Fancl : Corporate Governance Report updated on July 5, 2022

FANCL Corporation

CORPORATE GOVERNANCE

Last updated on July 5, 2022

FANCL Corporation

Kazuyuki Shimada, President & CEO, Representative Director

Contact: General Affairs Department, Administration Headquarters

Tel: [phone]

TSE Code: 4921https://www.fancl.jp/en/

I. Basic Views on Corporate Governance, Capital Structure, Corporate Profile and Other Basic

Information

1. Basic Views

FANCL positions full and proper corporate governance as an important management issue to enable us to become a corporation that our shareholders and all our stakeholders can rely upon. While closely following corporate ethics and the law, our basic policy calls for the enhancement of our internal control systems (which include risk management), the efficiency of management and the maintenance of transparency.

In addition, based on the principles below, we will work to develop and improve internal control based on this philosophy.

• "Can achieve more"

The FANCL Group is a corporation that truly cares for people, and seeks to eliminate customers' "negative" experience and pursue gentleness, safety, and assurance. We always put ourselves in customers' shoes and the happiness of our customers forms the basis of everything we do.

Reasons for Non-compliance with the Principles of the Corporate Governance Code [Updated]

The Company has implemented all principles of the Corporate Governance Code after the revision that took effect in June 2021.

Disclosure Based on the Principles of the Corporate Governance Code [Updated]

The following information is based on the revised code as of June 2021.

(Includes principles for the Prime Market, which will take effect from April 4, 2022.)

(Principle 1.4) Cross-shareholdings

The Company does not have any cross-shareholdings. Furthermore, it is our basic policy not to have any cross-shareholdings unless the significance of such holdings is recognized. We will exercise the voting rights of the shares that we are deemed to hold appropriately, after examining the content of the agenda items to be voted upon and judging whether such items contributes to the improvement of shareholder value.

(Principle 1.7) Related Party Transactions

When the Company is to conduct related party transactions and/or transactions involving conflict of interest, the Board of Directors first deliberates on important matters such as the transaction conditions and makes its decisions based on our board meeting criteria.

(Supplementary Principle 2-4-1) Ensuring Diversity of Core Human Resources 1. Ensuring diversity in the appointment of core human resources

Under the slogan of "Embrace differences" FANCL Group seeks to continually generate new value by ensuring that diverse talent with various values and viewpoints demonstrate their uniqueness and skills.

In FY Mar/2022, the Group formulated the FANCL Group Human Rights Policy, and we will endeavor to have not only our employees but also by all of our business partners involved in our products and services to understand this policy. We recognize the importance of respecting human rights in all of our activities and will request compliance with it.

We respect and acknowledge the diversity of gender, age, disabilities, values, ways of thinking, and ways of working, and strive for teamwork in an environment where each individual can shine with vitality.

One of the 7 Major Policy Challenges of the 3rd Medium-Term Management Plan, "Forward 2023" is to "Implement human resource development and utilization," with the goal of increasing the ratio of female managers to 50% and female senior managers to 30% by FY Mar/2024.

*Senior managers refers to manager positions (excluding directors) that are Division Manager or higher. *The 3rd Medium-Term Management Plan is available on our website. https://www.fancl.jp/en/ir/management/plan/

2. Current status and future voluntary and measurable goals for ensuring diversity of core human resources, etc. Ratio of female managers

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FY Mar/2020: 43.6%;	FY Mar/2021: 46.5%;	FY Mar/2022: 47.1%	FY Mar/2024 target: 50%
Ratio of female senior managers
FY Mar/2020: 23.1%;	FY Mar/2021: 22.5%;	FY Mar/2022: 25.3%	FY Mar/2024 target: 30%

3. Human resource development policy and internal environment improvement policy to ensure diversity of core human resources ［Human resource development policy］

The Company has established "FANCL College," an in-house institution specializing in education, to provide education tailored to the Company's situation, while developing various systems to enable it to respond quickly to its surrounding environment. The Company is striving to develop the next generation of human resources who can operate on a global stage, and who possess a high level of expertise.

