Corporate Governance Framework

Hitachi’s Corporate Governance Framework and Features (As of June 2023)

POINT❶

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.
POINT❷

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.
POINT❸

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 2022, CEO Keiji Kojima 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 promoting the execution of management strategies, more time is spent discussing and deliberating than is used to explain quarterly financial reports and business strategies. In addition, at the Board meeting CEO Kojima reports and discusses important topics for the executive side that were discussed at the Senior Executive Committee, facilitating a shared understanding with the executive side.

Board of Directors Meetings in FY2022

FY2022 Board of Directors Meeting Results
Meetings held	Nine days
Average number of agenda items	7.6 per meeting
Average meeting length	3.1 hours (longest meeting 5.3 hours)

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. In fiscal 2022, with the relaxation of border measures for COVID-19, we held a Board of Directors meeting overseas for the first time in three years (in the United States), as well as lectures by local experts and visits to local subsidiaries. Online participation in the Hitachi Social Innovation Forum, and attendance at the Internal Business Conference and the Research Presentation Meeting held at research institutes, including online, as well as visits to Hitachi Origin Park, provided opportunities to deepen understanding of the business and engage in dialogue with senior management and front line employees.

Activities of the Three Committees

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 directors.
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 2022, the Nominating Committee held meetings on 10 days.

■Primary Activities: In addition to deciding upon the contents of the proposals made concerning director appointments at the Annual General Meeting of Shareholders, the Nominating Committee confirmed receipt of a preliminary report on the executive officer system implemented in fiscal 2023. In addition, it promoted committee-related activities including discussions and individual interviews aimed at developing candidates for future management and leadership positions.

Audit Committee

The Audit Committee has the authority to audit the execution of duties of directors and executive officers and to decide on proposals submitted to the general meeting of shareholders for the election and dismissal of accounting auditors. The Audit Committee currently consists of five directors, including four independent directors and one standing Audit Committee member.
Hiroaki Yoshihara, the chairman of the Audit Committee, has been involved in accounting and other business practices at the KPMG Group for many years and possesses a considerable wealth of knowledge concerning finance and accounting.
In fiscal 2022, the Audit Committee held meetings on 15 days.

■Primary Activities: The Audit Committee conducted activities that were focused on its priority matters for consideration, which included the strengthening of collaboration and the facilitation of information sharing under a "Tripartite Audit" (audit by the Audit Committee, internal audit and audit by accounting auditors), and auditing of the establishment and operation of internal control systems from the perspective of risk management and validity of execution of duties. In addition, a standing committee member worked to obtain information as needed in a timely and accurate manner, mainly by collaborating with the Internal Auditing Office, among other departments, and attending important internal meetings such as the Senior Executive Committee, and facilitated information sharing with other committee members.

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. Currently composed of four directors, including three independent directors, the committee strives to ensure objectivity, transparency, and fairness in the remuneration determination process.
In addition, the Compensation Committee verifies and reviews details of the process used for determining remuneration for individuals, including assessments concerning basic remuneration amounts, evaluations of progress made toward individual targets, and performance appraisals that are tied to short-term incentive compensation.
In fiscal 2022, the Compensation Committee held meetings on 8 days.

■Primary Activities: The Compensation Committee determined remuneration amounts for individual directors and executive officers in accordance with established policies while verifying and reviewing the processes and results of appraisals for performance and individual targets tied to short-term incentive compensation for executive officers. In addition, the committee reviewed the executive compensation system while giving due consideration to compensation granted to managers at global companies and the goal of sharing value with shareholders, and decided upon policies covering remuneration for directors and executive officers in fiscal 2023.

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 shares of other companies except in cases where acquiring or holding such shares is necessary in terms of transactions or business relationships. We will promote reducing shares already held unless the significance or economic rationality of holding is confirmed.
The Board of Directors verifies the appropriateness of all stock holdings every year. In the verification, each individual stock is reexamined as to the purpose of holding the shares and whether benefits from holding shares are in line with capital efficiency targets. As the result of verification, we promote the sales of shares for which the significance or economic rationality of holding is not confirmed. In fiscal 2022, we reduced the number of shares held for nine listed stocks (total amount sold: 84,017 million yen). The ratio of policy regarding strategic shareholdings (total amount recorded on balance sheet) to net assets (consolidated basis) is 4.4% as of the end of fiscal 2022

Strategic shareholding status

Director and Executive Officer Compensation

Fiscal 2023 Revision of Executive Compensation System

At a meeting of the Compensation Committee, Hitachi discussed the executive compensation system to enable continued growth over the next ten years, through a modal change toward growth in MMP 2024. A decision was made to amend the executive compensation system to establish a system that can secure competitive superiority over global companies, ensure effective Pay-for-Performance that rewards contributions to growth and innovation, and increase corporate value by strengthening sustainable management.
With regard to employee compensation as well, Hitachi has introduced a framework in which individual targets are linked to the company's targets, and compensation is determined according to the achievement of those targets. The management targets put forward in MMP 2024 are applied as evaluation indexes when deciding compensation for individual employees. Hitachi will cultivate a growth mindset among both executives and employees and strive to achieve global growth as One Hitachi.

Basic Policy of the New Executive Compensation System

[image]Basic Policy of the New Executive Compensation System

Compensation structure

(1) Directors: Compensation for Directors is Basic compensation as fixed pay. The amount of Basic compensation is decided by adjusting a basic amount to reflect full-time or part-time status, committee membership and position, and travel from place of residence, etc. 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 medium- and long-term incentive compensation as variable pay. The basic amount of Basic compensation, short-term incentive compensation and medium- and long-term incentive compensation is set based on the ratio of compensation for the President & CEO, which in the past was 1:1:1, but has been changed to 1:1.2:2, increasing the ratio of variable pay with a focus on LTI, which takes the form of stock compensation, and the compensation ratios for other executives have also been set based on this ratio. This takes into account the composition of executive compensation for major global companies including European and the United States companies, in order to increase corporate value through the growth of global businesses.
If it is found that an executive officer has engaged in misconduct during their term of office, any compensation already paid shall be returned to the company (clawback provision).

For details of Compensation to Directors and Executive Officers, please refer to page 108 of the Annual Securities Report (the 154th business term)

Annual Securities Report (PDF format)

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