Corporate Governance

The MEDIPAL Group places importance on maximizing corporate value, while ensuring transparency and soundness of management. The Group also believes that disclosing high-quality information is one of its responsibilities to stakeholders, and that it enhances the transparency and soundness of management. Therefore, the Group takes a proactive approach to appropriate and timely disclosure.

The Board of Directors considers and decides matters stipulated by management policy and by laws, as well as other important matters concerning corporate management, and also supervises the status of overall business execution. The Board holds monthly meetings and, when necessary, extraordinary meetings. Audit & Supervisory Board members attend these meetings. Representative directors of main consolidated subsidiaries are appointed as directors of the Company to share information.
The Company has also adopted the executive officer system to clearly separate the functions of management decision making and supervision from the functions of business execution. Senior managers of the main consolidated subsidiaries are appointed as executive officers of the Company with the objective of upgrading and improving the corporate governance system for the entire MEDIPAL Group. They periodically exchange information, as well as deliberate and conduct studies, which helps maintain organizational unity.
In addition, to promote efficient Group management activities, representative directors, directors, and representative directors of consolidated subsidiaries designated by the president hold the Group Presidents Meeting. Functioning as an advisory council, the Group Presidents Meeting convenes once a month, in principle, to share information on the Group's management strategies and deliberate and consider business solutions.

1. Director Appointment Policy
   The basic policy is to appoint as director individuals who will take the lead in sincerely implementing compliance initiatives as well as individuals with extensive experience, deep insight, and a high level of specialization in order to contribute to the MEDIPAL Group's sustainable growth and medium-to-long-term improvement of corporate value.
   (1) Internal directors
   Candidates are chosen from among individuals with work history and skills in corporate management, healthcare, M&As, governance, IT, etc. Candidates must possess the appropriate leadership skills to promote the MEDIPAL Group's management philosophy as well as a medium-to-long-term perspective as someone engaged in supervision of management's decision-making and business execution. We also give comprehensive consideration to factors such as personality and experience.
   (2) Outside directors
   Candidates are chosen from among individuals with extensive knowledge and experience of corporate management, healthcare, finance/accounting, legal affairs, international affairs, etc. We also give comprehensive consideration to factors such as personality and concurrent service as an officer at another company. In principle, the total term of office is a maximum of eight or twelve years (four years as an Audit & Supervisory Board member with two or three terms). Outside directors are prohibited from serving as an officer at more than four companies. Notwithstanding, even in the event that a candidate does not meet the separately determined independence requirements, an individual with deep insight and a high ethical viewpoint can be selected as a candidate for outside director.
   However, in such a case, the ratio of independent outside directors shall be one-third or higher.
2. Director Appointment Procedure
   Candidates shall be proposed to the General Meeting of Shareholders after deliberation by and reports from the Nomination and Compensation Committee (with the majority of members being outside directors and an outside director serving as the chair of the committee), and a resolution by the Board of Directors. The selection of representative directors as well as executive directors with special titles is conducted by the Board of Directors after deliberation by and reports from the Nomination and Compensation Committee.
3. Director Dismissal Procedure
   In a case where a director commits an act that violates laws and ordinances or the articles of incorporation, or in a case where a director shows inadequate ability to carry out his/her professional duties due to negligence or other reasons, the Board of Directors will deliberate on the matter after fair and rigorous consideration by the Nomination and Compensation Committee.

The Company's Board of Directors is designed to have diverse representation as well as an appropriately balanced mix of knowledge, experience, and skills, including through the appointment of a number of outside directors and outside Audit & Supervisory Board members. The Company has appointed a diverse lineup of outside directors and outside Audit & Supervisory Board members, including former business executives and specialists in pharmaceutical development, accounting, and legal affairs, to ensure the effective functioning of the Board.

When appointing outside directors, the emphasis is on extensive experience, deep insight, and a high level of specialization, as well as the requirements stipulated in the Companies Act. We expect outside directors to contribute to improved corporate governance by contributing questions and opinions based on diverse perspectives that stimulate discussion at the Board of Directors meetings and contribute to appropriate decision-making. Our policy is for at least one third of directors to be independent outside directors. Of the 12 directors, four are outside directors, all of whom are independent outside directors. We believe we have appointed a sufficient number of independent outside directors based on comprehensive consideration of our industry, size, business characteristics, organizational structure, and the surrounding business environment. Of the five Audit & Supervisory Board members, three are outside members, all of whom are independent outside members. This system of monitoring and supervision of the Board of Directors by independent outside directors and independent outside Audit & Supervisory Board members ensures highly transparent management.