For more information on our specific initiatives for human resources development and utilization, please refer to our website. https://www.fancl.jp/en/sustainable/society/workstyle/rearing/

［Improvement of the internal environment］

We support employees' ability to balance work and family life by allowing them to work in a variety of ways, regardless of their circumstances relating to gender, childbirth, childcare, nursing care, or other.

For details, please refer to "III. 3. Measures to Ensure Due Respect for Stakeholders" in this report and our website. Promotion of Work-Life Balance: https://www.fancl.jp/en/sustainable/society/workstyle/rearing/index.html

ESG Data Book:https://www.fancl.jp/en/sustainable/data/esgdata/

The Company does not set or disclose targets for the promotion of non-Japanese employees and mid-career hires to management positions at this time, as they are appointed on the same conditions as new graduates, regardless of nationality or hiring period. However, in order to achieve our long-term vision "VISION 2030," we are more actively recruiting non-Japanese employees and are promoting globalization within the Company, as well as employee training, in preparation for full-scale growth overseas.

*For detailed information on the number of employees, number of non-Japanese employees, number of mid-career hires, ratio of male to female employees, and diversity and work styles, please refer to the ESG Data Book posted on our website.

https://www.fancl.jp/en/sustainable/data/esgdata/

(Principle 2.6) Roles of Corporate Pension Funds as Asset Owners

The Company has prepared basic policies and operational guidelines to ensure the safe and effective management of our reserve funds. After we grant permission to the trustees who will manage these, we periodically monitor their operations. In addition, by individually delegating to each investment management institution the selection of investees and the exercising of voting rights, there is no conflict of interest between the beneficiaries of our corporate pension and the Company. We have appointed our Human Resources Department to be the department in charge of our Group's corporate pension fund. The Department has acquired the necessary business knowledge by attending various seminars held by the investment institutions.

(Principle 3.1) Full Disclosure

1. Please see "I. 1 Basic Views" in this report for information about our management philosophy.
   For information about our Medium-Term Management Plan, please visit our website. (https://www.fancl.jp/en/ir/management/plan/index.html)
2. Please see "I. 1 Basic Views" for information about our basic policy concerning corporate governance.
3. Please see "II.1 Director Remuneration" for information about our policies for deciding the remuneration, etc., of Directors and Audit & Supervisory Board Members.
4. In the appointment of our Senior Management and in the nomination of Directors and Audit & Supervisory Board Members, we do not discriminate on the grounds of gender, age or nationality. We carefully consider the personal qualities and business insights of each person, and it is our policy to appoint people who properly understand and practice our Group's founding philosophy of "Eliminating the 'negatives' with a sense of justice" and our management philosophy of "Can achieve more" and can fulfill their duties and responsibilities. Candidates are considered and discussed by the Nomination and Compensation Committee (of which the Chairperson and the majority of Committee members are Independent Outside Directors) which then refers the nominees to the Board of Directors for final decision-making. With regard to outside members, we appoint people who possess a high level of insight and specialized expertise, and who can supervise and advise on management from an objective standpoint based on a wealth of experience.

The process of dismissal of Senior Management is as follows. If the qualities stipulated in the appointment policy are found to be lacking, then following the advice and recommendations of the Nomination and Compensation Committee, the person is dismissed following comprehensive judgment by the Board of Directors.

1. The reasons for the nomination of Director and Audit & Supervisory Board Member candidates are published in our Convocation Notice.
   https://www.fancl.jp/en/ir/stock_meeting/index.html

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(Supplementary Principle 3-1-3) Sustainability Initiatives 1. Sustainability Initiatives

Since our founding in 1980, FANCL Group has continued to grow as a company that provides solutions to social issues. Our founding philosophy of working to eliminate the 'Negatives' with a sense of justice, has been carried on through to the present day. In 2018, we developed the FANCL Group's Sustainable Declaration: "Building a Bright Future Together" to express our desire to contribute to building a sustainable society in line with the Sustainable Development Goals (SDGs) , and we are engaged in a variety of initiatives. Furthermore, based on our Medium-Term Management Plan "FORWARD 2023," -Conquer Adversity and Shape our Future, which commenced in FY Mar/2022, we have set three priority themes - Environment, Healthy Living, and Local Communities and Employees

