Corporate Governance

SUBARU has chosen a structure with a board of corporate auditors. The Board of Directors (nine members, of which three are outside directors) and the Board of Corporate Auditors (five members, of which three are outside corporate auditors) decide, supervise, and audit the execution of important business.
This structure also enables us to achieve more sound and efficient business operations through increased effectiveness of management monitoring by involving highly independent outside directors and outside corporate auditors. At SUBARU, in order to enhance the practical governance structure based on our present organizational design, we have established two voluntary meetings: the Executive Nomination Meeting (consisting of five directors, of which three are outside directors) and the Executive Compensation Meeting (also consisting of five directors, of which three are outside directors).

As of the resolution of the 91st Ordinary General Meeting of Shareholders held on June 22, 2022, SUBARU's corporate governance structure and the composition of the Board of Directors, Board of Corporate Auditors, Executive Nomination Meeting, and Executive Compensation Meeting are as follows.

Corporate Governance Structure

Directors/Auditors

(As of June 22, 2022)

*

◎ and ○ indicate attendance of the chairman and other members, respectively.

Note:

The list above does not cover the entire scope of knowledge held by the directors and corporate auditors.

Business Operation System

SUBARU has adopted a vice president system and converted the Aerospace division into an internal company in order to clarify responsibilities and accelerate the execution of business operations. In addition, the Executive Management Board Meeting (a body for preliminary deliberation of company-wide management matters before their presentation to the Board of Directors) and the Executive Meeting (a decision-making body for each business division) deliberate on matters before their discussion at meetings of the Board of Directors in order to identify issues and improve the efficiency of deliberations at meetings of the Board.

Board of Directors

The Board of Directors ensures fairness and transparency by performing the oversight function for overall management and makes the best decisions possible for the Company through appointment, evaluation, and resolution regarding the compensation of its CEO and other management team members, the assessment of material risks faced by the Company and the development of measures to deal with such risks, and decisions on the execution of important business of the Company. The Board takes these actions in the interest of effective corporate governance as well as sustainable growth and improvement of corporate value over the medium to long term. The Board of Directors consists of a maximum of 15 members, from within and outside of the Company, in accordance with the Articles of Incorporation.
It is now composed of nine directors, including three outside directors, which was approved at the 91st Ordinary General Meeting of Shareholders held on June 22, 2022. The meetings are chaired by the chairman of the Board of Directors.
Meetings of the Board of Directors were held 13 times in FYE March 2022 (in addition to these, there was one written resolution passed that has been deemed equivalent to a Board of Directors' meeting, pursuant to Article 370 of the Companies Act and the Articles of Incorporation).

Number of Board of Directors' Meetings Held and Attendance Rate

*

In addition to the number of Board of Directors' meetings shown in the above table, there was one written resolution passed in FYE March 2019, two in FYE March 2020, one in FYE March 2021, and one in FYE March 2022 that have been deemed equivalent to a Board of Directors' meeting, pursuant to Article 370 of the Companies Act and the Articles of Incorporation. Attendance rates for newly appointed directors are calculated based on the number of Board of Directors' meetings held after their appointment.

Executive Nomination Meeting

To ensure the fairness and transparency of decisions on executive appointment, this voluntary committee, whose membership also includes independent outside directors and based on ample deliberation, submits to the Board of Directors proposals regarding policies for the composition of the Board of Directors, the appointment or dismissal of the CEO and other top management members, and the nomination of candidates for directors and corporate auditors. It also determines and makes proposals for appointment, dismissal, and nomination for the same. The Executive Nomination Meeting was held twice in FYE March 2022, and submitted reports mainly on SUBARU's executive structure and appointments, the division of duties of executives, and the appointment of representatives of major subsidiaries.

Executive Compensation Meeting

To ensure objectivity and transparency in decisions on compensation for directors, the Executive Compensation Meeting, as a voluntary committee and on the basis of delegation by the Board of Directors, determines individual compensation amounts per director and other issues after ample deliberation. Where matters concern the executive compensation system in general, such as its revision, the Board of Directors deliberates on proposals approved by the Executive Compensation Meeting and decides on them by resolution.
The Executive Compensation Meeting was held seven times in FYE March 2022, and submitted revised policy drafts for determining director compensation systems and details of compensation for individual directors, while deciding on performance-linked compensation for directors (except for outside directors) and corporate vice presidents based on evaluations and the amount of compensation claims in respect of restricted stock compensation for each individual recipient.

