ORIX Corporation
3-22-8 Shiba, Minato-ku
Tokyo 105-8683
Japan

February 18, 2003

Via E-mail: rule-comments@sec.gov

Re: Standards Relating to Listed Company Audit Committees
File No. S7-02-03

Mr. Jonathan G. Katz
Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington D.C. 20549-0609

Dear Mr. Katz:

We are writing to comment on the SEC's proposed rule regarding standards for listed company audit committees (File No. S7-02-03). The SEC has proposed the new rule to implement Section 301 of the Sarbanes-Oxley Act.

Background

ORIX Corporation is a Japanese company whose ADRs have been listed on the New York Stock Exchange since 1998. Despite being a relatively new U.S. public reporting company, we have a track record for embracing international best practices on corporate governance and financial reporting that we believe makes us unique compared to many other Japanese companies.

For example, in the mid-1960s we became one of the first Japanese companies to publish U.S. GAAP financial statements, and today we exceed the SEC's minimum reporting requirements by publishing our U.S. GAAP financial statements on a quarterly basis. More recently, we have added three "outside" directors to our board of directors. We have also reduced the size of our board of directors and adopted the "executive officer" system to more effectively separate the day-to-day oversight of our business by senior management from the strategic decision-making and monitoring functions of our board of directors.

We strongly support the efforts of Congress and the SEC to improve corporate governance practices in general and to promote standards for the effectiveness and oversight of public company financial reporting in particular. We share the view that good corporate governance and sound financial reporting practices enhance shareholder protection and investor confidence in the capital markets, and we believe that our track record on corporate governance and financial reporting demonstrates that we are committed to continually improving our practices in these areas.

We would also like to note that Japan, like other countries, has recently adopted significant changes to its corporate governance system in its continuing effort to enhance the oversight of public company financial reporting. In this regard, we believe that legislators, regulators and many public companies in Japan are striving to attain investor protection goals that are substantially equivalent to those upon which Section 301 of the Sarbanes-Oxley Act is based.

Executive summary

We commend the SEC for seeking to include appropriate exemptions in the proposed rule for foreign private issuers with home country corporate governance arrangements that differ significantly from general practices among U.S. corporations. We believe that the SEC's proposed exemptions implicitly acknowledge that corporate governance systems in other countries are capable of achieving the same fundamental objective of Section 301 of the Sarbanes-Oxley Act and the SEC's proposed implementing rule, namely, enhancing investor confidence in financial reporting. For that reason, we also believe that including these exemptions in the proposed rule is entirely consistent with protecting the interests of shareholders in U.S. public companies.

The SEC explicitly recognized in its proposing release that various requirements of the proposed rule may conflict with legal requirements, corporate governance standards and the methods for providing auditor oversight in the home countries of some foreign private issuers. We believe these conflicts do exist for Japanese foreign private issuers, and we appreciate the opportunity to highlight for the SEC the ways in which the proposed rule conflicts with our home country arrangements.

We have summarized below our main issues with the proposed rule:

• The exemptions for foreign private issuers with home country corporate governance systems that differ significantly from those in the United States should be flexible enough to cover future changes in those foreign systems. We believe the proposed exemptions for foreign private issuers that operate in countries (like Japan) which have different corporate governance systems than the United States should be flexible enough to take account of the evolving nature of corporate governance systems in those other countries. As proposed, the rule does not provide for this flexibility. For example, in Japan, companies will be permitted to adopt a new "board committee" model beginning in April 2003 in lieu of the current "statutory auditor" model. However, the proposed exemption for companies that currently operate with statutory auditors (including Japanese companies) would not be available to Japanese companies that embraced the new board committee model as part of their corporate governance. We believe the final rule should be flexible enough to exempt not only the statutory auditor model but also the board committee model of corporate governance in Japan. If the final rule does not provide this flexibility, we believe the SEC should at least be willing to grant individual exemptions to Japanese companies that embrace the board committee model, so long as the SEC is satisfied that this new model is consistent with the objective of enhancing investor protection.

• The general exemption in the proposed rule for foreign private issuers that operate with statutory auditors may technically not be available to Japanese companies due to inconsistencies between the exemption and actual practices in Japan. On a more technical level, we believe that the proposed exemption from certain of the audit committee requirements for public companies in countries (like Japan) where companies rely on statutory auditors should be modified to address some inconsistencies with actual requirements and practices in Japan. Otherwise, this exemption will not be available to Japanese foreign private issuers, and we do not believe this is what the SEC intended.

