Risk Management

Goals and Achievements of Major Initiatives

Objective of initiatives Goals for fiscal year 2016 Achievements in fiscal year 2016 Evaluation Goals for fiscal year 2017
Ensure business continuity for the DIC Group. • Foster risk management for each Group company, mainly through the Risk Management Subcommittee.
• Regarding governance at subsidiaries, prepare a system that incorporates internal controls.
• Continue to prepare and renew BCPs and implement training to enhance viability. Prepare and renew manuals and plan and undertake various training programs to ensure that the corporate headquarters’ crisis management system functions effectively.
• Awareness of the Group risk management policy and risk management initiatives was encouraged among Group companies in Japan and support provided for companies’ efforts.
• The formulation of response measures was completed for 15 priority risks. Regarding governance at subsidiaries, steps were also taken to reinforce governance for subsidiaries by reviewing standards for appointing directors, management guidelines and training, among others. Efforts to strengthen internal controls through the identification of priority risks continued.
• Drills and training were implemented for product division BCP officers and product division–specific BCPs were revamped.
• To ensure the smooth functioning of task forces, manuals, systems and equipment were improved and replaced and map-based simulation exercises were conducted for members to raise the awareness of task force members and increase the effectiveness of the crisis management configuration. A crisis management configuration was formulated, equipment provided and disaster drills conducted based on a hypothetical scenario involving a major disaster at the corporate headquarters.
★★★ • Deploy a risk management system that conforms with the risk management policy and reinforce global awareness of the system.
• Promote ongoing Risk Management Subcommittee–led efforts to systematically implement response measures for critical risks, including governance at subsidiaries.
• Promote the ongoing improvement of product division BCPs and encourage communication between product divisions and plants.
• Advance efforts to reinforce the corporate headquarters’ crisis management configuration and promote safety measures overseas
  • Evaluations are based on self-evaluations of current progress. Key: ★★★ = Excellent; ★★ = Satisfactory; ★ = Still needs work

Basic Approach to Risk Management

The DIC Group undertakes risk management initiatives with the aim of appropriately and flexibly addressing changes in its operating environment and the diversification of risks, and of swiftly mitigating damage. The Group recognizes risks in three principal categories: externally caused risks that are beyond its control, corporate risks that can be prevented and business risks that should be handled by the relevant divisions/departments. The Risk Management Subcommittee, which is a subordinate committee of the Sustainability Committee, oversees management of these risk responses.

Risk Management Policy

The DIC Group first introduced risk management initiatives in 2001 by creating the Compliance Committee and setting up reporting channels. Following the inauguration of the Risk Management Subcommittee in May 2012, the Group undertook initiatives aimed at responding to serious natural disasters and promoting business continuity management (BCM). Since fiscal year 2014, the Risk Management Subcommittee has focused on establishing a risk management policy and a risk management system, efforts that are designed to further enhance corporate value Groupwide. In a bid to ensure the effective and sustainable implementation of initiatives, in January 2015 the Group introduced a newly formulated risk management policy.

  1. Risk management objectives
  2. The DIC Group undertakes risk management initiatives with the aim of appropriately and flexibly addressing changes in the operating environment and the diversification of risks, and of swiftly mitigating damage.

  3. Definition of risks and risk management
  4. The DIC Group’s definition of risk and risk management is as follows:
    1. Risk: All uncertainties that threaten the DIC Group’s sustainability and business goals.
    2. Risk management: Initiatives to enhance corporate value by managing all risks to the DIC Group from a Groupwide perspective.

  5. Risk management initiatives
  6. 1. The DIC Group comprehensively evaluates all risks based on their potential impact on operations and likelihood of occurring, among others, and prioritizes systematic and effective responses.
    2. The DIC Group constructs and validates risk management systems by repeating the plan–do–check–act (PDCA) cycle.
    3. The Risk Management Subcommittee shares responsibilities with the risk management teams of individual businesses to properly deploy risk measures within the DIC Group. The conference regularly reports on its activities to the Sustainability Committee.

