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 CEO, reviews the risks from an organization-wide perspective and advises the CEO 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. In February 2023, we established the Risk Management Division to enhance risk management across Kokuyo Group. The 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 end of the consolidated fiscal year under review.

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 has picked up recently, but its outlook remains uncertain. 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 expand business along two vectors: products and area. 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. For overseas markets, we work with local subsidiaries to understand the socio-political landscape in each country and build an organizational structure for managing the risks. We will further bolster this approach as we expand further globally.

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.
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 therefore trying to strike a balance between reducing workload in our distribution and construction workplaces and ensuring business continuity and growth.

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.

To succeed in a volatile business environment, we embrace change by expanding the reach of our business fields and restructuring operations as necessary. As part of such 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, and by ensuring that the processes can be undertaken repeatedly and are not dependent on a single employee.

We make 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 we may fail in our commitment to compliance, which may harm our 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. Since sales staff exercise considerable authority over the purchasing of goods from outside Kokuyo Group, internal controls may prove inadequate in preventing the malpractice. 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. We have published the Kokuyo Group Code of Conduct, the management repeatedly sends messages to staff about integrity in the workplace, and we provide education and training programs (including e-learning modules). 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, which is responsible for monitoring compliance across the organization. It also includes the J-SOX Committee, which reviews and audits our internal controls for reporting.

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. We have published the Sustainable Procurement Guidelines for building trusting and mutually beneficial relationships with suppliers. We work with suppliers to help ensure that they fulfill societal expectations regarding human rights and ecological sustainability and contribute to sustainable development.
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, and for two of the materialities (the exception being “contribute toward a society that coexists with nature”) we have set “commitment” goals to be achieved by 2024.

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.
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. While respecting individuals’ career aspirations, we assign employees to posts where they can best serve the organization and encourage them to take on new challenges with our 20% Challenge (an internal moonlighting scheme) in order to drive business change and nurture leadership talent. We also maintain high internal labor mobility and try to expose employees to a broad set of experiences and values so that employees have plenty of opportunities to fulfill their potential.
Another way we control this risk is to ensure that 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. 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. The Risk Management Committee’s Labor Subcommittee works 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. 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 the year under review, 20 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. In June 2023, we experienced a ransomware attack. Cyberattacks are increasingly prevalent, and companies are all the more vulnerable with the rise n working from home and other diversified workstyles. If a data breach does 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. In the year ended December 2023, the CSIRT worked effectively in dealing with the ransomware attack. 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.

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.

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 crisis arises. 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.