Corporate Governance

SUBARU has chosen a structure with a board of corporate auditors. The Board of Directors (eight members, of which three are outside directors) and the Board of Corporate Auditors (four members, of which two 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 92nd Ordinary General Meeting of Shareholders held on June 21, 2023, 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

Composition of the Board of Directors (BoD), Board of Corporate Auditors, Executive Nomination Meeting, and Executive Compensation Meeting

(As of June 30, 2023)

◎ and 〇 indicate attendance of the chairman and other members, respectively.

SUBARU has adopted a vice president system and delegates directors‘ business execution authority to vice presidents. By doing this, SUBARU clearly separates the function of decision making and the oversight of corporate management from that of the execution of business operations, expediting decision making.

Major Activities in FYE March 2023

The major activities of the BoD, the Executive Nomination Meeting, and the Executive Compensation Meeting during FYE March 2023 are as follows.

Meetings of the Board of Directors are held in principle once a month, and as needed otherwise, deliberating important matters based on the rules of the Board of Directors.
In FYE March 2023, the Board of Directors consisted of nine directors, including three outside directors, and met 13 times*, chaired by Director and Chairman Kazuo Hosoya. The board's business during the fiscal year included overall oversight of Company management and determinations on important business execution.
In addition to the number of Board of Directors meetings held in the above table, one resolution was adopted in writing that was deemed to be a resolution of the Board of Directors in accordance with Article 370 of the Companies Act and the Articles of Incorporation.

Major Items Deliberated in FYE March 2023

• Determination of candidates for directors and corporate auditors as well as the CEO and other management team members
• Decision to delegate authority to the Executive Compensation Meeting to determine the individual compensation of directors and vice presidents in accordance with the Company''s executive compensation system
• Monitoring of impact on production and sales caused by semiconductor supply shortages, etc.
• Discussion on medium- to long-term management issues including electric vehicle strategy, IR/SR activities, and matters reported by the Sustainability Committee and Risk Management and Compliance Committee and other bodies

Executive Nomination Meeting

The committee is composed of three outside directors (Mr. Yasuyuki Abe, Mr. Natsunosuke Yago and Ms. Miwako Doi) and two internal directors (Mr. Tomomi Nakamura and Mr. Kazuo Hosoya). In order to ensure fairness and transparency of decisions on executive appointment, this voluntary committee, on request for consultation by the BoD, approves and submits the proposals to the BoD for the nomination of candidates for directors and corporate auditors and the selection and dismissal of vice presidents, including the Chief Executive Officer (CEO), after ample deliberation.
The Executive Nomination Meeting was held seven times in FYE March 2023, chaired by Director and Chairman Kazuo Hosoya.

Executive Compensation Meeting

The committee is composed of three outside directors (Mr. Yasuyuki Abe, Mr. Natsunosuke Yago and Ms. Miwako Doi) and two internal directors (Mr. Tomomi Nakamura and Mr. Kazuo Hosoya). In order to ensure objectivity and transparency of decisions on executive compensation, this voluntary committee, on the basis of delegation by the BoD, determines individual compensation amounts per director and other issues after ample deliberation.
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 BoD.
The Executive Compensation Meeting was held four times in FYE March 2023, chaired by Director and Chairman Kazuo Hosoya.

Major Items Deliberated in FYE March 2023

• Verification of the compensation system for directors and vice presidents introduced from the current fiscal year
• Study of executive compensation levels using external survey data
• Determination of individual performance-linked compensation amounts for directors (excluding outside directors) and vice presidents based on performance evaluations
• Determination of individual base amounts and other matters for restricted stock compensation

Membership, Meetings Held, and Attendance for the Board of Directors, Executive Nomination Meeting, and Executive Compensation Meeting for FYE March 2023

◎ and 〇 indicate attendance of the chairman and other members, respectively.

*Corporate Auditor Yuri Furusawa was elected and appointed at the 91st Ordinary General Meeting of Shareholders held on June 22, 2022.

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.

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 March 3, 2022. To the right is the summary of the policy.

Overview of executive compensation system

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 the STEP mid-term management vision.
As before, outside directors will only receive basic compensation.

*Restricted stock

Compensation System for Directors (excluding 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.

Specific matters studied in FYE March 2023

1) Matters for resolution
Audit policy, audit plan and division of audit duties, consent to agenda items for the General Meeting of Shareholders (appointment of corporate auditors), evaluation and selection/dismissal of the accounting auditors, consent to the audit fee for the accounting auditors, preparation of the audit report, etc. for the current fiscal year

2) Matters for reporting

• Report on the results and findings of site visits to Company offices and affiliated companies
• Sharing of information from standing corporate auditors to outside corporate auditors on important company matters, including via the Executive Management Board Meeting and the Executive Meeting
• Status reporting from responsible departments on risk management issues that arise internally or within the industry from a preventive audit perspective

Individual opinions raised by the Board of Corporate Auditors are presented to relevant officers and others as appropriate to gain reference opinions for forming decisions on the execution of business.