DIC Corporation

Meeting of the Risk Management Subcommittee
Meeting of the Risk Management Subcommittee

In fiscal year 2016, DIC began encouraging awareness of its risk management policy across the global DIC Group by publishing information on the policy, as well as on risk management initiatives, on its in-house electronic noticeboard and through the Group newsletter, DIC Plaza. In Japan, the Company also sought to promote and raise awareness through the provision of training to plant general managers and senior executives of domestic Group companies.

Risk Definition and Risk Owners

The DIC Group recognizes risks in three principal categories. The Group manages these risks by clarifying specific risk owners, which are the divisions/departments responsible for implementing responses.

Risk Management System

In the process of formulating the risk management policy, the Risk Management Subcommittee established the DIC Group risk management system. This system begins with the distribution to directors of survey questionnaires regarding risks with the potential to interrupt the Group’s businesses. Based on survey results, the subcommittee determines priority risks. Risk management plans are produced and risk response measures implemented, improved and reviewed by executives, thereby completing the PDCA cycle, with the aim of facilitating ongoing risk reduction.
DIC positioned fiscal years 2014–2016 as the inaugural phase of risk management predicated on the new system, with subsequent steps to be repeated annually, leveraging knowledge and experience gained. Based on survey results, the subcommittee determines priority risks. The administrative groups that comprise the subcommittee spearhead the assignment of an owner to each risk and work with related departments to implement response measures. A total of 16 priority risks, including “earthquakes, tsunami, volcanic eruptions” and “currency and interest rate fluctuations,” were identified as risks to be addressed during this phase.
Looking ahead, DIC will continue to promote awareness and dissemination of the risk management policy and the risk management system. To enhance BCM, corporate headquarters will spearhead the preparation of Business Continuity Planning (BCP) Guidelines for lateral deployment across the DIC Group, which will be optimized to account for the situation on the ground in various countries and territories.

Progress of Response Measures in Fiscal Year 2016

In fiscal year 2016, the Risk Management Subcommittee completed the implementation of risk management plan measures to address 15 of the 16 priority risks, that is, all but “governance of subsidiaries,” which is particularly broad in scale and will thus be carried over. The effectiveness of measures was assessed and an executive review conducted, based on which the designation for all 15 was shifted from “priority” to “routine.” The subcommittee will continue to apply the PDCA cycle, taking decisive steps to further enhance DIC’s ability to manage these risks.
DIC’s first step in fiscal year 2017 was to incorporate materiality into the risk identification process. As a result, the Company identified six new priority risks to be addressed in fiscal year 2017, all of which have the potential to negatively impact business opportunities and/or growth if not addressed appropriately. The Company is currently taking decisive steps to address these risks.

Examples of Response Measures to Selected Priority Risks (Fiscal Years 2014–2016)

Risk Possible negative impacts Principle response measures
Currency and interest rate fluctuations Currency rates (sharp increase in the value of the yen): Decrease in the profitability of exports
Interest rate (increase): Increase in interest burden
● Currency rates: Review structure of foreign currency–denominated assets and liabilities; invest in emerging economies; promote the centralized management of foreign exchange risk for corporate transactions
● Reduce interest-bearing debt
Facility-related accidents Serious industrial accident; explosion and fire; occupational accident; damage due to earthquake or power failure ● Provide training regarding pertinent laws and regulations
● Provide safety training; promote risk assessment and process safety management (PSM)
● Prepare restoration plans
Intellectual property Litigation related to intellectual property infringement; suspension of business or R&D; indemnity payments ● Increase acquisition of strategic patents that keep competitors at bay
● Improve patent information-collecting capabilities in the PRC, ROK and Taiwan
Earthquakes, tsunami, volcanic eruptions Death and injuries arising from major earthquakes, tsunami or volcanic eruptions; inadequate efforts to assist stranded commuters and delays in the restoration of operations; loss of management resources; suspension of operations; restoration costs ● Collect basic information and develop response framework for domestic production facilities
● Provide support for efforts to assess the effectiveness of product-specific BCPs
Governance of subsidiaries Increase in control risks affecting the execution of subsidiaries’ businesses attributable to a weakening of awareness of the meaning of and/or methodologies used in risk management on the part of subsidiaries’ presidents ● Create and set down prerequisites for the appointment of directors, management protocols and the suitability of executives at subsidiaries
● Enact rules and standards of conduct for management of affiliated companies
Information security Significant loss of data due to physical damage; viruses resulting from access to malicious websites; theft or leak of information resulting from deliberate or negligent individual actions ● Update antivirus system for computers
● Rebuild network systems
● Promote employee training regarding rules and guidelines
Pandemics Depletion of personnel due to rapid increase in contraction among employees and their families; official restrictions on movement hindering the ability to commute, take domestic or overseas business trips and/or conduct regular operations ● Confirm crisis response preparations at individual sites; prepare crisis management frameworks and manuals; establish Groupwide crisis management infrastructure
● Create product-specific BCPs based on a hypothetical pandemic scenario

