisory Committee (two (2) of whom are Outside Directors) will hold voting rights on the Board of Directors. The Company views that this contributes to reinforcing the supervision function of the Board of Directors.
The Board of Directors is composed of all Directors including five (5) Outside Directors and meets, as a general rule, once a month. As for the executive system, the President and Executive Officer executes the overall operations of management based on the basic policy determined by the Board of Directors, while other Directors are in charge of respective business execution units based on segregation of duties and authority of duties provided in the “Regulations for Management of Organization and Duties.” Executive Offers execute their duties in accordance with the resolutions of the Board of Directors and based on the segregation of duties and authority of duties provided in the “Regulations for Management of Organization and Duties.”
In terms of internal control and risk management, the Corporate Supervisory Unit and the Internal Audit Office coordinate with the Internal Control Committee (chaired by the President and Executive Officer; attended by Full-time Audit and Supervisory Committee Members) in monitoring, from an objective standpoint, as to whether the internal control system is functioning appropriately.
Therefore, the Company is of the opinion that the management supervision function and the checking and supervision functions over business execution of Representative Directors, other Directors with executive authority over operations and each Executive Officer are secured and adopts the current governance system.

The Board of Directors comprises seven (7) Directors other than those serving on the Audit and Supervisory Committee and three (3) Audit and Supervisory Committee Members and is chaired by the Chairman & CEO. In addition to the regular meetings of the Board of Directors held once a month, an extraordinary meeting of the Board of Directors is held as necessary.
The Board of Directors deliberates all important matters of corporate management, including the Company’s management policy, business plan and capital strategy and makes decisions on these matters as well as approves important matters of each of the group companies and supervises the status of business execution of each company.
As prescribed in the Articles of Incorporation, the Company shall have not more than twelve (12) Directors other than those serving on the Audit and Supervisory Committee and shall have not more than four (4) Directors serving on the Audit and Supervisory Committee. As of the date of submission of the Securities Report, the Company has seven (7) Directors other than those serving on the Audit and Supervisory Committee and three (3) Directors serving on the Audit and Supervisory Committee. The Company also has five (5) Outside Directors, two (2) of whom are Audit and Supervisory Committee Members.
The term of office of Directors other than those serving on the Audit and Supervisory Committee is one (1) year while that of Directors serving on the Audit and Supervisory Committee is two (2) years. For the record, the Company has concluded a limited liability agreement, pursuant to Article 427, Paragraph 1 of the Companies Act, with five (5) non-executive directors (Mr. Junichi Fukui, Ms. Yukie Sato, Ms. Miyuki Sano, Mr. Haruo Sato and Mr. Masayuki Maekawa) so that these non-executive directors can fully demonstrate the roles expected of them. Based on this agreement, the liability of each of them is limited to the minimum liability amount as specified by laws and regulations.

In order to ensure that duties of Directors are executed efficiently and appropriately, the Company has in place a Board of Managing Directors, which is composed of all Full-time Directors with executive authority over operations above Managing Executive Officer and Full-time Audit and Supervisory Committee Members. Chaired by the President and Executive Officer, the Committee meets at least once a month. The Board of Managing Directors decides on matters to be addressed in the monthly report (including tables) and at meetings of the Board of Directors and states opinions and conducts discussions required for execution of business operations based on matters resolved by the Board of Directors. 

The Company establishes the Audit and Supervisory Committee for performing audits and exercising supervision from the perspective of ensuring lawfulness and appropriateness of the state of execution of duties by Directors and management of each of the CRESCO group companies. The Audit and Supervisory Committee comprises three (3) Audit and Supervisory Committee Members including two (2) Outside Directors. Chaired by the member selected among the Audit and Supervisory Committee Members, the Committee holds regular meetings once a month and extraordinary meetings when necessary.
Each Audit and Supervisory Committee Member possesses abundant experience and high-level expertise in each of their respective professional fields, performs audits and exercises supervision using the internal control system, complies with the policies, etc., set forth by the Audit and Supervisory Committee, expects necessary reports and research from Directors, etc., and reviews important settlement documents, etc.
The Audit and Supervisory Committee Members also attend meetings of the Board of Directors, the Internal Control Committee and other important meetings, coordinate with the Internal Audit Office and Accounting Auditors, etc., and work to reinforce the auditing and supervision functions over management. The Audit and Supervisory Committee also coordinates with the Internal Audit Office, the Group Supervisory-Unit, and the Corporate Supervisory Unit in supervising each of the group companies, periodically holds the Group Auditors’ Liaison Meetings (liaison meetings including auditors of subsidiaries) and performs monitoring of the status of management of each group company as needed.

