Corporate Governance

Overview of Corporate Governance Structure

Avex has adopted the system of a Company with Audit and Supervisory Committee, and the Audit and Supervisory Committee, which comprises three members including two Outside Directors, audits and supervises the business execution of Directors. The Board of Directors comprises five Directors (who are not Audit and Supervisory Committee Members) and three Directors who are Audit and Supervisory Committee Members and, out of a total of eight Board members, three are Outside Directors, which means that Outside Directors account for more than one-third of the Board of Directors. The Board of Directors meets once a month, as a general rule, to decide on the main issues facing the Company and its Group companies. The Management Meetings, comprised of executive directors and executives and charged with ensuring the control and flexibility of Group management, meets twice a month, as a general rule, to discuss and monitor significant matters related to management and business execution of Avex Group. Further, to ensure proper business operations by Avex Group, the Internal Affairs Department conducts monitoring in the form of operational audits in an effort to maintain and improve Avex Group's governance framework.

In addition, with the aim of ensuring the effectiveness and soundness of business operations, Avex Group has established the following corporate governance units.

Structure of corporate governance units and internal control system

Internal Control Systems

The Group maintains and develops a system of internal controls for ensuring the reliability of its financial reporting and increasing the effectiveness and efficiency of its business operations. In accordance with its "Fundamental Policy for Internal Controls," the Group checks the status and configuration of its system of internal controls every fiscal year. Moreover, to maintain and improve its system, the Group sets a compliance policy that underlies its corporate ethics stance, and all executives and employees are made aware of and fully understand the importance of strict compliance with laws and regulations. The Group has also established an Internal Reporting System ("Helpline") and allocated external lawyers to the Helpline to continually strive to guard against infractions of laws and regulations, unfair practices, and ethical transgressions occurring within Avex.

With regards to the risk control structure, the Group has developed a structure to provide risk management by establishing risk management regulations, specifying divisions bearing executive responsibility for risk, designating risks that may be faced by Avex and Group companies and preparing their countermeasures, and appointing directors with responsibility for risk control to manage the comprehensive risks that face the Group as a whole.

Further, the Group has developed a structure whereby the Internal Affairs Department conducts audits of the status of risk control and reports its findings to the president and to the Audit and Supervisory Committee Members. When potential issues are found, the Department takes steps to resolve them in partnership with the Risk Management Division and other relevant divisions. This system ensures that the risk control structure remains robust, and is constantly maintained and improved.

Outside Directors

Avex appoints three Outside Directors. When these Outside Directors are selected, Avex sets forth the Independence Standards as follows to assess their independence.

Criteria for assessing independence of Outside Directors

Avex deems that the Outside Director is independent if he/she does not meet any of the following criteria.

• Executive of the Company or its subsidiary (hereinafter the "Group").
• Major client or supplier of the Group (client or supplier with annual total amount of transactions exceeding 1% of the Group's consolidated net sales) or an executive thereof, or a party whose major client or supplier is the Group (a party with total amount of transactions exceeding 1% of their consolidated net sales) or an executive thereof.
• Consultant, accountant or legal professional who receives a large amount of monetary consideration or other property (annual total amount of transactions exceeding 10 million yen or 1% of their consolidated net sales, whichever is higher) from the Group besides compensation as director/auditor (or a person who belongs to such organization and is directly in charge of the Group if the entity receiving the assets is an organization such as a legal entity or an association).
• The major shareholder of the Company (*1) (or an executive of the said major shareholder if the shareholder is a legal entity).
  • *1: A major shareholder is a shareholder who possesses more than 10% of the voting rights held by all shareholders, under his/her name or other's name.
• An executive of the Group's major lender (*2)
  • *2: A major lender is a financial institution group from which the Group receives loans (those related to the consolidated group to which the actual lender belongs to), where the total amount of loan made by the Group to the said group of financial institution as of the end of the previous fiscal year exceeds 5% of the Group's total consolidated assets.
• Those that correspond to any of the items through a. to e. in the recent past.
• Relatives (spouse or relatives within the second degree of kinship) of those who correspond to any of the items through a. to f. (excluding insignificant persons).

Further, when selecting such Outside Directors, Avex considers factors such as their career history and experience, in addition to their character and insight, in order to strengthen the Company's management and corporate governance framework. For the current Outside Directors, the Company has appointed individuals with considerable expertise in the performance of duties, including legal qualifications and U.S. Certified Public Accountant qualifications, in addition to satisfying the above standards. The Company believes that this will further improve the Company's management and corporate governance system.

The Outside Directors attend the meetings of Avex's Board of Directors, which are held once a month as a general rule. Along with monitoring the status of management, the Outside Directors offer advice and exchange opinions when necessary with respect to business decisions. The Outside Directors also attend the monthly meetings of the Audit and Supervisory Committee, which are held once a month as a general rule, and so are aware of the situation regarding business execution by Directors of Avex and its Group companies. The Outside Directors also verify the results of internal audits carried out by the Internal Affairs Department, as well as the audit reports made by the accounting auditor and the structural condition of the system for internal controls. This knowledge enables them to liaise with the relevant departments to ensure the appropriateness of the Group's business operations.

Pursuant to Article 427, Paragraph 1 of the Companies Act of Japan, Avex has entered into contracts with all of the non-executive Directors to limit their liability to Avex under Article 423, Paragraph 1 of the same act. The maximum amount of liability set forth in each contract is the minimum liability stipulated by Article 425, Paragraph 1 of the Companies Act. The limitation of liability applies only to duties of the non-executive Directors performed in good faith and without gross negligence.

There are no capital, human, business or other relationship of interests between a company at which an Outside Director serves or had served as an officer and the Company and its other Directors.

Executive Compensation

The Company has positioned executive compensation as a driver to achieve sustained growth that will bring about greater corporate value. For the system to function properly from this perspective, decisions associated with the specific design and operation of the Company's system of executive compensation should take into account objective viewpoints from outside the Company. To this end, Avex has adopted a three-person Compensation Committee chaired by an Independent Outside Director and with an additional Independent Outside Director and a Director as members. Decisions made at the Board of Directors are based on the findings of the Compensation Committee.

Avex has set forth the following basic policies regarding executive compensation.

(Basic Policies on Compensation)

• To obtain the clear understanding of shareholders and other stakeholders, and to earn their trust, the Company will emphasize securing a high degree of objectivity and transparency in system design and operation, and will provide sufficient accountability in clearly demonstrating the basis for the amount of remuneration.
• With an emphasis on performance-linked compensation, and by having as our main pillars the principals of shareholder returns and assessment of corporate value, we will strongly advocate the concept of "pay for performance."
• Executive compensation will encourage continuous exercise of the spirit of our founders and expresses both the company's sustained and temporary growth.
• Together with the Avex corporate philosophy and a sufficient understanding of the entertainment industry's business characteristics, the Company will clearly articulate a vision for the organization so as to spark a love of challenge in members and, both in and outside of the Company, appeal to the human talent that could become the leaders that transform and drive forward the ability to invigorate the overall organization.
• Executive compensation will be consistent with the role of strongly leading the transformation and overall optimization of the organization for the realization of business expansion and enhancement of corporate value in the medium and long term.
• We will give consideration to tax efficiencies, to the extent possible, to mitigate cash outflows with deductible expenses.

Financial Audits

Avex has a contract with Deloitte Touche Tohmatsu LLC to conduct financial audits as stipulated in the Companies Act and Japan's Financial Instruments and Exchange Law.