TOPICS Initiatives to Strengthen Governance at Subsidiaries

Themes Guiding Efforts to Strengthen Governance at Subsidiaries

The DIC Group comprises 174 companies in 63 countries and territories. Two-thirds of the Group’s employees are located at, and more than half of its consolidated net sales are generated by, bases outside of Japan. DIC recognizes that ensuring subsidiaries share the same values and vision—despite differences in culture, social systems and customs—and maximize management resources, while at the same time complying with local laws, regulations and rules, is critical to sustainable growth for the Group.
It goes almost without saying that in the event of a transgression, an incident of noncompliance or an unforeseen contingency at an overseas DIC Group base, there is a risk that the DIC brand image could be negatively affected, causing damage to the Group as a whole. DIC has thus positioned governance at subsidiaries as a crucial risk requiring ongoing initiatives and will continue to promote efforts to reinforce the governance configurations of subsidiaries worldwide.

Framework for Supporting the Management of Subsidiaries

As an organization with global operations, DIC has worked continuously to create internal controls systems and establish governance configurations for its subsidiaries around the world. With the aim of ensuring that subsidiaries’ risk management systems function and of reinforcing and increasing the efficiency of their management, in fiscal year 2016 DIC outlined four key themes to guide these efforts. This move was made in line with the Company’s belief in the importance of establishing robust frameworks for the appointment of directors, the organization of corporate auditors, the operating structures underpinning subsidiaries’ management and the provision of support by the parent company.

① Enhance the visibility of Group governance systems: The DIC Group’s matrix-like governance organization positions products on one axis and regions on the other. Steps are being taken to clarify and set down standards for the segregation of duties and the delegation of authority to assist overseas subsidiaries in determining which of the two aspects should be given priority in making business decisions.
②Ensure appropriate behavior by subsidiaries’ boards of directors: Prerequisites for the appointment of directors to subsidiaries’ boards of directors, which are responsible for supervising executives’ performance of their duties, are being established, as are guidelines for board administration.
③Ensure appropriate behavior by subsidiaries’ executives: Prerequisites for the appointment of executives, including leadership skills, managerial competence and awareness of compliance, are being established.
④ Implement measures that help subsidiaries ensure rational front-line operations: Such measures include setting KPIs for subsidiaries that align with DIC targets, establishing criteria for the provision of support and management assistance by the parent company’s functional departments and determining acceptable operating levels.

Responding to New Laws and Regulations

Transfer price taxation is one of the principal challenges facing the DIC Group’s subsidiaries. With transfer pricing, companies risk double taxation on transactions within the Group, that is, on being taxed on profits in the country of domicile and the country to which it transfers, i.e., sells, its products. As a consequence of the Base Erosion and Profit Shifting (BEPS) Project*, effective from fiscal year 2018 DIC will be obliged to provide uniform information to local tax authorities in all of the countries in which it has operations. In response, the Company will work with the Group’s overseas regional headquarters (DIC (China) Co., Ltd. and DIC Asia Pacific Pte Ltd) and Sun Chemical Corporation, to confirm and organize transaction information.