• The disclosure obligations of foreign private issuers that rely on exemptions from the rule's requirements should ensure that U.S. investors receive meaningful information about the corporate governance practices of those issuers. We believe the final rule should require meaningful disclosure by foreign private issuers that have corporate governance arrangements that differ materially from those in the United States and that intend to rely on exemptions from the audit committee requirements of the rule. This will give foreign private issuers that rely on these exemptions the opportunity to demonstrate the scope of their corporate governance efforts and thus ensure that U.S. investors can make informed decisions about the adequacy of those alternative arrangements. We do not believe that the rule, as proposed, will ensure that investors receive this kind of disclosure.

Comments on the proposed rule

We have outlined below our specific concerns with the audit committee rule in the form proposed by the SEC. We have also attached exhibits to this letter to give the SEC more detailed background on some of the points we raise below.

1. The exemptions for foreign private issuers with home country corporate governance systems that differ significantly from those in the United States should be flexible enough to cover future changes in those foreign systems. For example, the proposed rule should accommodate Japanese foreign private issuers that adopt the new "board committee" model (in lieu of the current statutory auditor model) when that corporate governance option first becomes available to them in April 2003.

Japanese legislators and regulators, like their counterparts in the United States and other countries, have been implementing reforms in the corporate governance practices of public companies in Japan. We have highlighted some of these recent efforts in Japan in Exhibit A to this letter.

Recent changes in Japanese law that were enacted in May 2002 and that become effective in April 2003 will enable Japanese public companies, for the first time, to adopt a board committee model of corporate governance. Japanese companies that adopt this new model will create a board-level audit committee in lieu of the traditional board of statutory auditors, which by law must be abolished. Details of the new board committee model are summarized in Exhibit B to this letter. As noted in Exhibit B, the new Japanese board committee model is based upon the U.S. model, but the two models are not identical in all significant respects, particularly with respect to (1) requirements for including "outside" directors on the audit committee and (2) responsibilities of audit committees for auditor oversight.

ORIX believes that adopting the board committee model would be a significant step forward in enhancing its corporate governance practices. Unfortunately, the SEC's proposed rule - while it would appear to exempt the "status quo" corporate governance practices of public companies in Japan regarding financial reporting and auditor oversight - would not be flexible enough to exempt the new model. As a result, the rule would require Japanese foreign private issuers that adopted the board committee model to comply with the "full-blown" audit committee requirements of the rule, not all of which are consistent with evolving corporate governance practices in Japan, including those relating to the composition and responsibility of audit committees.

We believe the final rule should recognize the evolving nature of corporate governance practices in other countries, including Japan, and be flexible enough to permit foreign private issuers to embrace advances in their home country corporate governance systems. The rule in its proposed form does not achieve this result.

We also believe the SEC should have an interest in encouraging Japanese foreign private issuers to adopt audit committees, even if those audit committees (in their nascent stages of development) do not strictly meet all of the specific requirements contemplated by Section 301 of the Sarbanes-Oxley Act, particularly because this newly available option in Japan is premised on the same goal of providing effective oversight of public company financial reporting. However, the only exemption contained in the proposed rule is for Japanese companies that choose to retain the traditional statutory auditor approach. We believe this will unnecessarily restrict Japanese companies such as ORIX from adopting new corporate governance practices designed to enhance shareholder protection.

For the reasons described above, we believe the final rule should give Japanese foreign private issuers that adopt audit committees the same relief that the SEC appears to be prepared to give Japanese foreign private issuers that operate with statutory auditors - namely, exemption from the independence and oversight responsibility requirements of the new rule. Alternatively, we believe the final rule should impose "relaxed" or "gradual" audit committee requirements on Japanese foreign private issuers that choose to adopt audit committees as part of their corporate governance model. The SEC could achieve this result by giving these companies an appropriate transition period (say, three years) before they are required to comply with the full-blown requirements of the SEC's audit committee rule.

If the final rule does not provide for this flexibility, we believe the SEC should at least be willing to grant individual exemptions to Japanese foreign private issuers that embrace the board committee model, so long as the SEC is satisfied that adopting this new model is consistent with the objective of enhancing investor protection. The proposing release suggests that the SEC does not intend to entertain individual exemption or no-action requests, but we believe there will be instances in which relief would be appropriate for foreign private issuers (like ORIX) that would like to move forward on their corporate governance practices but which find themselves technically unable to do so because of the specific requirements of the SEC's audit committee rule.

