Corporate Governance Framework

Corporate Governance Framework

Board of Directors

Summary

• Independent outside directors comprise 8 of the 12 Board members.
• Each of the Nominating, Audit and Compensation Committees has been established with independent outside directors in the majority.
• The extensive experience and insight of the independent outside directors in international business management and administration serve to strengthen the Board's supervisory function.

The Board of Directors approves basic management policy for the Hitachi Group and supervises 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 Board of Directors Regulations. As of June 29, 2018, the Board of Directors was made up of 12 directors, two of whom concurrently serve as executive officers. Hitachi aims to reinforce the oversight function of the Board of Directors, of which eight independent outside directors, including non-Japanese, account for the majority, reflecting their global and diverse viewpoints. The term of office for directors is one year.
Within the Board of Directors, there are three statutory committees-the Nominating Committee, the Audit Committee, and the Compensation Committee-with independent outside directors accounting for the majority of members of each committee. The Board of Directors meetings were held on 9 days during the fiscal year ended March 31, 2018, and the attendance rate of directors at these meetings was 97%. The attendance rates for each independent outside director were as shown in the table below. To assist with the duties of the Board of Directors and each committee, staff who are not subject to orders and instructions from executive officers are assigned.
The Board of Directors continuously supervises succession planning for the CEO. The CEO is appointed or dismissed in line with the proposal of the Nominating Committee in consideration of the matters: (1) that the candidate has the highest personal and professional ethics, integrity, insight and leadership and (2) that the candidate is believed to be the one most qualified to realize sustainable enhancement of the Company's corporate value and shareholders' common interests, with rich experience and a distinguished record in the area of corporate management.

Attendance at meetings of the Board of Directors by independent outside directors in the fiscal year ended March 31, 2018

Furthermore, Hitachi formulated and published Corporate Governance Guidelines outlining the framework of corporate governance, such as the function and composition of the Board of Directors, qualifications for directors, criteria for assessing the independence of independent outside directors, and rules on those serving concurrently as officers at other companies.

• Corporate Governance Guidelines of Hitachi, Ltd.

Qualification for Independent Outside Directors and Criteria for Independence

In regard to the election of an independent outside director, Hitachi's Nominating Committee considers the following criteria for independence. In addition, the Committee also considers whether the independent outside director has outstanding character and insight and whether the independent outside director has worked in a leadership position in such fields as business, law, administration, accounting or education, or has experience at policy-making levels.
In regard to the independence of an independent outside director, the Company considers an independent outside director to be independent unless:

• His or her immediate family member is, or has been within the last three years, a director or an executive officer of the Company or any of its subsidiaries;
• He or she is currently an executive director, an executive officer, or an employee of a company that has made payments to, or received payments from, the Company for property or services in an amount which, in any of the last three fiscal years, exceeds 2% of any of the companies' consolidated gross revenues;
• He or she has received during any of the last three fiscal years more than ¥10 million in direct compensation for his or her service as a specialist in law, accounting or tax, or as a consultant from the Company, other than director compensations; or
• He or she serves as an executive officer or director of a not-for-profit organization, and the Company's discretionary charitable contributions to the organization in any of the last three fiscal years are more than ¥10 million and 2% of that organization's annual gross revenues.

Concurrent Officer Positions at Other Companies

In order for directors to secure the time necessary to understand the Company's business and prepare for and attend Board of Directors meetings, the Company considers it desirable for its directors not to hold concurrent officer positions (director, corporate auditor, or executive officer) in more than four other listed companies.

(1) Nominating Committee

The Nominating Committee has the authority to determine proposals submitted to the general meeting of shareholders for the election and dismissal of directors. The Nominating Committee consists of four directors, three of whom are independent outside directors.
The Nominating Committee meetings were held on 8 days during the fiscal year ended March 31, 2018.

(2) Audit Committee

The Audit Committee has the authority to audit the execution of duties of directors and executive officers and to determine on proposals submitted to the general meeting of shareholders for the election and dismissal of accounting auditors. The Audit Committee consists of six directors, including four independent outside directors and one standing Audit Committee member.
The Audit Committee meetings were held on 14 days during the fiscal year ended March 31, 2018.