• with the aim of contributing to the realization of a sustainable society and achieving sustainable growth for the Group. We have organized our priority issues and set quantitative targets to be achieved.
  *For details of FANCL Group's Sustainable Declaration, please refer to our website. https://www.fancl.jp/en/sustainable/guideline/

In addition, in October 2021, we established a Sustainability Committee with the aim of placing sustainability at the core of our management and improving our corporate value over the medium to long term by achieving the goals we have set for our priority themes.

2. Investments in human capital and intellectual property, etc., with an awareness of consistency with management strategies and issues

Investment in human capital

One of the seven major policy challenges of the 3rd Medium-Term Management Plan, "Forward 2023," is to "Implement human resource development and utilization". FANCL College, our in-house education and training division, is playing a central role in this effort, focusing on producing human resources who can embody our philosophy, who can lead the next generation, who can work globally, who can quickly adapt to the environment surrounding the company (SDGs, IT, Digital human resource training), and who can learn autonomously.

The annual education and training cost per employee (domestic consolidated) for FY Mar/2022 was ¥126,297, and the cost excluding the personnel cost of "FANCL College," the in-house education and training division, was ¥50,133.

For details, please refer to the ESG Data Book posted on the Company's website. https://www.fancl.jp/en/sustainable/data/esgdata/

Investment in Intellectual Property

FANCL's Research Institute conducts research and development activities in the fields of beauty and health, from basic research to product development, while constantly keeping in mind FANCL's corporate philosophy of "eliminating negatives" through science. In the 3rd Medium-Term Management Plan, we have set the goals of (1) accelerating business strategies, promoting research on solutions to eliminate negatives and (2) developing new products utilizing Kirin Group technologies and materials. In addition to tackling individual research themes with a broad perspective and flexible thinking, we also actively engage in joint research with universities, manufacturers, and various research institutions in Japan and overseas, with R&D expenses totaling ¥3,492 million in FY Mar/2022. (Cosmetics Business: ¥1,826 million; Nutritional Supplements Business: ¥1,499 million; Other Businesses: ¥166 million). In addition, the Research Strategy Office, a support division of the Research Institute, protects the inventions and research results created as intellectual property (patents) and actively applies for patents. 65 domestic and 5 foreign patents were applied for in FY Mar/2022.

With regard to the application, acquisition, and maintenance of trademarks, the Legal Department discusses future product development and overseas expansion plans with the business divisions and affiliated companies as appropriate, and carries out procedures in consideration of cost effectiveness. As of March 2022, FANCL Group had acquired approximately 2,600 trademark rights in 54 countries and regions. In addition, from the perspective of brand protection, we are also working on countermeasures against counterfeit products, mainly in Asia. We consider intellectual property to be an important management asset, and we aim to maximize the value of our intellectual property through its effective utilization.

3. Enhancing the quality and quantity of disclosure of the impact of climate change-related risks and opportunities on the Company's business activities and earnings, based on the TCFD framework or equivalent framework

FANCL Group announced its support for the recommendations of TCFD* in October 2020. We will take serious measures to counter climate change, deepen our understanding of the opportunities and risks that affect our business, and proactively disclose our efforts to address them.

The TCFD recommendations include disclosure of information on each of the following topics related to climate change: governance, business strategy, risk management, and indicators and targets. Along with disclosing information in line with these four disclosure recommendations, we conducted scenario analysis and assessed the risks and opportunities associated with climate change.

*For more information, please refer to our website. https://www.fancl.jp/en/sustainable/environment/tcfd/

(Supplementary Principle 4.1.1) Scope of delegation to Management

We have established the Board of Directors' meeting criteria, clarified the matters to be resolved at the meetings of the Board, and have delegated other decisions to Management. Management carries out their duties based on their authority to make decisions, depending on the size and nature of the transactions and operations concerned.