2. The general exemption in the proposed rule for foreign private issuers that operate with statutory auditors may technically not be available to Japanese companies due to inconsistencies between the exemption and actual practices in Japan.

We believe certain aspects of the proposed rule would (or may) preclude Japanese foreign private issuers with statutory auditors from relying upon the proposed exemption from certain of the audit committee requirements. This is because parts of the proposed exemption are inconsistent with actual corporate governance practices in Japan. As a result, Japanese foreign private issuers with statutory auditors have no assurances that the proposed audit committee exemption will be available to them, and we do not believe this was the result intended by the SEC.

We have highlighted the problematic provisions below, together with suggestions on how the SEC should address these problems. (We have also included as Exhibit C to this letter an overview of actual requirements and practices in Japan, so that the SEC has a better understanding of the conflicts with Japanese practices.) We believe the changes or clarifications we suggest below are consistent with the purposes of Section 301 of the Sarbanes-Oxley Act and with the protection of investors.

We note that audit committees in Japan will have powers and duties that are substantially similar to those given to statutory auditors. Accordingly, the inconsistency comments we highlight below with respect to actual practices in Japan will be equally true with respect to audit committees once that corporate governance model becomes available to Japanese companies on April 1, 2003.

A. Japanese companies with statutory auditors may not be able to satisfy the "auditor oversight" requirement of the audit committee exemption in the form proposed by the SEC, since the requirement suggests that statutory auditors must have responsibilities that are not consistent with actual practice in Japan.

The proposed "audit committee exemption" for foreign private issuers with statutory auditors, i.e., proposed Rule 10A-3(c)(2) under the Securities Exchange Act of 1934, requires as follows (emphasis added):

"(E) Such board or body, or statutory auditors, [must be] directly responsible, in accordance with standards prescribed by home country legal or listing provisions, for the oversight of the work of any registered public accounting firm engaged (including resolution of disagreements between management and the auditor regarding financial reporting) for the purpose of preparing or issuing any audit report or related work or performing other audit, review or attest services for the issuer;"

As proposed, this condition to the audit committee exemption is or may be impossible for Japanese companies to satisfy. This is because the actual function and responsibilities of statutory auditors in Japan, including the way in which statutory auditors interact with public accounting firms, is somewhat inconsistent with the requirements of the condition. We note some of the reasons for this below:

• Directly responsible for work of auditors. It is not clear to us that the relationship between statutory auditors and public accounting firms in Japan would satisfy the "directly responsible" requirement as currently proposed. In Japan, a public accounting firm is required to report directly to the statutory auditors with respect to its audit of the company's financial statements. Does this relationship suffice to make the statutory auditors "directly responsible" for the work of the public accounting firm? Does being "directly responsible" require the statutory auditors to supervise the work of the public accounting firm on its audit of the company's financial statements - or is having ultimate responsibility for this work sufficient?

  We believe the final rule should use a less precise standard than "directly responsible", i.e., one that is flexible enough to accommodate actual practices in Japan while maintaining the basic concept. Alternatively, we believe the SEC should provide appropriate guidance on the intended meaning of the "directly responsible" standard, either in instructions to the final rule or in the SEC adopting release, so that Japanese foreign private issuers can have more clarity on whether Japanese practice would satisfy this condition. See Exhibit C.

• Resolution of disagreements between management and auditors. In Japan, statutory auditors are not given specific authority to resolve disagreements between management and the company's public accounting firm on financial reporting, nor does this happen in practice. While statutory auditors may have the indirect ability to influence the outcome of disagreements between management and public accounting firms - for example, by withholding their approval of the financial statements that are presented to shareholders for approval - they are technically not involved in the discussions that occur between management and public accounting firms.

  We believe the final rule should omit the parenthetical reference to disagreements between management and the company's auditors altogether, since this is inconsistent with actual practice in Japan. See Exhibit C.

• Oversight of work on all audit reports. Japanese law gives statutory auditors the responsibility and authority to review the audit of the company's annual non-consolidated financial statements that are prepared in accordance with Japanese generally accepted accounting principles. This is because the non-consolidated Japanese GAAP financial statements represent (at least currently) the "primary" audited financial statements of Japanese public companies. In practice, some Japanese companies (including ORIX) ask their statutory auditors to review other audited financial statements, including those that may be prepared on a consolidated basis. However, this review is technically not required by Japanese law, and there is a question as to whether statutory auditors have any power or authority (or responsibility) to question or "push back on" anything other than the company's audited non-consolidated Japanese GAAP financial statements.