In June 2021, the Company established the Remuneration Committee chaired by an Outside Director. The Remuneration Committee is composed of three (3) or more Directors elected by a resolution of the Board of Directors, with the majority composed of Outside Directors.

• A policy for determining remuneration, etc. in officer remuneration for Directors (excluding Audit and Supervisory Committee Members) will be referred to the Remuneration Committee chaired by an Outside Director. In addition, the basic remuneration and bonuses in officer remuneration for Directors (excluding Audit and Supervisory Committee Members) will be determined upon deliberation by the Remuneration Committee. Fairness and objectivity in decision processes are thus respected.
• The policy on determining remuneration, etc. of Directors and the process of determination are defined separately for Directors (excluding Audit and Supervisory Committee Members) and Directors serving on the Audit and Supervisory Committee.
• Remuneration for officers consists of the basic remuneration, bonuses and the shares remuneration (excluding Outside Directors and Directors serving on the Audit and Supervisory Committee), and is determined within the scope of remuneration resolved at the general meeting of shareholders.
• The share remuneration is determined by a resolution of the Board of Directors.
• The remuneration for Directors serving on the Audit and Supervisory Committee is determined through consultation among Directors serving on the Audit and Supervisory Committee.

Based on matters resolved by the Board of Directors and matters decided by the Board of Managing Directors, Management Committees will be established as bodies to allow the discussion of matters related to the execution of business operations, consisting of all Full-time Directors with executive authority over operations and all Executive Officers as well as Full-time Audit and Supervisory Committee Members. In addition to safeguarding the prompt execution of business, the members will receive reports regarding the state of execution of duties, thus fulfilling a supervisory function. The Management Committees will meet at least once a month and will be chaired by the President and Executive Officer.
Moreover, all members have the right to convene meetings, enabling them to engage in business activities as necessary and with agility.

As of the date of submission of the Securities Report, the Internal Audit Office directly supervised by the Audit and Supervisory Committee comprises three (3) members. It performs audits systematically and exhaustively of all group companies, examines business operations, asset management and the state of information assets as needed and makes efforts to reinforce compliance relating to appropriate execution of business operations, ensure information security and promote efficiency. In addition to performing audits, members of the Internal Audit Office attend meetings of the Internal Control Committee and others, conduct various researches and provide reports as necessary to the Audit and Supervisory Committee and the President and Executive Officer.
The types of audits performed are as follows:

Business audit is an audit of business and system operations to determine whether the operations are carried out appropriately and rightly in accordance with various regulations, procedures and policies.

Accounting audit is an audit of transactions of all group companies to see whether the facts of transactions are presented on proper evidential documents and whether relevant ledgers are appropriately recorded and stored in accordance with relevant laws and regulations and rules.

Information security audit is an audit conducted to see whether personal information and other information assets of the Company are appropriately handled in accordance with the regulations for security.

Crowe Toyo & Co. is appointed as the Accounting Auditor and performs periodical audits as well as provides consultation and confirmation on business management objectives and issues as necessary in an effort to ensure transparency and appropriateness of accounting treatment. The Accounting Auditor, in order to achieve the respective audit objectives, establishes mutually trustful relationships with the Audit and Supervisory Committee Members (auditors in the case of a subsidiary) and the Internal Audit Office and promotes proper coordination under a collaborative relationship with a positive sense of urgency. The Company and the Accounting Auditor value interactive communication, mutually provide information and exchange opinions on necessary audit matters and make efforts to ensure that appropriate coordination is maintained.

The Internal Control Committee is composed of the Chairman & CEO, all other Full-time Executive Directors, the Manager of Internal Audit Office, Full-time Audit and Supervisory Committee Members and Executive Officers, and held four (4) times a year.
In order to promote the establishment and operational assessment of the internal control system, including the risk management system, and the reinforcement of the corporate governance system, the Internal Control Committee handles important issues concerning conformance with laws and regulations and the Articles of Incorporation, in accordance with “Basic Policy on the Establishment of the Internal Control System” set forth by the Board of Directors. It also exercises supervision across the Group through establishing, reviewing, and disseminating the Basic Compliance Policy and the “Code of Conduct for Compliance Management” to foster corporate ethics and compliance awareness.

