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Basic Policy on Establishment of Internal Controls System

Basic Policy on Establishment of Internal Controls System

We recognize that the starting point of corporate activities is the healthy coexistence and mutual prosperity of shareholders, business partners, and employees. To ensure appropriateness in the business activities of the corporate group comprised of our Company and our subsidiaries, we shall establish the following system (hereinafter, Internal Controls) in accordance with the Companies Act and the Regulation for Enforcement of the Companies Act.

1. System for ensuring business execution by directors and employees is compliant with relevant law and the Articles of Incorporation

Working under their assigned division of duties, directors and executive officers shall establish internal controls for their managed departments to ensure business execution is compliant with relevant law and our Articles of Incorporation. In addition to drafting and ensuring awareness of necessary regulations, directors and executive officers shall comply with the Board of Directors Regulations and Executive Officer Regulations.
The Board of Directors has outlined the NSD Group Code of Conduct and the NSD Group Behavioral Guidelines, and ensures awareness among all executives and employees, including affiliate companies. All Group executives and employees shall comply with this Code of Conduct and Behavioral Guidelines. Events suspected to be compliance violations shall be managed centrally by the secretariat of the Compliance Committee. Our policy on relations with antisocial forces is clarified in the NSD Group Code of Conduct and the NSD Group Behavioral Guidelines, and all Group executives and employees shall work to eliminate such relations.
Designate a Governance Committee as an advisory body to the Board of Directors to ensure fairness, transparency, and objectivity concerning decision-making by the Board of Directors and to enhance corporate governance.
The Internal Auditing Department directly subordinate to the President & CEO conducts internal audits of all business activities. Furthermore, supplement and strengthen internal controls by establishing a Whistleblowing and Consultation Desk that enables officers, employees, and other persons engaged in work for our company to engage in whistleblowing without retribution.

2. Structure for saving and managing information related to business execution by directors

Create and store records and other relevant documents concerning decisions related to business execution by the Directors and executive officers in accordance with the provisions outlined in Document Handling Regulations. Furthermore, prepare these records in a way that enables compliance with browsing requests by the Audit & Supervisory Board Member.

3. Regulations and other structures related to the management of loss risks

Outline Board of Directors Regulations and Work Authority Regulations. The execution of business shall be subject to prescribed decision-making and approval processes.

The Board of Directors shall designate an Officer in Charge of Internal Controls, and said Officer shall oversee Groupwide management and supervision of all matters concerning internal controls for the Group. In accordance with Risk Management Regulations, each department (and equivalent organizations, regardless of name) shall be responsible for minimizing damages related to their managed operations and be responsible for the effective implementation of internal controls related to said operations. Establish a Risk Management Committee to conduct Group risk management. Furthermore, the Internal Audit Department validates the status of internal control creation.

4. Structure for ensuring efficient business execution by Directors

Stipulate the division of duties and authority of directors, executive officers, and employees in accordance with regulations governing the Board of Directors, Management Meeting, Executive Meeting, executive officers, as well as organization and work authority regulations. Also, use the Executive Officer Structure to separate management decision-making and supervisory functions from business execution to strengthen supervisory functions by the Board of Directors and further promote dynamic business execution by executive officers.

5. Structure for ensuring appropriate operations by the corporate group

Apply the NSD Group Code of Conduct, NSD Group Behavioral Guidelines, and Affiliate Management Regulations to maintain and improve a uniform system of internal controls for the entire Group to ensure compliance and consistency with accounting standards for affiliate companies.
In accordance with Affiliate Management Regulations, certain matters shall be subject to Company approval and reporting requirements. Furthermore, matters specified as subject to said requirements must be approved by the Board of Directors of Company.
Each affiliate is expected to outline Board of Directors Regulations and Work Authority Regulations to clarify the division of duties and authority of directors and employees. The execution of business operations shall be subject to prescribed decision-making and approval processes.

The Company Whistleblowing and Consultation Desk may be used by all directors and employees of the Group, including affiliates. As necessary, our Internal Auditing Department shall conduct audits of affiliates. Additionally, Audit & Supervisory Board Members shall conduct audits of affiliates based on their own discretion as determined by the status of internal audits and the regular exchange of opinions with the accounting auditor.
In principle, a company director or employee shall be appointed as director or audit & supervisory board member of the affiliate. Through the execution of duties as a director or audit & supervisory board member of the affiliate, the appointed personnel shall work to improve the appropriateness of affiliate operations as well as conduct information gathering at affiliate meetings and provide supervision to affiliate management.
The Company Board of Directors receive or request regular reports on the status of affiliate performance and business execution as well as provide guidance and instruction based on risk levels.

