1. Corporate governance system

Outline

Epson's basic approach to corporate governance is geared toward

• continuously increasing enterprise value; and
• reinforcing business checks and balances, practicing sound corporate ethics, and ensuring business transparency and health.

The Company has a board of directors and a board of statutory auditors. The board of directors, which had ten members as of the date the Annual Securities Report was submitted, meets once a month and convenes extraordinary meetings as needed. The board of directors makes decisions regarding basic management policies, key business operations, period-end closing, disclosure timeframes, and other important issues. Various management bodies have been created to advise the president, deliberate issues to facilitate decision-making, and oversee and enhance the execution of business.
The main corporate management bodies and their aims are as follows:

Corporate Strategy Council/ Corporate Management Meeting

The Corporate Strategy Council and corporate management meetings are convened to thoroughly deliberate matters before they are referred to the board of directors.

Trust-Based Management Council

The Trust-Based Management Council meets to discuss compliance management, focusing primarily on internal control systems, and to deliberate issues relating to risks and the provision of internal controls.

Nomination Committee/ Compensation Committee

The Nomination Committee screens board of director candidates, and the Compensation Committee deliberates director remuneration issues.

Epson's system of corporate governance, including the elements above, is as follows:

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Reasons for adopting the current system of corporate governance

Epson is looking to initiate fresh growth by developing and executing strategic measures based on the SE15 Second-Half Mid-Range Business Plan (FY2012-14), which is aimed at achieving the goals set forth in Epson's SE15 Long-Range Corporate Vision.

As it moves forward on the new mid-range business plan, the Company believes that it will be important to have a governance system that strikes a good balance between business speed and efficiency on the one hand and effective oversight of management on the other.
To achieve business speed and efficiency, the Company employs an agile, practical management organization wherein directors who understand the situation inside the Company simultaneously oversee multiple key business operations and always make decisions based on what is best for the Epson Group as a whole. Meanwhile, to achieve effective oversight of management, the Company has selected one outside director to sit on the board and has engaged independent outside auditors who dispense management advice not only from a compliance perspective but also from a broader business perspective.

Internal control system and risk management improvements

Epson considers its Management Philosophy to be its most important business concept. To realize the mission stated in the Management Philosophy, the Company established "Principles of Corporate Behavior," rules for proper business conduct that are shared across the Group, worldwide. Departments within Epson pursue improvements to internal controls based on the Principles of Corporate Behavior. These improvements are reported to the Trust-Based Management Council, which is attended by all directors and auditors. By doing this, Epson is taking action to steadily improve the level of internal control for the entire Group.

Business execution system

Epson is implementing a system that will ensure the appropriate and efficient execution of business. To that end, Epson has established regulations governing each job function, the division of operational duties, and the management of affiliated companies while distributing power and authority across the entire Group. To ensure the appropriateness of corporate activities, affiliated companies must report or receive prior approval from the parent company for changes in management regulations. Regulations at affiliates that meet certain criteria are put on the agenda for discussion at the parent company's board meetings, thereby creating a system of business oversight for the Group.

Responsibility for the business execution systems of affiliates lies with the person responsible at the relevant operations division, and support for cross-organizational projects and the like is provided by the respective corporate departments.
Personnel responsible for business operations must report to the board of directors on the items below at least once every three months.

• Current business performance and performance outlook
• Risk management responses
• Status of key business operations

Safeguarding and management of work-related information

Information on business operations is safeguarded and managed under regulations governing, among other things, document control, management approval, and contracts, with directors and statutory auditors reviewing these and other relevant documents on an ongoing basis.
Regulations include the Basic Information Security Regulation, which helps to prevent leaks by providing Group-wide rules for managing information according to the level of sensitivity.

Compliance-based management

Epson has established Principles of Corporate Behavior for putting its Management Philosophy into practice, as well as regulations that spell out the compliance-based management requirements that underpin the principles, and an organizational compliance framework.
The president holds overall responsibility for management's legal compliance, with the persons responsible at each operations division in charge of compliance management at their respective businesses and subsidiaries. Head Office supervisory departments cooperate with the divisions to drive cross-organizational projects. Epson has installed a legal compliance hotline and other counseling services for reporting any violations. There is also web-based and other in-house compliance training for employees, including those at subsidiaries. The Trust-Based Management Council was established to deliberate legal compliance issues under the leadership of the president. The Trust-Based Management Council manages the overall state of compliance at Epson, including compliance with laws, internal regulations, and corporate ethics, as well as approaches to key areas of compliance. Auditors also take seats on the council to verify the details of legal compliance programs.
The president periodically reports to the board of directors on compliance management issues and formulates appropriate measures to respond to these issues.
Epson's Principles of Corporate Behavior categorically state that the Company will not be involved with anti-social elements in any way.