As a measure to enhance corporate governance, the Nomination and Compensation Committee was voluntarily established as an advisory body to the Board of Directors for the purpose of improving the fairness, transparency and objectivity of procedures related to the nomination and compensation of directors. The Nomination and Compensation Committee shall, in response to requests from the Board of Directors, deliberate and report to the Board of Directors on the following matters.

1. Matters Related to Nomination
   (1) Policy on appointment and dismissal of directors
   (2) Matters concerning appointment and dismissal of directors (matters subject to resolution by the General Meeting of Shareholders)
   (3) Matters concerning appointment and dismissal of representative directors
   (4) Matters concerning appointment and dismissal of executive directors with special titles
   (5) Matters concerning succession plans
2. Matters Related to Compensation
   (1) Policy on compensation of directors, etc.
   (2) Matters concerning director compensation limits (matters subject to resolution by the General Meeting of Shareholders)
   (3) Matters concerning compensation of each director
3. Other Management Matters the Board of Directors Deems Important
   The Nomination and Compensation Committee is composed of three members or more selected in accordance with the resolution of the Board of Directors. Outside directors account for a majority of the members, and the committee is also chaired by an outside director.

Committee Composition (As of March 31, 2023)

The Company employs a corporate audit system. In addition to attending an Audit & Supervisory Board, Audit & Supervisory Board members strictly audit the legality and adequacy of business execution by directors, based on the standards determined by the Audit & Supervisory Board, and exchange views with the independent auditors. The Audit & Supervisory Board members of the Group also exchange information and cooperate with each other.

Outside Directors' Attendance at Board of Directors Meetings in the Fiscal Year Ended March 31, 2023
Mitsuko Kagami	100% (15/15 times)
Toshio Asano	93% (14/15 times)
Kuniko Shoji	87% (13/15 times)
Hiroshi Iwamoto	100% (15/15 times)

Outside Audit & Supervisory Board Members' Attendance at Audit & Supervisory Board Meetings in the Fiscal Year Ended March 31, 2022
Tetsuo Kitagawa	100% (13/13 times)
Tomoyasu Toyoda	100% (13/13 times)
Yoko Sanuki	92% (12/13 times)

We have established a system that enables mutual cooperation between outside directors and outside Audit & Supervisory Board members and the Audit Office, Audit & Supervisory Board members, and independent auditors. This system enables these parties to coordinate as necessary, either directly or indirectly, through methods such as email or telephone. In addition, outside directors and outside Audit & Supervisory Board members share their views at meetings of the Board of Directors, and express their frank opinions on other occasions such as during briefings ahead of important discussions. The Company also periodically provides opportunities to view worksites at subsidiaries. In addition, every six months starting in the fiscal year ended March 31, 2022, the Company has held briefings on new businesses to further the outside directors' and outside Audit & Supervisory Board members' understanding of the Group's businesses. The Company also runs other briefings and information exchanges as needed in response to specific themes requested by the outside directors and outside Audit & Supervisory Board members.

The Company periodically verifies the effectiveness of the Board of Directors. Based on those evaluations, we implement measures on an ongoing basis for the improvement of issues and the enhancement of our strengths. This analysis and evaluation of the effectiveness of the Board of Directors leads to functional improvements.

Analysis/evaluation process

The Board of Directors created a questionnaire for all directors and Audit & Supervisory Board members with the cooperation of a third party, and analyzed and evaluated the results. In addition, we confirmed the evaluation results and initiatives going forward based on a report from the third-party organization given at a Board of Directors meeting.

Analysis/Evaluation Outline of Results

The average score for the question asking for an overall evaluation of the effectiveness of the Board of Directors was 4.0, above the average score for all questions of 3.7.
The questions on whether discussions at the Board of Directors were open-minded returned a high average score of 4.4, and there were multiple comments confirming the liveliness of discussions in the free comment section. In terms of the operation of the Board of Directors, multiple answers showed that the respondents thought the prior briefings were functioning effectively.
In light of these results, we conclude that the Board of Directors is functioning effectively overall.

