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Corporate Governance Framework

Hitachi’s Corporate Governance Framework and Features (As of June 2024)

[image]Hitachi's Corporate Governance Framework and Its Features
  1. POINT
    Transparency in Management

    Transitioned to a company with committees (currently a company with a nominating committee, etc.) in 2003.
    Hitachi established the Nominating Committee, the Compensation Committee and the Audit Committee, with independent directors comprising the majority of members and serving as chairpersons. This system ensures transparency in management, separates the oversight and execution of management, facilitates the full exercise of oversight functions, and enables discussions and reports to be conducted appropriately within these three committees.
  2. POINT
    Independence of the Board of Directors

    Increased the number of independent directors, including non-Japanese directors, in 2012.
    The Board of Directors, which is chaired by an independent director, has 12 members, including nine independent directors, two directors who are also serving as executive officers, and one director who is not serving as an executive officer. The chairman of the Board is an independent director. In addition, we have established a system that facilitates the full exercise of oversight functions by maintaining a separation between management oversight and execution.
  3. POINT
    Enhanced Collaboration through Tripartite Auditing

    Hitachi's Audit Committee and internal audit sections collaborate with third-party accounting auditors to strengthen Tripartite Auditing aimed at increasing the effectiveness of internal controls.

Administrative Performance of the Board of Directors

The Board of Directors approves the basic management policy for the Hitachi Group and oversees the execution of the duties of executive officers and directors in order to sustainably enhance corporate value and shareholders' common interests. The basic management policy includes the Mid-term Management Plan and annual budget compilation. The Board of Directors focuses on strategic issues related to the basic management policy, as well as other items to be resolved that are provided in laws, regulations, the Articles of Incorporation, and the Board of Directors Regulations.
In fiscal 2023, we reported on the progress of the Mid-term Management Plan 2024, including overall priority items and progress in each sector, and confirmed consistency with the plan. In addition to management plans and business strategy, wide-ranging discussion and deliberation took place regarding responses to cybersecurity, the risks of generative AI, and other matters.
Aside from these strategic discussions on basic management policies and risk-related discussions, recognition is shared between the supervisory and executive sides of management by reporting to the Board of Directors on important topics discussed in the Senior Executive Committee, an advisory body to the President & CEO, in order to promote discussion. To facilitate more lively discussion on these topics, more time is allotted to exchanging opinions than explaining each topic.

Board of Directors meetings in FY2023

FY2022 Board of Directors Meeting Results
Meetings held Nine days
Average number of agenda items 8.2 per meeting
Average meeting length 2.9 hours (longest meeting 5.8 hours)

FY2023 time spent and ratios of explanations and discussions of important topics (results up to January 31, 2024)

[image]Discussion of Major Themes

Providing Information to Independent Directors

The Board of Directors holds individual meetings and site visits to improve the effectiveness of the Board of Directors and increase opportunities for information sharing.
Hitachi holds Board of Directors meetings in countries closely related to its business once a year in general. In September 2023, we held a board meeting in Stockholm, Sweden. At the meeting held in Stockholm, directors discussed business strategy and environmental strategy in Europe, attended lectures by local experts, and visited local subsidiaries. In addition, in December 2023 Hitachi held a Board of Directors meeting at the Kyoso-no-mori, the R&D Group's Kokubunji site, which is one of Hitachi's research-and-development sites. Directors discussed research-anddevelopment strategy and innovation strategy, and were briefed on research-and-development initiatives by front-line employees.
Hitachi has also created opportunities for directors to increase their understanding of the businesses and engage in dialogue with senior management and frontline employees, including participation in the Hitachi Social Innovation Forum, internal business conferences, and research presentations held at research institutes, including those online, as well as visits to Hitachi Origin Park and other sites.

Activities of the Three Committees

Nominating Committee

■Major activities
In fiscal 2023, the Nominating Committee decided on the details of the election of directors to be submitted for proposal to the Annual General Meeting of Shareholders, discussed candidates for successor to the CEO, and received and confirmed a preliminary report on the structure of the executive officers for fiscal 2024. This committee determines director candidates, holds preliminary discussions concerning the appointment and dismissal of the CEO, and receives advance reports on the selection and dismissal of executive officers.
In fiscal 2023, the Nominating Committee held 10 meetings.

