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Transition into a Company with an Audit and Supervisory Committees

Structure and Merits of a Company with an Audit and Supervisory Committee

Image:Company with a Corporate Auditor System - Company with an Audit and Supervisory Committee

Merits of the Transition for Capcom

  • 1 Voting rights in Board of Directors meetings for directors who are Audit and Supervisory Committee members
  • 2 A portion of important business administration matters can be entrusted to directors
  • 3 Adds propriety audits to legal audits
  • 4 Audit and Supervisory Committee members can engage in systematic audits using internal control systems

Capcom aims to maximize long term corporate value based on its growth strategy. However, in order to ensure stable corporate management, Capcom believes it is essential to have a management base which can engage in thorough risk management. As such, on June 18, 2016 Capcom transitioned from a company with a corporate auditor system to a company with an audit and supervisory committee in order to strengthen the monitoring function of Board of Directors' meetings to further strengthen our management base, as well as to functionally expand management via fast decision making and increase understanding among overseas investors.

1. Structure

A company with an audit and supervisory committee is one type of organizational design for a public company introduced with the revisions to the Companies Act made in 2014.

In a company with an audit and supervisory committee, there are no auditors or auditor system. Instead, directors who are Audit and Supervisory Committee members are selected and an Audit and Supervisory Committee is established comprised of a majority of external directors. In other words, it is like a company with a corporate auditor system which has given Board of Directors meeting voting rights to its auditors. This type of structure makes it possible to further strengthen the monitoring function of Board of Directors' meetings.

2. Merits

This transition offers the four merits listed in the table above to Capcom.

As concerns merit 1, not only is there no such corporate auditor system in Europe and North America as found in Japan, auditors have no voting rights in Board of Directors meetings. As such, overseas institutional investors and others found it difficult to understand the monitoring function of our Board of Directors meetings. Compared with the corporate auditor system, a company with an audit and supervisory committee is a much easier to understand organizational design.
As concerns merit 2, by narrowing down Board of Directors meeting agenda items to highly important topics such as management policies and business strategy, management can be developed more quickly and flexibly, and external directors can focus further on their supervisory function.
Merit 3 not only gives the Audit and Supervisory Committee the right to state its opinions on director selection and remuneration at general shareholder meetings but also strengthens Capcom’s risk management through the monitoring of the administration of business matters.
As regards merit 4, as auditors are independent, they fundamentally engage in their own auditing, but Audit and Supervisory Committee members can order staff in the Internal Audit Department, an organization under their direct control, to implement an internal audit, and can scrutinize the resulting report. As the scope of business grows larger, such as through the expansion of the number of subsidiaries both domestic and international, the auditing function grows stronger than having several corporate auditors check the entirety of the companies in a group.

                                              

Message from the Chairman of the Audit and Supervisory Committee

Photo: Takayuki Morinaga, External Director, Chairman of the Audit and Supervisory Committee

Serving in the role of risk control for
company growth

Takayuki Morinaga

External Director
Chairman of the Audit and Supervisory Committee

"It is said that the transition to a company with an audit and supervisory committee in order to further the growth strategy was necessary, but what is lacking now?" "In order to strengthen monitoring functions, why is a company with a nominating committee not acceptable?" — As this is an important change to the company’s organizational design, there were many questions from the Board of Directors and investigating the necessity of this move was discussed over many hours. Initially, there were concerns about what it meant to so easily transition to the organizational design in fashion today.
However, we have reached the conclusion that a company with an audit and supervisory committee is the best method to further enhance governance and increase corporate value.

In my experience managing risk as part of corporate management, a company’s fate is determined by how quickly it can gather data both internally and externally. For global companies, in addition to auditing the lawfulness of the administration of business matters, the necessity of auditing the propriety of the administration of business matters is increasing. This is because business risk expands in proportion to the implementation of a company’s growth strategy, which also significantly influences corporate value. Because of this, , we have established an Internal Audit Department under the direct control of the Audit and Supervisory Committee in order to make it possible to gather information and audit it in an agile manner. It has also become clear in recent years, through corporate scandals both in Japan and overseas, that the presence or absence of a system like this significantly influences the effectiveness of risk management. However, in "auditing of propriety," the Audit and Supervisory Committee must have the ability to appropriately evaluate propriety, which I feel is a large responsibility.

In addition, as concerns a company with a nominating committee, another possible organizational design in the Companies Act is North American-style "monitoring" (with a supervisory body). We found this differs from the conventional Japanese-style "management" (with an ultimate decision-making body concerning the administration of business matters) not only in terms of the composition of directors but also the corporate culture, and arranging these would have required a significant amount of time.
The Nominating Committee and Remuneration Committee established as part of our transition are advisory committees, the Audit and Supervisory Committee holds the right to express its opinion at general shareholders meetings concerning director selection and remuneration. We acknowledge that this will serve as a strong check and balance function and that at this time a company with an audit and supervisory committee is the best for Capcom.

Conversely, while obvious, no organization is perfect. I do not mean this in the sense of "ploughing the field and forgetting the seed" but rather that what is important is to what extent we make use of this system to improve Capcom’s governance system. It is my desire to fulfil my role of risk control in Capcom’s growth strategy based on a firm understanding of the balance between execution and supervision and the independence of auditing as discussed at the Board of Directors.

Ratio of Internal Directors to External Directors

Graph: Ratio of Internal Directors to External Directors

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