Identified Issues

The results from the free comment section of the questionnaire highlighted the issue that the topics currently discussed often involved short-term themes or decisions on the execution of specific tasks, whereas multiple opinions confirmed that the Board of Directors should be discussing long-term strategies.
In terms of monitoring of the Board of Directors, the free comments also highlighted how monitoring should be performed as the Board of Directors of the holding company and the need to define the relationship with the business companies. As such, the questionnaire confirmed a range of opinions on how the separation of execution and supervision should be secured.

Status of Response

After reviewing the questionnaire results, we identified the following seven points for discussion at the Board of Directors.

1. Board of Directors monitoring function
2. Composition of the Board of Directors
3. Discussions at the Board of Directors’ meetings
4. Operation of the Board of Directors
5. Support systems for corporate officers
6. Dialogue with investors
7. Nomination and Compensation Committee

Of these, the main initiatives in the fiscal year ended March 31, 2023 were as follows.

3. Discussions at the Board of Directors’ meetings
   In the process of formulating the MEDIPAL Group’s Sustainability Policy Connecting to the Future with “Energy and Brightness” and the 2027 MEDIPAL Medium-Term Vision: Change the Oroshi Forever—Constant Innovation—, announced in October 2022, there were multiple discussion sessions between the outside directors and outside Audit & Supervisory Board members on the direction and strategy for medium- to long-term management of the business. The outside directors and outside Audit & Supervisory Board members also engaged in multiple exchanges of opinion when considering our basic capital policy that was announced in May 2023.
5. Support systems for corporate officers
   We ran a site tour of the Saitama RDC owned by our subsidiary PALTAC CORPORATION. The tour was aimed at helping outside directors and outside Audit & Supervisory Board members understand the Group’s business in more detail. Tour participants developed a real understanding of this next-generation distribution center equipped with cutting-edge AI technologies and robotics.
6. Dialogue with investors
   The content of discussions with institutional investors is shared at Board of Directors meetings and opinions are exchanged as needed with the outside directors and outside Audit & Supervisory Board members.

Looking ahead, we will continue to consult on and select high-priority themes and will engage in specific, concrete discussions at the Board of Directors’ meetings.

Our basic policy is to establish compensation levels and systems that are appropriate to the roles and responsibilities of each director as they work to realize our management philosophy, enhance corporate value, and achieve sustainable growth.
Compensation for directors includes base compensation and bonuses, and the amount of compensation is decided after taking into account general compensation levels in the market, our financial position, and the balance with employee salaries. The Nomination and Compensation Committee was voluntarily established as an advisory body to the Board of Directors for the purpose of improving the fairness, transparency and objectivity of procedures related to the nomination and compensation of directors and as a measure to enhance corporate governance.

1. Policy on decisions relating to the amount of monetary compensation and the methods used to calculate this amount
   Monetary compensation (i.e., compensation that is neither performance-linked compensation nor non-monetary compensation) is defined as a fixed monthly amount as base Compensation for Directors compensation paid in accordance with the position of each director.
2. Policy on decisions relating to the type of performance indicators used for performance-linked compensation and the methods used to calculate this amount or number
   Performance-linked compensation is monetary compensation paid at a certain time every year as a bonus. The total amount is determined by the Board of Directors based on consideration of the consolidated performance in each fiscal year (consolidated operating profit) as an incentive for executive directors to be conscious of business performance. It is apportioned according to the standards for each position.
3. Policy on decisions relating to the type of non-monetary compensation and the methods used to calculate this amount or number
   A system for non-monetary compensation has not yet been introduced, but for some time now we have been considering the introduction of a stock-based compensation scheme linked to the increase in corporate value as an incentive that functions with medium- to long-term earnings. The Nomination and Compensation Committee will also engage in various discussions on this matter.
4. Policy on decisions relating to the percentage breakdown for each type of compensation
   Compensation for executive directors comprise fixed monthly base compensation and bonuses linked to short-term earnings.
   The percentage breakdowns of these two types of compensation differ slightly depending on the position of each director, but in general the basic standard is for bonuses to account for approximately 25% of the total. The compensation for outside directors only consists of base compensation in view of their role and independence.
5. Methods to decide the content of compensation for individual directors
   The amount of compensation for individual directors is left to the decision of the Representative Director and President, based on resolution by the Board of Directors. However, the Representative Director and President is advised by the Nomination and Compensation Committee and receives a report from the committee on draft compensation amounts for individuals.
   The Nomination and Compensation Committee is composed of three members or more selected in accordance with a resolution of the Board of Directors. Outside directors account for a majority of the members, and the committee is also chaired by an outside director. In addition, persons nominated by the Audit & Supervisory Board members and committee chairperson can also attend as observers.

