Corporate Governance

Kawasaki Heavy Industries, Ltd. (KHI) has established a corporate governance system that accommodates the KHI Group's operations, with the Board of Directors and auditors playing central roles in governance, as they continuously work to improve this system. The basic stance of the KHI Group as a whole regarding corporate governance is to endeavor to increase the Group's corporate value through the highly transparent, efficient, and sound management of its operations as the Group works to build solid relationships with all of its stakeholders, including shareholders, customers, employees, and the community.

The Company adopts a statutory auditor system of corporate governance and has appointed an independent auditor. The Chairman serves as the presiding officer of the Board of Directors, which consists of 12 directors (authorized number: 15 directors). The Company has four corporate auditors and has established a Board of Auditors. In addition to the Board of Directors, the Company has established a Management Committee and a Group Executive Officer Committee, both of which are composed of representative directors and managers responsible for major subsidiaries, while the Group Executive Officer Committee also includes executive officers. To reinforce the oversight and monitoring function of the Board of Directors with respect to management overall, the Company appoints directors who do not have roles in the execution of operations. With regard to corporate auditors, to ensure objectivity and neutrality in the management oversight function, the Company appoints two outside corporate auditors with no business relationships or other vested interests in the Company.

To ensure the reliability of financial reports, the Company appoints internal corporate auditors who have considerable knowledge of finance and accounting. The internal corporate auditors and outside corporate auditors share information and work to enhance the management oversight function. For these reasons, the company does not appoint outside directors.

The Board of Directors appoints executive officers to conduct business operations.

The Board of Directors decides the basic objectives and policies for the execution of operations under the management plan and promptly issues directives for implementation to all executive officers. The Group Executive Officer Committee ensures that the objectives and policies are implemented. The Management Committee, which consists of representative directors and managers responsible for major subsidiaries, and the Board of Directors periodically follow up on the status of implementation of the management plan. The Company clearly defines the management responsibility of directors by means of incentivebased compensation that reflects business performance and a oneyear term of office for directors.

The Management Committee thoroughly discusses important management issues and confers with the Board of Directors concerning prescribed matters. As a rule, the Management Committee meets three times a month to discuss management policy, management strategy, important management issues, and other matters from the perspective of the Group as a whole.

The Auditing Department, an internal auditing unit with a staff of 10, strives to improve internal control functions by such means as the periodic conducting of audits to confirm whether operations are executed appropriately in accordance with laws, regulations, and the Company's internal rules in all of the Group's management activities. Also, the corporate auditors and the Auditing Department have monthly meetings and share information on the results and findings of their respective audits.

Concerning statutory auditing, the corporate auditors attend meetings of the Board of Directors and the Management Committee, examine important documents, and examine the state of business operations and financial assets through periodic meetings with the representative directors and audits of KHI's divisions and subsidiaries. In addition, two outside corporate auditors ensure the objectivity and neutrality of the management oversight function. The full-time corporate auditors and outside corporate auditors share information and strive to enhance the management oversight function.

With regard to independent auditing, the Company undergoes audits of its financial statements conducted by the Company's independent auditor, KPMG AZSA & Co. The corporate auditors and the Board of Auditors receive an outline of the audit plan and a report on important audit items from the independent auditor, and the Board of Auditors explains the Company's auditing plan to the independent auditor. The corporate auditors and the Board of Auditors periodically (twice a year) receive reports on the results of independent auditing and collaborate with the independent auditor by exchanging information and opinions. Also, the corporate auditors take part in the audits performed by the independent auditor as necessary and receive reports from the independent auditor concerning audits as appropriate.

The Company has two outside corporate auditors.

Kenzo Doi, an outside corporate auditor, has no vested interest in the Company other than a retainer agreement between the Company and Kobe Kyobashi Law Office, where he serves as a representative. The Company enhances the auditing function by taking advantage of Mr. Doi's deep knowledge and diverse experience as an attorney, and obtaining his fair and independent opinions.

The Company enhances the auditing function by taking advantage of Michio Oka's profound knowledge and diverse experience as a corporate officer, and obtaining his fair and independent opinions as an outside corporate auditor. Although in the past Mr. Oka served as a corporate officer of Kawasaki Kisen Kaisha, Ltd. and its affiliated companies, since there is essentially no capital relationship between Kawasaki Kisen and the KHI Group, and Kawasaki Kisen accounts for an insignificant portion of the KHI Group's net sales, Mr. Oka has no vested interest in the Company.

In accordance with Article 427, Paragraph 1 of the Japanese Corporate Law, and Article 43 of the Company's Articles of Incorporation, the Company has entered into contracts with the outside corporate auditors that limit the scope of liability of the outside corporate auditors to ￥10 million or the amount stipulated in Article 425, Paragraph 1 of the Japanese Corporate Law (an amount equal to two years' compensation paid to the corporate auditors), whichever is higher.

The Company is enhancing its internal control systems as described below and plans to review internal control systems as necessary, in light of changes in the environment surrounding the Company and other considerations.

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