Business Risks

We have a structure in place to identify a broad swathe of risks relevant to our organization, assess these risks, and control them (which, depending on the case, may mean avoiding, reducing, transferring, or accepting the risk). The Risk Management Committee, an advisory body to the Representative Corporate Officer and President, reviews the risks from an organization-wide perspective and advises the Representative Corporate Officer and President accordingly. If the committee determines that the risk in question is critical or urgent, it will report also to the Board of Directors and Audit Committee.
To enhance risk management across Kokuyo Group, the Risk Management Division gathers the key facts about incidents that have occurred in Kokuyo Group, decides how each incident should be handled in view of the risk level, and prepares a process for enacting the policy.
Described below are risks that have been identified as significant. These risks are associated with Kokuyo’s financial or operational performance or its cash flow.
All forward-looking statements are based on assumptions considered reasonable in light of information available as of the date on which we submitted the latest annual securities report.

Since we operate primarily in Japan, our operational and financial performance are vulnerable to socio-economic conditions in the country, particularly corporate earnings, capital expenditure, public investment, and demographic trends.
Some of our business operations (sales, production, purchasing) occur in Asian and other overseas markets. One of the key overseas markets is China. The Chinese economy remains sluggish. On top of the economic uncertainties in China, the direction of US policy could create volatility. Thus, our operational and financial performance are vulnerable to macro-environmental factors in China and in other countries where the company operates. These factors include economic, sociopolitical, and regulatory developments, and expectations related to ESG performance.
To control these risks, we have committed to expanding the reach of our business fields in a way that drives sustained growth. In Japan, we are transitioning our business model from tangible products to intangible solutions in order to expand the reach of our existing business fields and create new businesses.
Our overseas business operations are exposed to country- and region-specific risks. As we expand further overseas, we will enhance our approach whereby local subsidiaries coordinate with the relevant corporate divisions in Japan in identifying the socio-political landscape in the country or region concerned and in building an organizational structure for managing the risks.

We offer value-added products and services. The markets for these products and services are vulnerable to economic changes and consumers’ purchasing preferences. These markets are also increasingly crowded amid the trend of diversification and digitalization. If, as a result of these factors, we fail to maintain or improve our market position, our operational and financial performance may be harmed.
To control these risks, we will create business structures and processes that are adaptive to market change.
This category of risk includes supply chain risks. Our competitive advantage depends on us having an optimized sequence of processes across our supply chain, including procurement of raw materials, product development, production, sales, distribution, and delivery. One threat to this is the recent shortage of drivers in Japan. The driver shortage could potentially delay construction work. If such delay leads to a decline in the quality or competitiveness of our services, our operational and financial performance may be harmed.
While fierce competition is clearly a risk, it also presents an opportunity; it provides an impetus to cast aside old habits and to reshape the organization with a more far-sighted strategic vision that will deliver higher growth and keep raising the bar on customer satisfaction.
In Japan, an agenda is underway to reform working practices in the logistics and construction industries. Supporting this agenda will be crucial to our business continuity. We are using digital technology to strike a balance between reducing workload in our logistics and construction workplaces and ensuring business continuity and growth. For logistics workers, we are rolling out a pallet loading system and a clock-in and clock-off system for tracking duty time. For construction workers, we are rolling out a software tool that enables site photos and construction documents to be shared in real time between the site and the back office.

Kokuyo invests in securities. As such, Kokuyo is exposed to the risk that an investment’s fair value deteriorates as a result of unfavorable trends in money markets. Such cases would adversely impact Kokuyo’s operational and financial performance.
To mitigate this risk, Kokuyo regularly appraises its investment securities outside the quarterly fair value measurements and makes selling or purchasing decisions accordingly.

Shares held under cross-shareholding arrangements are regularly reviewed to verify their quantitative and qualitative value, and the results are reported to the Board of Directors. If the report suggests that there is little value in continuing to hold the shares, the board may decide to sell off all or some of the shares.

