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Corporate Governance

1. Basic Approach to Corporate Governance

Topcon has established the TOPCON Corporate Governance Guidelines in pursuit of the sustainable growth and medium- to long-term enhancement of corporate value of the Topcon Group (hereinafter referred to as the "Group"), comprising the Company and its affiliated companies, based on TOPCON WAY, a set of the fundamental values, evaluation standards, and basic principles of conduct to be shared by directors, corporate auditors, officers and employees of the Group in its aim to achieve effective corporate governance.

* Read more about the TOPCON WAY here.

2. Corporate Governance Structure

1.Corporate organization

Topcon has adopted the "company with a Board of Corporate Auditors" as its corporate structure under the Companies Act.

The Board of Corporate Auditors and Corporate Audit Division (internal audit department) discuss each of their audit plans and policies, etc., in advance. They work in mutual cooperation by regularly sharing information throughout the fiscal year to increase the efficiency and effectiveness of the operations of the Corporate Auditors.

2.Board of Directors

(1)Roles and responsibilities of the Board of Directors

The Board of Directors recognizes its fiduciary responsibility to shareholders towards the sustainable growth and medium- to long-term enhancement of corporate value of the Group. Based on such recognition, the Board of Directors works to achieve "improved management efficiency" in addition to "maintaining management soundness" and "ensuring transparency in management", as well as to fulfill its responsibilities towards all stakeholders in the management of the Group.

- To fulfill the responsibilities as stated above, the Board of Directors conducts, from an independent and objective standpoint, the assessment of the performance, appropriate development and implementation of internal control systems and risk management system, as well as the supervision of the overall business management of the Company.

- The Board of Directors makes decisions on matters provided for in laws and regulations and the Articles of Incorporation as well as on important matters relating to business management. The Board of Directors has adopted the "Executive Officer System" as a business execution system based on its decision making, and delegates day-to-day business execution to Executive Officers. Executive Officers are appointed by a resolution of the Board of Directors, taking into account their level of knowledge and experience as required in the relevant business field of the Company.

- The Board of Directors establishes a system to respond to cases where a Corporate Auditor or the Accounting Auditor discovers misconduct and requests appropriate measures, or identifies any inadequacies or problems.

(2) Composition of the Board of Directors

- The Company ensures the system to supervise the operation of the Company by appointing more than one Independent Outside Director, who express their opinions from an independent and objective standpoint at the meetings of the Board of Directors.

- The Board of Directors is composed of Directors who have different backgrounds in terms of expertise and experience, and maintains the proper number of Directors so that the Board of Directors can effectively exercise its decision-making and supervisory functions.

- If any Outside Director holds concurrent positions, such as an officer (as defined in the Companies Act) at another company, the Company shall limit the scope of holding such concurrent positions to the extent that the Outside Director can secure the time necessary to appropriately fulfill his or her roles and responsibilities at the Company.

- The Board of Directors conducts an analysis and assessment of its overall effectiveness and discloses a summary of the results thereof.

(3) Internal control systems

In order to ensure smooth business operations under appropriate control, the Board of Directors sets forth basic policies regarding the development of internal control systems, and supervises the establishment of the Group's structure and the status of implementation thereof to ensure compliance, appropriate financial reporting, and risk management.

- The Company has established the Corporate Audit Division as an internal audit department to validate the appropriateness and effectiveness of internal management systems, and maintains a system that facilitates the timely reporting of any significant matters to the Board of Directors, etc.

- The Company has established the Basic Rules for Risk and Compliance for the development of a risk management system capable of responding to any risk that arises within the Group in a timely and appropriate manner depending on the nature of the risk.

- The competing transactions of Directors, transactions between Directors and the Company, and transactions that involve conflicts of interest of both parties shall be matters to be approved by the Board of Directors.