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(Principle 4.9) Independence Standards and Qualifications for Independent Outside Directors

On the premise that the independence of our Outside Directors is able to satisfy the requirement of the Tokyo Stock Exchange's requirements for independence, we appoint people to the position of Outside Director who have a high level of expertise and abundant experience, and who can actively come up with proposals in response to the management issues of the Company, and who can provide management oversight functions in their position.

(Supplementary Principle 4.10.1) Independence, Authority, and Role of Nomination Committee or Remuneration Committee

The Company has established the Nomination and Compensation Committee under the Board of Directors, with the Chairperson and the majority of Committee members being Independent Outside Directors, in order to ensure the fairness, transparency and objectivity of the procedures and to have independent Outside Directors proactively participate in the nomination of candidates for Directors and decisions on compensation for Directors. The Committee examines the appropriateness of the content of the proposals made by the President and Chief Executive Officer to the Board of Directors for the nomination of the Company's Directors, Executive Officers, special officers, and representative directors of the Company's consolidated subsidiaries (hereafter, "Directors, etc."), and reports the results to the Board of Directors. In addition, as matters related to the remuneration of Directors, etc., the Committee examines the basic policy of the remuneration systems, the design of specific remuneration systems, and the appropriateness of the content of remuneration (including basic remuneration and stock-based remuneration) for each individual Director, etc., and reports the results to the Board of Directors. The Committee also deliberates on the skills that the Board of Directors should have and the skills of each Director in light of the corporate strategy.

(Supplementary Principle 4.11.1) Stance on Balance among Knowledge, Experience, and Skills, and on Diversity and Size of the Board of Directors, and Policies and Procedures for the Appointment of Directors

Our Articles of Incorporation permit us to appoint up to 15 Directors and up to 5 Audit & Supervisory Board Members.

We currently have 9 Directors, of which 4 are Outside Directors. We appoint Directors who have various forms of knowledge, experience and abilities for the execution of their duties, and who can function effectively in meetings of the Board of Directors.

In the appointment of our Directors, we do not discriminate on the grounds of gender, age or nationality. We carefully consider the personal qualities and business insights of each person, and it is our policy to appoint people who properly understand and practice our Group's founding philosophy of "Eliminating 'Negatives' with a sense of justice" and our management philosophy of "Can achieve more" and can fulfill their duties and responsibilities. Candidates are considered and discussed by the Nomination and Compensation Committee (of which the Chairperson and the majority of Committee members are Independent Outside Directors) which then refers the names to a meeting of the Board of Directors for final decision-making. With regard to Outside Directors, we appoint people who possess a high level of insight and specialized expertise, and who can supervise and advise on management from an objective standpoint based on a wealth of experience. The Nomination and Compensation Committee deliberates on the skills that the Board of Directors should have and the skills of each Director in light of the corporate strategy and reports its findings to the Board of Directors. For details, please refer to the Convocation Notice of the 42nd Ordinary General Meeting of Shareholders.

*For more information, please refer to our Convocation Notice. https://www.fancl.jp/en/ir/stock_meeting/index.html

(Supplementary Principle 4.11.2) Concurrent Positions of Directors

Important concurrent positions of Directors and Audit & Supervisory Board Members are published in our Convocation Notice.

(Supplementary Principle 4.11.3) Summary of the Results of Evaluation of the Effectiveness of the Board of Directors

Every year beginning from FY Mar/2016, each Director and Audit & Supervisory Board Member conducts a self-evaluation of meetings of the Board of Directors, so that we can gain a better understanding of the state of the Board and enable it to operate more effectively. The evaluation is conducted by sending a questionnaire survey to each Director and Audit & Supervisory Board Member that asks them about general matters relating to the Board of Directors, such as the roles and responsibilities of the Board of Directors, its size, composition and diversity, and its state of operation, the role and activities of the Outside Directors , as well as the support system and training for Directors, and communication with stakeholders. The results of the questionnaire were assessed.