  Similarly, there is a question whether the board of directors of a Japanese company is even permitted to delegate to the statutory auditors the responsibility for overseeing the audit work performed by the company's "registered public accounting firm" within the meaning of the Sarbanes-Oxley Act and/or for reviewing the U.S. GAAP financial statements that are audited by that accounting firm. (See further discussion of this issue below under paragraph (C).) While Japanese law could permit a board of directors to agree (by its internal rules) to consult with statutory auditors on these matters, it is not clear as a legal matter that a board of directors could actually delegate responsibility for these matters to the board of statutory auditors.

  We believe the final rule should be consistent with actual practice in Japan, by limiting the oversight responsibility of statutory auditors for work on audit reports to that which is required by local law. Alternatively, we believe the final rule should provide that the "directly responsible" standard would be satisfied if the foreign private issuer's board of directors agreed (pursuant to its internal rules and to the extent consistent with local law) to consult with the board of statutory auditors on matters relating to the oversight of the work of "registered public accounting firms".

• Oversight of work not related to financial statement audits. The requirement that the statutory auditors have direct oversight responsibility for public accounting firms that are engaged to perform "other audit, review or attest services" conflicts with actual practice in Japan, since the interaction between the statutory auditors and public accounting firms is generally limited to the company's audited Japanese GAAP financial statements. Imposing this requirement is also not consistent with Japanese law, which does not give statutory auditors the responsibility or authority to oversee work that is unrelated to audits of the company's Japanese GAAP non-consolidated financial statements.

  We believe the final rule should be consistent with actual practice in Japan, by limiting this oversight responsibility of statutory auditors to that which is required (if at all) by local law.

In addition, we believe there is some ambiguity as to the meaning of the requirement that the statutory auditors be directly responsible for the oversight of public accounting firms "in accordance with standards prescribed by home country legal or listing provisions". The intended meaning of this requirement is unclear, since it can be interpreted in at least three different ways:

• Home country legal or listing provisions must impose this responsibility on statutory auditors. (We note that if this is the intended meaning, then actual practice in Japan would not satisfy the requirement.)

• Any imposition of this responsibility on statutory auditors must be done in a manner that is consistent with, and which does not violate, home country legal or listing provisions.

• The statutory auditors must have this responsibility imposed upon them (e.g., by delegation from the board of directors) to the maximum extent permitted by (and consistent with) law - but it is acceptable if this responsibility is not imposed upon them for reasons of home country legal limitations.

We believe the SEC should provide greater clarity on the intended meaning of this "in accordance with" language - either by modifying the rule or by giving appropriate guidance to registrants. We also believe that the SEC should reject the first possible interpretation noted above, since it is not consistent with actual practice in Japan.

B. It is not clear what "independence" standards must be included in a foreign private issuer's home country legal or listing provisions in order for the audit committee exemption to be available.

The proposed audit committee exemption for foreign private issuers with statutory auditors requires as follows (emphasis added):

"(D) Home country legal or listing provisions [must] set forth standards for the independence of such board or body, or statutory auditors, from the foreign private issuer or the management of such issuer;"

It is not clear from the proposed rule whether the "independence" standards referred to in this condition relate not only to the scope of the authority of the statutory auditors to act without interference from the company's management but also to the nature of the relationships (past and present) between the individual statutory auditors and the company. Also, we note that "independence" is a term that is not used or commonly understood in the context of other corporate governance systems, including the Japanese system.

In Japan, the concept of "outside" directors and statutory auditors is used instead of "independent". An "outside" director of a public company under Japanese law is defined as a person who has never been involved, whether as director or as employee, in the management or operation of the company or any of its subsidiaries. Thus, unlike the proposed rules of the New York Stock Exchange, which would allow a former director or employee to be considered "independent" after a five-year cooling-off period, any person who has ever been a director or an employee of a Japanese public company or any of its subsidiaries is ineligible to become an "outside" director or statutory auditor of that company. In this sense, eligibility requirements for "outside" directors in Japan may be viewed as more strict than those for "independent" directors in the United States.