Major corporate auditor activities

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
Corporate auditors receive regular monthly reports from the Legal Department and the Risk Management and Compliance Office on compliance concerns including the operation of the whistleblowing system, and receive regular reports from human resource departments on the status of issues such as disciplinary cases and industrial accidents.
In addition, corporate auditors receive 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
Corporate auditors hold regular audit report meetings with internal audit units, receive reports on all internal audit results, and exchange information and opinions on internal control issues, which are reflected in audits by corporate auditors.
Corporate auditors also receive quarterly reports from the accounting auditors on the status of accounting audits and exchange opinions with them as necessary so as to ensure effective and efficient audits, thereby establishing close mutual cooperation in the three-party audit system.
As part of these exchanges, corporate auditors harness opportunities provided by quarterly reports to engage with the accounting auditors from the beginning of the fiscal year with respect to Key Audit Matters (KAMs), including candidate matters, about concepts such as the suitability of audit targets and the state of audit actions.
In addition, corporate auditors of the Company hold meetings to exchange opinions and share information with corporate auditors of Group companies as appropriate, and 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

The Internal Audit Department (15 members) has been established and reports directly to the President. 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. As an initiative to ensure effective internal audits, the Internal 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 on business execution are distributed to all directors, corporate auditors, and relevant departments at the same time as reports are directly made to the President at a monthly reporting meeting. 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 Internal Audit Department and corporate auditors work together to strengthen audit functions, as described in 3.3) “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. Furthermore, the Internal Audit Department regularly exchanges information with Group companies that have their own internal audit units, working toward greater cooperation. The Internal Audit Department carries out a yearly evaluation of its own activities and 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 units 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, 2023 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 2023 (Japanese version only)
• Financial Report for the Fiscal Year Ended March 31, 2023

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)

In the SUBARU Group, the Business Administration Department of SUBARU manages each Group company and their businesses to promote more unified activities. In addition, we have created a system in which SUBARU's corporate departments support these activities, thereby enhancing the effectiveness of Group governance.

1. Initiatives in the new group collaboration system

1. Embedding the group collaboration system FYE March 2023 was positioned as a phase to solidify the new collaboration system initiated in the previous fiscal year. We deepened communication between the Business Administration Department and Group companies. We also enhanced coordination among SUBARU's corporate departments to accelerate support to Group companies, ensuring the effectiveness of Group governance activities.

■ Deepening communication with the Business Administration Department
We have introduced and implemented a new tool that allows Group companies and the Business Administration Department to review the goals and outcomes of the year's business activities and governance initiatives throughout the year. Through this, we are not only enhancing communication between both parties but also elevating the quality of governance.

■ Enhancing support for Group companies
Relevant corporate departments are working together to evaluate and gradually implement concrete support measures for Group companies. Specifically, SUBARU is continuing to explore and implement corporate-related measures, including activities in which staff from SUBARU's finance and administration departments share information and provide support in financial and accounting domains to each company in addition to enhancing education programs for Group employees.

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. We hold regular presidents' meetings as a platform for sharing and discussing governance-related topics aimed at enhancing Group unity. Moreover, our bi-monthly Management Department Steering Committee meetings play a vital role in sharing information on topics related to corporate matters. In FYE March 2023, these meetings covered 27 topics, enabling us to promptly address legal and regulatory compliance and various challenges. We also initiated review sessions to foster collaborative discussions between SUBARU and its Group companies regarding strategies to address key corporate challenges. The program commenced full operation in FYE March 2024.
In addition, we are extending SUBARU's employee education programs to cover Group company employees as part of efforts to enhance the quality of Group personnel. 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

• Held meetings of Group company presidents (three meetings in June and November [2022], and March [2023])
• Held Management Department Steering Committee meetings (six meetings from April and then every other month, covering 27 topics)
• Initiated review sessions to foster collaborative discussions between SUBARU and its Group companies regarding key corporate challenges (started in FYE March 2024)
• Information sharing through a dedicated portal site for Group companies
• Held workshops for newly appointed executives (once in April)
• Staff from finance and administration departments share information and provide support to individual companies
• Extended SUBARU's educational framework to Group company employees
• 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

Enhancing governance at SUBARU dealerships involves the Japan Sales & Marketing Division assuming the responsibilities of the Business Administration Department. This enables close communication between SUBARU and its dealerships, advancing initiatives that contribute to the Group's sustainable growth and medium- to long-term enhancement of corporate value.

Initiatives for SUBARU dealerships

• Established the Risk Management and Compliance Committee
• Developed regulations and established and enhanced operation of an internal control system for audits, etc., conducted by the auditing departments of dealerships
• Held General Meeting of Shareholders and Board of Directors' meetings
• Enhanced the quality of auditing through appropriate assignment of standing corporate auditors (introduced standing corporate auditors at two companies)

Note: Parentheses indicate information as of April 2023.

Efforts to deepen communication between SUBARU and its dealerships

• Held monthly Leadership Meetings with 10 key dealerships we have invested in
• Held Specialist Committee meetings in four areas (sales, service, pre-owned vehicles, and IT) (at least once every six months)
• Held meetings of the Internal Audit Department Liaison Committee (twice a year)
• Implemented dealership audits through SUBARU's Audit Department
• Dispatched part-time directors and corporate auditors from SUBARU to 10 dealerships
• Implemented training for newly appointed executives at SUBARU dealerships
• Implemented dealership controls based on J-SOX

(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.

(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.