We operate in a volatile business environment, and our strategy for sustained business growth emphasizes change. That is, we pursue organic growth by strengthening longstanding businesses and expanding into new business sectors, and inorganic growth through M&A deals. With this emphasis on change, we must update our business processes from time to time, which may result in unforeseen scenarios arising within or outside of the organization or in atypical transactions. If our internal controls prove inadequate to deal with these situations, our operational and financial performance may be harmed.

As part of a wider effort to enhance our internal controls, we make our business processes more effective and efficient by visualizing, standardizing, and rectifying them.

Our operations are subject to regulations related to quality, fair trading, environment, workers’ rights, health and safety, accounting, and tax. If any of our operations are found to be in non-compliance with such regulations, this could harm our operational and financial performance.
Kokuyo’s marketing and sales operations are vulnerable to the risk of sales fraud. That is, there is a risk that staff accelerate revenue recognition or record fake sales in response to pressure to meet sales targets. In certain business units, such malpractice may occur because of alterations made in response to client demands, including alterations in the specified deliverables (tangible goods or intangible outputs), in the amount of revenue to be recognized and the timing of the recognition, in the services to be purchased from external partners, and in the amount to be paid for these services. Furthermore, Kokuyo’s compliance requirements may increase if regulations change (if a new regulation is introduced or if an existing one is tightened) or if Kokuyo further globalizes its operations or expands its portfolio. Any such additional requirements may increase the costs of Kokuyo’s operations or compel Kokuyo to invest, which may adversely impact Kokuyo’s operational and financial performance. Our compliance requirements may increase if regulations change (if there is a new regulation or tightening of an existing one) or if we further globalize our operations or expand our portfolio. Any such additional requirements may increase the costs of our operations or compel us to invest in compliance measures, which may harm our operational and financial performance.
To control this risk, we take action to build a culture of compliance. The Kokuyo Group Code of Conduct clarifies the requirement for employees to observe legal and regulatory requirements and internal rules and to uphold high ethical standards. The management repeatedly sends messages to staff about integrity in the workplace, and we provide education and training programs (including educational videos).
We also regularly check whether our rules and processes are up to date with the latest regulatory developments and whether employees are complying with them. Employees in domestic and overseas subsidiaries receive regular awareness-training for the prevention of anti-competitive practices (such as bid rigging), bribery, and organized crime.
Our organizational framework for compliance includes the Risk Management Committee. An advisory body to the Representative Corporate Officer and President, the committee is responsible for monitoring compliance across the organization. The framework also includes the J-SOX Committee, which reviews our internal controls for reporting and conducts other auditing and monitoring activities.

There is always a possibility that Kokuyo may need to recall a product because it was used in ways that the design team never envisaged. Such cases may adversely impact Kokuyo’s operational and financial performance as well as its brand reputation.
To mitigate this risk, Kokuyo has established an ISO 9001-compliant quality management system. This system extends throughout the value chain, from design to after-sales services. For cases where, despite all these efforts, a problem arises in a product or service, Kokuyo has product liability insurance to cover recall costs and to protect itself from any claims of damage that may ensue. However, if the insurance fails to provide sufficient cover, Kokuyo’s operational and financial performance would be adversely impacted.

We source some raw materials (e.g., base paper, resin, steel) from overseas companies. We therefore face the risk of unfavorable sales prices for the raw materials and the risk of adverse exchange rates or an adverse supply-demand relationship. If such adverse conditions persist over the long term, our operational and financial performance may be harmed. Additionally, with the increasing focus on ESG standards, companies are now expected to apply greater supply-chain due diligence to check for human rights violations or ecologically unsustainable practices in their supply chains. If our suppliers are unable to comply with ESG standards, we may be unable to procure the necessary raw materials. This situation would harm our reputation as well as its operational and financial performance.
In the immediate term, we control the risk of adverse exchange rates or an adverse supply-demand relationship by entering into forward exchange contracts for some of our cross-border transactions. Over the longer term, we do so by working toward an optimal percentage of procurement from local suppliers and by diversifying the supply chain.
To clarify our expectations toward suppliers regarding internal controls and to help build trusting and mutually beneficial relationships with them, we have published the Kokuyo Group Sustainable Procurement Policy and Kokuyo Group Sustainable Procurement Guidelines. Both sets of guidelines incorporate the revised standards on internal controls related to evaluating and auditing financial reporting and align with the latest trends in non-financial disclosures (sustainability reporting) and with the new (2025) edition of the Committee of Sponsoring Organizations of the Treadway Commission’s Internal Control – Integrated Framework.

