The Audit & Supervisory Board Initiatives

The Audit & Supervisory Board Members are entrusted by shareholders to audit Directors and Executive Officers’ execution of duties from an independent standpoint, and thus, are engaged in auditing activities to achieve sound and sustainable growth of the Company and the Group and establish governance that meets the trust of stakeholders. Accordingly, we provide in the Audit Report a more detailed explanation of the activities of the Audit & Supervisory Board Members during FY2024 under review to enhance the transparency of audits and the effectiveness of dialogue with stakeholders as below.

Audit policy

The Kao Group has worked to introduce ROIC company-wide and has decisively implemented structural reforms, aiming to be a company that sustains Global Sharp Top businesses. With a shared sense of urgency and necessity of reforms recognized by management, the Company has adopted a policy to audit the progress of implementation of the K27 Strategic Framework and the management’s responses to management environmental risks, while conducting auditing activities, including sustainability related activities in view of the requests and views of society and stakeholders.

Particularly important points in Audit & Supervisory Board Members’ activities

Lively exchange of opinions

In the course of auditing the execution of duties by Directors and Executive Officers, the Audit & Supervisory Board Members put importance on expressing opinions concerning decision-making processes and resolutions at meetings of the Board of Directors, the Management Board and other important meetings, as well as lively exchange of opinions with management, including unfettered discussions at meetings to exchange opinions with management.

Dialogue with people at the actual sites (Genba)

The Audit & Supervisory Board Members conduct on-site audits and interviews of each division and each group company, placing emphasis on understanding the degree of how well corporate strategy is being shared, whether their proactive efforts are being made, the challenges they are facing, their requests and opinions to management through dialogues in such onsite audits and interviews. They also share the results of these audits and interviews with management, as appropriate. After the on-site audits and interviews, these divisions and group companies makes use of the comments of the Audit & Supervisory Board Members in their initiatives through a PDCA cycle in which they add these comments to the lists of guidance and request items, and share the contents of these lists divided into advice and excellent initiatives across their organizations to improve the effectiveness of auditing. At least one Outside Audit & Supervisory Board Member has participated in approximately 80% of the interviews.

On-site audits and interviews at Kao Chemical Plant,
Penang, Malaysia

Composition and execution of duties of the Audit & Supervisory Board

The Audit & Supervisory Board consists of five Audit & Supervisory Board Members (two Full-time Audit & Supervisory Board Members and three Outside Audit & Supervisory Board Members). The Full-time Audit & Supervisory Board Members with extensive internal execution experience and diverse knowledge and Outside Audit & Supervisory Board Members with experience playing leading roles and a high level of professional expertise and insights share audit-related information in a timely manner and conduct deliberations from various perspectives. In addition, the Office of the Audit & Supervisory Board was established directly under the Audit & Supervisory Board to allow the members of the Office to assist the Audit & Supervisory Board Members in fulfilling their duties and to serve concurrently as auditors of subsidiaries.

Please find the link below for Audit & Supervisory Board Members.

Leadership: Audit & Supervisory Board Members

Deliberations by the Audit & Supervisory Board

Number of meetings held: 10
Attendance rate: all members marked 100%
Duration: Average of two hours
Main agenda of the Audit & Supervisory Board
- 24 resolutions:
  Audit policy, division of duties, critical auditing items, annual plan, audit report, policy on selection of candidate Audit & Supervisory Board Members, internal control matters, Accounting Auditor matters (including agreement on compensation, and deliberation on reappointment), appointment and compensation of Audit & Supervisory Board Members, etc.
- 14 matters considered:
  Audit findings, revision of the policy on selection of candidate Audit & Supervisory Board Members, a process of auditing internal control system, exchange of opinions with Representative Directors and Outside Directors, confirmation of the effectiveness evaluation process, etc.

Besides agenda items discussed at the Audit & Supervisory Board meetings, the members freely exchange opinions regarding the skills of the Audit & Supervisory Board Members, management and other issues they are concerned about as needed.

