JAL Investor Relations - Fundamental Policies and Actions Regarding Corporate Governance (Annual Report 2005)

Fundamental Policies and Actions Regarding Corporate Governance

(1) Fundamental approach
The JAL Group aims to engage in sound and transparent activities that are open to society, maximizing corporate value, and returning profit to every stakeholder.
Given this, the Group is taking a variety of measures in line with its conviction that the strengthening of corporate governance, rigorous compliance, and the assurance of transparency in management are important management issues.

(2) Corporate governance system for decision-making, business execution, and oversight
(As of March 31, 2005)
The Company is undertaking the following activities in the sphere of corporate governance.

a) The management responsibilities for the Group as a whole and the responsibilities for individual business operations are divided between Japan Airlines Corporation, as the holding company, and the operating companies, while the holding company supervises the operating companies. To speed up the decision-making process, the executive officer system has been adopted. At present the number of directors of the holding company is now 12, while the number of executive officers is 5.
To clarify management accountability on an annual basis, the term of office of directors and executive officers has been set at one year.

b) To facilitate the fair and transparent conduct of corporate activities and to enhance the corporate governance structure, the system of corporate auditing is being strengthened by including two external auditors among the total number of six auditors. In addition, there are three external directors.

c) A Compliance and Risk Management Committee has been established, chaired by the President and composed of full-time directors and corporate auditors. In addition, each of the operating companies – JAL International Co., Ltd. and JAL Domestic Co., Ltd. – has a committee charged with overseeing corporate activities and risk management. These committees ensure that Group management is transparent, and that a comprehensive risk management system is applied to corporate activities. The goal is to maintain the stability of the Group’s management and ensure that Group companies fulfill their social obligations. A Directors’ Compensation Advisory Committee, which is composed of the Group CEO and all external directors and external corporate auditors, has been established to advise the Board of Directors on matters involving the compensation of directors.

d) Contractual agreements covering management guidance and outsourcing of certain tasks exist between Japan Airlines Corporation, the holding company, and the operating companies Japan Airlines International Co., Ltd. and Japan Airlines Domestic Co., Ltd. In addition, these two operating companies function under the direct supervision of the holding company, including the requirement for discussing all important matters with the holding company prior to reaching decisions. From the standpoint of Group management, important subsidiaries and affiliates of the operating companies function under the supervision of the appropriate management systems of Japan Airlines International Co., Ltd. and Japan Airlines Domestic Co., Ltd. This system clarifies responsibilities and better facilitates the execution of business activities, thus strengthening the Group’s corporate governance. Moreover, in addition to audits conducted by the corporate auditors, business, financial and Group audits are performed internally for the purpose of reinforcing the JAL Group’s auditing functions.

e) In addition, the Group endeavors to bolster its ability to manage legal risk with regard to its operations, by maintaining a constant and close liaison with its consulting attorneys, as well as consulting with other attorneys and specialists.

f) In the FY2005-2007 Medium-Term Business Plan announced on March 10, 2005, it was stated that in order to implement the reform of the corporate structure and the cost structure swiftly, the holding company and operating companies are to be integrated. Specifically, in fiscal 2005 the corporate planning and marketing functions will be integrated and further steps to eliminate overlapping jobs and streamline the organization will be taken with a view to achieving substantial integration, the aim being to rapidly integrate the holding company and operating companies perhaps by as early as fiscal 2006. In addition, during fiscal 2005 the number of full-time officers will be cut by 30%. (By April 1, 2005, the number had been reduced by more than 30%.)

(3) Internal auditing and auditing by statutory auditors and independent auditors
Internal auditing entails the conduct of process audits, fi- nancial audits, group audits and environmental audits of the holding company, both operating companies and all Group companies by the Administration Department. Audits are conducted in accordance with plans for each fiscal year approved by the President, and if urgent matters arise during the course of a term they are addressed flexibly by prioritizing the audits again at those times. The selection of which units are to be audited involves the creation of a structure that ensures periodicity and inclusiveness, based on the audit record.
  There are two categories of process audit: the themed audit and the unit-based audit. Themed audits address Group-wide themes that are consistent over the medium to long term and are in line with medium-term plans (e.g. themes that focus on the increase of efficiency and productivity, compliance-related themes), and involve auditing that cuts across the Group organization. Unit-based audits and financial audits involve visiting some 20 locations each year, targeting head office administrative units, overseas and domestic branches and offices, and airport branches and offices, and are timed to match the terms of office of the accounting personnel. Group audits cover approximately 140 Group companies, principally consolidated subsidiaries, involving management audits of some 15 companies every year, combined with the giving of guidance to enable companies to enhance their internal control capabilities independently.
  With the cooperation of the Environmental Affairs, environmental audits inspect matters such as the state of in-Group observance of environment-related laws and of efforts directed at environmental conservation, and provide education and instruction in this field.
  The results of each audit are reported to the President, and reports are also submitted subsequently to statutory auditors.
  Audit visits are not purely for the purpose of unilaterally identifying and assessing problems. They also have the aim of providing advice and suggestions to stimulate improvements, and to work with the audited units to find solutions to problems. In addition, follow-up audits are conducted after a certain period to confirm what progress has been made with improvements. Auditing performed by our six statutory corporate auditors (of whom two are outside auditors in accordance with the stipulations of the Commercial Code) involves their attendance at meetings of the Board of Directors and other key meetings, as well as audits carried out annually with the seven staff of the Statutory Auditing Section, targeting approximately 100 company locations, subsidiaries, and affiliates. The results are reported to the Representative Directors. The statutory auditors also exchange information with internal audit units and the external auditors, and they hold meetings with the standing auditors of affiliates several times every year, with the aim of enhancing auditing throughout the Group.
  Financial auditing is assigned to Ernst & Young Shin Nihon, which conducts its audits based on the Commercial Code of Japan and the Securities and Exchange Law. In addition to regular audits, whenever necessary the firm also conducts assessments with respect to accounting-related issues such as those arising from the enactment, revision, or annulment of laws and regulations, and rationalizes our accounting practices accordingly.

(4) Related party interests concerning external directors and external corporate auditors
External director Shinobu Shimizu is the President of Tokyu Corporation, a shareholder of Japan Airlines Corporation. There are no other noteworthy personal, financial or other types of relationship with the holding company involving any other external directors or external corporate auditors.

(5) Measures taken during the past year to improve corporate governance
a) Meetings of the Compliance and Risk Management Committee were convened, and various actions were taken to ensure that our employees are fully familiar with the concepts contained in “Our Pledge to the Public” – the JAL Group’s code of conduct – which sets out the ways in which the Group should interact with other companies and the public in general.

b) Japan Airlines Corporation, Japan Airlines International Co., Ltd., Japan Airlines Domestic Co., Ltd. and JAL Sales Co., Ltd. developed a lateral structure for the assumption of responsibilities by officers in times of emergency, and a structure for enhancing preventive measures for various corporate risk and adapting to them.

c) To ensure transparency of management, steps were taken to develop and enhance publicity activities directed at the general public and the media, as well as IR activities, so as to conduct accurate and information disclosure without undue delay.

d) A structure was put in place to bring about integration and reorganization in the same types of business Japan Airlines Corporation, Japan Airlines International Co. Ltd., and Japan Airlines Domestic Co., Ltd. each conduct. This was instigated to accelerate decision-making, enhance business efficiency, and also to conduct unified business management.

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