Audit Committee

■Major activities
In fiscal 2023, the Audit Committee's major activities involved taking up important matters for consideration, such as strengthening Hitachi's Tripartite Audit structure (Audit Committee, Internal Audit Office, and accounting auditor), promoting information sharing, and auditing the development and operational status of an internal control system based on risk management and the appropriateness of business execution. In addition, the standing Audit Committee member worked to keep abreast of timely and accurate information and share information with other committee members by coordinating with the Internal Audit Office and other departments, and attending important internal meetings including those of the Senior Executive Committee.
In fiscal 2023, the Audit Committee held 15 meetings.

Compensation Committee

■Major activities
In fiscal 2023, in accordance with the policy for determining the details of compensation for directors and executive officers, the committee determined the amount of compensation for each individual director and executive officer, including the assessment of fixed compensation, as well as confirmation of and deliberation over the processes and details of performance evaluations and individual target evaluations regarding short-term incentive-based compensation for executive officers.
The committee also held discussions in light of analysis results from an outside third party organization on whether the new compensation system for executive officers revised in the previous fiscal year was functioning soundly as an incentive for enhancing corporate value in the medium to long term. Specifically, the committee confirmed the appropriateness of compensation levels based on a compensation benchmark analysis with the Japanese, European, and U.S. markets, and verified whether the new incentive system was functioning effectively from various angles, including verifying target settings and the validity of assessments.
In addition, the committee discussed the role of compensation for the Company's directors, a group made up of talent from various regions, in light of the compensation benchmark analysis. As a result, the committee decided to introduce a new compensation system from fiscal 2024 to promote greater awareness of enhancing corporate value in management supervision and advice.
More specifically, the committee revised compensation to levels that are competitive in the global market and introduced stock-based compensation with the aim of fostering an awareness of medium- to long-term enhancement of corporate value and sharing value with shareholders.
Note that in conducting its deliberations, the Compensation Committee took into account changing management conditions and feedback from shareholders and investors, while also seeking the necessary information, advice, and other insight from third-party organizations with global knowledge and experience.
In fiscal 2023, the Compensation Committee held seven meetings.

CEO Appointment, Dismissal, and Succession Plan

After a preliminary report to the Nominating Committee, Hitachi’s Board of Directors decides upon the appointment and dismissal of executive officers with the goal of constructing an optimal business execution system for management. As stipulated in our Corporate Governance Guidelines, our basic policy concerning the CEO requires that individuals serving in the position of CEO have extensive experience and achievements in the field of company management. They must also be considered optimally suited for conducting management aimed at achieving Hitachi's goals of continuously raising its corporate value and further serving the common interests of its shareholders. Decisions regarding the appointment or dismissal of the CEO shall be made based on prior deliberations and proposals by the Nominating Committee.
Regarding our CEO Succession Plan, as the speed of change in the management environment accelerates, we are striving to build a system that enables us to appropriately and promptly secure and develop (both internally and globally) necessary management personnel who will provide leadership that will allow us to realize our growth strategies. Accordingly, we are also concentrating on providing training for selected employees while targeting the early development of candidates for future management positions. Through this, participants discuss what is necessary for Hitachi's future growth, and by providing a forum for making recommendations to management, we foster next-generation leaders capable of acting authoritatively and resolutely.

Policy regarding Strategic Shareholdings

Hitachi's basic policy is not to acquire or hold the shares of other companies except in cases where acquiring or holding such shares is necessary in terms of commercial transactions or business relationships. We will promote divesting such shares already held unless the significance or economic rationalities of holding are confirmed. The Board of Directors verifies the appropriateness of all such shareholdings every year. In the verification, each individual share is examined as to the purpose of holding the share and whether benefits from holding the share are in line with our capital efficiency targets. As a result of verification, we promote the divesture of the share for which the significance or economic rationality of holding is not confirmed.