(3) Compensation Committee

The Compensation Committee has the authority to determine remuneration policies for directors and executive officers and remuneration for individuals (including amounts of remuneration) based on them. The Compensation Committee consists of four directors, three of whom are independent outside directors.
The Compensation Committee meetings were held on 4 days during the fiscal year ended March 31, 2018.

Composition of the Board of Directors and each committee (as of June 29, 2018)

Executive Officers

Executive officers decide on matters delegated to them by the Board of Directors and execute Hitachi's business affairs within the scope of assignments determined by the Board of Directors. As of June 29, 2018, Hitachi has 35 executive officers.

Senior Executive Committee

The Senior Executive Committee is a council to ensure that the President deliberately decides on important managerial matters, which may affect the business of Hitachi or the Hitachi Group, through discussion from diverse viewpoints. This committee consists of 12 members as of June 29, 2018: the President & CEO, five executive officers serving as executive vice presidents, five executive officers serving as senior vice presidents, and one executive officer serving as a vice president.

Director and Executive Officer Compensation

Basic Policy

• Compensation shall be sufficiently attractive to retain the personnel required to realize improvements in enterprise value through global business growth.
• Compensation shall be commensurate with the roles and responsibilities of directors and executive officers.
• Compensation for directors shall contribute to effective supervision of management.
• Compensation for executive officers shall provide incentives to contribute to sustained improvement in enterprise value through business execution, while striking an appropriate balance between short-term results and performance over the longer term.
• Compensation levels shall take into account remuneration at other companies, along with economic conditions and market trends.
• In considering the terms and amounts of compensation, the Compensation Committee shall seek objective advice as necessary from outside experts.

The Compensation Committee, of whose members more than half are independent outside directors, sets forth the policy on the determination of compensation details for directors and executive officers and, based on this policy, the amount of compensation, etc., of each director and executive officer, pursuant to applicable provisions of the Companies Act.
Since fiscal 2008, the compensation structures for directors and executive officers has been revised to eliminate severance payments.

Compensation Structure

(1) Directors

Compensation for directors consists of basic remuneration and a year-end allowance.

[1] Basic remuneration
Basic remuneration is decided by adjusting a basic amount to reflect full- or part-time status, committee membership and position, travel from place of residence, etc.

[2] Year-end allowance
Year-end allowance is a predetermined amount equivalent to about 20% of the director's annual basic remuneration, but may be reduced depending on financial results.
A director concurrently serving as an executive officer does not receive any compensation as a director.

(2) Executive officers

Compensation for executive officers consists of basic remuneration, performance-linked compensation, and medium- and long-term incentive compensation. The higher position the executive officer holds, the higher the proportion of variable pay is as a portion of total annual compensation.

[1] Basic remuneration
Basic remuneration is decided by adjusting a basic amount to reflect the results of an assessment. The basic amount is set in accordance with the relevant position.

[2] Performance-linked compensation
The performance-linked compensation is decided within the range of 0%-200% of the basic amount based on financial results and individual performance. The basic amount is set within the range of about 25%-35% of the total annual compensation of each executive officer in accordance with the relevant position.

[3] Medium- and long-term incentive compensation
Medium- and long-term incentive compensation is stock options as stock-based compensation, with share price conditions (stock acquisition rights with the strike price of ¥1). The number of stock acquisition rights to be granted is determined within the range of about 10%-40% of the total annual compensation of each executive officer in accordance with the relevant position. The number of stock acquisition rights that may be exercised will be determined within the range of 0%-100% of the stock acquisition rights granted in accordance with the conditions. The proportion of the assessment (0-100%) is determined by comparing the total shareholder return*1 for Hitachi stock against the rate of growth in the TOPIX benchmark. This is set to 0% if the TSR is less than 80% of the TOPIX growth rate, and reaches 100% once the TSR rises to at least 120% of the TOPIX growth rate, with intermediate results for figures in the 80%-120% range.

*1

Total Shareholder Return (TSR) includes capital gains (due to share price movements) and income (dividends).

*2

Stock options can no longer be exercised if fraud or other serious misconduct occurs during the term of office. Under a claw-back arrangement, the Company can demand repayment of economic gains made from any options that have already been exercised if fraud or other serious misconduct is discovered during the term of office.

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