Board of Corporate Auditors

The Board of Corporate Auditors, as an independent organization entrusted by shareholders, is responsible for ensuring the sound and sustainable growth of SUBARU and establishing a quality corporate governance system that can be trusted by society by performing audits of the execution of duties by directors, passing resolutions on the contents of proposal items regarding the appointment and dismissal, or non-reappointment, of accounting auditors that are to be submitted to the General Meeting of Shareholders, and performing business audits, accounting audits, and other matters prescribed by laws and regulations. The body consists of a maximum of five members in accordance with the Articles of Incorporation. It is now composed of five corporate auditors, including three outside corporate auditors, which was approved at the 91st Ordinary General Meeting of Shareholders held on June 22, 2022. The body is chaired by the standing corporate auditor. In FYE March 2022, 12 meetings of the Board of Corporate Auditors were held.

SUBARU recognizes that decision making regarding top management changes and successor selection may have a critical influence on corporate value. Therefore, in order to ensure a successful succession at the right timing, we invest substantial time and resources to carefully develop and implement succession plans.

In order to hand over the business to the right person, the BoD, as part of its essential duties, develops succession plans that can convince all stakeholder groups. To ensure objectivity and transparency in the process for deciding on the replacement and selection of the CEO, the BoD appropriately supervises the preparation of proposals by the current CEO through discussions at the Executive Nomination Meeting.

To be able to implement succession plans appropriately, the CEO begins to prepare for selection and development of their successor candidates independently upon assuming office. Key processes for this purpose include providing information on candidates to outside directors on an ongoing basis, particularly by enabling the directors to monitor the candidates in person continuously in day-to-day business settings, as a measure to ensure appropriate and timely evaluation and selection down the road.

The BoD and Executive Nomination Meeting meet on a regular basis to review the list of essential qualities and skills required of the CEO, which may include removing and adding items, in consideration of perception of current trends, changes in the business environment surrounding the Company, and the future direction of the Group's business strategies.

To ensure the objectivity of the successor selection process and increase the effectiveness of its supervision by the Board of Directors and Executive Nomination Meeting, it is important to have effective selection criteria in place, particularly for use by outside directors. To this end, SUBARU discloses two sets of criteria: “Abilities required of the SUBARU Group's CEO” and “Five key qualities required of the SUBARU Group's CEO.” These criteria serve as a guide for evaluating candidates in light of quality, competency, experience, track record, specialized expertise, personality, and other factors, which have been discussed and decided on by the Board of Directors and Executive Nomination Meeting.

*

Expenses to be incurred for offering the above training to directors and corporate auditors, including outside officers and vice presidents, are borne by the Company.

Directors, Corporate Auditors, and Vice Presidents

Corporate Profile: Directors, Corporate Auditors, and Vice Presidents

Outside Directors/Outside Corporate Auditors

Nomination Criteria

• The outside directors are expected to perform a monitoring function independent from the management team and provide appropriate advice on management on the basis of a wide range of sophisticated knowledge.
• The outside corporate auditors are expected to perform a management oversight function independent from the management team and undertake their role of auditing from the viewpoint of legality and appropriateness on the basis of broad and advanced knowledge.
• SUBARU has established criteria for independence of outside officers in addition to the criteria for independence established by the Tokyo Stock Exchange, and appoints outside directors and outside corporate auditors who meet those criteria.

*

Independent officers: Outside directors and outside corporate auditors with no risk of a conflict of interest with general shareholders as stipulated by the stock exchange.

Matters Concerning the Policy for Determining Details of Compensation for Individual Directors

SUBARU deliberated and decided on the proposal of the Policy for Determining Details of Compensation for Individual Directors approved by the Executive Compensation Meeting at the Board of Directors' meeting held on May 17, 2021. The policy is summarized below.