Three of our five materialities (issues that matter to our business and our stakeholders) concern the environment: “respond to the climate crisis,” “contribute toward a circular economy,” and “contribute toward a society that coexists with nature.” For these materialities, we have a set “challenge” goals to be achieved by 2030.
For these and other sustainability initiatives, the Sustainability Committee, attended by all managing officers, holds regular discussions, hears reports of progress in the initiatives, and monitors sustainability risks.

We take recruitment and training seriously on the belief that building a diverse workforce is crucial to our long-term business success. However, Japan’s fiercely competitive labor market may disrupt our efforts to recruit and train the staff we need to maintain and grow our businesses. If such efforts are disrupted, our future growth would be threatened.
Kokuyo values diversity and works to build an employee-friendly workplace, believing that creating a positive working environment is crucial to the organization’s long-term success. However, there remains a risk that Kokuyo’s efforts to create such a workplace fail to go as planned, leading to incidents in which employees suffer accidents, adverse health effects, or workplace harassment. Such incidents could damage business performance, incur accident compensation, or harm the Kokuyo brand. Any such eventualities could adversely impact Kokuyo’s operational and financial performance.
Our Talent Management Policy enshrines our commitment to supporting employees’ career development and empowering them to reach their potential, and sets out actions for this purpose. For example, it declares that both management and employees recognize that talent is an asset of society and that the company will support and empower its talent to drive business growth and benefit society. Guided by this policy, we have launched the interdivisional Talent Development Committee, on which managers consider multiple perspectives for supporting employees’ career development. We have also launched the Kokuyo Academia as to provide training opportunities in addition to on-the-job training. In these and other ways, we are expediting investment in talent development.
To promote diversity and inclusion, our training course on bullying and harassment now includes additional content, including content on abusive customer behavior and on bullying and harassment that targets a person’s sexual orientation and gender identity. We have also opened a health-management office in the nursing care and welfare center to guide efforts to make the workplace inclusive and safe for people with disabilities.
　We commit to making the workplace is safe and comfortable, with safety measures in place for emergency scenarios, as we believe that occupational health and safety is foundational to employee engagement. In line with a manual on global (Japan and overseas) safety standards, the Kokuyo Group Central Safety Health Committee coordinates the activities of all health and safety teams across Kokuyo Group and establishes processes and organizational structures for health and safety, incorporating feedback from employees.
As part of a horizontal, cross-organizational approach to addressing talent-development challenges, the Group HR and General Affairs Support Unit helps group companies in hiring and retention. To prevent health-and-safety risks from aging property, plants, and equipment, we schedule major renovation work, relocations, or rebuilding work, starting with the oldest facilities and aligning the schedule with business strategies. We also work to reduce overtime across the organization to promote employee wellness and allow employees more disposable time that they can use to plan their career.
We also provide employees with the Kokuyo Group Hotline for raising concerns about or seeking advice on matters of corporate ethics, compliance, and other matters that they may feel unable to raise through the usual channels. The hotline is global and accessible to all employees of the global Kokuyo Group, whether they work in Japan or an overseas location. Employees in Japan can additionally contact a third-party whistleblowing service, enhancing whistleblower protection. In June 2024, we extended the hotline to cover our supply-chain partners to encourage healthy and mutually beneficial supply-chain partnerships.
In the year under review, 25 calls were made to the Kokuyo Group Hotline.

