Corporate Governance

Fundamental Policy

CYBERNET SYSTEMS' corporate Code of Conduct emphasizes the importance of management transparency; and fulfilling our role as a good corporate citizen with high ethical standards. This basic stance applies to our interaction with employees, customers, software developers, business partners and shareholders. Our fundamental policy with regard to corporate governance is to ensure adherence to our Code of Conduct, work to enhance the speed of decision-making and strengthen management oversight functions.
In the area of legal compliance, we have formulated and a Compliance Handbook and distributed it to all directors and employees, as part of our efforts to build a corporate structure based on high ethical standards, which is capable of managing risk and providing appropriate checks and balances.

Overview of Corporate Governance Systems

(Including the organizational structure relating to management decision-making, execution and oversight)

Organizational Structure and Operation

Type of governance system adopted:	Company with corporate auditors

Directors

Chairman of the Board of Directors:	President
Number of directors:	6
Appointment of external directors:	None appointed

Reasons for the Adoption of the Current System

The Board of Corporate Auditors comprises one full-time corporate auditor and three corporate auditors. Two of these are external corporate auditors, one of whom is a certified public accountant. The Board of Corporate Auditors attends meetings of the Board of Directors and the Executive Meetings, the latter comprising directors and senior management. The full-time corporate auditor attends meetings of various committees made up of directors, and, where necessary, offers opinions to ensure the fulfillment of oversight and auditing functions in relation to the Board of Directors. The Company believes that this system is functioning adequately, and for this reason no external directors have been appointed at this stage. In addition, the full-time corporate auditor meets with the representative director on a regular basis to exchange opinions as part of efforts to ensure governance functions are fully carried out.

Corporate Auditors

Establishment of Board of Corporate Auditors	Yes
Number of corporate auditors	4

Cooperation between the Corporate Auditors and the Independent Auditor

In addition to the audit reports, the Company's corporate auditors and the independent auditor exchange information on a regular basis.

Cooperation between the Corporate Auditors and the Internal Auditing Department

The Company has established the Internal Auditing Department directly under the president to undertake internal audit functions and dedicated staff have been assigned to this role. Each year, this department carries out internal audits in accordance with the audit plan. Audits are carried out at least once each quarter, and the results of audits are reported simultaneously to the directors and all corporate auditors, from whom post-audit opinions are sought. At the same time, the general manager of the Internal Auditing Department exchanges opinions with the full-time corporate auditor regarding the content of audits in order to enhance internal controls. Furthermore, where deemed necessary, corporate auditors are present during internal audits carried out by the Internal Auditing Department.

Appointment of external corporate auditors	Appointed
Number of external corporate auditors	2

Other Activities by the External Corporate Auditors

The Company's external corporate auditors actively participate in meetings of the Board of Directors and the Executive Meetings, and, where necessary, the corporate auditors offer their opinions. In addition, the corporate auditors provide oversight and auditing of the operational execution of the directors from a range of perspectives.

Corporate Auditors

The General Administration Department acts as the secretariat for the Board of Directors and the Board of Corporate Auditors. In the area of basic policy regarding internal controls, assistants to the corporate auditors may be appointed upon the request of corporate auditors. To convey important information, where deemed necessary, the president (representative director) provides direct reports and explanations to the external corporate auditor.

Matters Relating to Such Functions as Operational Execution, Auditing, Oversight, Nominations and Remuneration