Strategic shareholding status

[image]Hitachi's Corporate Governance Framework and Its Features

Director and Executive Officer Compensation

Revisions to the Executive Compensation System (FY2023) and Introduction of Restricted Stock Compensation Units (RSU) for Directors (FY2024)

With the aim of promoting management from medium- to long-term perspectives and providing incentives for the sustainable enhancement of corporate value by having executives share more value with shareholders through the holding of shares from the moment they assume their posts, Hitachi has introduced a restricted stock-based compensation system for Japanese executive officers and corporate officers, and the officers of some Group companies. In fiscal 2023, to further promote management based on medium- to long-term perspectives and better enhance pay-for-performance under global compensation—the link between corporate value enhancement and compensation—we made further revisions, expanding the ratio of compensation conditioned on stock price, introducing a global competitor comparison as a new stock price condition, and adopting an incentive to be awarded upon achieving the goals of the 2024 Mid-term Management Plan.
From FY2024, we newly adopted an RSU system as compensation for directors to ensure that Hitachi directors will provide oversight and advice on management while remaining mindful of the need to enhance corporate value in the medium to long term.
Hitachi has also introduced mechanisms for employee compensation to link individuals' goals with those of the company and determine compensation based on their achievement, and the management goals set out in the 2024 Mid-term Management Plan are used as an evaluation metric when determining the compensation of individual employees. Hitachi will foster a growth-oriented mindset linking the enhancement of corporate value with compensation among both executives and employees, achieving global growth as One Hitachi.

Executive Compensation System

[image]Executive Compensation System

Compensation Structure

(1) Directors
Compensation for directors is made up of basic compensation as fixed pay and stock-based compensation. The ratio for the base amount of basic compensation to stock-based compensation is 3-to-1. The methods for determining each type of compensation are as follows.

Basic compensation

The amount of basic compensation is decided by adjusting the base amount to reflect full-time or part-time status, committee membership and position, meetings attended, and other factors.

Stock-based compensation

Restricted stock-based compensation units are granted to serve as an incentive to provide management oversight and advice with the medium- to long-term enhancement of corporate value in mind. After three years have passed, Hitachi provides an amount equivalent to the granted units in the form of common stock or cash.
Also note that Hitachi can request the return of compensation if a director is determined to have been involved with misconduct during their term of office (clawback system). A director concurrently serving as an executive officer is not paid compensation as a director.

(2) Executive Officers
Compensation for executive officers consists of basic compensation as fixed pay and short-term incentive compensation and mediumand long-term incentive compensation as variable pay. The ratio of base amounts for each form of compensation is determined to ensure the enhancement of corporate value through global business growth, referencing ratios for executive compensation at leading global companies, including those in Europe and the United States. In the case of Hitachi's President & CEO, this ratio is 1:1.2:2.
In addition, ratios are set so that the higher the rank of an executive officer position, the greater the variable compensation as a percentage of total compensation.
The details of compensation are disclosed in the "Executive Compensation, etc." section on page 93 of Hitachi's Annual Report (the 155th business term).

Compensation to Executive Officers (FY2023)

[image]Compensation to Executive Officers (FY2023)

Reflecting Sustainability Targets in Executive Compensation Evaluation

In fiscal 2023, Hitachi amended the executive compensation system to further accelerate growth as a global company, and to further strengthen links between increases in corporate value and compensation. The revised executive compensation system is more closely linked to the Mid-term Management Plan 2024 and incorporates sustainability targets.
Specifically, sustainability evaluations that had been used as an index for individual short-term incentive compensation (STI) are now treated separately and account for a larger ratio of STI.
In addition, an additional grant of shares equivalent to 10% of the standard amount of medium- to long-term incentive compensation (LTI) will be granted if the sustainability targets are achieved.
Sustainability evaluation in STI will be aligned to materiality topics including Environment, Business with Integrity and Quality of Life, each linked to sub-materiality topics targets listed below.
Going forward, Hitachi will enhance link of compensation and the growth of the company, cultivating a growth mindset and strive to achieve global growth as One Hitachi.

Materiality targets linked to executive compensation

Materiality Sub-material topics target
Environment
  • [Decarbonization]
  • ・Carbon neutrality through the value chain
  • ・Contributing to CO2 reduction through business
  • [Resource circulation]
  • ・Effective use of water
Business with Integrity
  • [Occupational safety]
  • ・Creating a safe working environment without accidents
Quality of Life
  • [Employee happiness]
  • ・More flexible working styles to increase engagement

Please see the News Release for details.

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