Total Amount of Compensation by Corporate Officer Category, Total Amount of Compensation by Category, and Number of Relevant Corporate Officers in the Fiscal Year Ended March 31, 2023

*1 For fixed compensation, the number includes one director who stepped down when they came to the end of their term of office as of the close of the 113th General meeting of the Shareholders held on June 24, 2022.

*2 There are no officers receiving a total of compensation and other benefits of ¥100 million or more in the fiscal year ended March 31, 2023.

The basic policy of the MEDIPAL Group is to reduce these shareholdings in the interest of controlling shareholding risk and capital efficiency. We will regularly verify the significance and economic rationality of our strategic shareholdings for the social significance of the main business and contribution to our earnings via stronger business relationships. If any of these shareholdings are deemed to be inappropriate, we will proceed with their sale after striving to gain sufficient understanding from our business partners. Even in cases where shareholdings are deemed appropriate, the Company may sell these in accordance with its basic policy of reducing strategic shareholdings and in consideration of market conditions, management and financial strategies, and other factors.
We also intend to limit strategic shareholdings to 10% or less of net assets and ¥50 billion or less by around March 31, 2027. Note that the Group regularly conducts verification and confirmation of the significance and economic rationale for all strategic shareholdings. Here, verification and confirmation refer to processes leading to a comprehensive judgment of whether the holdings will contribute to the maintenance and improvement of the Group’s corporate value. This judgment is based on the social significance of the main business, contribution to our earnings via stronger business relationships, and the current and future profitability of the business partner, taking into consideration the growth potential of the business partner and capital costs.

General Meeting of Shareholders
In order to provide shareholders with sufficient time to make decisions on exercising their voting rights, the Company issued the notice of convocation for the June 27, 2023 Annual General Meeting of Shareholders on June 1, 2023, which is earlier than the legal requirement. Prior to this, the Company also made an early disclosure of its notice of convocation for the General Meeting of Shareholders on its website on May 25, 2023. In addition, since the General Meeting of Shareholders held in June 2002, the Company has enabled voting rights to be exercised electronically via the internet, in order to ensure that voting rights are exercised promptly and actively. Since 2006, the Company has also joined the voting rights platform for institutional investors operated by ICJ, Inc. to create an environment in which institutional investors may directly exercise voting rights by electronic means. In addition, other measures to invigorate the General Meeting of Shareholders and facilitate the exercise of voting rights, including posting the notice of convocation and details of the resolutions on our website, have been taken.

We maintain active dialogue with institutional investors through events such as financial results briefings for securities analysts and institutional investors, IR meetings with the President and the corporate officer in charge of IR, and various conferences hosted by securities companies. Feedback from investors is reported to management of the Company and the relevant departments as necessary, where it informs policy in areas such as MEDIPAL Group management strategy and governance.

For dialogue with individual investors, we hold conferences for individual investors in major cities throughout Japan every year with the aim of enhancing the Company recognition and establishing its brand. We also send newsletters to shareholders twice a year, in June and December, to deepen their understanding of our management philosophy and business strategy.

Our basic capital policy is to strive for sustainable growth as a company and maximize corporate value through business and financial activities focused on both "improving capital returns" and "reducing capital costs*."
In order to generate profits that exceed the cost of capital, we will regularly monitor and verify such costs, and pursue the optimal capital structure for our company while ensuring financial soundness. In order to achieve this, we are identifying areas for improvement and examining and scrutinizing specific indicators (KPIs), the level of achievement we should aim for, and the timing of achievement. Once this initiative is completed, we will promptly disclose the specific details.

