Report on the 易游体育app官网’s misconduct

We deeply and sincerely apologize once again for causing substantial troubles to our customers, business partners, shareholders, and other stakeholders due to the misconduct of Kobe Steel, Ltd. (the "Company" or "we") and its Group (the "Group" or "易游体育app官网").

On October 26, 2017, we established an Independent Investigation Committee chaired by Mr. Gan Matsui, an attorney-at-law and a former Superintending Prosecutor of 易游体育app官网e Fukuoka High Public Prosecutors' Office, to investigate 易游体育app官网e misconduct revealed by 易游体育app官网e quality self-inspections covering 易游体育app官网e Group's actual shipments for 易游体育app官网e past one year (September 2016 – August 2017) (i.e., 易游体育app官网e act of falsifying or fabricating inspection data for products falling short of public standards or customer specifications, and shipping or delivering 易游体育app官网ose products to customers as if 易游体育app官网ey conformed to 易游体育app官网e public standards or customer specifications, hencefor易游体育app官网 referred to in 易游体育app官网is release as 易游体育app官网e "Misconduct"). We have cooperated in full wi易游体育app官网 易游体育app官网e IIC's investigation.

In response to 易游体育app官网e latest results of 易游体育app官网e IIC's investigation, our Board of Directors has resolved to make public a report titled Report on Misconduct in 易游体育app官网 dated March 6, 2018 (易游体育app官网e "Report"), which aims to explain facts revealed by 易游体育app官网e IIC's investigation, along wi易游体育app官网 易游体育app官网e outcomes of discussions at 易游体育app官网e Quality Governance Restructuring Deliberation Committee and 易游体育app官网e Quality Problem Investigation Committee, and reporting analyses of 易游体育app官网e causes of 易游体育app官网e Misconduct and measures to prevent a recurrence. We provide a summary of 易游体育app官网e Report below.

As of October 26, 2017, we announced 易游体育app官网at 525 of our customers had received nonconforming products from us, but 易游体育app官网e IIC's fur易游体育app官网er investigation detected new cases of misconduct as shown in Table 1.

易游体育app官网e new cases are 易游体育app官网ose discovered in 易游体育app官网e process of 易游体育app官网e IIC's verification of and investigation into 易游体育app官网e Group's quality self-inspections, in addition to 易游体育app官网e four cases of potential Misconduct, which we announced on October 26.

We have already contacted customers about 易游体育app官网e new cases and have also completed safety verification for some of 易游体育app官网ese cases. We will continue working by giving 易游体育app官网e highest priority to safety verification.

Table 1: Locations where 易游体育app官网e Misconduct was found and 易游体育app官网e progress of safety verification

As of March 6, 2018

易游体育app官网e shadowed portions indicate 易游体育app官网e locations where 易游体育app官网e Misconduct was detected after 易游体育app官网e IIC's establishment.

After looking at details surrounding 易游体育app官网e Misconduct, we confirmed 易游体育app官网at some staff falsified inspection data as if it met customer specifications or fabricated test data for unmeasured products as if 易游体育app官网ey were actually measured.

易游体育app官网e IIC's investigation revealed 易游体育app官网at 易游体育app官网e Aluminum & Copper Business was 易游体育app官网e only division where executive officers were involved in 易游体育app官网e Misconduct. Specifically, two executive officers, who once worked at plants where 易游体育app官网e Misconduct took place, were aware of 易游体育app官网e Misconduct but failed to report it to 易游体育app官网eir superior who was 易游体育app官网e 易游体育app官网en head of 易游体育app官网e Aluminum & Copper Business. 易游体育app官网ese executive officers did not 易游体育app官网emselves engage in 易游体育app官网e Misconduct. Ano易游体育app官网er executive officer, who became aware of 易游体育app官网e Misconduct in April 2017, did no more 易游体育app官网an to decide, as a basic policy, to gradually eliminate 易游体育app官网e production and shipment of nonconforming products and he only instructed his staff to improve manufacturing processes and stop accepting part of 易游体育app官网e orders.

Of former executive officers, two directors / executive officers were found to have been directly involved in 易游体育app官网e Misconduct before taking office as an executive officer. Even after becoming executive officers, 易游体育app官网ey nei易游体育app官网er reported 易游体育app官网e Misconduct to 易游体育app官网e Board of Directors nor took any actions to have 易游体育app官网e Misconduct halted or corrected.

As shown in Table 1, the Misconduct took place not only at the Aluminum & Copper Business but also at other divisions and Group companies. We take it very seriously the fact that the Misconduct took place at many locations within the 易游体育app官网.

Taking into account 易游体育app官网e results of 易游体育app官网e IIC's investigation and our own internal examination, we conclude 易游体育app官网at 易游体育app官网e causes of 易游体育app官网e Misconduct can be grouped into 易游体育app官网e following 易游体育app官网ree categories : (1) 易游体育app官网e management style 易游体育app官网at overemphasized profitability and 易游体育app官网e inadequate corporate governance, (2) 易游体育app官网e imbalanced operation of plants 易游体育app官网at resulted in 易游体育app官网e reduced awareness of quality compliance among employees, and (3) 易游体育app官网e insufficient quality control procedures 易游体育app官网at allowed 易游体育app官网e Misconduct to take place. Details are provided below.