Critical auditing items, achievements and evaluation of effectiveness

Critical auditing items	Audit method and efforts	Activity results and evaluation of effectiveness	Division of audit
Critical auditing items	Audit method and efforts	Activity results and evaluation of effectiveness	Full-time	Outside
Status of execution of duties by Directors and Executive Officers	Attend meetings of the Board of Directors to confirm the status of deliberations and resolutions, and express opinions if necessary	All Audit & Supervisory Board Members attended all meetings. All of them actively expressed their opinions.	✓	✓
	Attend important meetings such as the Management Board to confirm decision-making process, request explanations as necessary, and expressed opinions in a timely manner	Attendance rate was 100%, reviewed decision-making process and commented on matters to be considered.	✓	N/A
	Meetings to exchange opinions with management	Kao: Representative Directors (three times). Outside Directors (two times), Executive Officers with titles (four times) Important subsidiaries: Representative Directors (two times) With Representative Directors, exchanged opinions mainly on the implementation status of the K27 Strategic Framework and the progress of structural reforms. With Outside Directors, had in-depth discussions on critical issues and reported the results of such discussions to Representative Directors.	✓	✓
	On-site audits and interviews at worksites, divisions, domestic and overseas subsidiaries and affiliates (During on-site audits and interviews, we also confirm critical audit items such as internal control.)	113 cases Confirmed the degree of awareness about ROIC activities and the progress of structural reforms in each business Reported the risks and concerns identified in the process of auditing and the feedback, such as worries and opinions, from worksites to management	✓	At any time
	Attend the Committee for the Examination of the Nominees for Directors and Audit & Supervisory Board Members and Compensation Advisory Committee for Directors and Executive Officers	6 times	N/A	✓
Effectiveness of the Group governance	Systematize the Kao Group’s structure of Audit & Supervisory Board (the Company, affiliates, and subsidiaries) Improve the effectiveness of auditing activities tailored to each company’s characteristics, under the unified management of the Group	Maintained a structure in which members of the Office of the Audit & Supervisory Board concurrently serve as auditors of subsidiaries Held meetings to exchange opinions among all auditors of subsidiaries and affiliates (three times) Conducted effectiveness evaluation of auditors at important subsidiaries and shared issues and risks identified with the directors of these subsidiaries	✓	At any time
	Exchange opinions between the Accounting Auditor, Audit & Supervisory Board Members and related departments Report accounting audit results of the Accounting Auditor to the Board of Directors meetings	Exchanged opinions (12 times), and reported to the Board of Directors meetings (two times) Audit plan, accounting audit results, key audit matters, disclosure of non-financial information, non-assurance services management, audit quality, etc. Held global meetings to exchange opinions with domestic and overseas auditors and shared issues of each company	✓	✓
	Strengthen collaboration in Three Types of Audits (between the Audit & Supervisory Board Members, the Accounting Auditor, and the Department of Internal Audit)	Held meetings (three times) to share audit plans and critical audit issues Exchanged opinions on the disclosure of non-financial information, a medium- to long-term issue	✓	N/A
Development and operation of internal control	Hold interviews with the departments in charge of the second line of internal control Attend the meetings or check the minutes of Internal Control Committee and major subordinate committees Check the response status of the Compliance Hotline	Every quarter or semi-annually Confirmed that voluntary inspection and monitoring were firmly in place and issues had been improved Confirmed that the regulations for the Compliance Hotline were established and put in place. Expressed opinions on matters reported to the hotline and how these matters were handled	✓	At any time
	Collaboration with the Department of Internal Audit which is the division responsible for internal auditing	Held regular meetings (four times) to share audit plans and issues Vice President of the Department of Internal Audit attended the Audit & Supervisory Board meetings and the meetings to exchange opinions among auditors of the Group, as needed, to share audit findings and the awareness of risks	✓	At any time
	Evaluate the construction and operation status of the internal control system using a checklist	Generally valid	✓	N/A
Proactive disclosure	Investigate requests of society and stakeholders for information disclosure of the Company and confirmed its disclosure status and external evaluations	Looked into how the division mainly responsible for the disclosure of non-financial information had responded to such requests Promoted the disclosure of activities of the Audit & Supervisory Board Members	✓	At any time

Evaluation of the effectiveness of the Audit & Supervisory Board

Each year, the Board sets evaluation items, with a focus on critical auditing items, and evaluates the effectiveness of the Board from a multifaceted and objective perspective. For FY2024 under review, through comprehensive and unfettered discussions at the Audit & Supervisory Board meetings based on the self-evaluation by each Audit & Supervisory Board Member, and feedbacks from Representative Directors, Outside Directors and other related parties, it was concluded that the system of the Board as a whole was functioning effectively.
Regarding ROIC by business extracted in FY2023, the Audit & Supervisory Board confirmed the progress of the utilization of ROIC by business in Business, Sales, Production, R&D and other organization through on-site audits and interviews and shared them with the Board of Directors. In addition, to further strengthen cooperation among the three types of Audits (Audit & Supervisory Board, Accounting Auditor, and the Department of Internal Audit, they began holding meetings and sharing their audit plans and key issues among them. They also exchanged opinions on disclosure of non-financial information as a medium to long-term issue.
In the process of evaluating the implementation status of the K27 Strategic Framework and the progress of structural reforms, the Audit & Supervisory Board Members confirmed that initiatives aimed at improving capital efficiency and profitability had been put in place and identified specific outcomes of these initiatives through on-site audits. The members will keep track of the progress in the development of the Global Sharp Top businesses including the development of growth strategies for the Cosmetics Business. Regarding Group governance in Japan, the effectiveness of each auditing activity was improved, because of the system in which, the members of the Office of the Audit & Supervisory Board concurrently serve as auditors of group companies, and the sharing of findings in regular meetings at which all auditors of subsidiaries and affiliates exchange opinions. In overseas, we will continue to observe design of the cross-functional overseas governance by the Headquarters.
The issues identified through the effectiveness evaluation will be reflected in auditing activities and critical auditing items for FY2025 so that the effectiveness of the Board will be further improved.

For a summary of the Audit & Supervisory Board’s effectiveness evaluation, please see the following website:

Summary of Evaluation of the FY2024 effectiveness of the Audit & Supervisory Board