Matters concerning the resolutions of the General Meetings of Shareholders on compensation, etc., for directors and corporate auditors

By a resolution passed at the 85th Ordinary General Meeting of Shareholders, held in June 2016, the maximum total amount of annual compensation, etc., for directors is 1.2 billion yen (including a maximum 200 million yen for outside directors). The maximum total amount of monetary compensation is 200 million yen per year, within the abovementioned limitation, by a resolution passed at the 86th Ordinary General Meeting of Shareholders, held in June 2017.
By a resolution passed at the 75th Ordinary General Meeting of Shareholders, held in June 2006, the maximum total amount of annual compensation, etc., for corporate auditors is 100 million yen.

Matters concerning the delegation relating to the details of compensation, etc., for individual directors

SUBARU has voluntarily set up the Executive Compensation Meeting in order to enhance the effective governance structure based on the existing organizational design. By the delegation resolution of the Board of Directors, the Executive Compensation Meeting determines specific compensation amounts, etc., of individual directors, following sufficient deliberation by its members including outside directors.
Its authorities include the determination of specific amounts of basic compensation, short-term performance-linked compensation, and restricted stock compensation as well as their payment schedule. For restricted stock compensation, the number of shares allotted to individual directors is determined by the resolution of the Board of Directors based on decisions of the Executive Compensation Meeting. With regard to revisions of the compensation system and other matters pertaining to compensation overall, proposals approved by the Executive Compensation Meeting are deliberated and decided on by the Board of Directors.
The Executive Compensation Meeting in FYE March 2022 was comprised of two representative directors and three outside directors. Its chairman was Mr. Kazuo Hosoya. To ensure transparency and effectiveness of the executive compensation determination process, the Executive Compensation Meeting shall, by a resolution of the Board of Directors, be structured so that the majority of its members are outside directors. Executive Compensation Meetings were held seven times in FYE March 2022. The body debated the compensation structure and established a policy for determining details of compensation, etc., for individual directors. It also decided on matters such as performance-linked compensation levels for directors (except for outside directors) and executive officers based on performance evaluation, and the amount of monetary compensation claims for individuals regarding restricted stock compensation.

Matters concerning performance-linked compensation, etc.

In the mid-term management vision “STEP” progress briefing made on May 11, 2021, SUBARU announced it aims to achieve a ratio of shareholders' equity to total assets of 50% and to maintain a minimum ROE of 10%. In accordance with these goals, the Executive Compensation Meeting, upon authorization by the Board of Directors, decided short-term performance-linked compensation levels for directors, using the consolidated ordinary income* for FYE March 2022 as the basis, making adjustment using the matrix of ROE and degrees of improvement in shareholders' equity ratio. Short-term performance-linked compensation is not given to outside directors in view of their roles of fulfilling monitoring and oversight functions of corporate management from an independent position.

*

Since the SUBARU Group started to voluntarily apply the IFRS to the accounts from FYE March 2020, this figure was converted to consolidated ordinary income under the JGAAP.

Performance indicators used to calculate the amount of performance-linked compensation, etc., for the fiscal period under review are as follows.

Details of non-monetary compensation

SUBARU grants restricted stock compensation to directors for the purpose of providing them with an incentive for sustained improvement of the Company's corporate value and promoting further value sharing with the shareholders, and pays monetary compensation for the acquisition of these. Directors shall wholly contribute the monetary compensation claim paid as above in the form of properties contributed in kind, and shall, in return, receive shares of SUBARU's common stock through issuance or disposal. In addition, for the issuance or disposal of shares of SUBARU's common stock, SUBARU and eligible directors shall enter into a restricted stock allotment agreement that includes provisions such as the one to restrict the transfer of the shares for three years after the date of allotment.
Restricted stock compensation is not given to outside directors in view of their roles of fulfilling monitoring and oversight functions of corporate management from an independent position.

Compensation System for Directors (excluding outside directors)

*1

Figures in the above table include three internal directors and an internal corporate auditor who resigned before the last day of the fiscal year under review. At the end of the year, there were nine directors, including three outside directors, and four corporate auditors, including two outside corporate auditors.

*2

The restricted stock compensation in the above table includes the amount of phantom stock expense recorded for grants to non-residents.

