Reinforcing risk management

Basic view

In order to sustainably improve the 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 established the Risk Management Committee, chaired by our president, to consider measures for countering company-wide risks. The Information Security Subcommittee and BCM^* Subcommittee have also been established as subordinate bodies for forming and implementing countermeasures for individual 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.

Risk management promotion system diagram

Link: Overview of Murata’s Corporate Governance System

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 is preventing oversights in risk identification and working to build a system that can appropriately respond to risks by correctly recognizing (1) risks which must be identified as company-wide risks from among those extracted by the Business Division responsible for implementation and (2) risks that the Key Functional Staff Department and Business Division responsible for implementation must share and cooperate for. (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 the 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.

The Internal Audit Department also monitors for the proper implementation of the PDCA cycle for risk management in the company through direct and indirect audits of the Risk Management Committee and Key Functional Staff Department.

Business and other risks

Risks that may have a material impact on the company include the following. The frequency of occurrence and the degree of impact of residual risk remaining after implementing each risk countermeasure, are classified into the three categories – “High,” “Medium,” and “Low.” With regard to the degree of impact, an indicator is selected from the five indicators of “Organizational impact,” “Impact on production activities, etc.,” “Regulatory/administrative impact,” “Impact on business transactions,” and “Media/reputational impact” and classification is made based on the criteria that has been set in advance for each indicator. For more details about each risk, refer to the Consolidated Financial Statements and Auditor's Report (date of submission: June 29, 2022).

External environmental risks

Risk categories	Risk description	Primary response	Frequency of occurrence	Impact
Risks relating to global business development	Political situation in the corresponding country and region that we are entering, 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	Medium	High
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	High	High
Risks related to financing	Lack of internal funds for investment aimed at business growth and capital requirements for working capital	Fundraising through borrowing from banks and the issuing of domestic straight bonds	Medium	Medium
Risks related to fund management	Impact on portfolio assets due to deteriorating conditions in financial markets	Hold funds that are distributed across highly safe financial products	Low	Medium
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: Prevent pollution and manage chemical substances	Low	Medium
Climate change related risks	Increase in plant building and operating costs following introduction of carbon pricing as well as the advancement of stricter energy conservation standards (transition risk) Complete shutdown of major plants and raw material supply disruptions due to typhoons, heavy rainfall, and other abnormal weather (physical risks)	Actively introduce energy conservation and initiatives to reduce CO₂ in collaboration with suppliers Utilization of internal carbon pricing system Strengthen each initiative in accordance with TCFD and SBT guidelines Link: Reinforcement of climate change countermeasures Link: TCFD measures	Medium	Medium
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 High-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: Secure and safe workplace and health management	Low	High

Strategic risks

Risk categories	Risk description	Primary response	Frequency of occurrence	Impact
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 environment and wellness market while maintaining communications and mobility as the core fields 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	Medium	High
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	Medium	Medium
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	Partner diversification Earnings diversification through new businesses and other forms of expansion	Medium	Medium
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	Medium	High

Management foundation risks

Risk categories	Risk description	Primary response	Frequency of occurrence	Impact
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	High	High
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	Low	High
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	High	Medium
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	Medium	Medium
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: Acquiring and developing human resources	Medium	Medium

Business execution risks

Risk categories	Risk description	Primary response	Frequency of occurrence	Impact
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 Link: Murata value report: Message from the Director of Corporate Technology & Business Development Unit Link: Measures concerning intellectual property	Low	High
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	Medium	Medium
Risks relating to customer trust	Unable to collect account receivables due to customer bankruptcy, etc.	Partner diversification Configure transaction conditions that take continuous credit risk evaluation into consideration	High	Low
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 clients and other collaborators Build in quality during every stage from development to shipping Link: Responsibility to customers for quality and action	Medium	High

Business Continuity Management (BCM)

Murata set Business Continuity Management (BCM) as a key issue in fiscal 2019, and since then has continued to promote various measures and implement continuous improvements.

Background for setting material issue
Companies are expected to prioritize human life and safety while quickly resuming product supply and to fulfill social obligations, even if an emergency arises with a significant impact on business. To become the top components manufacturer in the world, Murata has set this as a material issue with the understanding that promoting global business continuity management is a key issue.
Our goal
We aim to build BCM organizations in domestic and overseas business sites and plants, in order to prepare for disaster.

Basic BCM policy

1.
Ensure the safety of employees and others, and then work toward preventing secondary disasters.
2.
Do everything possible to resume production and keep supplying products to markets.
3.
Support regional recovery as member of the local community.
4.
Thoroughly implement required advance measures after taking costs and benefits into consideration, in order to minimize asset loss during a disaster and to resume production more quickly.
5.
Revise the Business Continuity Plan (BCP) regularly and as the business environment changes, in order to continuously improve business continuity organizations.
6.
Establish business continuity organizations with all employees working together under the proactive leadership of management.

Specific initiatives

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 2022, we developed and strengthened BCPs that cover the required items (possible scope of damage, action plans required for business continuity, and advance measures) at domestic business sites and plants, and worked on establishing a BCP to prevent risks that would impair business continuity, and to minimize loss if risks should materialize.

Future initiatives

We must promote the establishment of BCM organizations to handle risks that could occur at the global level, prevent risks that could impair Murata's business continuity, and minimize loss if risks should materialize.

Toward that end, Murata conducts regular drills and other activities at domestic and overseas business sites and plants, in order to verify the effectiveness of our BCP and, when required, revise it. We continue to implement measures in order to ensure that autonomous BCM activities are put into practice, and to build BCM organizations in order to continuously supply products markets throughout the entire group.

An earthquake in the Nankai Trough would be especially massive and damaging, and we realize that we must prepare for this. We continue to promote measures in order to fulfill our obligations as a components manufacturer to continue to supply products.

Governance