Risk management

Epson's risk management system is founded on regulations that define the organization, procedures, and other key elements of this system.
Overall responsibility for risk management resides with the president, with the persons responsible at each operations division in charge of risk management at their respective businesses and subsidiaries.
The Trust-Based Management Council was established to deliberate risk management issues under the leadership of the president. The Council identifies important Group risks and manages programs to control them. When major risks become apparent, the president leads the entire company in mounting a swift initial response in line with Epson's prescribed crisis management program.
The president periodically reports to the board of directors on risk management issues and formulates appropriate measures to respond to these issues.

2. Audit system

Internal audit

Epson's compliance system guards against potential legal and internal regulatory violations in departmental operations, and the Audit Office reports directly to the president the results of routine internal audits, including those conducted at Epson subsidiaries. The Audit Office evaluates the effectiveness of the governance process and requests improvements where needed.

Statutory audit

Epson has appointed three outside statutory auditors to its five-member board of statutory auditors to ensure greater independence and transparency of audits.
Based on corporate regulations governing auditors and audit procedures, statutory auditors have the authority to conduct hearings with directors and other personnel whenever they deem such hearings necessary. Statutory auditors are also authorized to attend important business meetings, which enables the auditors to conduct audits based on the same information as that available to directors. Statutory auditors also routinely review important documents related to management decision making.
Epson has established an Audit Staff Office with specialized personnel to assist the statutory auditors in their duties. The views of the board of statutory auditors are given a great deal of weight in the evaluation and transfer of personnel assigned to this office.
To improve the effectiveness of their audits, statutory auditors consult on a regular basis with the internal Audit Office and independent public accountants.
Statutory auditors hold regular meetings with representative directors to directly assess business operations.

3. Outside directors and outside statutory auditors

View on independence

Epson, taking Tokyo Stock Exchange requirements for independent directors under advisement, selects outside directors and outside statutory auditors who do not have potential conflicts of interest with general shareholders. The outside director and the outside auditors that are currently engaged all meet these requirements.

Outside directors

Epson's board has one outside director. No special interests exist between the Company and the outside director. The outside director, Toshiharu Aoki, was an executive at Nippon Telegraph and Telephone Corporation and at NTT Data Corporation. Epson does not currently have a business relationship with Nippon Telegraph and Telephone Corporation. Although Epson does have a business relationship with NTT Data Corporation, which Epson has engaged primarily to build internal information systems, the transaction amount is insignificant when compared to the net sales of both companies.

Outside statutory auditors

Each of Epson's three outside statutory auditors draws on a wealth of experience and keen insight when conducting audits, and offers frank opinions to the board of directors. No special interests exist between the Company and any of the outside statutory auditors.
Outside statutory auditor Yoshiro Yamamoto is a former Fuji Bank, Ltd. (now Mizuho Corporate Bank, Ltd.) executive who has been retired from the bank for 10 years. He was invited to become an auditor because he fit the needs of the Company and for no other reason, such as a recommendation by Fuji Bank, Ltd. Net interest-bearing liabilities account for only a small percentage of the Company's total assets, and the Company's dependence on bank loans is low. Furthermore, the Company deals with multiple financial institutions and does not depend on Mizuho Corporate Bank, Ltd. for a high proportion of its borrowing. There is therefore no special relationship between the Company and Mizuho Corporate Bank, Ltd., and Mizuho Corporate Bank, Ltd. does not influence Epson's decision-making.
Outside statutory auditor Tatsuhiro Ishikawa is an attorney, but the Company has never engaged him to perform duties under an advisory agreement or under any other separate agreement, nor does it plan to do so in the future.
Outside statutory auditor Kenji Miyahara was an executive at Sumitomo Corporation. Although the Company trades with Sumitomo Corporation in materials and so on, the transaction amount is insignificant when compared to the net sales of both companies.
There is no particular system of coordination between outside statutory auditors and audit functions in the Group; however, statutory auditors actively consult with the internal Auditing Office and independent public accountants. Each time an issue is identified by an audit, details are passed on to the outside statutory auditors to keep them informed as appropriate. Moreover, statutory auditors take seats on the Trust-Based Management Council, which manages the operational effectiveness of internal controls, and they actively seek explanations from departments where there has been an important incident involving internal control. Statutory auditors are thus kept abreast of operational issues and the status of measures to address those issues.