Revision of Executive Compensation in FYE March 2023

With resolution of the 91st Ordinary General Meeting of Shareholders held on June 22, 2022, SUBARU has revised the compensation system for its directors and vice presidents (excluding outside directors, hereinafter referred to as “directors, etc.”), effective from FYE March 2023 as follows. This revision was carried out in order to provide incentives to directors, etc., for sustained improvement of SUBARU's corporate value over the medium to long term and to promote further value sharing with shareholders.

a. Purpose of revising the executive compensation system

The Company is revising the compensation structure by enhancing the link between performance and compensation and raising the ratio of stock compensation, as well as adding a variable compensation type (PSU*) that is linked to the degree of achievement of performance targets, to the number of shares granted for a portion of the stock compensation plan. This aims to accelerate the achievement of the priority initiatives listed in the mid-term management vision “STEP” and further stimulate motivation and morale of directors, etc., for contributing to the improvement of the SUBARU Group's performance and corporate value over the medium to long term.

*

Performance share unit

b. Overview of revisions to the executive compensation system

(I) Composition of compensation
The ratio of compensation for the Representative Director, President and CEO will be set as 45% for basic compensation, 30% for annual performance-linked compensation, and 25% for restricted stock compensation (15% for variable compensation type (PSU) + 10% for fixed compensation type (RS*)) upon achievement of the KPIs set forth in "STEP."
As before, outside directors will only receive basic compensation.

*

Restricted stock

Compensation System for Directors (Representative Director, President and CEO) after revisions

(II) Annual performance-linked bonuses (Short-term incentive)
We have set a compensation table more closely linking compensation to annual performance the higher the rank, based on the KPI of consolidated profit before tax for the fiscal year under review. Based on this table, cash compensation is paid at a certain time of each year. For executive vice presidents, senior vice presidents, and vice presidents, specific amounts will be determined after taking into consideration performance and level of contribution to human resource development. Such compensation will not be paid to outside directors.

(III) Restricted stock compensation (Medium- and long-term incentive)
As of FYE March 2018, SUBARU has introduced fixed compensation type restricted stock (RS) compensation to directors, etc., for the purpose of providing them an incentive for sustained improvement of the Company's corporate value over the medium to long term and further value sharing with the shareholders.
In order to encourage the achievement of the goals in the SUBARU Group's mid-term management vision, we have added variable compensation type (PSU) restricted stock to the compensation structure to increase the weight of stock compensation. In addition, the KPIs for the variable compensation type (PSU) will be reviewed in conjunction with updates to the mid-term management plans and management indicators. For this revision, consolidated ROE will be used for quantitative (financial) evaluation and employee engagement (employee satisfaction evaluation) will be used for qualitative (non-financial) evaluation, with the goal of achieving the priority initiatives in STEP. Such compensation will not be paid to outside directors.

The approval of the Board of Directors is obtained in advance where a transaction poses the risk of a conflict of interest. A report on the positions that each director has held concurrently over the past financial year is provided once a year at the April meeting of the Board of Directors (a report to confirm that there have been no improper transactions or positions held).

Auditing by Corporate Auditors

SUBARU has formulated internal rules to ensure the effectiveness of corporate auditors' audits (e.g., Standards for Corporate Auditor's Audit) and developed a whistleblowing system. In this way, the Company established a framework where the corporate auditors can gather information from directors and employees as needed in case of matters that may cause significant damages to the Company, significant violation of laws/the Articles of Incorporation, or other significant compliance matters. In addition, the framework ensures smooth performance of corporate auditors' duties by assigning employees independent from directors to support duties of corporate auditors and making them known to all employees.
In FYE March 2022, audits focused on (1) the status of risk management promotion, (2) the Group governance system, and (3) the progress of the mid-term management vision “STEP.” These confirmed the soundness of efforts to resolve overall management issues including governance at each department and Group company.

Main Initiatives

1) Confirming management monitoring and execution
In accordance with audit plans by corporate auditors, each corporate auditor attends important meetings, including those of the Board of Directors, Executive Management Board Meeting, and Risk Management and Compliance Committee. When in attendance, they monitor management decision-making processes, seek explanations as necessary, and actively express their opinions. Through exchanges of opinions with directors, vice presidents, and others, as well as site visits to major business establishments and Group companies, corporate auditors also confirmed the status of business execution including the maintenance and operation of internal controls, with a focus on priority audit items.
We also ensure the effectiveness of audits by utilizing remote methods, such as online meetings, as necessary and appropriate.

