1. Basic Structure of Corporate Governance and Reasons for Adoption
The Company has supervised management through a Board of Company Auditors comprised exclusively of Outside Company Auditors. Additionally, in order to separate the supervisory and executive roles of management, the Company has adopted an Executive Officer System by which the Board has retained the responsibility for management decision-making and supervision, while Executive Officers have been made responsible for the executive functions.
The Company’s Board of Directors, led by the Outside Directors and Outside Company Auditors who are highly independent experts of a variety of fields, supervises the execution of duties from an objective perspective and enhances the effectiveness of corporate governance by engaging in frank and multilateral discussions on management.
With regard to business execution, the Company introduced an internal Company System in July 2016, in an effort to ensure the optimal allocation of management resources across all Group Companies. Following the ensuing changes to the internal reporting control framework, starting from the three months ended September 30, 2016, the Company changed its reportable segments to two segments: “Internet Services” and “FinTech.” Accordingly, the Executive Officers under the supervision of the Representative Directors (Chief Executive Officer and Executive Vice Chairman), who serve as Segment Leaders, have assumed the function of business execution of the respective companies for which they are responsible.
2. Corporate Organization
(Directors, Board of Directors, Executive Officers, etc.)
While it is stipulated in the Articles of Incorporation that the number of Directors shall be not more than 16, the Board of Directors consists of eight Directors, including five Outside Directors. Resolutions to appoint Directors must be approved by a majority of voting rights at an Annual General Shareholders’ Meeting attended by shareholders holding at least one-third of voting rights.
In addition to regular meetings, the Board of Directors holds special meetings as required. At these meetings, Directors make decisions on important management matters and supervise Executive Officers’ activities. Executive Officers, upon receiving business execution orders from the CEO, carry out business execution within the administrative authority set forth by the Company. To enhance the corporate value, as to a case that requires new capital expenditure including any investment, members, including Outside Directors and external experts, of the Investment Committee preliminarily deliberate on whether the case should be proceeded or not. The result of such deliberation shall be reported to the Board of Directors. Starting from April 2016, the Company has been holding intensive sessions every quarter held separately from the meetings of the Board of Directors, where Directors and Company Auditors mainly engage in debate about Group management strategy, etc., separately from the meetings of the Board of Directors. Participants discuss matters from a medium- to long-term perspective, rather than confining themselves to short-term issues or items discussed at the meetings of the Board of Directors. In addition, in August 2016, the Company completely revised the items to be discussed by and the standards for the Board of Directors in order to achieve prompt corporate management.
Status of business for major segments is shared on a monthly basis at the Budget Meeting, which Executive Officers attend. We ensure appropriate and efficient conduct of business operations and management across the Group Companies.
(Company Auditors and the Board of Company Auditors)
The Company has four Company Auditors, including one Full-time Auditor. All four are Outside Company Auditors.
A three-member Company Auditors’ Office assists the Company Auditors in the performance of their duties. In addition to its regular meetings, the Board of Company Auditors holds special meetings as required.
In accordance with audit policies and plans established by the Board of Company Auditors, the Company Auditors attend meetings of the Board of Directors and other important management meetings, and receive reports about the state of the Company’s operations from Directors, the Internal Audit Department and other sources. In addition, they check the operations of the Company and its subsidiaries. In addition, the Company Auditors receive audit reports from the independent auditors and audit financial statements and business reports. They also discuss various matters with the CEO.
3. Internal Control Systems and System to Ensure the Appropriateness of Operations of Subsidiaries of the Company Submitting Financial Reports (Including Risk Management Systems)
The Board of Directors of the Company has made the following resolutions concerning systems to ensure the performance of business operations of Directors comply with laws, regulations and the Articles of Incorporation, and that business operations of the Rakuten Group are conducted in an appropriate manner. The Company has created such systems in accordance with this resolution.