1. Method of Operational Execution, Auditing and Oversight
   1. Method of Operational Execution
      The Board of Directors (meetings convened at least once a month) is the body responsible for deliberating on and making decisions regarding management policy and other important matters, while receiving oversight and auditing by the corporate auditors. Regular reports on the status of operational execution are mandated to be submitted to directors at Board of Directors meetings as part of the Board of Directors' role in overseeing operational execution. Each director strives to expedite decision-making in accordance with policies decided by the Board of Directors and based on clearly defined responsibilities and decision-making processes.
   2. Method of Auditing and Oversight
      • Internal Auditing
        Separate from the auditing carried out by the corporate auditors, the Company has established the Internal Auditing Department. This department monitors the status of internal control systems and administrative functions and works to ascertain any problems relating to these systems. The department also carries out regular internal audits and formulates concrete proposals aimed at improving operational procedures.
      • Audits by the Corporate Auditors
        The Board of Corporate Auditors rigorously audits the directors' execution of duty. The full-time corporate auditor meets with the representative director at least once a week to maintain rapport with the latter and monitor any important matters.
      • Independent Auditor
        MISUZU Audit Corporation (formerly ChuoAoyama PricewaterhouseCoopers)has been appointed as the Company's independent auditor, and the Company receives audits by MISUZU. The Certified Public Accountants to carry out audits of the Company were Takashi Nagasaka and Kenji Murayama. In addition, 15 Certified Public Accountants and seven associate accountants assisted in carrying out these audits. Furthermore, the independent auditor and the corporate auditors hold regular meetings, and, where necessary, exchange information to enhance their level of cooperation.
2. Process for Reinforcing Operational Execution and Oversight Functions
   1. Legal Counsel, Independent Auditor and Other Third-party Advisors
      In addition to accounting audits by the independent auditor, a variety of professional advice is solicited and received in relation to management activities, including from general legal counsel.
   2. Policies Aimed at Building a Corporate Culture Conducive to Thorough Compliance
      To foster a corporate ethos that proactively promotes adherence to laws and rules, the Company has formulated Compliance Guidelines and distributed a summary of this within the Company. In addition, internal training is carried out as part of our efforts to promote a shared understanding of compliance issues and disseminate a thorough awareness of the Compliance guidelines. Once a year our general legal counsel conducts a compliance seminar for Company managers in order to instill a strong compliance ethos within our corporate culture.

Policies Relating to Shareholders and Other Stakeholders

Measures to Revitalize the General Meeting of Shareholders and Facilitate the Exercise of Voting Rights

	Supplementary Explanation
Scheduling of the General Meeting of Shareholders to avoid the days on which a large number of companies hold meetings	To enable a large number of shareholders to attend, we strenuously avoid holding the General Meeting of Shareholders on days when many other companies hold such meetings.
Other	We select meeting locations near to railway stations to ensure easy access for attending shareholders.

Investor Relations (IR) Activities

	Briefing Provided by the Company's Representative in Person	Supplementary Explanation
Holding of regular briefings for individual investors	Yes	We participate in briefings and IR fairs, aimed at individual investors and organized by major media organizations and securities companies, approximately five times a year. At such events, the Company's representative provides an introduction to the Company's business. For shareholders, we hold an annual business briefing, at which the Company's representative provides an overview of the current business situation and future strategies.
Holding of regular briefings for analysts and institutional investors	Yes	After the announcement of fiscal year-end and interim results, results briefings are held, as well as an annual business briefing. In addition, the Company holds small meetings approximately 180 times per year with institutional investors, at which the Company's representative provides a briefing.
Holding of regular briefings for overseas investors	Yes	The Company conducts overseas IR road shows twice a year in June and November. The road shows cover institutional investors in Europe (United Kingdom, Switzerland, others), North America (New York), and Asia (Singapore, Hong Kong). Briefings are provided by the Company's representative.
Posting of IR materials on the Company's Web site	Yes	The Company's corporate brochure, investors' guide, financial results summary, business report, securities filing, and results briefing materials are posted on the Company's web site. In addition, an easy to understand explanation and video presentation about the Company's core business, Computer Aided Engineering (CAE), are also available through the Company's web site.
Establishment of a department (personnel) responsible for IR	-	The Public Relations Department is responsible for IR, with two personnel assigned to IR responsibilities.
Other	-	To eliminate any disparity in the level of information provided to overseas investors, the Company publishes English versions of its corporate brochure, investors' guide, press releases, financial results summaries and Web site. To help eliminate any disparity between information provided to institutional investors and individual investors, the Company provides timely access to streamed video of its results briefings.

Measures to Respect the Position of Stakeholders

	Supplementary Explanation
Establishment of internal rules to respect the position of stakeholders	Through the formulation of Compliance Guidelines and by promoting the Company's stance and Code of Conduct toward customers and shareholders, we demonstrate the importance of respecting those stakeholders' positions. We have also formulated a IR Basic Policy to make explicit the importance of building a relationship of trust with our stakeholders.
Implementation of environmental protection activities and corporate social responsibility (CSR) activities	From the current fiscal year, we have embarked on a plan to introduce an environmental management system. In the area of CSR, we are focusing on long-term stability and growth. By promoting our medium and long-term plans, we aim to contribute to society and promote career opportunities for disabled persons.
Formulation of policies for the provision of information to stakeholders	In addition to timely disclosure, we are pursuing a program of proactive IR. In the previous fiscal year, we received a 2005 Excellent IR Company Encouragement Award from the Japan Investor Relations Association. This demonstrates our strong commitment to the provision of information.

