Basic Policy

The Sumitomo Forestry Group utilizes wood as a healthy and environmentally friendly natural resource to provide a diverse range of lifestyle-related services that contribute to the realization of a sustainable and prosperous society. All our efforts are based on Sumitomo's Business Spirit, which places prime importance on fairness and integrity for the good of society. Therefore, we strive to ensure management transparency, sound and legal business practices as well as rapid decision-making and business execution.

By further enhancing and strengthening its corporate governance through these efforts, the Company aims to continuously increase its corporate value and conduct management that lives up to expectations of various stakeholders around the Group.

Corporate Governance and Internal Control

Sumitomo Forestry introduced the executive officer system to separate decision making and management oversight functions from operational execution functions. Comprised of nine directors (seven male/77.8%, two female/22.2% ) including three outside directors (one male, two female), the Board of Directors is structured to make quick decisions. The oversight function of the Board of Directors has been strengthened, the lines of operational responsibility clarified, and the Chairman of the Board of Directors no longer serves as an executive officer. The Nomination and Remuneration Advisory Committee has been established to provide opinion to the Board of Directors on selecting director and statutory auditor candidates and executive officers as well as compensation of directors and executive officers, for the purpose of ensuring transparency and fairness of decision-making.

Sumitomo Forestry has a board of company statutory auditors. In addition to attending important meetings within the Company, the statutory auditors provide oversight for the directors' execution of duties, through sharing information and opinions with auditors at Group companies and the staff in the Internal Audit Division, and by supervising staff assisting auditing operations.

As of March 30, 2023, nine directors (including three outside directors), five statutory auditors (including three outside auditors) and 20 executive officers (including 5 persons concurrently serving as directors) were appointed to the Company. The Company notified Tokyo Stock Exchange, Inc. of the designation of the three outside directors and three outside statutory auditors as independent officers as required by its regulations.

Corporate Governance System

Board of Directors and Executive Committee

In principle, the Board of Directors meets once a month, making decisions and carrying out its supervisory function for important issues in accordance with its discussion standards. In addition to making decisions on all important items and confirming business results, it supervises the directors' execution of their duties. Directors and statutory auditors are required to maintain an attendance rate of 75% or higher as a general rule.

The Executive Committee, which is an advisory body for the President, holds meetings twice a month, before the Board of Directors meeting to ensure that there is sufficient prior discussion on important issues. It is attended by those directors who also serve as executive officers, as well as the full-time statutory auditors as a general principle.

The Company ensures prompt decision-making and separation of supervision and operational execution functions, for effective performance of the Board of Directors. In fiscal 2022, the Board of Directors meetings were held 15 times while Executive Committee meetings were held 26 times.

*1Position, responsibility and significant concurrent positions as of March 30 2023

*2Attended meetings and the attendance rate to Board of Directors meetings are in fiscal 2022

*3Attended meetings and attendance rate of Board of Directors meetings are after appointment as a director on March 29, 2022

*4Appointed on March 30, 2023

Structure of the Board of Directors

The Board of Directors is composed of 17 individuals in a structure built on expertise, such as knowledge, experience, skill, and diversity. Sumitomo Forestry considers diversity such as gender and nationality as well as expertise which includes those who have a wealth of experience and success in the operations of the Sumitomo Forestry Group, those who have a wealth of experience and success in business such as corporate management, industry and policy and those who have specializations such as law and accounting.

Nomination Procedure for Directors

Director candidates are selected at the Board of Directors from a pool of personnel with superior personality traits and acumen, and potential value to the Company through consultation with the Appointment and Remuneration Advisory Committee. Summaries of background and interlocking status of the directors are available on the website.

Summary of Analysis/Evaluation and Results of Overall Effectiveness of the Board of Directors

1．Method of evaluation
This fiscal year and with guidance from an outside organization, the effectiveness of the Board of Directors was evaluated through a self-evaluation and analysis using a survey submitted by each of the directors and statutory auditors (the method of response was anonymous with responses sent directly to an outside organization, which maintained anonymity) and an outside evaluation of the survey results. In addition, an evaluation was conducted based on the implementation status of the role of the Board of Directors as set out in the Company’s Basic Policy on Corporate Governance (hereinafter, current status) and an exchange of opinions with outside directors and outside auditors.

2．Result of evaluation

• As a result of the evaluation described in 1., the Company believes that the Board of Directors is functioning effectively.
• In terms of areas cited for improvement last fiscal year, the Company prepared and distributed materials on issues to be discussed at the Executive Committee meetings, which are held in advance of the Board of Director meetings to clarify discussion points and improve the management efficiency of Board of Director meetings. In addition, we confirmed that the progress of the Medium-Term Management Plan is regularly discussed at board member gatherings, which aim to enhance Board of Director meetings and the content of discussions conducted there.
• Future challenges based on opinions include the monitoring of succession plans for top management and the development of effective measures to counter new operational risks with the expansion of our business fields.