In any event, we believe that the purpose of requiring certain companies to have "outside" directors and "outside" statutory auditors under Japanese law is consistent with the "independence" requirements under Section 301 of the Sarbanes-Oxley Act, in that both aim to ensure that these individuals can perform their roles in a disinterested fashion and without being influenced by company management.

Accordingly, we believe the final rule should make it clear that "independence" standards imposed by other countries need not necessarily coincide with those imposed by the U.S. requirements. As a result, these standards would not need to address the nature of all the relationships between the individual statutory auditors and the company, including those based on present company affiliations, family relationships, transactional relationships and the like. Alternatively, we believe the final rule should make the "independence" concept more general or generic.

C. With respect to the appointment and retention of public accounting firms, it is not clear what the phrase "to the extent permitted by law" is supposed to mean. This ambiguity could lead to uncertainty among Japanese foreign private issuers regarding their ability to rely on the audit committee exemption.

The proposed audit committee exemption for foreign private issuers with statutory auditors requires as follows (emphasis added):

"(F) Such board or body, or statutory auditors, [must be] responsible, to the extent permitted by law, for the appointment and retention of any registered public accounting firm engaged by the issuer. Such responsibility may be vested in such board or body, or statutory auditors, in any manner, including without limitation by law or listing provision or delegation."

As proposed, this requirement could be interpreted to mean that a foreign private issuer will be entitled to rely on the audit committee exemption only if its statutory auditors have been given the maximum degree of responsibility possible - consistent with home country law - for appointing and retaining the company's registered public accounting firm.

If this is the intended interpretation of this requirement, Japanese foreign private issuers will have a problem in demonstrating that they have done all they can - to the maximum degree possible - to give statutory auditors this responsibility. While Japanese law would permit a board of directors to agree (by its internal rules) to consult with statutory auditors on the appointment and retention of public accounting firms, it is not clear that a board of directors could actually delegate responsibility for these matters to the board of statutory auditors. Indeed, most legal commentators in Japan believe that Japanese law would prohibit delegation by the board of directors to statutory auditors of any responsibilities that are not specifically enumerated in the law.

Even if Japanese foreign private issuers believed that delegation was not permissible under Japanese law, the lack of controlling precedent would make it difficult for them to conclusively establish this position as a matter of law. We do not believe the SEC intended to place such a burden on foreign private issuers that seek to rely on the exemption. Accordingly, we believe the final rule should use a standard other than the "maximum extent permitted by law" standard, so that foreign private issuers can have greater certainty of their ability to rely upon the exemption.

D. If statutory auditors of a foreign private issuer are elected by the issuer's shareholders, those statutory auditors should not be considered "elected by management" (making the audit committee exemption unavailable) simply because management is involved in the process of their nomination and election.

The proposed rule's audit committee exemption for foreign private issuers with statutory auditors requires as follows (emphasis added):

"(C) The board or body, or statutory auditors, [must not be] elected by management of such issuer and no executive officer of the foreign private issuer [can be] a member of such board or body, or statutory auditors;"

Statutory auditors of Japanese companies are elected by shareholders at a general meeting of shareholders. The board of directors (which is comprised of executive and non-executive directors) is responsible for proposing nominees to fill vacancies in statutory auditor positions. However, any proposal to elect a new statutory auditor must first be approved by the existing statutory auditors before the proposal is put before shareholders. Once this approval is obtained, management puts forward the names of the nominees for approval at a general meeting of shareholders.

We believe that the SEC should clarify that statutory auditors who are elected by shareholders in the circumstances described above will not be considered to be "elected by management" simply because directors with management responsibility are involved in the process of identifying nominees for statutory auditors and presenting those nominees to shareholders for their approval.

3. The disclosure obligations of foreign private issuers that rely on exemptions from the rule's requirements should ensure that U.S. investors receive meaningful information about the corporate governance practices of those issuers.

As proposed, the new rule would require foreign private issuers that rely on certain exemptions from the audit committee requirements to include Form 20-F disclosure which highlights reliance on the exemption. This would include, for example, an exhibit to the Form 20-F annual report the sole purpose of which appears to be to identify those foreign private issuers that have auditor oversight arrangements that differ from those used by U.S. companies.

As a general matter, we believe the final rule should seek to promote meaningful disclosure by foreign private issuers that will be exempt from the new audit committee requirements, so that investors can have informed views about the adequacy of corporate governance arrangements by those issuers. We also believe that requiring "formulaic" disclosure on these matters will be of little practical use to investors.

