Management Structure

Conducting Integrated Group-Wide Promotion of Compliance and Risk Management

In fiscal year 2003, the Daikin Group established the Corporate Ethics Committee as an organ for leading group-wide corporate ethics activities. In fiscal year 2007, the name was changed to the Corporate Ethics and Risk Management Committee for the purpose of carrying out integrated action in compliance and risk management. This committee holds two meetings a year.

In the area of legal compliance, compliance and risk management leaders (CRLs) in each division gather the latest legal information and check to see if laws are reflected in company rules and manuals. There are also monthly daily triple checks to ensure everyone is following laws and company rules and manuals. The results of these checks are reported at monthly CRL meetings for the sake of sharing information. There are also self assessments carried out once a year to ensure that employees are following the Compliance Action Guidelines stipulated in the Handbook for Corporate Ethics.

In the area of risk management, we have a group-wide cross-organizational risk management. Every year, self assessments are accompanied by risk assessment in all divisions. From the results, the key risks in each division are identified and measures are then created to reduce these risks.

Based on the results of self assessments and risk assessment, the Corporate Ethics and Risk Management Committee draws up an annual company-wide "to do" list, along with a time frame and managers responsible for carrying out the tasks on the list. These tasks are carried out using the PDCA management cycle.

For more information, see Risk and Measures.

Building Compliance and Risk Management Systems for Overseas Group Companies

Since fiscal 2003, nine major overseas group companies^* have had CRLs (compliance and risk management leaders) to lead compliance activities based on the Daikin Industries' model and adapted to their own particular situation. With compliance committees, Corporate Ethics Handbooks, and regular self assessment and risk management conducted, these companies strive for the same level of compliance as Daikin Industries. Since fiscal 2009, these overseas companies have, like Daikin Industries, decided on key issues to work on each year based on the results of self assessments and risk assessments.

In fiscal 2010, major overseas group companies requested their affiliates within the region to conduct self assessments and risk assessments with the aim of stepping up compliance and risk management activities across the entire group.

Sharing Information with Major Overseas Group Companies

Representatives of Daikin Industries regularly visit these companies and meet with the CRLs to see how they are progressing and share valuable information on overall group compliance and risk management.

In fiscal 2010, Daikin Industries representatives joined the meetings of legal managers at Daikin group companies in China and Thailand, and discussed with legal managers in Daikin companies in the U.S. and Europe future plans for legal matters.

In fiscal 2011, Daikin will speed up its compliance measures for major overseas group companies in each region, as well as improve the sharing of information among companies.

* Major overseas companies:
Daikin Europe N.V., Daikin America Inc., Daikin Air Conditioning (Americas) Inc, Daikin Air conditioning (Singapore) Pte., Daikin Industries (Thailand) Ltd., Daikin Australia Pty., Ltd., Daikin Air-conditioning (Shanghai) Co., Ltd., Daikin (China) Investment Co., Ltd., Daikin Fluorochemicals (China) Co., Ltd.

Corporate Ethics and Risk Management

Handbook for Corporate Ethics

Daikin Industries' Handbook for Corporate Ethics Revised; Group Divisions and Overseas Group Companies Follow

In fiscal 2008, Daikin Industries revised the Handbook for Corporate Ethics, a valuable guide to employee behavior. At that time, hearings were held with overseas group companies and the Group Compliance Guidelines were formulated to clarify common compliance matters for the entire group worldwide. Employees in Japan have been given compliance cards and are urged to carry these with them at all times to ensure that they always follow rules and ethics.

The revisions provided an opportunity for renewed education and training. The multi-faceted training uses every opportunity to teach the basics of the handbook items and carry out practical study and discussion of case studies in a question-and-answer format.

With revisions to the Handbook for Corporate Ethics, we also revised the departmental handbook that each company division could keep up with relevant laws. Each division uses these handbooks to conduct training whenever possible at each base at for each job level.

At major overseas companies as well, the revised handbooks from Japan were the basis of ethics handbooks that were revised by each company in fiscal 2008.

• See Group Compliance Guidelines
• Ensuring Legal Compliance in the Entire Supply Chain (Responsibility to Business Partners)

Checking Legal Compliance through Audits

Legal Audits Ensure Laws are Being Followed

Based on self assessment results, legal compliance audits are conducted to make sure that all Daikin Industries business divisions and group companies in Japan are abiding by laws and regulations.

In fiscal 2010, audits were conducted in six divisions of Daikin Industries and group companies in Japan. All relevant documents were inspected and compliance and risk management leaders (CRLs) led hearings with managers. Audit results were reported to general managers so that everyone could share an awareness of what must be done to improve compliance.

Number of compliance violations, countermeasures

Education

Case Studies on Intranet Help Spread Knowledge on Compliance

The revisions to the Handbook for Corporate Ethics in fiscal 2008 provided an opportunity to also revise our education program to make it more focused on the practical matters of compliance. The Compliance Action Guidelines, created based on the Group Compliance Guidelines, were the topic of monthly training for compliance and risk management leaders (CRLs) in all divisions starting in September 2008. There was also training that used case studies to teach the most relevant laws in the areas of marketing, manufacturing, and purchasing. As well, new employees and newly appointed managers received compliance training.

