The Audit & Supervisory Board Initiatives

The Audit & Supervisory Board Members are entrusted by shareholders to audit Directors’ 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. We provide in a detailed explanation of the activities of the Audit & Supervisory Board in FY2023 under review to enhance the transparency of audits and the effectiveness of dialogue with stakeholders as below

Audit policy

In FY2023, as the business environment remained uncertain in the face of rising geopolitical risks and other factors, we were required to make a major transformation toward achieving profitable growth. Under these circumstances, with a shared sense of urgency and necessity of reforms recognized by management, the Company adopted a policy to audit the progress of implementation of management strategies and response to management environmental risks, while conducting auditing activities, including ESG 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

The Audit & Supervisory Board Members attend meetings of the Board of Directors, the Management Board and other important meetings with regard to auditing the duties of Directors. They put emphasis on confirming decision-making process for reaching resolutions, and express their opinions as appropriate.

Dialogue with people at the actual sites (Genba)

In addition, the Audit & Supervisory Board Members conduct on-site audits and interviews of each division and subsidiary and affiliates. By placing importance on dialogue with people at the actual sites (Genba), they confirm the degree of how well corporate strategy is being shared and whether proactive efforts are being made. They also identify any issues that occur at Genba. At least one Outside Audit & Supervisory Board Member has participated in approximately 60% of the interviews.

On-site audits and interviews at Kao Vietnam Plant

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 their respective expertise (certified public accountant, attorney-at-law) and abundant knowledge gained from experience as officers of other companies share audit-related information in a timely manner and conduct deliberations from various perspectives.
The Office of the Audit & Supervisory Board was established directly under the Audit & Supervisory Board, to assist the Audit & Supervisory Board Members with their duties and to allow the members 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: 11
Attendance rate: all members marked 100%
Duration: Average of 1 hour and 51 minutes
Main agenda of the Audit & Supervisory Board

26 resolutions: Audit policy, division of duties, critical auditing items, annual plan, audit report, Audit & Supervisory Board rules, internal control matters, Accounting Auditor matters (including agreement on compensation, and deliberation on reappointment), appointment and compensation of Audit & Supervisory Board Members, etc.
9 matters considered: Audit findings on critical auditing items, revision of Audit & Supervisory Board rules, closely monitoring issues concerning internal control, exchange of opinions with Representative Directors and Outside Directors, confirmation of the effectiveness evaluation process, etc.

Irrespective of agenda items at the Audit & Supervisory Board meetings, opinions regarding medium- to long-term issues are exchanged freely as needed.

Critical auditing items, achievements and evaluation of effectiveness

Critical auditing items	Audit method	Activity results and evaluation of effectiveness	Division of audit
Critical auditing items	Audit method	Activity results and evaluation of effectiveness	Full-time	Outside
Status of execution of duties by Directors	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 (six times) Important subsidiaries: Representative Directors (two times) Exchanged frank opinions regarding management issues, future governance., etc. Discussed the priority levels of risks and issues with Outside Directors, and shared the results of such discussions with Representative Directors, etc. to deepen understanding	✓	✓
	On-site audits and interviews of worksites, divisions, domestic and overseas subsidiaries and affiliates (During on-site inspections and hearings, we also confirmed priority audit items such as internal control.)	107 cases Emphasis placed on dialogue (using half the hours of interviews for the exchange of opinions) Confirmed the improvement status at a later date, seeking for the completion of reporting on audit findings. Shared the findings with executive officers as appropriate along with excellent on-site initiatives	✓	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	7 times	N/A	✓
Effectiveness of the Group governance	Systematized 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	Under a system in which members of the Office of the Audit & Supervisory Board concurrently serve as Auditors of subsidiaries All Auditors of subsidiaries and affiliates regularly exchanged opinions to identify and review risks (five times). Provided training to improve their skills Conducted effectiveness evaluation of the Auditors at important subsidiaries	✓	At any time
Effectiveness of the Group governance	Exchange opinions between the Accounting Auditor, Audit & Supervisory Board Members Report accounting audit results to the Board of Directors meetings	Exchanged opinions (15 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	✓	✓
Development and operation of internal control	Held 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 Expressed opinion on matters reported to the hotline and how these matters were handled. Confirmed that the progress was seen in the hotline system	✓	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.	✓	At any time
	Evaluation of the construction and operation status of the internal control system using a checklist	Generally valid	✓	N/A
Proactive disclosure	Investigate into requests of society and stakeholders for information disclosure of the Company and confirmed its disclosure status and external evaluations	Looked into how the Company had responded to such requests. Confirmed that the system for promoting and the status of information disclosure were generally satisfactory Promoted the disclosure of activities of the Audit & Supervisory Board Members	✓	N/A

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. In FY2023, through comprehensive and unfettered discussions at the Audit & Supervisory Board meetings based on the self-evaluation by each Audit & Supervisory Board Member, the exchange of opinions with Representative Directors, and feedbacks from Outside Directors and other related parties, it was concluded that the system of the Board as a whole was functioning effectively.
The Audit & Supervisory Board observed and assessed , at Genba, the degree of utilization of ROIC in each business segment and the progress of structural reforms, which are part of management strategies; compiled the results of such observation and assessment into a proposal, and shared the proposal with Directors. The Board will continue to observe the ROIC in each business segment. As for the threefold auditing structure, to further strengthen the collaboration between three organizations, we understand that we need to share auditing plans and issues with other organizations.
The issues identified through the effectiveness evaluation will be reflected in auditing activities and critical auditing items for FY2024 so that the effectiveness of the Board will be further improved.

Please find the link below for the overview of evaluation of the effectiveness of the Audit & Supervisory Board.

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