Kokuyo has established processes for controlling access to sensitive information, including confidential business information and customers’ personal information. These processes include safeguards against system failure and cyberattacks. However, as rigorous as these security measures are, they may fail to protect against threats from unexpected sources. Cyberattacks are increasingly prevalent, and companies are all the more vulnerable with the risen working from home and other diversified workstyles. If a data breach does occur, Kokuyo’s operational and financial performance would be adversely impacted.
As our business profile expands, our frontline business processes may increasingly fall outside the coverage of our core IT system, creating risks for productivity and internal controls. If such risks occur, Kokuyo’s operational and financial performance would be adversely impacted.
To counter the growing cyber threats, we run vulnerability checks to identify ways to bolster our security, including our ability to detect and repel viruses and other cyberattacks, and regularly back up data.
We have a computer security incident response team (CSIRT) that works to contain damage when a cyberattack or other information security incident occurs. The CSIRT has proven effective.
To help safeguard customer information and personal information, the Risk Management Committee’s Information Security Subcommittee sets out rules on data handling, provides employees with e-learning modules about information security, and also works to raise awareness among our contractors and business partners. Other information security measures include regular inspections of personal data handling and regular deletion of redundant data.
Much time has passed since our core IT system was first launched. As our organization grows, our business portfolio and business processes change. We will therefore update the core IT system along with our business processes.

Kokuyo pursues M&A deals and invests in companies with a view to sustainably improving its enterprise value. The fourth medium-term plan provides a budget of \70 billion for M&A investments and other growth capital expenditure (the M&A investments may go over budget depending on the potential deals). We have explored M&A deals related to furniture and stationery operations in India, Australia, ASEAN, Japan, and other territories. All potential investments are subject to a due diligence process by the Investment Council, which examines, among other things, the potential investee’s financial health and the terms and conditions of the contract.
Investments are then subject to regular reviews, which focus on how well the profit plan has progressed and whether the investment still represents value for money. Despite these measures, there remains a risk that changes in the business landscape will cause Kokuyo to lose money on an investment. In such cases, Kokuyo may need to recognize impairment of tangible assets, intangible assets (such as goodwill), or investment securities, which would adversely impact its operational and financial performance.
To minimize the risk of impairment loss, Kokuyo subjects potential investments to a due diligence process with advice from outside experts, and continually works to improve its due diligence. To build competence as an investor, Kokuyo accumulates knowledge related to M&A deals and stakes in businesses, and trains general staff in these matters.

We retain a real-estate portfolio. Macro-economic developments could cause our real-estate holdings to lose their value. If this occurs, Kokuyo’s operational and financial performance would be adversely impacted.
To control this risk, we try to keep our real-estate and net cash flows efficient by selling off non-business assets and selling off properties when the lease agreement expires.
The year ended December 2025 was the first year of Unite for Growth 2027, the fourth medium-term plan aligned with CCC 2030, our long-term vision for sustainable corporate development. Unite for Growth 2027 sets out an updated version of our Forest-Like Management Model, under which we will deliver experience value by leveraging our forte in the wow-factor creation cycle and bolster our strategic assets to increase the replicability of business success. In these ways, we will expand the reach of our business fields and penetrate international markets, delivering higher business value and raising the overall value of our organization. As part of this, we have decided to relocate our head office. The new location will provide a more employee-friendly workplace and stimulate communication with a wide range of stakeholders, expediting the company’s distinctive creativity. We will decide what to do with the vacated land and office building in due course (we may decide to sell said assets).

Our business assets are located in Japan and overseas. These assets are vulnerable to emergencies that disrupt social infrastructure across a large region. Such emergencies may include natural disasters, which have become larger and more frequent with climate change. They may also include an unprecedented outbreak of infectious disease. Such risk is hard to avoid. If such a disaster occurs, we may be forced to suspended operations, which would adversely impact our operational and financial performance.
To control the risk, we engage in disaster management and business continuity planning so that our businesses will continue to function in a range of disaster scenarios and so that normal operations resume as soon as possible. Emergency protocols are regularly reviewed and amended as necessary to ensure their effectiveness. For natural disasters, we work to preempt the dangers by establishing safety protocols for each workplace. We also stockpile emergency supplies and subscribe to an appropriate insurance policy to ensure an effective response if and when a natural disaster occurs. For disease outbreaks, we work to minimize the effects on business activities while prioritizing the safety of customers and employees.
In compliance with government directives and public demand, we have set guidelines for safeguarding employees in emergencies and are prepared to use different locations and communication methods as circumstances warrant. We will always try to strike a balance between safeguarding our customers, employees, and partners and keeping our businesses running so that they can serve as social infrastructure.