In fiscal 2010, we strove to boost compliance knowledge and awareness with illustrated training material on the intranet on the subject of compliance case studies. Centered around specially assigned employees, the training material used easy-to-understand language and illustrations in stories based on eight topics including information management and the Anti-Monopoly Act. So far the site has had over 40,000 hits.

We also held a seminar for officers on insider trading rules, as well as courses for sales managers on the Premiums and Representations Act and labeling restrictions, and for production division purchasers on the Subcontract Act.

We are creating a second set of case studies so that we can continue to raise awareness of compliance.

Continuous Compliance Education for Overseas Group Companies

Daikin Industries requires overseas group companies to strictly follow their respective corporate ethics handbooks and to educate their employees on these handbooks.

Each major overseas company has its own compliance system and conducts compliance education according to its particular needs.

In fiscal 2010, Shanghai Daikin Air Conditioning Co., Ltd. translated Daikin Industries' collection of case studies into Chinese for in-house compliance education.

In-House Information

Compliance Information Archive Used to Relay Importance of Compliance to Employees

To raise employees' awareness of compliance, general managers and managers take every opportunity to give talks on the importance of compliance that draw on their wealth of experience.

In November 2009, Daikin Industries created a publication called the Compliance Information Archives, a compilation of information that is given to managers. They then use this to continually keep their employees informed and aware of the importance of compliance.

In fiscal 2010, the archives were revised to include the past year of new compliance information.

We are looking into giving this information to a wider range of people.

Help-Line

Help-Line for Corporate Ethics Offers Counseling and Gathers Opinions

We have a Help-Line for Corporate Ethics in the Legal Affairs, Compliance, and Intellectual Property Center, where employees from Daikin Group companies worldwide including retired employees can give opinions or receive consultation on all corporate ethics matters.

Although corporate ethics issues are normally taken care of in the part of the organization where they occur, sometimes this is not easy. In that case, the corporate ethics manager, representing the Help-Line for Corporate Ethics, consults directly with the employee to hear his or her opinions. The help-line is designed to be worry-free and accessible: users can contact it by phone, fax, or mail and their names are kept confidential.

All queries and opinions to the help-line are investigated, and discussions are held with the related company division, with measures promptly carried out so that problems do not reoccur. Drastic measures will be carried out in the case of a potential company-wide problem.

To ensure that the help-line is well publicized, the help-line's contact information is provided on the compliance card that all employees carry with them at all times.

Daikin Australia Pty., Ltd., Daikin Europe N.V., and Daikin Industries (Thailand) Ltd. each has its own help-line for corporate ethics.

Risk and Measures

Identifying the Most Important Risks, then Formulating and Implementing Measures

With the Daikin Group expanding rapidly around the globe, we introduced company-wide, cross-organizational risk management in 2006 in order to quickly get an overall picture of risks from a global point of view and reduce the risks.

In fiscal 2010, we identified risks related to product liability and quality, information leaks, and transfer pricing taxation as the most important risk areas, and the Corporate Ethics and Risk Management Committee created measures to deal with these.

And for the divisions and group companies in Japan that that carried out risk assessment, hearings were held to determine what progress is being made in implementing legal audits. And during visits to overseas group companies, Daikin Industries confirmed progress in risk assessment implementation and measures being taken in response to important risks.

Most Important Risks and Measures

Product Liability and Quality Risk

In fiscal 2010, the Air Conditioning Manufacturing Division vowed to "ensure the level of quality needed to build trust among customers," one of the three pillars crucial to reaffirming Daikin's reputation for technology. To this end, officers in charge of quality do a weekly follow-up covering everything from confirmation of where the defect occurred to prevention of reoccurrence. The aim is to ensure that defects to not happen again. And as a way to develop higher levels of quality, we switched to independent operation of design review with the development team at the core.

Furthermore, to ensure timely and appropriate measures to deal with defects, information related to product safety is accumulated and reported monthly.

Information Leaks Risk

In October 2010, information managers and IT security managers held a joint meeting at which they once again drove home the importance of managing corporate secrets and protecting personal information.

We plan to take the hardware technology already in use for information management in the Air Conditioning Manufacturing Division and apply it for measures in other business divisions.

Transfer Pricing Taxation Risk

With development bases expanding throughout the world, we must deal with the transfer pricing taxation risk that occurs during licensing of intellectual property generated at each base within the group. For example, we formulated the Global Group Intellectual Property Management Guidelines, which we ensure are familiar with the entire group.

Preparing for Earthquakes

Preparing for Earthquakes through Safety Confirmation System and Building Reinforcement

In the event of an earthquake, ensuring the safety of employees and their families is first and foremost. To this end, in fiscal 2008 we built a safety confirmation system in which we have the cell phone numbers of all Daikin Industries' employees and their family members on file. In fiscal 2009, we expanded this system to include all Daikin Group company employees. We are also working towards protecting employees by gradually reinforcing company buildings against earthquakes.

We are currently in the process of formulating a business continuity plan (BCP) under which we identify priority areas of business so that we can continue operations or recover within a short time after an earthquake.

Following the March 2011 Great East Japan Earthquake, we are reviewing and upgrading our disaster response measures.

For more information, see Response to the Great East Japan Earthquake.