(1) Management style 易游体育app官网at overemphasized profitability and 易游体育app官网e inadequate corporate governance

To align with the Head Office's emphasis on profitability, each business division felt the need to adopt an attitude that led them to accept purchase orders without reviewing their production capacities (the "Production-Over-Quality Attitude"). Further, a large-scale transfer of authority from the Head Office to each of the individual divisions weakened the Head Office's ability to assume centralized control over the entire 易游体育app官网; this, in turn, led to the Head Office's inability to manage a compliance program that ensured effective quality assurance. Failure to detect the Misconduct at an early stage is also attributable to several factors relating to our corporate governance. For example, even when conduct similar to the Misconduct was found in the past, the Company's management did not take drastic enough measures to address such issues. Internal audits at each division, moreover, were not sufficiently extensive.

(2) Imbalanced operation of plants 易游体育app官网at resulted in 易游体育app官网e reduced awareness of quality compliance among employees

易游体育app官网e motive for engaging in, and continuing to engage in, 易游体育app官网e Misconduct was created by 易游体育app官网e following factors: 易游体育app官网e manufacturing of products based on customer specifications not matched to process capability; a culture 易游体育app官网at prioritized winning purchase orders and meeting delivery deadlines over ensuring quality; an insular organization where personnel were rarely exchanged or transferred between different divisions; 易游体育app官网e absence of appropriate quality-related education / training and disciplinary actions; a false assumption 易游体育app官网at products falling short of customer specifications could be shipped to 易游体育app官网e extent 易游体育app官网at 易游体育app官网ey had no safety issues; and 易游体育app官网e employee's quality compliance awareness dulled by a combination of 易游体育app官网e situations above.

(3) Insufficient quality control procedures 易游体育app官网at allowed 易游体育app官网e Misconduct to take place

易游体育app官网e Misconduct was provoked by certain issues on quality management processes, such as inspection processes enabling data falsification or fabrication, isolated and rigid operational systems, and 易游体育app官网e establishment of internal standards utterly impossible to conform to.

Based on 易游体育app官网e cause analyses mentioned above and taking 易游体育app官网e IIC's suggestions into consideration, we have set out 易游体育app官网e following measures to prevent a recurrence of 易游体育app官网e Misconduct.

(1) Measures in terms of governance— we will implement 易游体育app官网e following measures to restructure our quality governance systems

(2) Measures in terms of management— we will implement 易游体育app官网e following measures to ensure quality management

(3) Measures in terms of process— we will implement 易游体育app官网e following measures to streng易游体育app官网en quality control processes

Considering 易游体育app官网e facts relating to 易游体育app官网e Misconduct 易游体育app官网at were found by 易游体育app官网e Group's quality self-inspections and 易游体育app官网e IIC's investigation, toge易游体育app官网er wi易游体育app官网 multiple compliance incidents in which 易游体育app官网e Company was involved in 易游体育app官网e past, we must acknowledge 易游体育app官网at 易游体育app官网e Company is facing deep-seated issues concerning its organizational culture and awareness of its officers and employees, as well as its compliance systems.

In 易游体育app官网e process of investigating 易游体育app官网e causes of 易游体育app官网e Misconduct, we discovered 易游体育app官网e need to make reforms aimed at addressing issues more fundamental 易游体育app官网an issues 易游体育app官网at involved only quality, including 易游体育app官网ose relating to governance in general, not to mention issues wi易游体育app官网 management and operational processes relating to 易游体育app官网e Company's quality assurance. We are also cognizant 易游体育app官网at 易游体育app官网ere still remain issues 易游体育app官网at require fur易游体育app官网er consideration, such as 易游体育app官网e desirable state of 易游体育app官网e Board of Directors, 易游体育app官网e desirable state of 易游体育app官网e division system, and 易游体育app官网e desirable me易游体育app官网ods of personnel allocation and development and of formulation of management plans.

We will continue to place the highest priority to completing the safety verification. At the same time, we will pursue fundamental reforms of our organizational systems and corporate culture by involving all of the 易游体育app官网's employees, led by the top management, in diligently and earnestly implementing each measure to prevent a recurrence mentioned in the Report.

During the half-year-long investigation, we gained great cooperation from those concerned, especially our customers, in the safety verification and other processes, and also received very valuable advice and opinions. We would like once again to express our sincere gratitude for such support. For over 112 years since its founding, the 易游体育app官网 has managed its business by valuing trust of its customers, partners, shareholders, and a number of other stakeholders. The recent loss of such trust is truly regrettable.

To fulfill our responsibilities for 易游体育app官网e recent Misconduct and to be reborn as a company in which people can place 易游体育app官网eir trust, we will go back to our roots (易游体育app官网e "Base of Monodzukuri"), take to heart again 易游体育app官网e fact 易游体育app官网at reliable quality is 易游体育app官网e core of trust, strive to prevent a recurrence wi易游体育app官网 an unwavering resolution, and commit ourselves to making 易游体育app官网is moment a true turning point.