3.Board of Corporate Auditors

ⅰ)Roles and responsibilities of the Board of Corporate Auditors

The Board of Corporate Auditors recognizes its fiduciary responsibility to shareholders towards the sustainable growth and medium- to long-term enhancement of corporate value. Based on such recognition, the Board of Corporate Auditors ensures corporate soundness as well as works to contribute to the common interests of shareholders.

・The Board of Corporate Auditors of the Company consists of 4 Corporate Auditors (including 2 Outside Corporate Auditors).

・To ensure transparency and fairness, at least half of the Board of Corporate Auditors shall be Independent Outside Corporate Auditors. In addition, at least one Corporate Auditor who has knowledge of financial and accounting affairs shall be appointed.

・If any Outside Corporate Auditor holds concurrent positions, such as an officer (as defined in the Companies Act) at another company, the Company shall limit the scope of holding such concurrent positions to the extent that the Outside Corporate Auditor can secure the time necessary to appropriately fulfill his or her roles and responsibilities at the Company.

・The Board of Corporate Auditors collaborates with Outside Directors and the internal audit department.

・Corporate Auditors proactively collect information necessary for audits by attending important meetings of the Company and provide opinions in an appropriate manner on related matters to Directors, as necessary.

ⅱ)Relationships with the Accounting Auditor and internal audit department

The Board of Corporate Auditors has established a system to conduct sufficient and appropriate audits in collaboration with the Accounting Auditor and the internal audit department.

・The Board of Corporate Auditors evaluates the independence and expertise of the Accounting Auditor by formulating assessment and appointment standards of the Accounting Auditor for the purpose of appropriate selection and assessment.

・The Board of Corporate Auditors establishes a system to respond to cases where the Accounting Auditor or internal audit department discovers misconduct and requests appropriate measures, or identifies any inadequacies or problems.

4.Accounting Auditor

The Accounting Auditor assumes an important role to secure the reliability of the financial information of the Group and bears responsibility to shareholders and investors.

・The Accounting Auditor ensures a system under which it can conduct appropriate audits in collaboration with the Board of Corporate Auditors.

・The Accounting Auditor ensures independence and expertise.

・The Accounting Auditor complies with standards on quality control for audits necessary to appropriately conduct accounting audits.

 

5.Competition Advisory Committee

To ensure objectivity and transparency in relation to the handling of director compensation, etc., we have established an independent Competition Advisory Committee, which falls under the Board of Directors. The Competition Advisory Committee provides recommendations to the Board of Directors when it receives requests for advice from the Board of Directors.

 

6.Internal audit department, etc.

The Company has established the Corporate Audit Division as an internal audit department to validate the appropriateness and effectiveness of internal management systems, as follows:
The Management Audit Office consists of six people.

・The Corporate Audit Division aims to contribute to enhancing the corporate governance and risk management of the Group. The Corporate Audit Division is responsible for the internal audit process, and develops a system under which the Corporate Audit Division validates the appropriateness and effectiveness of internal management systems such as compliance, and reports to the Board of Directors, the Board of Corporate Auditors, and Representative Director in a timely manner if any significant issue is discovered.

・The Corporate Audit Division conducts group company audits in collaboration with Corporate Auditors and the Accounting Auditor to ensure the appropriate business conduct of the entire Group.

・With respect to whistleblowing matters, the Corporate Audit Division shall contribute to the early discovery of risk information and conduct measures regarding the nature of the whistleblowing matter in a swift and appropriate manner.

 

7.Directors and Corporate Auditors

ⅰ)Directors

Directors recognize their fiduciary responsibility to shareholders and execute their duties as Directors towards the sustainable growth and medium- to long-term enhancement of corporate value.

・Directors, as members of the Board of Directors, supervise the execution of business operations by Executive Directors and Executive Officers.

・Directors collect sufficient information to execute their duties, while requesting explanations on various matters and proactively expressing opinions and holding open and constructive discussions at meetings of the Board of Directors.

・Directors proactively collect information for appropriately fulfilling their roles and responsibilities, and if necessary, seek the advice of external experts at the expense of the Company.

