Business Risks

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.
Kokuyo has established the Risk Management Committee to help comprehensively identify and assess risks to Kokuyo’s businesses and then facilitate efforts to manage the potential impacts of these risks (including efforts to avoid, mitigate, transfer, or accept the risks). An advisory body to the representative director and president, the Risk Management Committee analyzes risk-management themes from a pan-organizational perspective and then reports its findings to the president and representative director.
All forward-looking statements are based on assumptions that the management considered reasonable in light of information available as of the end of the consolidated fiscal year under review.

(1) External Risks

1) Economic Risks

Since Kokuyo operates primarily in Japan, its operational and financial performance is vulnerable to economic conditions in the country, particularly conditions related to corporate earnings, capital expenditure, and public investment. Some of Kokuyo’s business operations (sales, production, purchasing) are based overseas (in Asia and elsewhere), and there are plans to further globalize business operations. As such, Kokuyo’s operational and financial performance is vulnerable to economic, sociopolitical, or regulatory developments in these countries, and to general trends in ESG management.
To mitigate this risk, Kokuyo, as part of its portfolio management, operates in multiple business segments and allocates its resources optimally, according to industrial trends and business conditions. Kokuyo works with local subsidiaries to gain an accurate understanding of the political and economic circumstances of the country or region in question and to respond accordingly. Kokuyo has committed to further strengthening the way it responds to such changes.

2) Market Risks

Kokuyo offers 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, Kokuyo fails to maintain or improve its market position, its operational and financial performance may be adversely impacted.
To mitigate this risk, Kokuyo, as part of its portfolio management, operates in multiple business segments and allocates its resources optimally, according to industrial trends and business conditions. While fierce competition is clearly a risk, it also presents an opportunity: It provides an impetus to keep raising the bar in customer satisfaction and to dispense with old habits in favor of a more far-sighted strategic vision, one that will deliver higher growth and achieve excellence.

3) Risks Associated with Changes in Fair Value

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.

(2) Risks Related to Business Operations

1) Compliance Risks

Kokuyo makes every effort to comply with legal and regulatory requirements, as well as with social norms, concerning quality, fair trading, environment, workers’ rights, health and safety, accounting, and tax. Despite these efforts, there is always a risk that Kokuyo may fail in its commitment to compliance. Such failure would adversely impact Kokuyo’s operational and financial performance. Kokuyo’s marketing and sales operations are particularly 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, in response to client demands, the specified deliverables (tangible goods or intangible outputs) were altered or the timing or amount of revenue to be recognized was altered from that initially agreed to. 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.
To mitigate compliance risk, Kokuyo has published a code of conduct (Kokuyo Group Code of Conduct) to promote a culture of compliance and ethics, and it trains staff in compliance. Kokuyo regularly checks whether its rules and processes are up to date with the latest regulatory developments and whether employees are complying with them. As part of this, Kokuyo conducts surveys among a wide sample of staff to confirm compliance. Employees in domestic and overseas subsidiaries receive regular awareness training to prevent anti-competitive practices (such as bid rigging), prevent bribery, and deter the influence of organized crime. Kokuyo’s organizational framework for compliance includes the Risk Management Committee. An advisory body to the representative director and president, the Risk Management Committee monitors compliance across the organization. Compliance is also monitored by the boards and risk/compliance committees of each subsidiary or affiliate. Another compliance body is the Internal Accounting Control Committee, which assesses, audits, and monitors internal control systems related to financial reporting.

2) Quality Risks

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.

3) Procurement Risks

Kokuyo sources raw materials (e.g., base paper, resin, steel) from domestic and overseas companies. It therefore faces the risk of unfavorable sales prices for the raw materials or from unfavorable currency trends or supply/demand trends. If unfavorable conditions persist over the long term, Kokuyo’s operational and financial performance may be adversely impacted.
Additionally, with the increasing focus on ESG/sustainability, 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 Kokuyo’s suppliers are unable to comply with ESG standards, Kokuyo may be unable to procure the necessary raw materials. This situation would adversely impact Kokuyo’s reputation as well as its operational and financial performance.
In the immediate term, Kokuyo mitigates the risk of unfavorable supply/demand or currency trends by entering into forward exchange contracts for some of its cross-border transactions. Over the longer term, it does by working toward an optimal percentage of procurement from local suppliers and by diversifying the supply chain. Kokuyo has published a procurement policy (Sustainable Procurement Guidelines) for building trusting and mutually beneficial relationships with suppliers. By working with suppliers, Kokuyo aims to fulfill societal expectations regarding human rights and ecological sustainability and contribute to sustainable development.