2) Meetings with departments related to internal controls
The Legal Department and the Risk Management and Compliance Office report monthly on compliance concerns including the operation of the whistleblowing system, and human resource departments report regularly on the status of issues such as disciplinary cases and industrial accidents.
In addition, the Company receives reports from the departments in charge of managing subsidiaries on the status of governance and internal controls for subsidiaries as appropriate.

3) Cooperation in the three-party audit system
The Company holds monthly audit report meetings with the Internal Audit Department, receives reports on all internal audit results, and exchanges information and opinions on internal control issues.
We also receive quarterly reports from the accounting auditors on the status of accounting audits and exchange opinions with them as necessary on major matters for consideration in audits and other subjects, thereby ensuring close mutual cooperation in the three-party audit system.
In addition, we hold meetings to exchange opinions and share information with corporate auditors of Group companies as appropriate, and we also seek to collaborate with these corporate auditors by requesting their attendance at site visits of their respective Group companies.

Based on the findings confirmed through the above audit activities, we capture a range of opportunities to engage with the business execution side, including exchanges of opinions with all corporate auditors, the chair of the Board of Directors, and the representative directors, and at Group company presidents' meetings. Through these activities, we share information and provide necessary advice and recommendations for the resolution of important management issues, including the strengthening of Group governance.

Internal Auditing

SUBARU has established the Audit Department (15 members) that reports directly to the President as an internal auditing organization. This organization evaluates the state of the development and operation of internal controls with regard to business execution at SUBARU and its Group companies in Japan and overseas from an independent and objective standpoint, providing advice and proposals for improvement. The Audit Department systematically conducts audits of business execution in accordance with an annual business audit plan prepared at the beginning of each fiscal year, taking into consideration the risks and internal control status of the entire Group. Audit reports are distributed to all directors, corporate auditors, and relevant departments at the same time as reports are directly made to the President. In parallel with this, reports are also made at semi-annual meetings of the Board of Directors and quarterly at joint meetings consisting of all vice presidents.
SUBARU's Audit Department and corporate auditors work together to strengthen audit functions, as described in “Cooperation in the three-party audit system” above. In addition, we strive to strengthen audit functions by sharing information with the accounting auditors on audit plans and audit results on a quarterly basis. In addition, the internal Audit Department periodically undergoes an evaluation by external experts to confirm that the audit operations are being performed appropriately.

Management System

With the aim of increasing the effectiveness of internal controls and risk management, the Internal Audit Department was made independent of the Risk Management Group (overseen by the Chief Risk Management Officer (CRMO)) to ensure a higher level of independence of internal audit departments in the organization and to enhance the effectiveness of internal controls.

Internal Control System

In accordance with the Companies Act and the Ordinance for Enforcement of the Companies Act, SUBARU's Board of Directors has adopted a basic policy on putting in place systems that ensure that the performance of duties by directors is in conformity with laws and regulations and with the Articles of Incorporation, and other systems prescribed in the ordinance of the Ministry of Justice as being necessary to ensure the appropriate operations of the Company and the corporate group consisting of the Company and its subsidiaries. The Board of Directors maintains and operates this basic policy, reviewing it as needed.

Regarding internal control reporting systems pursuant to the Financial Instruments and Exchange Act, the evaluation of the internal control system related to financial reporting is dated the final day of the consolidated accounting period and is conducted in accordance with generally accepted assessment standards for internal control over financial reporting.
The President and Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) evaluated the status of the development of the internal control system related to financial reporting as of March 31, 2022 and affirmed that it has been established properly and functions effectively, and issued an internal control report audited by the accounting auditors to that effect.

• Annual Securities Report and Internal Control Report for FYE March 2022 (Japanese version only)
• Financial Report for The Year Ended March 31, 2022

The SUBARU Group has established a Group-wide governance stance that contributes to the sound business operations of the Group's global companies in order to maintain and enhance brand value and enhance the overall strength of the Group in response to social demands, including for sound corporate governance.

Group Companies (Affiliates in Japan, Excluding SUBARU Dealerships)

As part of efforts to strengthen the governance of the SUBARU Group, with reorganizations in April 2021 we updated to a new group collaboration system. In this system, the Business Administration Department of SUBARU manages Group companies and their businesses to promote more unified activities. In addition, we are working to create a system in which SUBARU's corporate departments provide cross-organizational support for these activities, striving to enhance the effectiveness of Group governance.

