Canon global

Governance Structure

Canon has strengthened its corporate governance by adopting an independent internal auditing structure in addition to its General Meeting of Shareholders, Board of Directors, and Board of Corporate Auditors and the independent auditor, as legislated.
As a horizontal organization that includes worldwide Group companies, management committees are established to address important management issues, and serve a mutual-check function complementing our system of products operations.
We have strengthened our management system through the appointment of executive officers, numbering 17 as of April 1, 2012.

Corporate Governance Structure (As of April 1, 2012)

Board of Directors

Important management decisions are discussed and ratified at meetings of the Board of Directors and the Executive Committee with all directors in attendance as a general rule. As of April 1, 2012, Canon's Board consists of 18 members. We believe that familiarity with current on-site conditions is integral to more effective and efficient decision-making. Accordingly, the Company does not appoint outside directors. This management structure has functioned effectively for Canon since its establishment, as evidenced by the Company's steady development.

Executive Officer System

Timely, appropriate decision making and efficient business activities are vital issues for Canon as it pursues its basic strategies of diversification and globalization.
To this end, Canon Inc. introduced an executive officer system in April 2008 to maintain an adequately scaled Board of Directors while allocating the execution of duties to executive officers appointed for their significant knowledge of the business. The objective is to create a managerial structure that can respond appropriately to business expansion and globalization through strengthened executive functions. As a result, we have created a system in which directors can focus more attention on management and supervision than before. We currently have 17 executive officers (as of April 1, 2012).

Board of Corporate Auditors

As of April 1, 2012, there are five members on Canon's Board of Corporate Auditors, three of whom are outside corporate auditors. We have reported to the stock exchanges of Tokyo, Osaka, Nagoya, Fukuoka, and Sapporo that each of the three outside corporate auditors is an independent auditor according to the rules of each exchange.
In addition to auditing the execution of duties by directors, the corporate auditors audit the execution of duties by the executive officers and the presidents of Group companies in Japan and overseas. To verify that decision-making is being conducted in an appropriate manner, the corporate auditors attend meetings of the Board of Directors, the Executive Committee and the Management Strategy Committee. They also verify the execution of duties through onsite auditing, and inspect resolution and approval documents to fulfill their broad range of duties relating to corporate governance.
In addition, the Board of Corporate Auditors complies with pertinent Japanese laws and supervises the appropriateness of audits by the Accounting Auditors and the compliance system. Moreover, as Canon Inc.'s shares are listed on the New York Stock Exchange, the Board of Corporate Auditors is also obligated to monitor the independence of the Accounting Auditors in accordance with the
Sarbanes-Oxley Act.^*
To support the activities of the auditors, including the outside corporate auditors, Canon has established an Office of Corporate Auditors and placed the required number of dedicated staff at their disposal.

Cooperation with the Accounting Auditors and the Internal Auditing Division

The Board of Corporate Auditors works closely with the Accounting Auditors and the internal auditing division to ensure the effectiveness of auditing and supervision.
At the beginning of the year the Accounting Auditors submit summaries of the auditing plans and reports on the main auditing items to the Board, which examines them and comments on their validity. The Board also engages in discussions with the Accounting Auditors concerning the audit results, as well as such matters as risk evaluation and the operation of the internal control system from the standpoint of the Accounting Auditors. Furthermore, in addition to conducting onsite audits, attending audit reviews, and taking accounting audit and internal control audit reports from the Accounting Auditors, the Board also receives detailed explanations of the audit quality control system so as to determine its validity. Also, pre-approval regulations are stipulated relating to contracts between Group companies and the Accounting Auditors, and after pre-contract discussions, an approval system is strictly enforced.
At the beginning of the year the internal auditing division submits the internal auditing plans and reports on the main internal auditing items to the Board of Corporate Auditors for preliminary confirmation. After the internal auditing has been conducted, the internal auditing division reports to the Board on such items as the internal control system, quality control, environmental conservation, and security.

External Audit

Canon Inc. contracts an independent auditor to conduct an external audit of the Company's financial statements in accordance with the Companies Act and the Financial Instruments and Exchange Law of Japan. An audit of internal controls is also conducted in accordance with the Financial Instruments and Exchange Law and the Sarbanes-Oxley Act.
As for 2011(the 111^th term), the auditor expressed unqualified opinions on Canon's financial statements and its internal control.

Internal Audit

Upgrading and Expanding the Internal Auditing Structure

With a 60-year history, the Corporate Audit Center, Canon's internal auditing division, is under the direct supervision of the president and has been in existence since 1951. In accordance with management's determination of the importance of strengthening the internal audit structure and increasing the effectiveness of governance, Canon has since 2002 been working to strengthen and expand the internal auditing structure. The Corporate Audit Center comprises knowledgeable members drawn from a broad range of fields, spanning from planning and development through production and marketing, and as of April 1, 2012, the Center consists of five departments with 69 employees in total.
The Corporate Audit Center is in the process of a step-by-step expansion, and plans to bring the number of staff to 100. Education and training programs for new members are being enhanced, and the Center plans to have 80 auditors on staff by the end of 2012.
The Corporate Audit Center focuses primarily on Canon Inc. and Group manufacturing/R&D companies worldwide and has been granted the authority to audit all areas of business without exception, including at Group companies both in Japan and overseas.
The Center took particular care concerning overseas Group companies in 2011, conducting audits of 10 Group companies in Malaysia, Thailand, China and Taiwan, as well as of the Development Division in India.

