Corporate Governance

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Corporate Governance

Corporate Governance Management Structure

The Corporate Governance System

IHI defines corporate governance as a system designed to maximize corporate value by increasing efficiency of management to leverage the company's capabilities as much as possible. Given this definition, recognizing that decisionmaking within industry must follow the law and appropriate procedures and the importance of systems to monitor operational execution, we are enhancing our corporate governance framework.

Under the terminology of the Companies Act in Japan, IHI is classified as a “company with auditors,” and of its five corporate auditors, three are outside corporate auditors.Twenty-two members of the top management are selected to act as executive officers to concentrate purely on operational execution, and eight of them also serve as members of the board of directors (as of March 2011).

We have established a Management Committee, composed by persons appointed by the Chief Executive Officer (CEO) and charged with supporting the CEO in decision-making and operational execution.

We also established a Compensation Advisory Committee with the objective of guaranteeing the appropriateness of executive compensation. This organization consists of four members: an outside director, who acts as committee chair; one outside corporate auditor; the board member in charge of human resources; and the board member in charge of finances.

The Support System for Outside Directors and Outside Corporate Auditors

In IHI, the roles of supporting outside directors and supportingoutside corporate auditors go the Administrative Division andthe Auditors' Office, respectively. The Administrative Divisionsupports the outside directors by explaining the agendas forBoard of Directors' meetings and assisting them perform theirduties in other ways. In the Auditors' Office, IHI employeessupport the outside corporate auditors not only by assistingthem perform their duties, but also by providing reports fromthe standing corporate auditors on the day-to-day status of thecompany and by sharing other information with them.

Compensation for Directors and Corporate Auditors

Compensation for directors takes into account their performance, position, and achievement of goals in their areas of responsibility, and the amount is determined within the framework approved at the General Meeting of Shareholders.In FY2010, total annual compensation for the board of directors was ¥630 million, while total annual compensation for the corporate auditors was ¥84 million.

Internal Control

Internal Control System

In IHI, our fundamental policies in establishing internal control system aim at raising the effectiveness of corporate governance and increasing corporate value. These fundamental policies guide us in establishing the framework to achieve sound compliance and enhanced risk management and, further, in implementing and operating the control system common to all Group companies. At IHI, we realize that establishing dependable corporate governance system is essential to our efforts to expand the Group's businesses globally and we are proactively working on it.

As a response to prevent window dressing and other accounting improprieties, Japan has instituted the commonly called J-SOX system, an internal control reporting system based on the Financial Instruments and Exchange Act. The J-SOX system mandates the implementation and operation of internal controls for preparing proper financial statements and disclosing them, as well as the submission of a report evaluating effectiveness of such controls. According to the evaluation of IHI's internal controls for FY2010, no flaws in internal controls were found that were likely to have a significant effect on the Group's financial statements. The internal control report that summarized these evaluation results was subject to an external audit performed by an auditing firm. With regard to the monitoring functions of the internal control system, we merged the former Internal Control Office with the former Auditors' Office in April 2010 as part of an effort to strengthen and optimize the functions of the Head Office in managing the Group. The objective of the merger was to strengthen and raise the level of the internal control system of the executive division by centralizing independent monitoring functions, launching the Internal Auditors' Office, and unifying and optimizing monitoring functions.Monitoring will contribute to raising competitiveness of the Group companies and improvement of corporate value.

IHI Group's Internal Control system

As of March 31, 2011

Project Control System

We established the Project Audit Division in January 2008 for the purpose of assessing whether construction of large-scale projects (construction projects subject to the percentage of completion method *1), as of their implementation stage, is properly evaluated with regard to the management status of construction and the risks assessment, and whether the projects' estimated profitability is properly and transparently calculated.We examine the management status of construction of largescale projects (subject to the percentage of completion method), domestic or overseas, including those by the affiliated companies, from the following viewpoints:

  • ・Adequacy of the project's execution system after receipt of order
  • ・Appropriateness of management status of intermediate cost*2 relative the project's progress of work
  • ・Transparent appropriateness and timeliness of the project's estimated profitability

The results of the assessment and proposals for improvement, if any, go through the Management Committee and are then duly reported to the CEO.

In addition, by releasing the information about the items we examine and decision examples on the website, we share the information with the division charged with gathering cost information for various projects and thus assist in making possible proper intermediate cost and risk management.

