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：Minimize discrepancies between the plan and actual results and secure stable profits
- Strengthen Financial Base：Maintain Risk-weighted Assets within the buffer (shareholders’ equity)
- Maintain Corporate Reputation：Fulfill CSR requirements and preserve corporate reputation
We categorize our business activities into investments and commercial transactions and manage risk after identifying both common and category specific risk factors.
We, by studying advanced methods and processes, have created an effective risk management framework that anticipates changes in the external environment. 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 altering, and new business models that we could never have imagined are emerging on a daily basis. To respond to such situations in a timely and effective manner, we continue to evolve our risk management activities under the leadership of senior management.
Risk Management Framework
Maintain Risk-weighted Assets within our buffer / Maximize Risk-adjusted Return
Deliberate and monitor important projects through Business Unit Investment Committee and Company Investment Committee
Selective investment & strengthening of post-investment value creation
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.
We will also develop a system that allows us to take steps to avoid repeating past regret at each stage of the investment process—(i) selecting individual businesses for investment and making investment decisions, (ii) managing businesses after investment, and (iii) evaluating businesses based on investment performance. Specifically, we will increase the value of each business by steadily implementing the planned measures, including establishment of strict investment discipline for selecting investments, development of an optimal governance structure for increasing the value of each business after investment, and investing the right resources at the right time.
Stepping up our monitoring efforts, we will set a clear time frame and make improvements to business investments that do not increase in value as expected. If improvement is not expected, we will engage in thorough asset recycling.
Furthermore, to increase our commitment to value creation, we will also consider a new compensation system linked to investment performance.