We will strive to further improve the effectiveness at Board of Directors meetings by continually working to heighten the level of discussion with awareness toward highlighted topics in the future.

Board of Statutory Auditors

The Board of Statutory Auditors meets to discuss and make decisions on important matters regarding audits. The five statutory auditors, including the three outside statutory auditors, utilize the deep insights and diverse perspectives they have acquired from their various business backgrounds to provide oversight for the directors’ execution of duties. The Board of Statutory Auditors met 14 times during fiscal 2022.

The appropriate human resources are also appointed as statutory auditors at our main subsidiaries for the purpose of improving the effectiveness of auditing and informational exchange at these companies. Meetings of Statutory Auditors of Sumitomo Forestry and its subsidiary companies are held with members composed of full-time statutory auditors of Sumitomo Forestry as well as auditors of our main subsidiaries. This meeting was held five times in fiscal 2022.

*1Position, responsibility and significant concurrent positions as of March 30, 2023

*2Attended meetings and the attendance rate to Board of Directors meetings and Board of Statutory Auditors meetings in fiscal 2022.

*3Appointed on March 30, 2023

Outside Directors

In the selection procedure for outside directors and statutory auditors, determinations are based on the following standards of independence and professional criteria.

Three of our current outside directors and three of our outside statutory auditors are considered independent based on the above list of independency criteria, not to pose a conflict of interest with general shareholders.

Nomination and Remuneration Advisory Committee

The Board of Directors establishes a Nomination and Remuneration Advisory Committee as an advisory body from which it seeks opinions to ensure fairness and transparency in matters including the selection of candidates for the Board of Directors and auditing posts, the selection of executive officers, the dismissal of board members, statutory auditors or executive officers, evaluations of the chief executive officer and other executive officers, and remuneration for board members and executive officers. The Nomination and Remuneration Advisory Committee will consist of the Chairman, the President, and all outside executives (three outside directors and three outside statutory auditors) where the majority must be outside executives, and the chairperson must be an outside director.

The Board of Directors determines the directors and executive officers' remunerations within the amount specified by resolution of the General Meeting of Shareholders, taking into consideration the opinions stated by the Nomination and Remuneration Advisory Committee.

*1The position as of March 30, 2023

*2Attended meetings and the attendance rate to Nomination and Remuneration Advisory Committee meetings are in fiscal 2022.

*3Appointed on March 30, 2023

Risk Management Committee

Information regarding the Risk Management Committee is found in "Risk Management/ Risk Management Framework".

In fiscal 2022, Risk Management Committee was held four times, Compliance Subcommittee was held twice, BCM Subcommittee was held twice, and reports were made four times to Board of Directors respectively.

Sustainability Committee

In response to matters including Global Warming, SDGs and human rights issues, the Sustainability Committee was established in fiscal 2018 based on the growing requirements for medium to long-term initiatives and informational disclosure about the Environment, Society and Governance (ESG).

The Sustainability Committee is made up of executive officers also appointed as director, and divisional mangers with representative director president and executive officer acting as the Committee chairperson. The Committee is convened four times a year to formulate and promote initiatives for medium to long-term ESG challenges related to the sustainability of the Sumitomo Forestry Group including climate change in addition to analyzing risks and opportunities, conducting progress management of the Mid-Term Sustainability Targets, which incorporate business strategies toward achieving the SDGs, including monitoring of implementation and effectiveness of the Our Values and Code of Conduct.

The content of all committee proceedings is reported to the Board of Directors to enable our business operations to become part of the solution for social issues.

Internal Audits

Sumitomo Forestry's Internal Audit Department draws on risk assessments in selecting about 60 business sites from among the roughly 200 business sites in the Group every year to conduct internal audits. The sites are selected by specifying an order of priority based on the two perspectives of operational risk (business results, size, complexity of business, etc.) and control risk (risk management framework). In principle, the assessment will be conducted by visiting the site, interviewing the parties concerned, and checking the actual documents and other items. We also conducted some interviews by remote audit (paper audit and video conference) during the time of travel restrictions because of outbreak of coronavirus disease (COVID-19). In addition, the company has been promoting DX on the occasion of calamity of coronavirus disease (COVID-19), including introduction of audit software to work on Computer Assisted Audit Techniques (CAATs), a technique for extracting large amounts of digital data and using audit tools to verify the validity of numerical values.