（Basic Policy on Strategic Shareholdings）
Our group's basic policy is to reduce the balance from the perspective of controlling stock ownership risk and improving capital efficiency. Regarding strategic investment stocks, we regularly verify the significance and economic rationality of holding them from the perspective of the social significance of the main business, the degree of contribution to profits by strengthening business relationships, etc., and if the appropriateness of holding is not recognized. We will work to gain the full understanding of our business partners before proceeding with the sale. In addition, even if the validity of holding the shares is recognized, the shares may be sold in accordance with the basic policy of reducing the balance and taking into consideration the market environment, management/financial strategy, etc. By the end of March 2027, which is the final year of the 2027 Medipal Medium-Term Vision, we aim to reduce the balance held to less than 10% of net assets and less than 50 billion yen.

We regularly verifies and confirms the significance and economic rationality of holding all strategic investment stocks. This verification and confirmation is based on the social significance of the main business and the degree of contribution to profits by strengthening business relationships, as well as the current and future profitability and profitability, taking into account the growth potential and capital cost of the business partner. This refers to comprehensively determining whether something contributes to maintaining and improving the corporate value of our group.
（Basic Policy on Distribution of Profits ）
In addition to strategic investments that contribute to the stable growth of existing businesses, we are concentrating management resources on "new businesses," "medical devices and reagents business," and "agrofoods business," which we have positioned as particularly important businesses. By doing so, we strive to continuously improve our corporate value.
Regarding profit distribution, in principle, we will "maintain and improve the dividend payout ratio stably based on the profit before deducting goodwill amortization and intangible asset amortization expenses arising from growth investments as set out in the 2027 Medipal Medium-Term Vision." While comprehensively assessing capital needs, our policy is to flexibly implement ``acquisitions and cancellations of treasury stock'' with the aim of improving capital efficiency and further returning profits to shareholders.
This will result in total shareholder returns for the five-year cumulative period from the fiscal year ending March 2023 to the fiscal year ending March 2027, based on the profit before deducting goodwill amortization expenses and intangible asset amortization expenses associated with growth investments listed in the 2027 Medipal Medium-Term Vision. We will strive to achieve a 40% propensity.

Among the Company's subsidiaries, PALTAC CORPORATION is listed on the Prime market of the Tokyo Stock Exchange. The Company’s views on the purpose of having listed subsidiaries and measures to ensure effective governance systems at listed　subsidiaries are as follows.

• PALTAC engages in the Cosmetics, Daily Necessities and OTC Pharmaceutical Wholesale Business, and cooperates to generate synergy with the Prescription Pharmaceutical Wholesale Business, which is the main business of the MEDIPAL Group's other subsidiaries. The Group is striving to find a future growth strategy in the business fields of “Pharmaceuticals, Health, and Beauty” together with PALTAC.
  Recently, the dispensing business of drugstores, our customers, has expanded. MEDIPAL is now able to offer total solutions to the needs of its customers. This also leads to enhanced synergy through coordination between PALTAC, which handles cosmetics, daily necessities, and OTC pharmaceuticals, and MEDICEO CORPORATION, which handles prescription pharmaceuticals.
  PALTAC is highly significant in terms of the Group's efforts to achieve sustainable growth. The Group will utilize the know-how of both the Prescription Pharmaceutical Wholesale Business and the Cosmetics, Daily Necessities and OTC Pharmaceutical Wholesale Business to optimize the supply chain and enhance the Group's business fields as a wholesaler engaged in the distribution of products indispensable to people's daily lives.
• The Company believes that from the standpoint of Group management, it is preferable for PALTAC to boost its corporate value by ensuring its independence, procuring its own financing, and aggressively conducting its business operations based on swift decision making. PALTAC decides on appropriate business strategies independently and in a self-directed manner.
• The Company plans to retain a majority of PALTAC’s shares and keep PALTAC as a consolidated subsidiary from the viewpoint of contributing to the improvement of corporate value for both companies. Furthermore, in our role as the parent, the Company dispatches directors to PALTAC to ensure appropriate Group governance.
  However, PALTAC has established an independent committee of all the independent outside directors and independent outside Audit & Supervisory Board members, and is working to ensure protection of minority shareholders’ interests.