1 Team 05

Corporate Governance Group 5

Corporate Governance - Did TEPCO’s corporate governance function? -

05/10/2012

2 Team 05

0. Outline

BackgroundWhat happened in TEPCO after 311?

ObjectivesWhy did we choose TEPCO incident as a case?What would we like to clarify?

Problems of the past corporate governanceWhat were likely to be problems?

The changes after the incidentWhat changed?How is the structure of present corporate governance?

How to evaluateWould we like to invest as a fund manager?

3 Team 05

1. Background

Company profileTokyo Electric Power Co., Ltd.TEPCO is the biggest electric companyFounded in 1951# of Employees is 38,701 (as of March, 2012)Revenue: 5,349 billion yen (FY2011)

5,016 billion yen (FY2009)Net profit: -781 billion yen (FY2011)

133 billion yen (FY2009)

4 Team 05

1. Background

What happened in TEPCO after 311?

The disaster on 311

The highest Tsunami to Fukushima

Nuclear power plant down!

Referred to Japan Meteorological Agency

5 Team 05

1. Background

What happened in TEPCO after 311?It is said that disaster was caused by human error

with no pre-disaster effortsThen…

51% of Input of public fund

Much compensations

Responsibility to electric

supplyImport of the

expensive fuels

Bankruptcy

6 Team 05

2. Objectives What is the problem of this incident?

This incident has the complex problem Many causes to bankrupt of TEPCO

Clarify the problems by focusing on corporate governance and evaluate the updated structure

TEPCOPlant protection actionCorporate governance

NATURAL DISASTER

Tsunami / Earthquake

GOVERNMENTSupervision TEPCO

7 Team 05

3. Problems of the past corporate governance The past corporate governance

Committees

Internal Auditors

External Auditors

Referred to Financial report FY2009

Board

Ownership

8 Team 05

3. Problems of the past corporate governance The past corporate governance

Board of director

Board Members 20[Internal] 18[External] 2

Tomijiro Tomita, Daiichi life insuranceYasushi Aomori, MEIJI University

One tier structure, the chair is presidentMonthly board of directors meeting &

extraordinary meeting

9 Team 05

3. Problems of the past corporate governance The past corporate governance

Auditor system

Auditors 7[Internal] 3[External] 4

Sadayuki Hayashi, ex. Advisor to the Ministry of Foreign Affairs of Japan (MOFA)

Koichi Takatsu, LayerHiroshi Komiyama, ex. Chancellor of the

university of TokyoKazuko Oya, Shiseido

10 Team 05

3. Problems of the past corporate governance The past corporate governance

Main part of committeesRemunerationInternal controlCSR, Human rights

477 460

661 669 654 648 698 700

170

62 62

62125

0 00 0

0

0

100

200

300

400

500

600

700

800

900Remuneration of

internal board membersbonus

remuneration

119104

148 155133 141

98 98

39

1212

12 0

00

0 0

0

0

20

40

60

80

100

120

140

160

180Remuneration ofinternal auditorsbonus

remuneration

11 Team 05

3. Problems of the past corporate governance The past corporate governance

Ownership structureVery dispersed

Top share : Japan Trustee Services Bank, Ltd. (4.47%)

4%4% 4

% 4%

3%

3%

2%2%1%

1%73%

Japan trusty serviceDaiichi insuranceNihon insuranceJapan master trustTokyo MetropolitanMitsui Sumitomo bankMizuho bankInsideJapan trusty serviceMitsubishi UFJ bankothers

Stock share of foreigner: 17%

12 Team 05

3. Problems of the past corporate governance The past corporate governance

TEPCO said Board with committee & auditor system…enhances Smart discussion from a neutral standpoint of viewdrives adequate supervisionorganizes managing directors meeting & other meetingspromotes framework of quick decision-makingenterprises project management and maintains a stable

supply of electric power: internal control, CRS, system security

enrolls internal audit system: Quality and Safety Systemsestablishes nuclear safety quality assurance meeting

Perfect?