Internal Audit Implementation Status

In its bid to link internal auditing with increased corporate value, the Corporate Audit Center conducts an array of audits, including corporate audits, business audits, accounting audits, IT system audits and compliance audits, and undertakes improvements based on its findings. To confirm the actual implementation of these improvements, a series of rolling follow-ups have been carried out, using a combination of document and field auditing methods.
Auditing plans are drafted by the chief of the Corporate Audit Center and approved by the president before execution.
During 2011, the Center put 128 auditing themes into practice, and issued more than 1,800 improvement recommendations concerning such areas as business structures and profitability, placing orders at and making payments to business partners, accounting treatment of entertainment and travel expenses, and compliance management concerning different types of work (such as facility work and personnel management).
The Center also sought to improve internal controls and strengthen the system for preventing irregularities by implementing new audit themes, such as status of contract management audits, status of in-house PC, server and software management/operation audits, and status of management/operation company mobile devices audits.
All audit results are reported directly to the chairman, president, executive vice president, board of corporate auditors, and the chief of the department being audited with the aim of facilitating improvements.
Audits related to such fields as product quality, environmental conservation, and security are carried out by the Corporate Audit Center in cooperation with the relevant control division.

Strengthening Internal Control Auditing

In addition to the abovementioned themed audits, the Corporate Audit Center annually conducts internal control auditing for complicance with the Sarbanes-Oxley Act to ensure the reliability of financial reporting. During the execution of internal control audits, each division conducts a self-assessment, which is followed by a supplementary audit by the Corporate Audit Center to verify its conclusions, leading to the realization of "self-contained internal control."
In 2009, the Center also began conducting expanded audits beyond confirmation of the reliability of financial reports. These Expanded Range Internal Control Audits cover the overall condition and application of the internal control structure from the perspective of the effectiveness and efficiency of work and legal compliance.
Canon has continued with Expanded Range Internal Control Audits, conducting such audits at two Canon Inc. division headquarters and two product operations, as well as at one Group company in 2011. In addition, organizational-level field audits were conducted at five Group companies.

List of Divisions Responsible for Internal Audits and Internal Checks

Corporate Audit Center	Auditing of management functions, operations, accounting, IT systems, compliance, internal controls to comply with the Sarbanes-Oxley Act, and so forth
Global Logistics Management Center	On-site diagnosis of security trade control at Canon Group companies located in Japan and overseas
Facility Management Headquarters	Examination of safety management structures, such as premises security, hazardous materials and chemical substance management, etc.
Human Resources Management & Organization Headquarters	Auditing of the introduction and operational status of the occupational safety and health management system
Information & Communication Systems Headquarters	Internal checks to ensure security of information, including internal IT
Environment & Quality Headquarters	Examination of operation status of environmental management systems, examination of quality assurance activities based on the Quality Management System
Global Procurement Headquarters	Examination of compliance, effectiveness and efficiency in procurement

Management Committees

Activities of Management Committees

Corporate Ethics and Compliance Committee

The Corporate Ethics and Compliance Committee, comprising executives and representatives of each division headquarters convenes every quarter to discuss and approve corporate ethics and compliance policies and measures. The corporate auditor attends these meetings as an observer.
At one of the quarterly meetings each year, the Committee invites the presidents of Canon's regional marketing headquarters worldwide as well as Group manufacturing companies worldwide to attend an Expanded Corporate Ethics and Compliance Committee Meeting with the aim of improving compliance awareness throughout the Group. At this meeting, compliance policies and measures are discussed and approved, and there is exchange of information concerning such matters.
There were 82 participants at the 2011 Expanded Corporate Ethics and Compliance Committee Meeting. A lawyer with corporate ethics credentials was invited to give a lecture, providing deeper understanding of the goals and interrelationship of governance and internal controls from a compliance perspective, as well as of the key aspects of compliance.

Internal Control Committee

The Internal Control Committee, chaired by the president and attended by all directors and Group company presidents, oversees the internal control structures and activities for the Group.
The committee ensures reliable financial reporting in accordance with Article 404 of the Sarbanes-Oxley Act and Article 24-193 of the Financial Instruments and Exchange Law of Japan. It also pursues effectiveness and efficiency in business, including the observance of related laws, regulations and internal rules with the objective of promoting a sustainable Group internal control structure.
During 2011, the sixth year under the Sarbanes-Oxley Act and the third year for the Financial Instruments and Exchange Law, we returned a positive assessment on the validity of internal controls with relation to ensuring the reliability of financial reporting.
The Internal Control Committee, in cooperation with Group companies, will continue to strengthen and improve internal corporate controls, including those in response to the Sarbanes-Oxley Act and the Financial Instruments and Exchange Law.

Disclosure Committee

The president of Canon Inc. chairs the Disclosure Committee, which is responsible for making decisions regarding the necessity, content and timing of disclosure. Its objective is to achieve the timely, accurate and comprehensive disclosure of the Company's material information in accordance with related laws, regulations and the rules of stock exchanges.
Financial information (securities reports, earnings summaries, etc.), occurrences (occurrences significant in terms of their relationship to the company's business operations or properties), and other details requiring timely disclosure are reported to the Committee by the person in charge of the disclosure working group at each division headquarters.