In the Board evaluations of FY Mar/2022, we determined that overall, the Board of Directors is operating appropriately, and that the effectiveness of the Board is being maintained.

Result of FY Mar/2022 Board evaluations

1. (In continuation from the previous fiscal year) FANCL's strengths are rooted in its founding philosophy and management philosophy, and these form the starting point for discussions at meetings of the Board of Directors. Meetings of the Board of Directors are held under the leadership of the Chairperson of the Board, in an environment which enables the expression of free and frank opinions. Outside directors are actively encouraged to express their opinions, and executive officers positively respond to issues raised by outside directors and reflect their opinions in the management of the Company.
2. The composition of the Board of Directors is appropriately balanced between executive and non-executive directors. The Outside Directors have different business experience and areas of expertise, ensuring a diversity of perspectives. Although there is a discussion about increasing the number of outside directors to a majority of the Board of Directors, the current composition serves to ensure the effectiveness of the Board of Directors.
3. Themed sessions, advance briefing sessions on matters to be resolved, and facility tours, are conducted in a comprehensive and detailed manner, bridging the information gap between internal and external directors and invigorating the discussions during the Board of Directors' meetings.

It was recognized that the Board of Directors should work on the following areas.

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• Further increase diversity, including the appointment of female directors from within the Company
• Implement the regular monitoring of management issues discussed at the Board of Directors' meetings
• Expedite the deliberation of business plans for the new fiscal year

Regarding issues recognized in the FY Mar/2021 evaluation

Efforts were made to improve the following issues identified in the previous fiscal year.

1. Activation of discussions on important management issues

After providing sufficient information and advance explanations of matters to be resolved to outside directors, the Board of Directors were able to focus their discussions on a number of important management issues, which was evaluated as leading to effective discussions and improvement of important management issues at the Board of Directors' meetings.

2. Revision of the content of the report on business execution

The content of the report and the format of the materials were revised, which was evaluated as an improvement in clarity. On the other hand, it was pointed out that there were some months when not enough time was provided for reporting, and efforts will be made to ensure sufficient time is provided to achieve improvements in the future.

Based on the results of this evaluation, we will strive to ensure and improve the function and effectiveness of the Board of Directors.

(Supplementary Principle 4.14.2) Measures for Training of Directors and Audit & Supervisory Board Members

When newly appointed Outside Directors or Outside Audit & Supervisory Board Members take their positions, in addition to explaining to them our management philosophy, business details, management strategy, the business environment and issues surrounding our operations, we use outside training courses to enhance their knowledge of their legal roles and duties.

In addition to this training, we make efforts annually to ensure that all Directors and Audit & Supervisory Board Members acquire necessary knowledge and we promote the understanding of their roles and responsibilities. This is done through holding study sessions run by lawyers who cover the Companies Act and the latest situations. We also provide appropriate information about corporate governance and other areas that is necessary, and we endeavor to promote their acquisition of required knowledge and understanding of their roles.

(Principle 5.1) Policy for Constructive Dialog with Shareholders

The systems we have put in place and the initiatives we have taken to encourage constructive dialog with shareholders are as follows.

• In our dialogue with individual shareholders, we place the highest priority on the General Shareholder Meeting. By holding the

Meeting on Saturdays or Sundays it is easier for shareholders to attend, so many can be present. At the Meeting, we carefully explain our future business strategies and business prospects, using videos for ease of understanding, and the Director in charge or the Chairman can answer questions from the shareholders. Starting from the 2022 General Shareholder Meeting, we have streamed our General Shareholder Meetings live via the Internet.

• Business Management Division Directors and Executive Officers engage in dialogs with analysts, institutional investors and others.
• Individual discussions with analysts and institutional investors are held, and the details are reported to our Directors and Executive Officers.
• We hold financial results briefings for analysts and institutional investors (4 times a year) in which the Representative Director explains the outcomes.
• Each of our divisions (IR, Corporate Planning, General Affairs, Accounting, and Legal) collaborate in the release of financial results and in the General Shareholder Meeting and other events, and strive to deliver accurate information.

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