Basic Stance on Internal Control Systems and the Implementation of Such Systems

The Company recognizes the establishment and operation of appropriate internal control systems as important management issues. Consequently, the Board of Directors has formulated a basic policy on the establishment of internal control systems and has simultaneously begun the development of related internal rules.

1. System to Ensure that the Execution of Duties by the Directors Conforms to Laws and the Articles of Incorporation
   1. The regulations of the Board of Directors will be formulated in the Board of Directors and decisions regarding execution of the important business of the company are made in line with the standards stipulated in these rules.
   2. In order to supervise the execution of duties by the directors, in the regular monthly meeting of the Board of Directors and extraordinary meetings of the Board of Directors which are held as necessary, each director reports on the state of business execution, and monitors and supervises the execution of duties by the other directors.
   3. CYBERNET SYSTEMS is a company which has established a Board of Corporate Auditors. Each corporate auditor monitors and supervises the state of execution of duties by the directors by attending the meetings of the Board of Directors, and listening to the opinions about the directors.
   4. As the foundation of the compliance system, we have formulated the Compliance Principles which stipulate the standards for conduct which directors and staff must apply, and we will thoroughly implement these principles.
   5. We will stipulate the Regulations Concerning Protection of Internal Whistle-Blowers and will develop an internal whistle-blowing system which designates the corporate auditors as the direct recipients of information.
2. System Concerning Storage and Management of Information Related to Execution of Duties by the Directors
   The directors will store and manage the following documents (including electromagnetic records, the same hereinafter) according to the Document Management Regulations. These state that the document must be stored together with related documentation, using an appropriate method and in an easily retrievable condition, and must be kept for at least ten years.
   1. Minutes of the General Meeting of Shareholders
   2. Minutes of meetings of the Board of Directors
   3. Minutes of executive meetings
   4. Circulars for managerial approval
   5. Contracts
   6. Accounting records, financial documents
   7. Business Reports
   8. Copies of documents submitted to the tax office and other government bodies or the stock exchanges
3. Regulations and Other Systems Concerning Management of the Risk of Loss
   1. The directors will recognize the following forms of risk as risks involved in the execution of the business of the CYBERNET Group and establish a system for risk assessment and management which includes the appointment of a risk manager for each type of risk.
      1. Credit risk
      2. Market risk
      3. Internal control risk
      4. Law violation risk
      5. Information leakage risk
      6. Risk of disasters, etc.
      7. Other risks related to business continuity
   2. We will formulate the Risk Management Regulations as the foundation of the risk management system, decide on a risk manager for each type of risk, and establish a risk management system which complies with these regulations. In the event of unforeseen circumstances, in compliance with the Business Risk Management Regulations a task force headed up by the president will be established, and a system will be put in place to take prompt action to prevent the damage spreading and to keep it to a minimum.
4. System to Ensure Efficient Execution of Duties by the Directors
   1. As the foundation of the system to ensure efficient execution of duties by the directors, meetings of the Board of Directors will be held regularly once a month and in addition, extraordinary meetings will be held as necessary. Important matters related to the management policies and business strategies of CYBERNET SYSTEMS will, in principle, be discussed in the executive meetings which are held twice a month and are comprised of members of the Board of Directors and executives who are company staff, and after these deliberations executive decisions will be made by the Board of Directors.
   2. Concerning business execution based on decisions by the Board of Directors, the Division of Duties Regulations and Job Authority Regulations stipulate each person in charge and their responsibilities, and the details of procedures for business execution.
5. System to Ensure Execution of Duties by the Staff Conforms to Laws and the Articles of Incorporation
   1. As the foundation of the compliance system, we will stipulate the Compliance Principles and will develop a number of compliance regulations.
   2. We will stipulate the Regulations Concerning Protection of Internal Whistle-Blowers and will develop an internal whistle-blowing system which designates the corporate auditors as the direct recipients of information.
