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Corporate Governance

1. Basic Concept for Corporate Governance

In order to increase the transparency of management for shareholders, investors, and society as a whole, including business partners, employees and local communities; and to ensure fair, effective corporate management, Mori Seiki has identified the reinforcement of its corporate governance and the strengthening of its management oversight functions as its top priority.
We will continue to improve our corporate values for long-term stability, and will endeavor to ensure that our business activities are rooted in an even greater sense of corporate ethics.

2. Outline of the system of corporate governance, and reason for adopting the system of corporate governance

Mori Seiki has adopted an auditing system.
As of 15th June, 2012, the Board of Directors consists of five Directors and the Board of Auditors consists of three auditors, two of whom are external auditors.
The Board of Directors meets regularly and whenever necessary to debate important management issues, and to make decisions through lively discussions in which directors state their opinions freely. Also, by making the term served by Board members to one year, we have a system in which the mission and responsibilities of the Directors are made clear. We instituted Management Councils with the President as Chairman in 2006, and Operating Directors' Meetings in 2009 to speed up the decision-making process and to improve the soundness of our administration. In addition, Management Meetings attended by the Directors, Operating Directors and General Managers are convened once a month to completely share and manage the progress on important issues and basic strategies, strengthening the corporate governance of the Group as a whole.
In recent years, international concern about measures to prevent the proliferation of weapons of mass destruction and the excess stockpiling of conventional weapons has been growing. To address this, the Mori Seiki Group has set up an Export Control Committee, with the President as chairperson. This committee formulates the internal regulations (Compliance Program), reviews and changes the contents of the regulations to ensure compliance with export control laws, and conducts rigorous discussions on matters such as the propriety of exports of our products. In 2005, as part of the establishment of our internal control system, we established an Information Disclosure Control Committee, with the Executive Officer of the Administrative HQ as its chairperson, which acts as an advisory body to decide rules for the disclosure of information, in order to improve the transparency and soundness of our management. In accordance with the auditing policy, the auditors attend meetings of the Board of Directors, Operating Directors' Meetings, Management Meetings and other key meetings, where they express their opinions. In addition to this, they peruse documents about important decisions, and conduct strict audits in every department at the Head Office, as well as each Campus, Technical Center and consolidated Group company.
Through this process we have sought to achieve a fast decision-making process with a small number of Directors and energize the Board of Directors, we have revamped our management by, for example, establishing a compliance system, and we have established an efficient corporate governance system with an increased level of fairness and transparency in management.
The corporate governance system of Mori Seiki is as follows.

3. Maintenance of an internal control system and risk management system

Mori Seiki implements the following "Basic Policy on Internal Controls" decided by the Board of Directors.

·A system to ensure that the business conduct of Directors and employees conforms to all relevant laws and articles.

Mori Seiki clarifies the criteria for the actual behavior of its Directors, Operating Directors and managerial staff through the mission statement, the 10 tenets of the "Mori Seiki Way", the employee handbook, the export control program, and all of the codes of conduct, stipulations and rules relating to the environment, occupational health and safety, quality management systems and so on.
We have established a Management Council chaired by the President, and this council serves as a mechanism for putting these behavioral codes of conduct in order, promoting compliance, educating the managerial staff, and taking cross-sectional control.
We deal undaunted as an organization with organized violence by antisocial groups, and the basic policy behind our approach is to eradicate antisocial power.

·A system for the storage and management of information concerning the business conduct of Directors

Mori Seiki manages and saves the information on daily decision making and business conduct obtained through the minutes of general meetings of shareholders, the minutes of Board of Directors Meetings, the minutes of Management Councils, the minutes of Operating Directors' Meetings, the minutes of Management Meetings, and the internal electronic decision-making system. The Directors and Auditors can view this information either in document form or in electromagnetic media at all times.
We have provided "regulations on the storage and management of information concerning the business conduct of Directors", and have clarified the system for the storage and management of information concerning business conduct.

· Regulations to manage risks of loss, and other systems

Mori Seiki practices environmental/occupational health and safety/quality risk management in accordance with a management system, risk management relating to the reliability of financial reports, risk management in accordance with the export control program, and risk management in daily business in accordance with the internal electronic decision-making system.
We established a Management Council chaired by the President, where the President appoints the Director with overall responsibility and the Director with responsibility in each category, and we are working to build a system where this council comprehensively and generally manages risk throughout the Group as a whole.

·A system to ensure that the Directors' business is conducted efficiently

Mori Seiki seeks to make the conduct of the Directors' business more efficient by using the following business management system. We have also introduced an Operating Director system in order to support Directors and facilitate fast decision making and efficient conduct of business.