1. Initiatives in the new group collaboration system

In FYE March 2022, as the start of our new collaboration system, we redefined the roles and responsibilities of the relevant SUBARU departments involved in Group governance, and reflected and clarified these in the Subsidiary Management Rules. In addition to laying the foundation for governance activities between Group companies and SUBARU, each relevant department is promoting governance activities while deepening cooperation.

■ Roles and responsibilities of the Business Administration Department

Clarification of the roles and missions of the Group companies under their authority, overall management of business operations, support for the establishment of management foundations, etc.

■ Roles and responsibilities of the departments responsible for corporate functions

Presenting policies and guidelines to Group companies, support and collaboration in the area of corporate functions, etc.

■ Roles and responsibilities of the Corporate Planning Department

Establishment of the Group governance structure, handling of cross-Group issues, operation of the performance evaluation system, etc.

2. Initiatives to enhance the effectiveness of governance

As basic governance activities, we continue to promote the development of forums for information sharing and exchange of opinions with Group companies and the creation of educational opportunities. In particular, in FYE March 2022 we increased the number of meetings of the Management Department Steering Committee, which mainly handles topics related to corporate functions, from once every fiscal year to once every two months, in order to expand communication and promptly address various issues. In addition, by converting our education for employees into a remote format, we have created an environment facilitating the necessary training even amid the COVID-19 pandemic. SUBARU also continues to dispatch its directors to Group companies and assigns standing corporate auditors appropriately.
Through these efforts, we are working to further improve the effectiveness of Group governance.

Initiatives in the SUBARU Group

• Information sharing through a dedicated portal site for Group companies
• Held meetings of Group company presidents (held three meetings)
• Held meetings of the Management Department Steering Committee (held once every two months from FYE March 2022)
• Held workshops for newly appointed executives (held one session)
• Conducted rank-specific training for employees of Group companies (converted into remote format from FYE March 2022)
• Dispatched personnel from the Business Administration Department of SUBARU to play a part in the management of Group companies by serving as part-time directors
• Enhanced the quality of auditing through appropriate assignment of standing corporate auditors (12)

Dealerships

Initiatives designed for dealerships

• The G10 Leadership Meeting
• Meetings of the Internal Audit Department Liaison Committee (held twice a year)
• Meetings of the General Affairs and IT Specialist Committees (held twice a year)
• Enhanced the quality of auditing through appropriate assignment of standing corporate auditors (one standing corporate auditor, 11 part-time corporate auditors)

*

Parentheses indicate results from FYE March 2022

(1) Policy for cross-shareholding
SUBARU holds listed stocks as cross-shareholdings and engages in dialogues with the companies in question. Each year, SUBARU's Board of Directors quantitatively measures and compares benefits from holding, using dividend yield, and the capital cost involved, using weighted average cost of capital (WACC), in order to verify each. The Company will maintain these holdings only if it deems, based on the results of this verification, that the shares will contribute to its medium- to long-term management and business strategies in a qualitative manner.

(2) Verification details for cross-shareholding
Based on the above policy, SUBARU has steadily reduced the number of listed stocks held as cross-shareholding. As a result, 60 issues held at the end of March 2015 decreased to two issues at the end of March 2021. We consider these two issues to be essential to hold at this time for the following reasons, but we will continue to hold dialogue with these companies at least once a year, and the Board of Directors will evaluate and scrutinize these issues annually to determine whether they should be held or not.

Number of Listed Stocks and Total Amount Reported on the Balance Sheet

(3) Criteria for exercising voting rights for cross-shareholding
With regard to the exercise of voting rights for listed stocks held as cross-shareholding, the Board of Directors deliberates on and determines the criteria for exercise with evaluation items such as whether the company is consistently exhibiting poor performance, whether a sufficient number of independent outside directors are in place and if management is supervised appropriately, and whether there are any corporate governance issues present. Although these are our general principles, we hold dialogues at least once a year with companies whose stock we hold to avoid making blanket decisions. Accordingly, we exercise our voting rights appropriately in light of the performance, management policies, and medium- to long-term management plans of the companies in question, as well as from the perspectives of corporate value enhancement, corporate governance, and social responsibility.
In addition, we will continue to verify whether or not our criteria for exercise of voting rights warrant review.