In the internal audits, the department checks on how a business site is executing its operations and managing its office work, including its compliance with laws and regulations, and it reports its findings to the President, the executive officer in charge of internal audits and to internal statutory auditors, as well as to the manager responsible for the business site and the executive officer or director in charge of the business site. Furthermore, plans and results regarding internal audits are reported directly to the Board of Directors, and a discussion session with outside officers has been held at least once a year regarding internal audits.

Executive Remuneration

In accordance with laws and regulations, Sumitomo Forestry discloses the remuneration paid to officers (directors and statutory auditors) each fiscal year.

*1Names and amounts of officers whose remuneration is greater than or equal to 1 billion yen are disclosed in Financial Statements.

*2The above includes one director who retired at the conclusion of the 82nd Ordinary General Meeting of Shareholders held on March 29, 2022.

*3The total amount of non-monetary remuneration for directors is respectively (i) 8 million yen, the amount to be expensed in the current financial year in respect of the allotment of restricted shares granted to six directors (excluding outside directors) under the old system (a remuneration plan for shares with restriction on transfer before March 2022) and (ii) 51 million yen, the amount to be expensed in the current financial year in respect of the allotment of restricted shares under the new system (performance-based remuneration plan for shares with restriction on transfer after March 2022), which is the estimated amount of monetary compensation claims based on the estimated number of shares to be delivered after the three-year evaluation period.

Executive Remuneration

[Remuneration for directors]

1. Basic policies

The remuneration of directors of the Company is designed in accordance with the following policies:

• The remuneration plan should be highly linked not only to short-term performance but also to medium- to long-term performance and improvement of corporate value;
• The plan should be linked to the value to be newly created and provided in the course of promoting the ESG integrated management;
• The plan should be designed to be linked to the shareholder value of the Company;
• The remuneration level should be such that the Company can secure and maintain the human resources necessary to achieve its long-term vision; and
• The plan should ensure transparency and objectivity in the remuneration determination process.

2. Remuneration level

From the perspective of ensuring objectivity and appropriateness of the executive remuneration, the level of remuneration for directors of the Company will be set with reference to the levels of other companies as surveyed by outside professional organizations, with the aim of achieving the mid-to-high level of remuneration in companies of similar size. The Company will revise the remuneration levels as necessary in response to changes in the external environment.

3. Composition of remuneration

Renumeration for directors of the Company is composed of three types: (i) fixed remuneration commensurate with the director’s responsibilities and roles, (ii) annual performance-based bonus as a short-term incentive, and (iii) performance-based restricted stock remuneration as a medium- to long-term incentive. Thus, the remuneration plan is designed to encourage management efforts from a short-term, and medium- to long-term perspective and to appropriately reward the results of such efforts. Remuneration for outside directors, who are responsible for management supervision from an independent standpoint and not in a position to execute business, is composed solely of fixed remuneration.
A summary of each type of remuneration is as follows:

• <Fixed remuneration>
• The Company will determine the amount of fixed remuneration for each position of director in accordance with their responsibilities and roles. The fixed remuneration will be monthly, and a fixed amount will be paid in cash on a fixed date of each month.
• The amount of remuneration for outside directors, consisting only of monthly remuneration as fixed remuneration, will be determined in accordance with their responsibilities and roles.
• <Annual performance-based bonus>
• The amount of annual performance-based bonus will be judged comprehensively and determined by multiplying the standard bonus amount stipulated for each position with a payout ratio that fluctuates (lower limit 0%~upper limit 180%) in proportion to the base profit for each business year (the amount obtained by deducting actuarial differences regarding employees’ retirement benefit obligation and net income attributable to non-controlling interests from consolidated recurring income for the relevant fiscal year).
• The Company has adopted the method of amortizing actuarial differences regarding employees’ retirement benefit obligation as a lump sum in a single business year. Accordingly, any significant fluctuation in actuarial differences due to stock price fluctuations, interest rate conditions, or other at the end of the business year will have a significant impact on business performance. Therefore, to calculate base profit, the Company uses consolidated recurring income after deducting actuarial differences regarding employees’ retirement benefit obligation.
• Payment of annual performance-based bonus to each eligible director will be decided upon by the Board of Directors taking into consideration the opinions of the Nomination and Remuneration Advisory Committee, which is chaired by an outside director and in which a majority of its members are outside officers.
• <Performance-based restricted stock remuneration>

• Performance-based restricted stock remuneration is structured to reflect the Company’s performance during each period (three years) of the Medium-Term Management Plan. The standard stock remuneration amount prescribed for each position consists of (i) a portion linked to the growth rate of the Company’s market capitalization relative to TOPIX (two-thirds of the standard stock remuneration amount by position), and (ii) a portion linked to the achievement rate of SBT (Science Based Targets) greenhouse gas emission reduction targets (one-third of the standard stock remuneration amount by position), each during the relevant period.