- System for Ensuring Directors and Employees Comply with Laws, Regulations and the “Articles of Incorporation”
Rakuten, Inc. has stipulated the "Rakuten Group Code of Ethics" and it as well as the companies which are its subsidiaries (“Rakuten Group”), shall accordingly comply with all laws and regulations and undertake business actions with a high commitment to ethics. The proper execution of duties by Directors and employees of Rakuten Group shall be absolutely ensured through: operational audits carried out by the Internal Audit Department (an independent organizational unit under the direct control of the Representative Director and President); initiatives promoting Group-wide compliance under the leadership of the Chief Compliance Officer (CCO), who oversees the integration of Group-wide compliance management, and Company CCOs appointed according to Rakuten, Inc.’s internal Company System structure; and by reporting the status of compliance initiatives to the Group Compliance Committee.
Moreover, Outside Directors and Outside Company Auditors shall also thoroughly supervise and audit the execution of duties by Directors and employees. To technically and objectively verify compliance with laws, regulations and the “Articles of Incorporation”, lawyers shall be appointed for those positions.
Additionally, compliance education about the knowledge and sense of ethics needed as a member of Rakuten Group shall be carried out for all the executives and employees of Rakuten Group. Rakuten Group shall appropriately create a system for internal reporting that prevents retribution against those who report and consult through establishing a point of contact for executives and employees of Rakuten Group to consult and report about legal violations and other compliance issues. Rakuten Group will also create a system to collect information widely from outside the company.
- System for Managing and Protecting Information Related to the Execution of Duties by Directors
Any information, including written documents and digital records, regarding the execution of duties by Directors of Rakuten, Inc. shall be legally and properly preserved and managed in accordance with the Rakuten Group Regulations and other internal regulations. Additionally, Directors and Company Auditors shall have full-time access to all information relevant to this matter.
- System for Risk Management
The various risks that arise during the course of business operations shall be properly dealt with by the appropriate organizational units-in-charge based on each Group Companies’ internal regulations, detailed regulations, and operational manuals.
Regarding risk related to information management, the IT Security Governance Department of Rakuten, Inc. shall play a major role in thoroughly conducting risk management for the Group as a whole in order to minimize exposure to that risk. Moreover, the primary businesses of Rakuten Group possess the accreditation of the Information Security Management System (ISMS).
Regarding risk related to business activities, in order to manage risk appropriately that may arise from Directors performing their duties in each business, Rakuten Group requires that all investment proposals are discussed in the Rakuten, Inc. Investment Committee and obtain the approval from the Rakuten, Inc. Board of Directors if they exceed a certain amount. Additionally, Rakuten Group aims to gather group-wide risk information through strengthening its emergency response system, risk assessments as well as thoroughly managing business risk.
- System Allowing Directors to Efficiently Carry Out their Duties
An appropriate and efficient decision making system to allow Directors of Rakuten Group to execute their duties shall be formulated based on the Rakuten Group Regulations, and other internal regulations. Moreover, transparency and speed in decision making shall be sought by promoting online internal procedures.
Prompt and flexible decision-making and execution of duties shall be promoted by having Executive Officers, who were appointed by Board of Directors, perform duties under the control of Directors.
- System to Report Financial Information Appropriately
A system to ensure appropriate operations shall be established to guarantee proper financial reporting related to the disclosure of management information, financial information, etc. Appropriate accounting practices shall be used and disclosure will be timely. Further, the effectiveness of internal control over all related functions shall be assessed for compliance with the “Standard for the Management Assessment and Auditing of Internal Control Over Financial Reporting” which is based on the “Financial Instruments and Exchange Act”.
- System for Rakuten Group to Only Engage in Appropriate Business Practices
In order to realize unified Group management, Rakuten, Inc. will stipulate Rakuten Group Regulations and other internal regulations dealing with company ideals, group governance, company management, risk management, compliance, etc. Regarding the execution of the subsidiary’s significant duty, Rakuten Group shall create a system for approval and reporting to Rakuten, Inc. based on the Rakuten Group Authority Table and Rakuten Group Guidelines. The RGR will protect the independence of the subsidiaries while also creating the needed framework for business operations which will be followed by the entire Rakuten Group.