The Information Security Committee is composed of the Director in charge of information systems departments, committee members chosen by each unit, and Full-time Audit and Supervisory Committee Members and chaired by the Director in charge of information systems departments.
The Information Security Committee develops plans for information security and system operation, evaluates their execution, proposes improvements, etc., as required, in order to ensure the efficient and proper operation of information security measures and systems of the CRESCO Group. It also tries to improve awareness of information security by the entire Group through various educational activities regarding the importance of information security.

The Committee of Presidents of the Group is established to communicate the management policy of the Group and discuss management issues for each group company and other important matters.
The Committee of Presidents of the Group is composed of all Full-time Executive Directors and Full-time Audit and Supervisory Committee Members of the Company, and presidents of the Group companies. Its meeting is held at least once a year.
The Committee of Presidents of the Group promotes close coordination with group companies while respecting the independence of each company within the CRESCO Group, to ensure that the Basic Compliance Policy and the “Code of Conduct for Compliance Management” are widely known to members of each group company and to strive for the compliance management and the proper enforcement of the internal control system for the Group as a whole.

The Company designates all qualified Outside Directors as Independent Directors. There are no stipulated independence criteria for selecting outside directors, but the Company focuses on each candidate's abundant experience and high-level expertise in corporate management, etc., in addition to the independence requirements set forth under the Companies Act. Therefore, the election criteria include the fulfillment of statutory requirements and the appropriateness of personal traits. The Company also takes into account the following points to ensure that appointed individuals carry out objective and strict supervision over the business execution status.

• Invite Independent Directors from outside the CRESCO Group.
• Do not depend on a certain firm, etc.
• No direct interests exist between the CRESCO Group and related persons of the Group and the candidates for Independent Directors.
• The candidates possess expertise on characteristics of the industry and professional knowledge.

The Company recognizes the primary roles of Independent Directors as follows:

• Unreservedly address questions and provide comments and opinions to the top management from an independent standpoint.
• Clarify points of discussion or dispute and propose constructive arguments.
• Monitor deliberations and decision-making at meetings of the Board of Directors to ensure that they are appropriate and do not contravene the concept of duty of care of a prudent manager.
• Closely examine all proposals from a strict perspective while maintaining independence and fairness and exercise voting rights.
• Provide comments and opinions from an objective standpoint with regard to the standards for management stance and soundness of the company.
• Conduct objective supervision over management policy, etc., based on common sense and experience outside the company.
• Address issues objectively in regard to the checking of the status of establishment of internal control and risk management and promote preventive audits.

The Company has ten (10) Directors in total (including five (5) Outside Directors), comprising seven (7) Directors (excluding Audit and Supervisory Committee Members) (including three (3) Outside Directors) and three (3) Directors serving on the Audit and Supervisory Committee (including two (2) Outside Directors), and secures an effective system for management supervision where these Directors collect information and take other steps as appropriate.
Furthermore, the Company invites all Outside Directors from outside the CRESCO Group to adopt objective viewpoints in management. Considering that the current five (5) Outside Directors of the Company are highly independent and bear no risk of causing conflicts of interest with general shareholders and that they fulfill the requirements for independent directors set forth by Tokyo Stock Exchange, Inc., the Company registers the Outside Directors with Tokyo Stock Exchange, Inc., as Independent Directors.
The Company recognizes the primary roles of Outside Directors as follows:

• Unreservedly address questions and provide comments and opinions to the top management from an independent standpoint.
• Clarify points of discussion or dispute and propose constructive arguments.
• Monitor deliberations and decision-making at the meetings of the Board of Directors to ensure that they are appropriate and do not contravene the concept of duty of care of a prudent manager.
• Closely examine all proposals from a strict perspective while maintaining independence and fairness and exercise voting rights.
• Provide comments and opinions from an objective standpoint with regard to the standards for management stance and soundness of the company.
• Exercise objective supervision over management policy, etc., based on common sense and experience outside the company.
• Address issues objectively in regard to the checking of the status of establishment of internal control and risk management and promote preventive audits.

The department in charge of legal affairs, which serves as the secretariat of the Board of Directors and the Audit and Supervisory Committee is responsible for support. A system is in place to issue notifications on meetings of the Board of Directors and the Audit and Supervisory Committee and other convocation notices by e-mail based on the Regulations for the Board of Directors and the Regulations for Audit and Supervisory Committee. In regard to support for Outside Directors (including Audit and Supervisory Committee Members), the secretariat provides, as necessary, explanations on the contents of proposals or additional material in advance.