We would encourage the SEC to expand the disclosure requirements of the final rule, by requiring foreign private issuers that intend to rely on an exemption from the SEC's audit committee requirements to disclose information regarding (1) home country corporate governance systems generally and (2) corporate governance practices adopted by the issuer specifically. We believe this approach would be preferable to the approach taken by the SEC in the proposed rule, i.e., one that requires detailed disclosure of home country corporate governance arrangements only if those arrangements would, in the issuer's view, materially adversely affect the ability of the issuer to maintain independent oversight of public accounting firms. Similarly, we question whether the "exhibit" requirement of the proposed rule will lead to meaningful disclosure for investors.

If the SEC nevertheless determines to maintain the approach taken in the proposed rule, we note that the disclosure required by proposed Rule 10A-3(d) does not appear to be technically feasible for foreign private issuers that operate with statutory auditors and that intend to rely on the general audit committee exemption, since these issuers do not have audit committees.

* * *

Should you have any questions concerning these comments, or should we be able to assist you in identifying solutions to the concerns that we have raised in this letter, we would welcome the opportunity to be of assistance.

Sincerely,

Yoshihiko Miyauchi
Chairman and Chief Executive Officer
ORIX Corporation

Exhibit A

Summary of Recent Amendments
to the Commercial Code of Japan
Relating to Corporate Governance

Corporate governance in Japan is undergoing dramatic change. As a result of globalization and borderless financial and capital markets, Japanese corporations have begun to advocate corporate governance practices that meet global standards. In addition, several high profile corporate scandals have caused companies and regulators to focus on and improve accountability to shareholders. Accordingly, Japanese corporations and legislators are working together to reform the traditional corporate governance structure through recent amendments to the Commercial Code of Japan.

The Commercial Code was enacted in 1899 and was modeled after the commercial laws of continental European countries such as Germany. Since the mid-1970s, legislators have frequently amended the corporate governance rules. For example, prior to October 1993, large companies in Japan, defined as companies with paid-in capital of at least ¥500 million or total liabilities of at least ¥20 billion, were required to have two or more statutory auditors (one of whom had to fill that role full-time). Following an October 1993 amendment to the Commercial Code, (a) large companies were required to have at least three statutory auditors, one of whom may not be a director, manager or employee of the company or any of its subsidiaries for the past five years, and (b) a board of statutory auditors became mandatory for all large companies.

The trend toward enhancing corporate governance, which has been heavily influenced by U.S. corporate governance standards, has accelerated in recent years. The Commercial Code was amended in 2002 to allow corporations to adopt a committee-based system for the first time, instead of the traditional "statutory auditor" based system. The committee-based system is discussed in more detail in Exhibit B.

The U.S. government has commented on these recent amendments, acknowledging the improvements to Japan's corporate governance rules. For example, the "Fourth Joint Status Report under the U.S.-Japan Enhanced Initiative on Deregulation and Competition Policy", released on June 30, 2001,¹ stated that:

"The Commercial Code reforms, when fully implemented, will enable U.S. firms to engage more easily in mergers and acquisitions in Japan, since they will have increased flexibility in financing and corporate structuring options and will be able to use American-style management approaches. The proposed corporate governance reforms will enable U.S. firms operating in Japan to streamline their boards of directors and become more flexible in their oversight." (emphasis added)

In addition, as recently as June 25, 2002, in the "U.S.-Japan Economic Partnership for Growth: U.S.-Japan Investment Initiative 2002 Report",² the U.S. State Department stated that the Commercial Code revisions were one of the "areas of progress". It also stated:

"The Government of Japan this year submitted a significant revision of the Commercial Code, which among other things allows greater corporate flexibility, including permitting Japanese companies to adopt a U.S.-type corporate governance system. This new flexibility will increase the level of transparency for foreign investors and promote investment." (emphasis added)

Below is a brief overview of recent corporate governance-related amendments to the Commercial Code.

2001 Amendments to the Commercial Code

The 2001 amendments to the Commercial Code, which were enacted on December 12, 2001 and became effective on May 1, 2002, strengthened the functions and powers of statutory auditors. These reforms included:

• Requiring statutory auditors to attend board meetings and to express their views at those meetings;

• Increasing the number of and adopting stricter requirements to qualify as outside statutory auditors;³

• Extending office terms of statutory auditors from three years to four years;

• Providing resigning statutory auditors the right to express their opinions at a shareholders' meeting with regard to their resignation; and

• Providing the board of statutory auditors the right to consent to and propose the appointment of a new statutory auditor.