6. Matters concerning employees when an Audit & Supervisory Board Member requests the designation of personnel to assist with said duties

Designate one or more staff from among employees assigned to the Internal Auditing Department to assist with the duties of Audit & Supervisory Board Members when needed.
To ensure the independence of said employee(s) from directors and executive officers, decisions concerning human resource affairs related to said employee(s) shall be subject to the prior approval by the Audit & Supervisory Board.
If instructions are issued to said employee(s) in relation to the execution of duties of an Audit & Supervisory Board Member, in order to ensure the efficacy of said instructions, said employee(s) is required to comply with the command authority of the Audit & Supervisory Board and shall be bound by the duty of confidentiality, both regarding the details of said instructions and regarding whether or not any instructions were issued by the Audit & Supervisory Board.

7. Structure for directors and employees to report to the Audit & Supervisory Board and other structures related to reporting to Audit & Supervisory Board Members.

In addition to matters mandated by law, directors, executive officers, and employees must report to the Audit & Supervisory Board Members on the status of internal audits. Furthermore, directors, executive officers, and employees must report to the Audit & Supervisory Board on important matters related to the status and content of reporting submitted to the Whistleblowing and Consultation Desk, internal scandals, and legal violations.

8. Structure for an affiliate director or employee, or personnel receiving a report from such persons, to report to a Company Audit & Supervisory Board Member

In the event of an incident with the potential to have a serious impact on the operations or financial status of an affiliate, the directors or employees of said affiliate must report to a Company director or general manager in charge of said affiliate without delay. Matters requiring the execution of duties by Company Audit & Supervisory Board Members must be reported to said Members without delay.
The status of internal audits and important matters concerning an affiliate reported to the Whistleblowing and Consultation Desk must be reported to an Audit & Supervisory Board Member. A person discovering matters with the potential to cause severe harm to an affiliate must report to a Company Audit & Supervisory Board Member or general manager in charge of said affiliate without delay.
Furthermore, the director(s) or employee(s) of the affiliate must conduct appropriate reporting when requested by a Company Audit & Supervisory Board Member.

9. Structure for ensuring persons conducting the reporting outlined in the above two clauses are not subjected to retribution for reporting

Create explicit documentation indicating that, as with reporting to the Whistleblowing and Consultation Desk, in the event of reporting to the Company Audit & Supervisory Board Members that contributes to the Board’s execution of duties, the whistleblower shall be free from retribution. Furthermore, reinforce awareness of this policy among all Group directors and employees.

10. Matters concerning procedures of the prepayment and reimbursement of expenses incurred during the execution of Audit & Supervisory Board Member duties and other policies concerning the treatment of expenses and liabilities incurred during the execution of said duties

Expenses and liabilities incurred during the execution of normal duties by the Audit & Supervisory Board Members are treated as part of the Company budget. Unless otherwise deemed unnecessary to the execution of duties by the Audit & Supervisory Board Members, expenses incurred in relation to a specific incident cannot be denied. When deemed necessary to the execution of duties by the Audit & Supervisory Board Members, the Audit & Supervisory Board Members may, at its own discretion, hire attorneys, certified public accountants, or other outside experts from specialist organizations.

11. Other structures for ensuring the effective implementation of audits by the Audit & Supervisory Board Members

An Audit & Supervisory Board Member may, at any time, request a business reporting from a director, executive officer, or employee to examine the status of operations and assets. The Audit & Supervisory Board Member may attend Management Meeting and other important meetings. The President & CEO shall engage in the regular exchange of opinions with the Audit & Supervisory Board.

12. Structure for establishing and implementing internal controls related to financial reporting

The Board of Directors shall outline Internal Control Implementation Standards for Financial Reporting and draft a basic policy for ensuring the reliability of Group financial reporting. The President & CEO shall outline Implementation Guidelines for Internal Controls Related to Financial Reporting to create, implement, and evaluate internal controls related to financial reporting. Furthermore, the President & CEO shall establish a structure that enables corrective action in the event of problems with internal controls.

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