13 Team 05

3. Problems of the past corporate governance Problems of the past CG

were…no diversified members, especially no outside

views to corporate governancemerely comprised members from TEPCO

employeesto be monopolist without the supervision from

product markets and public

The checking function had not worked…

15 Team 05

4. The changes after the incident

Before

Shareholder’s meeting

Board of Directors

Outside Auditors

Operating Officers

Committee

After

Shareholder’s meeting

Operating Officers

ExternalInternal

Internal Auditors

The changes of CG structureTEPCO recruited many of outside members for its governance.

Board of Directors

16 Team 05

4. The changes after the incident The changes of structure of CG

Background of Outside Board Members

Chair SHIMOKOUBE KazuhikoAudit & compensation committee

Lawyer

2 　 SUDO FumioNominating committee

Advisor , JFE Holdings

3 　 NOUMI KimikazuCompensation committee

Representative Director & President, Innovation Network Corporation

4 　 KOBAYASHI YoshimitsuCompensation committee

CEO of Mitsubishi chemical holdings

5 　 KASHIYA ToshioAudit committee

Chartered Public Accountant (CPA)

6 　 FUJIMORI YoshiakiCompensation committee

CEO of Living life (LIXIL)

2-tier

Background of Outside AuditorsTAKATSU Kouichi Lawyer

KOMIYAMA Hiroshi Outside board member , JX Holdings

OHYA Kazuko Special Adviser, SHISEIDO

17 Team 05

4. The changes after the incident The changes of structure of C Ｇ

Compensation for board members

Total(Million Yen)

Detail (Million Yen) Number of members

Basement Bonus

Board member 170 170 - 19

Auditor 39 39 - 5

Outsider 47 47 - 6

477 460

661 669 654 648 698 700

170

62 62

62125

0 00 0

0

0

100

200

300

400

500

600

700

800

900Remuneration of

internal board membersbonus

remuneration

2011

18 Team 05

4. The changes after the incident

Other important changes : a lot of business alliancesThey will not consider only companies with

committees but also business partnersThe new structure of corporate governance for

TEPCO from the point of business partners’ view

Referred to Yomiuri

19 Team 05

5. How to evaluate

Item DetailStructure Transit over to a “In-house Company System

(Committee System)” ✔

Introduce a governance system with a majority of its board members from outside

Tire Separation of management and owner to be 2-tier ✔

Transparency Total compensation for board members and auditors is open to public △

Supervision The strict supervision from business partners and public by starting alliance business ✔

Key criteria observation

They obviously changed to be a company with good governance!

Would you like to invest in TEPCO?

20 Team 05

5. How to evaluate

TEPCO estimated and recorded as an expense compensation for nuclear damages in an amount totaling \2.5 trillion.

\128

\2400

2010 20122011

Key criteria observation stock price

Not invest in TEPCO at this moment. Keep watching its change.

21 Team 05

Thank you for your attention.

Tokyo Electric Power Company (2012). Financial report FY 2011 Tokyo Electric Power Company (2012). Annual report FY 2011 Tokyo Electric Power Company (2010). Financial report FY 2009 Forbes (2011). Did management problems at TEPCO cause Japan’s $15B radiation

leak? Bob T. and Chris M. (2011). Tokyo Electric Power and the disaster at Fukushima

Daiichi The Wall Street Journal (2011). The Fukushima Warning, Mismanagement at TEPCO

is a symptom of deeper governance problems in corporate Japan Japan Center for Economic Research (2011). Crisis offers change to cure economic

ills GMI Ratings (2011). Japan in focus: Why risk management matters Yomiuri Shimbun (2012). Tokyo Gas eyes electricity business / Tie-up with TEPCO to

rebuild thermal plants signals newcomers' entry into market

References

23 Team 05

Appendix

24 Team 05

Appendix

25 Team 05

Appendix

26 Team 05

Appendix 3) Optimal Leveraging of Present Management

Resources Increasing the quality of Power Grids (smart meter installations)

and establishing an environment that provides new business opportunities to various industrial players.

The promotion of know-how in the areas of construction/operations of high efficient power units and high quality grid management has been at a standstill.

Global Business Development with other Partners. 4) A New Mindset

“Reluctance to Seek Outside Support”, “Over-sectionalism”, “Lack of Transparency” and “Unwillingness to Compete”, etc.

It is of utmost importance that each employee adopts the new mindset so that all efforts will be harmonized and the quality of human resources will be enhanced.

27 Team 05

Appendix