2002 Amendments to the Commercial Code

The 2002 amendments to the Commercial Code, where were enacted on May 22, 2002 and will become effective on April 1, 2003, focus on reforms to corporate governance. The core of these reforms will be to enable a company to choose between the existing statutory auditor-based model and the new committee-based model. The new structure eliminates the statutory auditor requirement and introduces a committee-based system that establishes three committees (nominating, compensation and audit) consisting mainly of outside directors, as well as an executive officer system.

In addition, to ensure adequate disclosure, the 2002 amendments require publicly traded large companies in Japan to prepare consolidated balance sheets and income statements, and to report those statements to their shareholders at annual general shareholders' meetings. For Japanese companies with a March 31 fiscal year end, this new requirement will become effective for fiscal years ending on or after March 31, 2005.

Exhibit B

Overview of the
Committee-Based Model
in Japan

Effective April 1, 2003, large companies in Japan may elect to adopt a new committee-based model of corporate governance by establishing nominating, audit and compensation committees of the board of directors. To implement this structure, the board of directors must propose its adoption to a general meeting of shareholders for approval. If a company adopts this model, it must abolish its board of statutory auditors.

While a vast majority of Japanese companies have indicated that they intend to continue to rely on the traditional statutory auditor model as part of their corporate governance system, an increasing number of companies have recently expressed their intentions to adopt, or to seriously consider adopting, the committee-based system. These companies include Sony Corporation and ORIX Corporation.

Composition. Each committee, including the audit committee, is required to consist of three or more directors, a majority of whom must be "outside" directors. Directors may serve on more than one committee.

An "outside" director is defined as a director who is not and has never been a director, officer or employee of the company or any of its subsidiaries. During debates in connection with adopting the new committee-based model, and in view of prevailing Japanese business custom and corporate practice, it was determined that it would be extremely impractical to require all members of each committee to be outside directors, and that the committee's independence from management would be sufficiently ensured by requiring a majority of each committee's members to be outside directors. This approach reflects in part the perceived difficulties in Japan in moving quickly to a system where more than half the entire board of directors is from "outside" the company.

While Japanese corporate law allows the same person to serve as both a director and officer of the company, a director who sits on the audit committee cannot also serve as an officer, manager or employee of the same company or any of its subsidiaries, or as a director of any of its subsidiaries.

Powers and duties of audit committee. Under the committee-based model, the audit committee generally has powers and duties that are similar to those given to statutory auditors. (See Exhibit C to this letter for a summary of the duties and powers of statutory auditors.) This includes responsibility for monitoring the performance of the directors and officers of the company in the performance of their duties, as well as for proposing the appointment, reappointment or dismissal of the company's public accounting firm. Like the statutory auditor model, any proposal for appointment, reappointment or dismissal of a public accounting firm needs to be submitted to a general meeting of shareholders for approval. In furtherance of their responsibilities, audit committees will have the power to request of any director or officer, at any time, a report of the company's business operations and/or to inspect for themselves the details of the company's business operations and financial condition.

Officers. Under the committee-based model, a company will also have officers (Shikko-yaku), who are appointed and dismissed by the board of directors and who make the material management decisions for the company. The board of directors may delegate substantial management authority to officers under this system. For example, the board may delegate to officers the authority to approve issuances of new shares of capital stock and bonds.

Other committees. Under the committee-based model, a company will be required to establish not only an audit committee but also a nominating committee and a compensation committee. This approach is designed to enhance the effectiveness of the board's supervision over managers of the company as a whole, relative to the traditional corporate governance model.

Comparison to statutory auditor model. The key differences between the new committee-based model and the traditional statutory auditor model in Japan include:

• Reliance on board committees. Under the committee-based model, a company will be required to establish not only an audit committee but also a nominating committee and a compensation committee. These new board-level committees, including the audit committee, are vested with the power and authority to make recommendations to the full board of directors on matters that were previously considered the exclusive domain of the full board.

• Board-level composition. Audit committees will be comprised of members of the board of directors. Statutory auditors, while they attend board meetings and are entitled to express their opinions at those meetings, are not members of the board of directors and have no vote on board-level matters.

• Previous affiliations with issuer. The requirements for having "outside" members are more strict for audit committees than for statutory auditors. At least a majority of the members of an audit committee must be from "outside" the company, compared to at least half of the members of a board of statutory auditors.