・As an executive incentive for Directors (excluding Outside Directors), the Company adopts a compensation system that is linked to its medium- to long-term business performance, with a view to sustained improvement in the Group's business performance as well as the medium- to long-term enhancement of its corporate value.

ⅱ)Corporate Auditors

Corporate Auditors recognize their fiduciary responsibility to shareholders and execute their duties as Corporate Auditors, ensuring corporate soundness towards the sustainable growth and medium- to long-term enhancement of corporate value.

・In accordance with policies and assigned duties set forth by the Board of Corporate Auditors, Corporate Auditors conduct audits on the status of the execution of duties by the Directors and Executive Officers, etc., of the Company, through the following activities: attending important meetings of the Company, including the meetings of the Board of Directors; receiving reports from Directors, etc. on the status of their execution of duties; receiving materials and information on related matters; and collaborating with the internal audit department and the Accounting Auditor.

・Corporate Auditors audit the decision making by the Board of Directors and the status of the development and implementation of internal control systems.

・Corporate Auditors proactively collect information for appropriately fulfilling their roles and responsibilities, and if necessary, seek the advice of external experts at the expense of the Company.

ⅲ)Independent Outside Directors and Independent Outside Corporate Auditors

There are two independent independent outside directors and two independent independent outside corporate auditors.

Independent Outside Directors and Independent Outside Corporate Auditors supervise the execution of business operations, provide advice for the sustainable growth and medium- to long-term enhancement of corporate value, and manage conflicts of interest, while conveying the opinions of stakeholders including minority shareholders to the Board of Directors.

・Independent Outside Directors share information regarding matters related to the business and corporate governance of the Group and exchange opinions with each Director, Executive Officer, and Corporate Auditor.

・The Company appoints the Outside Directors and Outside Corporate Auditors who meet the criteria for independence specified by financial instruments exchanges.

・Independent Outside Directors and Independent Outside Corporate Auditors work to exchange information and share perspectives based on an independent and objective standpoint by holding of regular meetings.

Personal relationships between the Company and outside directors and outside corporate auditors, capital relationships or transaction relationships and other interests

-Director Kazuyuki Matsumoto serves as an outside director for KITZ CORPORATION but we have no transactions with said company. Furthermore, although we have do have mutual appointments with Nabtesco Corporation, where Director Matsumoto previously served as Representative Director and President, we have no transactions with said company.

-Director Akira Sudo is a special consultant for TOSHIBA CORPORATION but we have no major transactions with said company.

-Corporate auditor Tatsuya Kuroyanagi is a Senior Advisor to Kadota & Co., Inc. but we have no major transactions with said company.

-Corporate auditor Keiji Takeya is an outside corporate auditor to Ekitan & Company, Limited but we have no transactions with said company.

ⅳ)Training policies

The Company provides information and knowledge on business activities necessary for Directors and Corporate Auditors to fulfill their roles and responsibilities appropriately in accordance with the following provisions.

・When Directors or Corporate Auditors are newly appointed, the Company provides training regarding laws and regulations related to the business of the Group and the Group's corporate governance, and provides, on an ongoing basis, such training even after assuming office as Directors and Corporate Auditors.

・In addition to the aforementioned, when Outside Directors and Outside Corporate Auditors are newly appointed, the Company provides the information regarding the Group's business and overall organization, etc., and also provides, on an ongoing basis, the necessary information regarding the Group's business strategies and issues to be addressed, etc., even after assuming office.

8.Summary of limited liability contract

In accordance with the provisions of Companies Act Article 427, Paragraph 1 as well as the Articles of Incorporation, the Company concludes contracts with each outside director and outside corporate auditors limiting liability for damage compensation resulting from a failure to fulfill duties. The compensation liability limit in accordance with said contracts is set as the minimum liability limit stipulated by law.

Topcon's Corporate Governance Structure

img_governance_e.jpg

3. System of Internal Controls

Basic policies related to the company's system of internal controls are as enumerated below:

(1)System to ensure that the performance of director and employee duties are in

compliance with the law and company articles of incorporation

  • Establish the TOPCON WAY as a representation of values common throughout the Topcon group and the Topcon Global Code of Conduct to outline a specific code of conduct for the Topcon group. At Topcon, use the company anniversary and other occasions as opportunities for top management to reaffirm the importance of these values and the code of conduct with every director and employee within the Topcon group. Also work continuously to promote awareness through daily educational activities.
  • Important matters that could impact Topcon or the Topcon group overall shall be determined by the board of directors. Elect outside directors to maintain and strengthen a supervisory function related to the execution of duties by directors.
  • Utilize an Internal Reporting System to uncover issues quickly and work to enhance timely and appropriate responses.
  • Establish a Corporate Audit Division that will serve as an internal audit department under direction directly of the president. Validate the appropriateness and efficacy of compliance and other internal management systems. Establish a system to ensure that reports are made in a timely manner to the president and board of directors if a major issue is discovered.
  • Reinforce that legal compliance is most important during the execution of duties. In particular, create separate internal rules and management systems to strengthen compliance with respect to the Anti-Monopoly Act, export restrictions, insider trading restrictions, the protection of private/sensitive information, and environmental protection.
  • Outline guidelines in the Topcon Global Code of Conduct related to preventing relationships with antisocial forces and reinforce the refusal to be involved in the business activities of antisocial forces on a company-wide level.

(2)System for preserving and managing information related to director execution of duties

  • Minutes, documents, approval forms, and other important materials related to board of directors and executive officers meeting are preserved and maintained based on internal company rules. The internal company rules have "Regulations of the Board of Directors", "Executive Officers Regulations", "Group Governance Rules", "Basic Regulation on Information Security", "Document handling official regulations" and "Documents preservation standard(rules)".
    (This includes executive officers meeting information, as the company has adopted the executive officer system)

(3)Rules and Systems for Managing Risk of Loss

  • Establish Basic Rules for Risk and Compliance, appoint individuals responsible for risk management, and establish a system capable for responding to any Topcon and Topcon group risks in a timely and appropriate manner.
  • Establish an Internal Reporting System that allows a person who discovers a risk to report risks directly without having to go through the normal chain of command. This will contribute to the early discovery of risk information and assist in the rapid and appropriate response to situations as well as increase risk management awareness among all directors and employees, including group companies. It should be noted that the "Internal Reporting System" is under the jurisdiction is the internal audit department "Corporate Audit Division".
  • Topcon has established the Basic Regulation on Personal Information Protection concerning protection of private information, and the Basic Regulation on Information
    Security regarding confidential information and associated regulations thereof and seeks to keep employees of Topcon and subsidiaries fully informed of these regulations.

(4)System to Ensure the Efficient Execution of Director Duties

  • The board of directors meets once per month (and on other occasions as needed) to deliberate issues and receive reports about regular agenda items related to management policies, laws, articles of incorporation, or other important matters related to the management of the company, practicing and strengthening the supervisory function over the company.
  • By entrusting day-to-day execution to executive officers, deliberation of important business execution issues within the scope of the decision-making authority of the president based on the internal rules and make a decision. To ensure sufficient and substantive discussion in the board of directors, the company will establish a system that can quick decision-making.
  • "Regulations of the Board of Directors", "Executive Officers Regulations", "Group Governance Rules", such as "Business Organization Regulations", etc., and in accordance with the appropriate procedures that have been defined in the internal rules, are each of the business executive.

(5)System for Ensuring the Appropriate Activities of the corporate group, Comprised of the company, Parent companies, and Subsidiaries

  • The application of the TOPCON WAY as values common throughout the Topcon group enables the company to transcend national and company borders and ensure that Topcon directors and employees in every country and region share the same values and judgment standards throughout the group. Disseminate the Topcon Global Code of Conduct as a detailed code of conduct to ensure adoption by group companies as well as the company and establish an awareness of legal compliance.
  • Establish Group Governance Rules applicable to Topcon and group companies and clearly set decision-making standards and matters for reporting. Make these rules known and throughout the year hold several opportunities for business execution status reporting. Share information within the Topcon group and provide instruction to group companies aimed at improving compliance awareness.
  • The Corporate Audit Division, which is the Topcon internal audit department, shall coordinate with corporate auditors and accounting auditors in their respective audits as well as participate in group company audits to ensure the appropriate conduct of Topcon group business.

