Honda 2007 Annual Report Download - page 51

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Code of Ethics
The Company has also established a “Code of
Ethics” as set forth in the rules of the U.S. Securities
and Exchange Commission regulations pursuant to
Section 406 of the Sarbanes-Oxley Act of 2002.
Companies listed on the NYSE must comply with cer-
tain standards regarding corporate governance under
Section 303A of the NYSE Listed Company Manual.
However, listed companies that are foreign private
issuers, such as Honda, are permitted to follow
home country practice in lieu of certain provisions of
Section 303A.
The following table shows the significant differ-
ences between the corporate governance practices
followed by U.S. listed companies under Section
303A of the NYSE-listed Company Manual and those
followed by Honda.
Corporate Governance Practices Followed by
NYSE-listed U.S. Companies
A NYSE-listed U.S. company must have a majority of directors meeting
the independence requirements under Section 303A of the NYSE-Listed
Company Manual.
A NYSE-listed U.S. company must have an audit committee composed
entirely of independent directors, and the audit committee must have at
least three members.
A NYSE-listed U.S. company must have a nominating/corporate gover-
nance committee composed entirely of independent directors.
A NYSE-listed U.S. company must have a compensation committee
composed entirely of independent directors.
A NYSE-listed U.S. company must generally obtain shareholder approval
with respect to any equity compensation plan.
Corporate Governance Practices Followed by Honda
For Japanese companies that employ a corporate governance system
based on a board of corporate auditors (the “corporate auditor system”),
including Honda, Japan’s company law has no independence require-
ment with respect to directors. The task of overseeing management and,
together with the accounting audit firm, accounting is assigned to the
corporate auditors, who are separate from the company’s management
and who satisfy the independency requirements under Japan’s Company
Law. In the case of Japanese companies that employ the board of corpo-
rate auditors system, including Honda, at least half of the corporate
auditors must be “outside” corporate auditors who must meet additional
independence requirements under Japan’s company law. An outside
corporate auditor is defined as a corporate auditor who has not served as
a director, accounting councilor, executive officer, manager or any other
employee of the company or any of its subsidiaries. Currently, Honda has
three outside corporate auditors which constitute 50% of Honda’s
corporate auditors.
Like a majority of Japanese listed companies, Honda employs the corpo-
rate auditor system as described above. Under this system, the board of
corporate auditors is a legally separate and independent body from the
board of directors. The main function of the board of corporate auditors is
similar to that of independent directors, including those who are members
of the audit committee, of a U.S. company: to monitor the performance of
the directors, and review and express opinion on the method of auditing
by the company’s accounting audit firm and on such accounting audit
firm’s audit reports, for the protection of the company’s shareholders.
Japanese companies that employ a corporate auditor system, including
Honda, are required to have at least three corporate auditors. Currently,
Honda has six corporate auditors. Each corporate auditor has a four-year
term. In contrast, the term of each director of Honda is one year.
With respect to the requirements of Rule 10A-3 under the U.S. Securities
Exchange Act of 1934 relating to listed company audit committees,
Honda relies on an exemption under that rule which is available to foreign
private issuers with boards of corporate auditors meeting certain criteria.
Honda’s directors are elected at a meeting of shareholders. Its Board of
Directors does not have the power to fill vacancies thereon.
Honda’s corporate auditors are also elected at a meeting of shareholders.
A proposal by Honda’s Board of Directors to elect a corporate auditor
must be approved by a resolution of its Board of Auditors. The Board of
Auditors is empowered to request that Honda’s directors submit a pro-
posal for election of a corporate auditor to a meeting of shareholders. The
corporate auditors have the right to state their opinion concerning election
of a corporate auditor at the meeting of shareholders.
Maximum total amounts of compensation for Honda directors and
corporate auditors are proposed to, and voted on, by a meeting of
shareholders. Once the proposals for such maximum total amounts of
compensation are approved at the meeting of shareholders, each of the
Board of Directors and Board of Auditors determines the compensation
amount for each member within the respective maximum total amounts
Currently, Honda does not adopt stock option compensation plans. If
Honda adopts such plans, Honda must obtain shareholder approval for
stock options only if the stock options are issued with specifically favor-
able conditions or price concerning the issuance and exercise of the
stock options.