In addition, the Internal Audit Department, which is an independent organization under the Representative Director and President, shall ensure the appropriateness of operations by having a strong relationship with the organizational unit-in-charge of internal audit of each subsidiary and by conducting internal audits on Rakuten Group as a whole.
- Requests from Auditors for Employees’ Assistance and Employees’ Independence from Directors
To assist the duties of Company Auditors, the Company Auditors Office shall be established under the Board of Company Auditors, and the Company Auditors may give orders to the employees belonging to the Company Auditors Office as the need arises. Additionally, when the employees assist Company Auditors, the effectiveness of the orders from Company Auditors shall be ensured by not receiving orders from Directors and the approval from the Company Auditors for transfer and assessment of the employee’s performance shall be obtained.
- System for Directors and Employees to Report to Company Auditors and for Company Auditors to Carry Out Effective Audits
Directors and employees of Rakuten Group shall give all legally required reports to Company Auditors and provide additional necessary reports and information if the Company Auditor requests it. Rakuten, Inc. will ensure the effectiveness of audits through prohibiting the retribution for reporting against those who report to the company auditors.
Additionally, if Rakuten, Inc. receives a request for prepayment of expenses or repayment from Company Auditors, it shall pay the expense or debt promptly unless the expenses are proved not to be necessary for the execution of the Company Auditor’s duty.
Internal Audits, Company Auditor Organization,
Personnel and Procedures
Internal audits are conducted by the 18-member (excluding General Manager) Internal Audit Department, which is an independent unit reporting directly to the CEO. Head office divisions, business units and group companies are all subject to internal auditing. Audits are implemented under plans approved by the Board of Directors with the aim of verifying the legality, appropriateness and efficiency of operations. The purpose of the internal audit process is to ensure that business operations are conducted in an appropriate manner by identifying any improvements that may be required, and by monitoring the implementation of those improvements. Audit results are reported to the Board of Directors, the CEO, the Group Compliance Committee responsible for areas covered by audits, and the Company Auditors. The Internal Audit Department also cooperates with the Board of Company Auditors. The Internal Audit Department is also working to enhance the effectiveness of internal audits throughout the group by working closely with audit units in the Group Companies. In addition to holding regular exchanges of opinions and conducting information sharing, the Group Companies shares the results of the internal audits with the Independent Auditors, as necessary.
Information about audits by Company Auditors can be found under “Corporate Governance 2. Corporate Organization (Company Auditors and the Board of Company Auditors).”
Outside Directors and Outside Company Auditors
The Company’s eight-member Board of Directors currently includes five Outside Directors, and all four Company Auditors are Outside Company Auditors. Outside Director Ken Kutaragi is a senior technology advisor of Sony Corporation, which has a business relationship including sales of goods with the Company. The ratio of the amount of transactions between Sony Corporation and the Company in fiscal 2016 is less than 1% of the combined total amount of Cost of sales and Selling, general and administrative expenses at the Company for the year. Outside Director Joshua G. James is Founder and CEO of Domo, Inc., which has a business relationship including provision of services with the Company. The ratio of the amount of transactions between Domo, Inc. and the Company in fiscal 2016 is less than 1% of the combined total amount of Cost of sales and Selling, general and administrative expenses at the Company for the year. Outside Director Takashi Mitachi is Vice Chairman of KEIZAI DOYUKAI (Japan Association of Corporate Executives), to which the Company pays membership fees. The ratio of the amount of fees in fiscal 2016 is less than 1% of the combined total amount of Cost of sales and Selling, general and administrative expenses at the Company for the year. Outside Director Jun Murai is Dean and Professor of the Faculty of Environment and Information Studies of Keio University, which shares a role in operating an international standardization body to which Company pays membership fees. The ratio of the amount of fees in fiscal 2016 is less than 1% of the combined total amount of Cost of sales and Selling, general and administrative expenses at the Company for the year. He is also an Outside Director of BroadBand Tower, Inc., which has a business relationship involving provision of services with the Company. The ratio of the amount of transactions between BroadBand Tower, Inc. and the Company in fiscal 2016 is less than 1% of the combined total amount of Cost of sales and Selling, general and administrative expenses at the Company for the year. Outside Company Auditor Takeo Hirata is Chairman of Japan Society of Sports Industry, to which the Company pays membership fees. The ratio of the amount of fees in fiscal 2016 is less than 1% of the combined total amount of Cost of sales and Selling, general and administrative expenses at the Company for the year. Outside Company Auditor Katsuyuki Yamaguchi is an Attorney and Partner of Nishimura & Asahi and an Outside Company Auditor of BrainPad Inc., with which the Company has transactions including provision of services. The ratio of the amounts of transactions between Nishimura & Asahi and BrainPad Inc. and the Company in fiscal 2016 is less than 1% of the combined total amount of Cost of sales and Selling, general and administrative expenses at the Company for the year, respectively.