In the course of FY2010 (ended March 31, 2011), 54 construction projects were audited, including all of the 36 projects, accounted for by the percentage of completion method, by the parent company IHI and 18 projects by 4 of our affiliated companies.

We will continue to strive to achieve proper and timely estimates of profitability of large-scale projects done on a consolidated basis.

  1. *1 Construction projects subject to the percentage of completion method: large-scaleprojects, where sales and profits are not booked after construction is completed;instead, sales and profits are booked per year in line with the project's progress of work.
  2. *2 Intermediate cost: an estimated final cost at completion of the project, calculated whilethe project is under construction by adding an estimate of the expenses that areexpected to arise in the future to the expenses that have actually arisen.

Initiatives to Win Back the Trust

After large-amount revisions to our financial statements in FY2007 and the subsequent request for improvement of internal controls that accompanied the assignment of our stock to “securities on alert” lists by each of the domestic stock exchanges, we have implemented the following measures to develop and enhance our internal control systems.

  • ・Enhancement of monitoring functions
  • ・Enhancement of the process of collection of necessary information in a timely manner
  • ・Promotion of reform of corporate culture
  • ・Enhancement of corporate governance

(For details including the sequence of events of this case, please consult “Improvement Status Report” dated September 8, 2008, located in “IR Library” under “IR” section of the IHI's website. Please click here to consult the present state of internal control systems.)

Restatement of prior-year financial results and our response

2007.9.28 Released “Notice of Revisions to Operating Performance Forecast” and “Notice of Potential Revisions to Previously Announced Fiscal Year's Results”
2007.10.9 Established the “External Investigation Committee”
2007.12.11 The Tokyo Stock Exchange (TSE) designates the stock as “supervision post”
2007.12.12 Released “External Investigation Committee's Examination Report on Earnings Deterioration in IHI's Energy and Plants Operations”
2007.12.14 Released “ <Correction>Concerning partial correction of the released interim financial summaries for the FY Ended in March 2007 ”
2007.12.27 Submitted interim financial report for FY2008 and revised prior-year reports to Kanto Finance Bureau of the Ministry of Finance
2008.2.9 The TSE requests “Improvement Report” while designating IHI's stock as “securities on alert”
2008.2.25 Submitted “Improvement Report” to the TSE
2008.3.1 Established “Operating System Improvement Monitoring Committee” as a voluntary advisory body to the Board of Directors
2008.7.9 The Financial Services Agency (FSA) orders the Company to pay a fine
2008.9.8 Submitted “Improvement Status Report” to TSE and all other financial instruments exchanges where the Company's stock is listed
2009.5.12 TSE and all other financial instruments exchanges where the Company's stock is listed remove the Company's stock from their “securities on alert” lists

* The Tokyo Stock Exchange, through a transfer of shares on August 1, 2007, became a stock company-type financial instruments exchange.

In order to verify implementation of the measures we took to remedy the situation—from an outsider's unsparing point of view, we nominated four law and accounting professionals, with no stakes in the Company, who formed the Operating System Improvement Monitoring Committee as a voluntary advisory body to the Board of Directors in March 2008.

We have listened to the questions and opinions voiced by the Members of the Committee with regard to reports and explanations provided by the Company and then adopted them into our improvement measures and in their implementation. Subsequently, the Members gave their assessment that the internal controls have been properly implemented and functioning, and the Committee completed its work in June 2011, in line with the original schedule.

Below are the milestones of the improvement progress in the monitoring process up until FY2010.


Regularly Scheduled Meetings: 34 Sessions (including 10 in FY2010)

The Committee has held regular meetings concerning the implementation status of the improvements noted in the “Improvement Status Report” for a total of 34 times or about once a month as a rule by March 2011. The Committee had interviews and hearings about the status of implementation of improvement measures with the Energy Operations (currently, the Energy Systems and Nuclear Power Operations), the Environment and Plants Operations (currently, the Plant Engineering Operations), other business areas and Group companies that perform construction projects under the percentage of completion method, as well as the Finance and Accounting Division and other departments of the Headquarters. The Committee gave its expert opinions about our operational processes, from the receipt of a large-scale order and down to the calculation of the intermediate cost, and about the status of improvements in monitoring by the Headquarters.

Onsite Inspections of Projects: 9 Locations (including 3 in FY2010)

The Committee visited nine sites, the Aioi Boiler Manufacturing Plant, which produces products ordered from Power Plant Division, as well as construction sites where work is actually being done. The Committee talked to the employees engaged in operations on these sites to confirm the status of the internal management system at their work site.

