Reinforcing Risk Management

Basic view

In order to improve the sustainable enterprise value of the entire Group, Murata is building a risk management system to appropriately manage the various internal and external risks related to its business activities. Moreover, we are engaging in activities to reduce loss when risks are discovered that have a significant impact on our business. Examples of these activities include regularly classifying and evaluating each risk concerning our overall business activities and implementing countermeasures in advance according to the priority, etc.

Promotion structure

Murata has established the "Risk Management Committee" as a subcommittee of the CSR Management Committee, which is chaired by the President and Representative Director. This committee is chaired by the Director and Managing Executive Officer and is composed of Directors from the departments of General Affairs, Human Resources, Accounting, Finance, Planning, Public Relations, Intellectual Property, Environmental Affairs, Information Systems, and Legal Affairs to discuss countermeasures concerning company-wide risk matters. We have also established the Information Security Subcommittee and BCM^* Subcommittee as subordinate organizations to study and take measures to address particular risks.

^*BCM (Business Continuity Management)
Management activities are operated on an ongoing basis to formulate, maintain, and renew the BCP (Business Continuity Plan), to allocate budget and resources for business continuity, to take preventative measures, and to conduct, check, and continually improve education and training for permeating initiatives.

Understanding risks

The Key Functional Staff Department and the Business Division responsible for implementation, which are responsible for risks, extract the risks that the Murata Group is currently facing or risks that are expected in the near future. The Key Functional Staff Department prevents the omission of risk identification by correctly recognizing: (1) risks which must be identified as company-wide risks from among the risks extracted by the Business Division responsible for implementation and (2) risks that the Key Functional Staff Department and Business Division responsible for implementation must mutually share and cooperate on. Further, the department is building a system that can appropriately respond to company-wide risks. (Refer to the figure below) Moreover, the extracted risks are comprehensively identified and managed by evaluating the importance based on the frequency of occurrence and impact and then displaying those risks on a risk map.The Risk Management Committee reviews the details of risks with a high degree of importance and urgency from among the risks which are extracted in this manner and issues instructions for added countermeasures as needed. In addition, the departments which are responsible for each risk report on those risks with a high degree of importance and urgency to management within the Board of Directors and Management Committee. This enables management to identify the corresponding risks and take the appropriate risk countermeasures.

Business and other risks

Risks that may have a material impact on the company include the following. For more details about each risk, refer to the Consolidated Financial Statements and Auditor's Report (date of submission: June 29, 2021).

External environmental risks

Risk categories	Risk description	Primary response
Risks relating to overseas business development	Political situation in the corresponding country and region that we are entering, exchange rates, taxation and other legal systems, various regulations pertaining to finance and import/export, the status of social capital development, other special regional characteristics, and the impact of sudden changes in these factors	Thorough discussion of risks before starting operations overseas Promote the multipolarization of production sites Build an alternative production system Build a system for gathering information about the international situation on multiple fronts
Risks relating to exchange rate fluctuations	Impact of exchange rate fluctuations on production, sales, and other business activities as well as the company's performance and financial condition	Configure the appropriate sales prices which anticipate exchange rate fluctuations Implement exchange contracts for a certain percentage of foreign currency denominated transaction amounts
Risks related to financing and fund management	Lack of internal funds for investment aimed at business growth and capital requirements for working capital Impact on portfolio assets due to deteriorating conditions in financial markets	Fundraising through borrowing from banks and the issuing of domestic straight bonds Hold funds that are distributed across highly safe financial products
Risks related to environmental regulation	Costs increase in order to adapt to domestic and overseas environmental regulations	Ongoing initiatives to reduce waste Form an environmental committee chaired by the executive officer in charge and promote the undertaking of environmental measures Link: Use of Sustainable Resources Link: Prevention of Pollution and Management of Chemical Substances
Climate change related risks	Introduction of a carbon tax and other energy cost increases (transition risks)	Implement energy-saving measures and reduce CO₂ emissions Utilization of a carbon pricing system
Climate change related risks	Complete shutdown of major plants and raw material supply disruptions due to typhoons, heavy rainfall, and other abnormal weather (physical risks)	Strengthen each initiative in accordance with TCFD and SBT guidelines Link: Reinforcement of climate change countermeasures
Risks related to the suspension of business activities due to disasters and infectious disease, etc.	Long-term suspension of business activities due to the occurrence of large-scale natural disasters and the spread of infectious disease, etc. at business locations	Place production sites in a distributed manner in domestic and overseas locations Implement disaster drills and business continuity drills on a regular basis Implement various measures to handle the novel coronavirus infection Link: Business Continuity Plan (BCP） Link: Safe and secure work environment and health management

Strategic risks

Risk categories	Risk description	Primary response
Risks related to fluctuations in the demand for our products	The occurrence of surplus assets, etc. or the loss of sales opportunities due to sudden changes in the global economic situation	Diversify risks through business development in the automotive market which has a comparatively long product life cycle Arrange for the appropriate production facilities and necessary staff based on medium to long-term demand forecasts Continuously improve production efficiency through the proactive utilization of IT technology Flexibly adjust production capacity and the number of working days
Risks related to product competitiveness (market share)	Decrease in the company's market share after a loss of competitiveness	Continuously release new, high value-added products Continuously and proactively promote cost reduction Develop a supply capability that is able to meet customer demand in a timely manner Maintain and expand our share through sales networks and other overall strengths
Risks related to dependencies on specific partners and products	Sales decline in the event that product sales of a specific partner stagnate Sales decline in the event that the demand for a specific product decreases	Customer diversification Earnings diversification through new businesses and other forms of expansion
Risks related to M&A, business alliances, and strategic investment	Notable changes in the market and competitive environments and conflicting interests between business partners or incurring additional costs due to the loss of human resources and the impact of the impairment loss of goodwill and long-term assets	Carry out a thorough risk analysis of the target market and business or the financial status of the partner company and regular verification of the corresponding matters, make course corrections as needed, and improve the effectiveness of collaboration