Mr. Ken Kutaragi, Mr. Joshua G. James and Mr. Jun Murai, Outside Directors, and Mr. Katsuyuki Yamaguchi, Outside Company Auditor, respectively hold the Company’s shares, and the numbers of shares held by them are as described in the respective columns of “Number of shares held” in “IV. Information on the Company Submitting Financial Reports 5. Directors.” There are no other personal, capital or business relationships or significant interests.
With the aim of ensuring a high level of transparency and strong management supervision, thereby increasing the corporate value, the Company, in selecting its Independent Directors and Independent Company Auditors, determines persons who, in principle, do not fall under any of the following criteria to be independent, and Outside Directors Ken Kutaragi, Takashi Mitachi, Jun Murai and Youngme Moon and the Outside Company Auditor Takeo Hirata are appointed to the position of Independent Director/Company Auditor specified by the regulations of the Tokyo Stock Exchange.
- Executive of the parent company or a fellow subsidiary of the Company (*1)
- A party whose major client is the Company or an executive thereof or a major client (*2) of the Company or an executive thereof
- Consultant, accountant or legal professional who receives a large amount of monetary consideration or other property from the Company besides compensation as Directors or Company Auditors
- A person or party who has recently fallen under any of a) through c) above (*3)
- A close relative of a person who falls under any of a) through d) above, or a close relative of an executive of the Company or its subsidiary (including those who were executives until recently) (including a close relative of non-executive Director or accounting advisor of the Company or its subsidiary, in the case where Outside Company Auditor is appointed as an Independent Company Auditor)
- *1：An executive as stipulated in Article 2, Paragraph 3, Item 6 of the Ordinance for Enforcement of the Companies Act, which includes employees in addition to executive Directors, and does not include Company Auditors.
- *2：Refers to cases in which, using the transaction amount with the Company as the criterion, the sum of the Company’s total purchase amount accounts for 1% or more of the total amount of sales, general and administrative expenses.
- *3：Cases which are considered, in effect, equivalent to the present condition, such as where a party or person fell under any of a) through c) at the time the contents of the proposal of the General Shareholders’ Meeting are determined for the election of such Independent Directors or Independent Company Auditors as Outside Directors or Outside Company Auditors.
There are five Outside Directors. Mr. Ken Kutaragi, has extensive knowledge of the entertainment business and technology and wide-ranging experience in business management. Mr. Takashi Mitachi has extensive experience and expertise mainly as a business consultant. Mr. Jun Murai has a distinguished background as an academic expert in Internet technology. Mr. Joshua G. James has specialized knowledge of Internet services and wealth of experience in the management of Internet service businesses in North America. And Ms. Youngme Moon has a distinguished background mainly as an academic in the field of business management. All Outside Directors have been appointed for their ability to provide management with advice and recommendations based on their experience and expert knowledge.