• 1) Fast decision making using the internal electronic decision-making system
• 2) Reports on conduct of Directors, Operating Directors and executives in Board of Directors Meetings, Management Councils, Operating Directors' Meetings and Management Meetings and monitoring of the execution of duties by Auditors
• 3) Drafting the medium-term management plan according to Board of Directors Meetings, Management Councils, Operating Directors' Meetings and Management Meetings, setting the business result targets and budgets for each operating department based on the medium-term management plan, and implementing business result management on a monthly and quarterly basis by utilizing IT
• 4) Reviewing business results on a monthly basis through Board of Directors Meetings, Management Councils, Operating Directors' Meetings and Management Meetings, and implementing strategies for improvement

· A system to ensure that the corporate group consisting of Mori Seiki and its affiliated companies conducts business in an appropriate manner

Mori Seiki ascertains and assures the propriety of the business of its subsidiaries and affiliates through the internal electronic decision-making system, use of the weekly report system and various scheduled meetings on a consolidated basis, regular and random visits by the President and responsible Directors, and periodic internal auditing of subsidiaries.
With Mori Seiki's Administrative HQ and Accounting/Finance HQ as the departments responsible for the internal control of the Group, we are making progress with consultation and sharing information about internal controls among Mori Seiki and each of the companies in the group, and building a constitution, including systems for efficiently transmitting directions and requests.

·Matters concerning employees who were appointed by auditors to assist them with their duties and the independence of these employees from Directors

Mori Seiki currently has one staff member assisting the Auditors. Personnel changes, evaluations, etc. of the assisting staff member must be agreed to by the Auditors, and exchanges of opinions with Auditors are held periodically in order to achieve a system in which the audits are more effective and in which their independence is assured.

·A system in which Directors and employees report to the auditors, and systems for other reports to the auditors

At Mori Seiki, the Auditors attend important regular meetings including the Board of Directors Meetings, Management Councils, Operating Directors' Meetings, and Management Meetings, listen to the decisions and reports, and, if necessary, request a report from the Directors, Operating Directors or managerial staff.
The Directors, Operating Directors and managerial staff must immediately report any fact that could significantly harm the company to the Board of Auditors or the Auditors upon discovery of the fact, and the "regulations to ensure effectiveness of audits conducted by the Auditors" have been prepared to make the details of these regulations clear. It shall also be understood that the Board of Auditors, or the Auditors, can request reports from the Directors, Operating Directors or managerial staff.

·A system to ensure that other audits conducted by the Auditors are carried out effectively

At Mori Seiki, the Board of Auditors, or the Auditors, have regular and temporary exchanges of opinion with both the President and the Accounting Auditors.
We will continue to maintain this system as we look ahead.

4. Status of the internal audit and the audit conducted by the Auditors

As part of our internal audit, we have set up an Internal Auditing Department with three full-time working staff, under the direct supervision of the President, which checks that the business operations of the Mori Seiki Group are conducted appropriately and effectively. Regarding our adoption of a system of internal control and reporting (with reference to the "J-SOX" Act, Japan's equivalent of the Sarbanes-Oxley Act), we promoted the construction of an internal control system in October 2005 prior to the approval of the bill. and we have already completed preparations for reliably operating this system within the Group both in Japan and overseas.
With regard to the audit conducted by the Auditors, currently the Board of Auditors is comprised of one Corporate Auditor and two External Auditors who attend the Board of Directors Meetings, Operating Directors' Meetings and Management Meetings in accordance with the policy determined by the Board of Auditors and the auditing plan, and hear the status of execution of relevant work from the Directors, Operating Directors, Internal Auditing Department and so on. They also peruse documents about important decisions, and examine the status of work and assets in every department at the Head Office, as well as each Campus, Technical Center and consolidated Group company. The Auditors provide guidance for and auditing of the Directors on matters involving corporate governance, compliance, risk management, and overall business management.
The Auditors and the Internal Auditing Department cooperate closely with each other, and the Internal Auditing Department provides the Auditors with regular reports about the status of internal controls. The Auditors, Internal Auditing Department, and Accounting Auditors make conscientious effort in conducting proper and strict accounting audits by holding meetings every quarter and whenever necessary to actively exchange their opinions and information.

5. External Directors and External Auditors

Mori Seiki has two External Auditors.
The External Auditors have no special financial interest in relation to Mori Seiki, whether in terms of personal/business relations, trade or otherwise, and maintain a highly independent status.
Each of the External Auditors debate and decide the auditing policy, the auditing plan, the auditing method, and the allocation of duties, in the Board of Auditors in cooperation with the Corporate Auditor, and auditing is implemented throughout the year based on this. They also exchange opinions regularly with the top management and Directors, and conduct audits by visiting actual sites such as plants and group companies. Information is shared with the Accounting Auditor by holding regular meetings.

Mori Seiki has sought to secure a robust auditing system with a team of three Auditors including two External Auditors, and has strengthened monitoring of the management functions. The two External Auditors are designated as Independent Directors, and in our judgment implementing the auditing from an independent and fair standpoint by External Auditors gives us a governance system that functions adequately to secure objectivity and neutrality without appointing External Directors. Therefore, we are maintaining the present system.