Management foundation risks

Risk categories	Risk description	Primary response
Risks related to information security	Information leaks due to internal fraud and the suspension of corporate activities due to cyber attacks Impact of the exposure of private information and the violation of legal and regulatory matters	Implement measures in terms of the three human, technical, and physical aspects based on information security management Link: Information Security
Risks related to public regulations and compliance	Disposition by a supervisory authority due to violations of the Antimonopoly Act, export and import regulations, and other public regulations, filing of a lawsuit, suspension of business activities, and other risks, damage to the corporate brand value, and loss of social trust	Install a Compliance Promotion Committee, enact a "Corporate Ethics Policy and Code of Conduct," and carry out compliance promotion activities Link: Compliance
Risks related to intellectual property	The outbreak of an intellectual property dispute with a third party that results in restrictions on the production and sale of the Group's products, compensation for damages, licensing consent fees, and other payments	Build a global intellectual property portfolio Survey and confirm the intellectual property rights of other companies at the appropriate time during design development Link: Measures Concerning Intellectual Property
Risks related to taxation	Payment of back taxes and the resulting damage to our credit worthiness Dual taxation due to taxation under transfer pricing regulations	Implement tax processing in accordance with "global tax policies" Establish a specialized tax organization Secure and train human resources with specialized knowledge and extensive experience
Risks related to the hiring and securing of human resources	Intensified competition to acquire human resources who possess superior expertise	Strengthen our activities to hire human resources for new markets and outstanding human resources for DX Implement various measures to increase employee motivation such as expanding the education system to support capability development and personnel placement emphasizing capability and aptitude Link: Approach to Human Rights and Labor Policies

Business execution risks

Risk categories	Risk description	Primary response
Risks related to the development of new technologies and products	Contraction of existing markets due to technology innovation Impact of the shortening of the lifecycle of existing products	Continuous and proactive implementation of the research and development investment required for new technologies and new product development
Risks related to procurement	Suspension of the supply of material products and price increases due to problems in the business management of a supplier, deterioration of public order, spread of infectious disease, disasters (man-made and natural), depletion of resources, etc.	Secure adequate stock based on a material product inventory policy, shift to multiple vendors, and confirm Business Continuity Planning (BCP) by suppliers in advance Create a database of the production locations of material suppliers and develop a rapid recovery and response system by formulating an initial response flow Link: Responsibility to and Actions Concerning Suppliers
Risks relating to customer trust	Unable to collect account receivables due to customer bankruptcy, etc.	Customer diversification Configure transaction conditions that take continuous credit risk evaluation into consideration
Risks related to quality	The occurrence of compensation liability and loss of trust due to accidents caused by product quality, market recalls, and production suspension, etc.	Develop a quality assurance system to observe product compliance Audit and provide guidance to suppliers and other collaborators Build in quality during every stage from development to shipping Link: Responsibility to Customers for Quality and Action

Business Continuity Plan (BCP）

A major natural disaster has the potential to bring business to a stop for extended periods. Consequently, Murata has devised a business continuity plan (BCP) to ensure that we can fulfill our duty to provide customers with a stable supply of products. We are conducting initiatives to minimize damage and continue business, such as ensuring earthquake resistance and safety for buildings and production facilities, constructing backup frameworks for our communications and information systems, and maintaining supply from inventory.

Within material procurement, the production locations of material suppliers are stored in a database so that procurement activities are not delayed when a disaster or other risk occurs. We are also formulating an initial response system and an initial response flow for expected risks aimed at the implementation of a rapid initial response. Furthermore, with regard to important materials we are promoting measures such as implementing a multi-vendor system, confirming the BCP implementation status of our vendors, and ensuring sufficient inventory to cover the expected recovery period, if risks materialize, as measures to ensure stable procurement.

In addition, we are working to confirm effectiveness and continually improve initial response measures, improve crisis response capabilities, and find points to be improved regarding BCP by conducting periodic disaster drills and business continuity drills. During fiscal 2020, the headquarters carried out BCP training in a workshop format based on disaster scenarios and revised the basic BCP and BCM rules for the headquarters based on the training results.

Initiatives in response to new coronavirus infection (COVID-19)

With the continuing global spread of the novel coronavirus infection (COVID-19), Murata has made it a top priority to ensure the health and safety of its employees and business partners and provide peace of mind to everyone in the community. We do so while fulfilling our responsibility to globally supply the electronic components that support society and connect the supply chain.

Until now, Murata has devised various measures to prevent infection, prevent the spread of infection, and ensure business continuity through the Crisis Management Center established at its headquarters. We have also strived to continue operation of our domestic and overseas production sites through the strong sense of responsibility of our employees and by practicing behaviors that prevent infection.

Specifically, Murata is working to minimize the impact of the novel coronavirus infection on employee health and Murata business operations by implementing measures to prevent employee infections such as telecommuting, staggered working hours, business travel restrictions, recording employee activity records within the company, setting up barriers in the cafeteria and workplace, requesting employees to refrain from private activities, and developing BCP in the event of an outbreak.

Governance