We define “risk” as “the possibility of losses due to the occurrence of anticipated or unanticipated situations,” and also as “the possibility of not achieving the expected return on business activities.” We have set the following three items as the goals of our risk management activities.
- Stabilize Performance
- Strengthen Financial Base
- Maintain Corporate Reputation
In addition, we classify our risks into two categories: Quantifiable risk and Non-quantifiable risk and have frameworks appropriate for each type of risk.
We have created an effective risk management framework that anticipates changes in the external environment by studying advanced methods and processes. Our goal is to implement the best practice in risk management while maintaining the flexibility to adapt to changes in the business environment. The business environment is continually changing, and new business models that we could never have imagined are emerging on a daily basis. In order to respond to such situations in a timely and effective manner, our risk management has continued to evolve under the leadership of top management.
Definition of Risk
- The possibility of losses due to the occurrence of anticipated or unanticipated situations
- The possibility of not achieving the expected return on business activities
Goals of Our Risk Management
- Stabilize Performance: Minimize discrepancies between the plan and actual results and secure stable profits
- Strengthen Financial Base: Maintain Risk-adjusted Assets within the buffer (shareholders’ equity)
- Maintain Corporate Reputation: Fulfill CSR requirements and preserve corporate reputation
Risk Management Framework
Quantifiable Risk = Value Creating Risk
Maintain Risk-adjusted Assets within our buffer / Maximize Risk-adjusted Return
Deliberate and monitor important projects through Business Unit Investment Committee and Company Investment Committee
Non-Quantifiable Risk = Value Breaking Risk
Risk control by avoiding or minimizing risks
Companywide internal control reinforcement initiatives centered on Internal Control Committee
Risk Management System for Investments
Decision-making process for investments
Once an investment has been made the decision to withdraw becomes difficult, and in the event of withdrawal, losses
tend to be larger.
Therefore, we have adopted a unified framework that covers everything from the entry into the investment to the exit and that takes into account changes in the portfolio as a whole, as well as the nature of the risks involved in each individual investment opportunity, while reviewing the process for assessing and following up investment projects as appropriate.
When assessing investment projects, the investment theme is clarified at the initial stage of the process, and is verified as a key point of due diligence. In addition, by applying a discount rate appropriate to each business risk, we are able to calculate an “appropriate price” for the investment, and evaluate the opportunity from both quantitative and qualitative aspects.
With regard to the decision-making process for investments, the Business Unit Investment Committee or the Company Investment Committee meets at each stage of consideration and implementation, depending on the scale and importance of the project.
From an early stage, these committees conduct in-depth discussions regarding the strategic positioning of the project, the background to and the reasoning behind the selection of the project, and the various factors that may affect the success of the investment.
Execution support and monitoring of investments
With regard to post-investment execution support, issues are clarified before the decision to invest is made, and a system has been established to work on resolving smoothly any issues that emerge after the investment has been made. For especially important projects, in addition to the “100-day plan*” execution support system, which provides integrated support functions, a “Focused Follow Up” system has been established that consists of plans to improve performance, and following up of project execution, provided by the Company Investment Committee.
In fiscal 2018, we introduced a new “full potential plan” investment monitoring system that is intended to improve the quality of the investment portfolio. Investment targets are evaluated mainly using quantitative indicators, and categorized into “Satisfactory,” “Not Satisfactory,” and “Not Good.”
After confirming the positioning within the investment portfolio, a further strengths and weaknesses review of business potential is performed. Depending on the outcome of the review, specific measures may be taken to maximize the value of the business in accordance with the growth strategy of “Increase Value of Existing Business,” but withdrawal will be encouraged for businesses with limited room for growth.
* Activities, performed mainly in the first 100 days immediately after the investment has been executed, to construct and develop management infrastructure aimed at drawing up a medium-term plan that seeks to maximize business value, including management of the investment, and which management and financial indicators should be used as targets