Exhibit C

Overview of
Statutory Auditor Model
in Japan

Under current Japanese corporation law, corporations must maintain statutory auditors - also known as corporate auditors - who are legally separate and independent from the corporation's board of directors. The function of statutory auditors is similar to that of independent directors, including the audit committee, of a U.S. corporation: to monitor the performance of the directors, and review and express opinions on the method of auditing by the corporation's public accounting firm and on such accounting firm's audit reports.

In recent years, provisions of Japanese corporation law governing statutory auditors have undergone several amendments in order to expand and strengthen the powers, duties and responsibilities of, as well as the qualifications for becoming, statutory auditors. These amendments were promulgated in 1974, 1981, 1993 and 2001.

Set forth below are the principal features of the current statutory auditor model in Japan as it applies to "large companies", generally defined as companies with paid-in capital of at least ¥500 million or total liabilities of at least ¥20 billion.

We note that, effective April 1, 2003, the principal features of the audit committee model for large companies in Japan will be substantially similar to those outlined below with respect to statutory auditors.

Election. Statutory auditors are elected at a general meeting of shareholders. When submitting a proposal to a shareholders' meeting to elect a statutory auditor, the directors must first obtain the consent of the board of statutory auditors. The board of statutory auditors also is empowered to adopt a resolution requesting that the directors submit a proposal for election of a statutory auditor to a general meeting of shareholders. If, notwithstanding such resolution by the board of statutory auditors, such proposal is not submitted to the meeting of the shareholders, the directors are subject to the imposition of civil fines. The statutory auditors have the right to state their opinion concerning election of a statutory auditor at the meeting of shareholders. By granting to the board of statutory auditors a right to propose election of statutory auditors and requiring the consent of the board of statutory auditors for election of a new statutory auditor, the Japanese corporate governance system prevents the directors from improperly influencing the statutory auditors.

Dismissal and Resignation. Dismissal of a statutory auditor requires adoption of a "special" resolution at a general meeting of shareholders. A special resolution requires a two-thirds vote of shareholders present at a shareholders' meeting with the quorum of holders of a majority of the issued shares of the corporation's voting common stock. In the event of dismissal of a statutory auditor or resignation of a statutory auditor in the middle of his or her term, the statutory auditor has the right to state his or her opinion concerning such dismissal or resignation at the next general meeting of shareholders. The statutory auditors' right to state their opinions at a general meeting of shareholders is intended to prevent improper dismissal of a statutory auditor or improper pressure by the directors on a statutory auditor to resign.

Term of Service. Currently, statutory auditors generally serve three-year terms. Following recent changes in Japanese corporate law, this will soon be extended to four-year terms. The four-year term of a statutory auditor, which is significantly longer than a typical term of a director (two years), is designed to stabilize the statutory auditor's status within each corporation to provide a strong check on the board of directors.

Independence. A corporation is required to have at least three statutory auditors. A statutory auditor cannot simultaneously serve as a director, manager or other employee of the same corporation or any of its subsidiaries. In addition, currently, at least one of the statutory auditors of a corporation must be an "outside" statutory auditor,⁴ and effective the date of the ordinary general meeting of shareholders relating to the corporation's first fiscal year ending after May 1, 2005, at least half of them must be outside statutory auditors.

Compensation and Expenses. The corporation's articles of incorporation or a resolution adopted at a general meeting of shareholders must set forth the compensation of statutory auditors. If the articles of incorporation or a resolution adopted at a general meeting of shareholders sets a ceiling, the statutory auditors may set the amount of their own compensation under the ceiling. The corporation must prepay or reimburse expenses incurred by statutory auditors in discharging their duties unless the corporation proves that such expenses were not related to the discharge of their duties.

Full-time Statutory Auditors. The statutory auditors of a corporation must select among themselves one or more "full-time" statutory auditors. A full-time statutory auditor is generally considered one who is able to devote himself or herself exclusively to discharging the duties of a statutory auditor of the corporation on a full-time basis during its business hours.

Powers and Duties. The statutory auditors owe to the corporation a duty of care with respect to the exercise and discharge of their powers and duties. Shareholders may bring a derivative lawsuit against a statutory auditor to account for his or her actions as a statutory auditor. In exercising and discharging their powers and duties, the statutory auditors act individually. The principal powers and duties of the statutory auditors are as follows: