Corporate Governance

Overview of Corporate Governance Structure

The Company uses the corporate auditor system. There is a Board of Statutory Auditors with 4 members, including 2 outside auditors, that monitors the performance of directors. In addition, there is a Board of Directors with 6 members, including 2 outside directors, which 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 group executives and charged with ensuring the control and flexibility of Group management, meets weekly, as a general rule, to discuss and monitor significant matters related to management and business execution of Avex Group. Furthermore, 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 system.

Furthermore, with the aim of ensuring the effectiveness and soundness of business operations, Avex Group has established the following committees.

Structure of corporate governance units and internal control system

Internal Control Systems

The Group has a system of internal controls for increasing the effectiveness and efficiency of its business operations and ensuring the reliability of its financial reporting. 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. Furthermore, the Group has 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.

As regards 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.

Furthermore, concerning this risk management approach, we have arranged that the Internal Affairs Department conducts audits of the risk control situation facing the Company and its Group companies and reports its findings to the president and to the auditors. 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 and Outside Auditors

Avex appoints two outside directors and two outside auditors. When these outside directors and auditors are selected, Avex sets forth the Independence Standards as follows.

Avex deems that the outside officer (outside director and outside auditor) 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 group of financial institution 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).

For the current independent outside director, the Company has appointed a person who has extensive experience and knowledge in the field of business and organizational strategy as a professor in graduate school, 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 render advice and exchange opinions when necessary with respect to business decisions.

The outside auditors also attend the monthly meetings of the Board of Directors and the Board of Auditors meetings, which are also 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 auditors 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 of the structural condition of the system for internal controls. This knowledge enables them to liaise with the relevant departments to ensure that the necessary actions are taken to make corrections to and 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 outside directors and outside auditors to limit the liability of each outside director/outside auditor to Avex under Article 423, Paragraph 1 of the same act. The amount of liability set forth in each contract is the minimum liability stipulated by Article 425, Paragraph 1 of the Companies Act. These limitations of liability are prefaced on good faith on the part of the outside directors and auditors, as well as the absence of any substantial losses pertaining to their respective duties.

There are no capital, human, business or other relationship of interests between outside directors, outside auditors, or a company at which an outside director and/or an outside auditor serves or had served as an officer and the Company, other directors and auditors.

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 3-person Compensation Committee chaired by an outside director and with an additional outside auditor and a director as members. Decisions made at the Board of Directors are based on the findings of the Compensation Committee.

Avex, with the intent of having the current system of executive compensation conform to "avex group growth strategy 2020—towards an innovative future of entertainment," has set forth its basic policy on compensation up until the fiscal year ending March 31, 2021, as follows:

(Basic Policy on Compensation)

• To obtain the clear understanding of shareholders and other stakeholders, and to gain 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."
• Having a grasp of the spirit of our founders, we at Avex have a keen awareness of both sustained and temporary growth.
• Together with the Avex corporate principles 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 the spirit 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.
• Looking to raise corporate value and to realize the goals set forth in "avex group growth strategy 2020— towards an innovative future of entertainment," with unflagging resolve we will lead our transformation, aligning with our role of strong leadership for the overall optimization of our organization.
• We will have consideration for 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.