There are four Outside Company Auditors. Mr. Takahide Uchida has extensive knowledge and experience mainly in the fields of finance and business management. Mr. Yoshiaki Senoo has extensive knowledge and experience relating primarily to finance business, business management and compliance. Mr. Takeo Hirata brings wide-ranging expert knowledge and experience relating primarily to sport and education. Mr. Katsuyuki Yamaguchi was selected as a person who could contribute to the Company’s audit systems through his extensive knowledge and experience, especially as an attorney, and through his perspectives as an expert on corporate law. Documents for meetings of the Board of Directors are forwarded in advance to the Outside Directors and Outside Company Auditors, who, if necessary, can also seek advance briefings from and consultations with the units concerned. As noted above, the Outside Company Auditors also actively exchange views and collaborate with the Internal Audit Department and the independent auditors.
The Company has signed an agreement with each of its Outside Directors and Outside Company Auditors under the provisions of Article 427, Paragraph 1 of the Companies Act. This agreement is summarized below:
Provided that duties have been carried out in good faith and without gross negligence, the total liability in situations as defined in Article 423, Paragraph 1 of the Companies Act will be limited to the sum of the amounts stipulated in the following items:
- Two times the bigger of the sum of fees, bonuses and other payments received or asset benefits received in the year that includes the date on which the event that resulted in the liability occurred, and in the preceding year, or the value of asset benefits to be received (excluding benefits stipulated under Item ii below).
- Two times the smaller of the sum of retirement bonuses or asset benefits that are in the nature of retirement bonuses, or that amount divided by the number of years during which the office of Outside Director or Outside Company Auditor was held.
- The amounts stipulated below if Share Options, as defined in Article 238, Paragraph 3 of the Companies Act, were exercised or transferred after the person was appointed as an Outside Director or an Outside Company Auditor.
1. If the Rights have been Exercised
An amount calculated by subtracting the sum of the issue price of the Share Options and the paid-in value per share on the exercise date from the market price per share on the exercise date and multiplying the result by the number of shares granted through the exercise of the Share Options.
2. If the Rights have been Transferred
An amount calculated by subtracting the issue price of the Share Options from the transfer price and multiplying the result by the number of Share Options.
The Status of Audit
Rakuten, Inc. has an audit contract with Ernst & Young ShinNihon LLC. The auditor conducts an audit based on the Companies Act and Financial Insruments and Exchange Act.
Basic Views on Eliminating Anti-Social Forces
<Basic Policy on Eradicating Antisocial Forces>
The “Rakuten Group Code of Ethics” calls for confronting antisocial forces with a resolute attitude and for standing staunchly on the side of social justice for the greater good if inappropriate demands are made. In addition, the Rakuten Group Regulations and other internal regulations establish detailed methods for handling antisocial forces. We have fully communicated these methods internally and to Group companies and established related systems.
<Systems for Eradicating Antisocial Forces>
- Establishment of a Response Unit and Appointment of Managers Responsible for Preventing Inappropriate Demands
The General Affairs and Facilities Management Department has been determined as the unit in charge of responding to antisocial forces, and its General Manager has been given responsibility for coordinating response. In addition, corresponding managers and staff have been assigned at the business and branch office levels as required to ensure that antisocial forces are dealt with appropriately.
- Coordination with Outside Specialists
We keep in regular contact with the police, attorneys, the National Center for the Elimination of Boryokudan ("violent elements") and other outside specialists, and closely coordinate with them. We are also members of the Special Violence Prevention Council and receive guidance on handling antisocial forces.
- Collection and Management of Information on Antisocial Forces
The response unit regularly collects and manages information to help in handling antisocial forces. The information is shared with managers and staff in charge of dealing with antisocial forces in the Company and the Group Companies.
- Establishment of a Response Manual
The Rakuten Group Regulations and other internal regulations have been established. General principles and specific methods for handling antisocial forces are broadly communicated internally and to Group companies.
- Training Activities
Along with sharing information on antisocial forces internally, managers and staff in charge of dealing with antisocial forces undergo regular training on response guidelines in order to improve their response capabilities.