  To promote management that emphasizes medium- to long-term enhancement of shareholder value, performance-based restricted stock remuneration is a plan to grant restricted stocks to eligible directors after the final fiscal year of the three-year Medium-Term Management Plan as an incentive to increase corporate value during the period of the Medium-Term Management Plan, in accordance with the achievement status of the Medium-Term Management Plan. The applicable period of the plan is the three years from January 1, 2022, to December 31, 2024 (hereinafter, the applicable period).

  The amount of performance-based restricted stock remuneration is calculated using two indices and the method for calculation is as follows.

  Remuneration linked to market capitalization growth rate
  The aim of this system is to compare the Company’s market capitalization growth rate with the TOPIX growth rate to objectively measure and reflect the Company’s relative stock market valuation in the remuneration amount.
  ＜Calculation formula＞ Amount equivalent to two-thirds of the standard stock compensation amount by position x payout ratio (growth rate of Company’s market capitalization during the period of the Medium-Term Management Plan/TOPIX growth rate during the same period)*

  *The payout ratio range will be from 0% (lower limit) to 120% (upper limit).

  Remuneration linked to sustainability indices achievement rate
  By setting a payout ratio upper limit of 100%, if the Company fails to achieve its SBT (Science Based Targets*¹) greenhouse gas emission reduction targets*², the amount of remuneration will be reduced from the standard stock remuneration amount in accordance with the status of target achievement, thereby creating a strong incentive to achieve the targets.
  ＜Calculation formula＞ One-third of the standard stock remuneration amount by position x payout ratio (percentage of achievement of Medium-Term Management Plan SBT greenhouse gas emission reduction targets).*³

  *1Refers to the emission reduction targets set by companies and to be achieved in five to fifteen years to comply with the level required by the Paris Agreement that was adopted at the 21st Session of the Conference of the Parties to the United Nations Framework Convention on Climate Change (COP21) and took effect in 2016 (which sets a goal of limiting global warming to well below 2℃ above pre-industrial levels and pursuing efforts to limit the increase to 1.5℃).

  *2The emission reduction target for the initial coverage period has been set at –21.7% compared to the Company’s figures in fiscal 2017.

  *3The payout ratio range will be from 0% (lower limit) to 100% (upper limit).

• The stock remuneration amount to be paid to each eligible director will be determined by the Board of Directors after the end of the subject period by calculating the cumulative amount of stock remuneration during the subject period based on the actual value of each evaluation index and considering the views of the Nomination and Remuneration Advisory Committee.

4. Remuneration composition ratio

The plan has been designed so that the ratio of fixed remuneration to variable remuneration for directors should be 60 to 40 when the base profit is 100 billion yen. Specifically, fixed remuneration accounts for 60%, annual performance-based bonus (variable) accounts for 25%, and performance-based restricted stock remuneration (variable) accounts for 15% of total remuneration, respectively. Remuneration for outside directors consists solely of fixed remuneration.

5. Remuneration governance

Matters regarding the amount of individual remuneration for directors and other will be determined at a Board of Directors meeting taking into account the views of the Nomination and Remuneration Advisory Committee chaired by an outside director, in which outside officers (three outside directors and three outside statutory auditors) constitute a majority of its eight members.

6. Forfeiture of remuneration

If the Board of Directors confirms any wrongdoing or other misconduct by a director, the Company may demand a payment restriction or return of the performance-based restricted stock remuneration paid to such director.

[Remuneration for Statutory Auditor]

Compensation for Statutory Auditors consists only of monthly compensation as basic compensation. In addition, we use results of a survey conducted by a third party for directorship remuneration at domestic corporations in order to set an appropriate remuneration level from the perspective of ensuring objectivity and appropriateness of executive remuneration.

Strategically-held Shares

Article 5 of Sumitomo Forestry's Basic Policy on Corporate Governance cross-shareholding is as follows.

1. The Company may acquire and hold shares in its business partners and counterparties when the Company determines that such shareholdings will contribute to mid- to long-term enhancement of the Company’s corporate value from the perspective of, among others, maintenance and reinforcement of long-term and stable business relationships with those partners and counterparties as well as expansion of the Company’s business as a result of such closer ties with those parties.

2. At meetings of the Board of Directors, the Company will regularly examine whether the holdings of the shares under the preceding paragraph (the “Strategically-held Shares”) lead to the improvement of its corporate value through analyzing the relationship between the profits/risks associated with such holdings and the cost of capital, and will verify the purpose and rationale of such holdings. When the Company judges that the rationale and necessity of such holdings cannot be confirmed, it will reduce the number of such Strategically-held Shares.

3. The Company will appropriately exercise its voting rights pertaining to the Strategically-held Shares in accordance with its voting criteria and based on its comprehensive judgment from the perspective of the improvement of its corporate value.