Inspections at Kure Shipyard of IHI Marine United (December 2010)

Reports to the Board of Directors: 12 Times (including 4 in FY2010)

Once per quarter (March, June, September, December), the sequence of events and the results of the monitoring program were reported to the Board of Directors, and the Board heard the opinions of the Committee about concerns that had come up at the regular meetings and the circumstances that they had checked during their onsite inspections.

Corporate Value in Society
Report on Results of Monitoring of Operating System Improvements

Operating System Improvement Monitoring Committee
Tetsuo Kawawa
(Certified Public Accountant)
Akio Okuyama
Committee Member
Mineo Enomoto
Committee Member
Iwao Toigawa

From left,
Mr. Enomoto, Mr. Kawawa, Mr. Okuyama and Mr. Toigawa

Based on its recognition that the causes behind the corrections of the prior period financial results it made in fiscal 2007 were (i) the process of transmission and comprehension of essential information in the calculation and checking of the estimate of total cost of sales of construction contracts applicable to the percentage-of-completion method and (ii) insufficiencies in the internal monitoring system, IHI sought various advice, such as the opinions of the External Investigation Committee that served as a forerunner to the Operating System Improvement Monitoring Committee (the “Committee” hereinafter in this section) and, in February 2008, collated improvement proposals and, staying faithful to these, constructed internal organizations and business processes. As a result, the management of risks and the management of profit and loss in IHI's execution of business has been observably improved.

For example, under the newly established system, in treating orders for projects, there is an emphasis on bringing forward burdens so that rather than being incurred at a later stage, they are given priority and carried out at the initial stage, and the organ for judging whether or not to accept orders for projects has been enhanced: the Major Projects Review Committee* can make such judgment on a dedicated basis based on reliable information. Moreover, the system by which the reviewing organ can ensure “informed decisions” i.e., judgments based on correct information is not only an important result for risk management, but this committee also enhances opportunities for the high-level discussion of business strategies and functions to ensure that management judgments are based on sound reasoning.

In project management also, the development of a multilayered system of information reporting and exchange that extends from the project works site to the headquarters has improved the system that enables timely sharing and visualization of important information: the percentage of completion, signs of delays and other risks and challenges, and cost of sales and revenue recognition, of construction contracts. This contributed to a system monitoring the management status of cost and others by the Finance & Accounting Division. In addition, there is better awareness towards cost management and risk management at construction sites and plants in Japan and abroad, and efforts are now made towards the management of project performance integrating information from function-allocated subsidiaries. These are other important outcomes of improvements.

Furthermore, the project management office that is positioned as an internal audit division specialized in construction contracts applicable to the percentage-of-completion method conducts monitoring from a third-party perspective and serves a proper internal check function. It will be important to uphold the validity of this role into the future.

After conducting monitoring for more than 3 years, the Committee believes that firstly, these improvements are supported by (i) the understanding of corporate officers and employees that, to ensure the accuracy of financial results and earnings forecasts and maintain the trust of the capital market, it is necessary for the headquarters to timely identify the cost of sales and total revenue of construction contracts applicable to the percentage-of-completion method, and (ii) the maintenance of vigilance towards PDCA. Secondly, the Committee believes that the IHI Group possesses a sense of responsibility, passion and technological strengths expressed by: “carry all that is requested through to completion.” We believe that through 3 years of improvement efforts, the IHI Group is now equipped with, in addition to this manufacturer's spirit, which is expressed by that slogan, the capabilities of risk management and the management of profit and loss.

The Great East Japan Earthquake that occurred in March 2011 delivered tremendous damage to many Japanese companies and the IHI Group is not an exception. However, we observe that the corporations of Japan encountered this unprecedented crisis, and while battling to recover from the damage, they hold a strong consciousness of their social mission corresponding to the industry to which they belong. The IHI Group also achieved its mission to its customers as a supply chain and clearly showed efforts to support the disaster stricken regions. By sincerely carrying out business backed up by this social mission, the Group is raising its corporate value in society. Now, as the precepts of social infrastructure are undergoing rapid change, we expect the IHI Group will demonstrate its own value in society by the development of technology and the construction of infrastructure founded on safety and environmental considerations.

* Major Projects Review Committee
An internal company organization for reviewing large projects before their orders are accepted, which was established to appropriately decide whether or not to accept orders of large projects that could have significant effect on IHI's business performance

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