   3. In order to ensure the legality of our business execution and to avoid inappropriate risks from contracts, etc., we will establish the "legal check" system, and will establish its information counter in the General Administration Department. The General Administration Department carries out the legal check in cooperation with a corporate lawyer, etc., as necessary.
   4. In order to prevent and eliminate sexual harassment and to solve this problem, we will establish a dedicated hot line (the W-Line) inside the company, based on the Sexual Harassment Prevention Regulations.
   5. We will establish another hot line (the K-Line) which offers consultations regarding other labor conditions, work-related concerns and worries, etc.
   6. We will establish an Internal Auditing Department independent from execution divisions, as an internal audit division.
   7. We will establish an information security policy, and endeavor to enhance information security and to protect personal information.
6. System to Ensure the Appropriateness of Operations in the CYBERNET Group Comprising the Company and its Parent Company/Subsidiaries
   1. In order to ensure the appropriateness of operations in the CYBERNET Group companies, we will stipulate the CYBERNET Group's Company Principles as company principles which are to apply to all of the group companies. The group companies will stipulate a number of regulations with these company principles as their foundation.
   2. Concerning the business management of the group companies, we will stipulate the Management Regulations of Affiliated Companies and will carry out business management of our subsidiaries through final approval by CYBERNET SYSTEMS and a reporting system, and will carry out monitoring as necessary.
   3. If a CYBERNET SYSTEMS director discovers a law violation or other important matter related to compliance in a group company, he or she will report it to the CYBERNET SYSTEMS corporate auditors.
   4. If a subsidiary deems that business management or instructions from CYBERNET SYSTEMS are in violation of a law or that there is some other compliance-related problem, it will report the issue to the CYBERNET SYSTEMS corporate auditors. The corporate auditors will be able to state their opinion and require the implementation of measures for improvement.
   5. If it is deemed that business management or instructions from the parent company to CYBERNET SYSTEMS are in violation of a law or that there is some other compliance-related problem, it will be reported to the corporate auditors of the parent company. Furthermore, while preserving an appropriate and good relationship with the parent company, mutual independence will be maintained.
7. Matters Concerning the System for Staff Assisting the Duties of the Corporate Auditors and the Independence of the Staff Assisting the Duties of the Corporate Auditors from the Directors
   1. We will establish the Regulations Concerning the Staff Assisting the Duties of the Corporate Auditors and, when so requested by the corporate auditors, assistants to the corporate auditors will be appointed from among the staff of CYBERNET SYSTEMS as the staff assisting the duties of the corporate auditors. In order to ensure the independence of the assistants to the corporate auditors, the appointment, dismissal, evaluation, transfer, and salary revision, etc., of assistants to the corporate auditors will be decided by the Board of Directors after obtaining the agreement of the Board of Corporate Auditors.
   2. The assistants to the corporate auditors will be appointed exclusively to the Internal Auditing Department and will not jointly hold other positions related to the execution of business.
8. Systems Concerning Reporting to the Corporate Auditors Including System for Reporting by the Directors and Staff to the Corporate Auditors, and System to ensure that the Audits of Corporate Auditors are Implemented Effectively
   1. If a director discovers a serious law violation or another important fact related to compliance in CYBERNET SYSTEMS, he or she will report it to the corporate auditors immediately, and will report it immediately to an executive meeting when necessary for a reminder or for prevention of reoccurrence, etc.
   2. We will stipulate the matters that directors and staff must report to the corporate auditors and the timing of those reports and, based on the applicable regulations, the directors and staff will report important matters which have an impact on the business operations or business performance of CYBERNET SYSTEMS to the corporate auditors, as such matters arise. Furthermore, the corporate auditors will be able to require directors and staff to make reports at any time necessary.
   3. By maintaining appropriate operation of the Regulations Concerning Protection of Internal Whistle-Blowers and the hot lines, we will ensure an appropriate system for reporting law violations and other compliance-related problems to the corporate auditors.
   4. If the corporate auditors deem that there is a problem related to CYBERNET SYSTEMS's law compliance system, the Regulations Concerning Protection of Internal Whistle-Blowers, the various hot lines, or the independence or effectiveness of the internal auditing office, they will be able to state their opinion and require the implementation of measures for improvement.

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