4) Talent and Labor

Kokuyo works to attract and develop talent on the belief that building a skilled workforce is crucial to the organization’s long-term success. However, competition for talent has grown fierce amid dwindling talent numbers in each professional category. These circumstances may drive an outflow of talent or prevent Kokuyo from attracting promising talent. In such case, Kokuyo’s 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.
To mitigate this risk, Kokuyo has adopted an approach to talent development predicated on the idea that employee growth should go together with business growth. In this approach, supervisors meet with employees to set performance goals and evaluate performance, ensuring that talent development is personalized to each employee. Kokuyo also strives to deploy staff in an optimal manner and in accordance with its business strategy, and provides fresh opportunities for internal moonlighting through the 20% Challenge scheme. These initiatives help nurture the talent who can lead business transformation and create new value. They also enhance internal labor mobility, creating more opportunities for diverse employees to feel empowered.
Kokuyo also recognizes that employees can only feel empowered and thrive at work if the workplace is safe and comfortable and if an emergency response plan is in place. To that end, the Kokuyo Group Central Safety Health Committee, as the body responsible for overseeing health and safety across the Kokuyo group, coordinates the efforts of the group’s workplace-specific health and safety committees in establishing mechanisms and systems with engagement and feedback from employees.
As part of these efforts, Kokuyo provides a whistleblowing hotline (the Kokuyo Group Hotline) through which employees can raise concerns that they may feel unable to raise through the usual workplace channels. The hotline is available to all employees of Kokuyo’s global group.

5) Information Risks

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 the rise in working from home and other diversified workstyles has made companies all the more vulnerable. If a data breach does occur, Kokuyo’s operational and financial performance would be adversely impacted.
To mitigate the risk, Kokuyo has established information handling protocols, and it provides training to employees and contractors. As cyber attackers grow increasingly sophisticated, Kokuyo updates and strengthens its cyber defenses accordingly. Kokuyo routinely tests the vulnerability of its information systems to viruses, cyberattacks, and data leakage, and takes measures as necessary.

6) Investment Risks

Kokuyo pursues M&A deals and invests in companies with a view to sustainably improving its enterprise value. All potential investments are subject to a due diligence process, 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.

(3) Other Risks

1) Disaster Risks

Kokuyo's group has workspaces and production sites 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, Kokuyo may be forced to suspend operations, which would adversely impact its operational and financial performance.
To mitigate the risk, Kokuyo engages in disaster management and business continuity planning to ensure that its businesses continue to function in a range of disaster scenarios and that normal operations resume as soon as possible. Emergency protocols are regularly reviewed and amended as necessary to ensure their effectiveness. For natural disasters, Kokuyo works to preempt the dangers by establishing safety protocols for each workplace. It also stockpiles emergency supplies and subscribes to an appropriate insurance policy to ensure effective response if and when a crisis arises. For disease outbreaks, Kokuyo works to minimize the effects on its business activities while prioritizing the safety of customers and employees.
In the matter of disease outbreaks, it would be remiss not to mention Covid-19. The pandemic brought prolonged and severe economic damage to Japan and other countries around the world, and Kokuyo and its group felt the effects. The outlook for recovery remains opaque, and there is a possibility that global economic adversity will continue into the long term. At an early stage in the crisis, Kokuyo established a taskforce headed by the representative director. The taskforce immediately began working to prioritize the safety of customers, employees, and partners, and to cooperate with authorities in curbing the spread of infections.
Kokuyo provides a manual outlining safety checks, and it flexibly utilizes workplaces and communication methods to comply with government requests and societal expectations. Kokuyo Its offices continue to rigorously apply anti-infection measures, including social distancing, daily cleaning, disinfection, and use of face masks.
While continuing to prioritize the safety of customers, employees, and partners, Kokuyo maintains stable operations and business continuity, thereby providing social infrastructure and contributing toward economic stabilization.