(6)Matters related to Employees Asked to Assist Corporate Auditors

  • In response to a request by corporate auditors, employees assigned to the Corporate Audit Division may be asked to assist corporate auditors in their responsibilities.

(7)Matters related to Employee Independence from Directors

  • The duties of Corporate Audit Division shall not be subject to influence by directors or executive officers. The assignment of Corporate Audit Division employees shall be determined beforehand in discussions with the board of corporate auditors.

(8)System for directors/employees to report to corporate auditors, other reports to corporate auditors

  • To ensure audits of the decision-making process, establish a system for corporate auditors to have access to information by attending board of director meetings, executive officers meetings, or other important internal meetings, or by reading meeting minutes or other records/materials.
  • Establish a system that allows the corporate auditor to throughout the year receive reports from various executive divisions within the company regarding business status or visit group companies to conduct audits of business status.
  • Corporate auditors may, when deemed necessary, require operational reports from company and/or subsidiary directors, executive officers, or employees.
  • For auditors, management audit office was carried out the situation and the results of an audit report relating to internal audit, will strive to cooperation and efficiency.

(9)System to Ensure Practicality of Corporate Auditor Audits

  • The board of directors shall exercise consideration to allow unhindered performance of audit activities, allowing corporate auditors to attend board of director meetings, executive officers meetings, or other important internal meetings (including such meetings at subsidiaries). Corporate auditors shall ensure opportunities for regular audits of company (including subsidiary) operations, and appoint staff to assist in audit duties.
  • Corporate auditors and directors shall establish regular opportunities to exchange opinions, ensuring that the input of corporate auditors is appropriately reflected in management decisions.
  • Accounting auditors and auditors will establish a forum for exchange of information and opinions.

4. Framework for Preventing Harm by Antisocial Forces

We outline that "Absolutely no relations shall be held with antisocial forces or organizations that threaten the order or safety of society." To ensure the strict maintenance of legal compliance and appropriate external supervision, in October 2010 we established the "Basic Regulations for External Supervision". These regulations outline the establishment of an implementation system for external supervision as well as clearly define the following basic policies.

  1. Reject any involvement in or support of business activities by antisocial forces.
  2. Work to differentiate between antisocial forces and customers, general public, etc., and partner with relevant departments to ensure optimal responses.
  3. In the event of incidents, including transactions or product accidents, related to antisocial forces, involve attorneys, etc., to ensure a practical, transparent resolution.
Reject all unjust requests involving violent behavior or threats, and do not become involved in resolutions that involve unjust or illegal expenditures.

5. Directors and Corporate Auditors Compensation

Total compensation of directors and corporate auditors for the fiscal year ended March 2017 was as shown below:

governance_2017.png


(Note)

  1. As of March 31, 2017, the company had 7 directors, 2 corporate auditors, and 4 outside officers.
  2. As of March 31, 2017, the maximum compensation levels for directors was ¥700 million as resolved at the 124th Ordinary General Meeting of Shareholders held on June 28, 2017, with maximums for the fi xed portion of ¥300 million and the performance-linked portion of ¥400 million as determined based on prescribed benchmarks for the relevant fi scal year. This total does not include employee compensation for directors who also serve as employees. The maximum total fi xed annual compensation for an outside director is ¥30 million.
  3. Corporate auditors compensation is limited to a maximum 100 million yen annually, as established in a resolution by the Ordinary General Meeting of Shareholders for the 120th Fiscal Period held June 26, 2013.

6.Pertinent material

TOPCON Corporate Governance Guidelines (2017/6/28)