  • *BEPS is the artificial reduction of taxable income through the shifting of profits to low-tax jurisdictions or other locations where there is little or no economic activity. The BEPS Project is an initiative undertaken in response to demands by G20 member countries seeking to prevent the erosion of their tax bases to plug gaps in tax rules that make BEPS possible.
VOICE

Governance leverages common Group values and mechanisms to create an operating foundation that allows people on the front lines to focus on their responsibilities.

For an organization like the DIC Group, which has two-thirds of its employees overseas, the physical and psychological distance between corporate headquarters in Tokyo and bases overseas makes it difficult for everyone to feel like they are part of single global team. However, I believe that creating such a sense of solidarity is crucial.
By capitalizing on shared values and vision to promote sustainable business expansion and maximize profitability, Group companies can both make their presence felt and contribute to continued growth for the DIC Group as an attractive and admired corporate organization. This is the true objective of governance. Making certain that all employees—whether at corporate headquarters or a Group company—feel they are all on the same team and setting common Groupwide rules to promote cooperation will enable us to maximize and benefit from synergies.
We will continue working to create an operating foundation that allows leaders on the front lines at each of the Group’s bases to focus on their responsibilities, without being inundated by everyday management–related minutia. I am confident that creating a work environment that inspires pride in each and every employee will help further enhance the DIC Group’s appeal and drive growth.

Executive Officer (In charge of Finance and Accounting Division) Hiroyuki Ninomiya

Executive Officer (In charge of Finance and Accounting Division) Hiroyuki Ninomiya

BCM

Drawing on lessons from the Great East Japan Earthquake, the DIC Group now accounts for all risks with the potential to interrupt business continuity through BCM. These risks include natural disasters such as large earthquakes and floods; influenza and other pandemics; explosions, fires, leaks and other facility accidents; and major corporate scandals. The Group comprehensively estimates the probability of each risk and its impact on management, prioritizing response measures for more significant risks.
In Japan, which is currently experiencing an active period in terms of volcanic and seismic activity, the Group deploys ongoing natural disaster response measures. These include maintaining headquarters’ functions and task force framework, support measures for disaster-stricken areas, and producing and renewing BCPs for each key product. The Group facilitates and maintains a system to maintain business continuity through training drills. These encompass drills for safety confirmation, emergency radio warnings, comprehensive disasters, disaster map exercises and BCP.

BCM in Fiscal Year 2016

Initiatives in fiscal year 2016 included renewing BCPs. This involved providing training (classes and theoretical training) for all product division BCP officers and preparing updated plans. The goals here were to ensure that BCP officers share a common understanding of business risks and to reinforce recognition of the need to address business continuity as an inherent aspect of everyday operations by predicting potential crises and making preparations, thereby enabling DIC to leverage limited resources to secure supply chains and restore sites to operability in the aftermath of a major disaster.
Acting through the Responsible Care Department, DIC promoted ongoing efforts to reinforce responses to risks specific to global chemicals manufacturers, including those associated with process safety and disaster prevention, the management of chemicals substances and export controls. The Company also took steps to prevent patent disputes and strengthen competitiveness, expanding its intellectual property database to avoid the danger of violating the intellectual property rights of other companies and promoting ongoing efforts to secure intellectual property rights and the use of “black boxing” to protect for its own technologies.

Complementary Production Capabilities

The DIC Group recognizes the need to ensure it can fulfill its supply responsibilities even in the event of damage to facilities from a major natural disaster and thus incorporates this perspective into its BCPs. One way it seeks to do so is through complementary production capabilities. For example, the Group’s LC production facilities in Japan and the PRC collaborate on the implementation of BCPs, using a common emergency response manual and holding regular response simulation sessions. Group pigment production facilities have developed a framework that involves continuous cooperation to plan emergency response measures.

Emergency Response Exercises and Drills

The DIC Group has developed and maintains a system designed to ensure its ability to minimize damage in the event of a disaster, as well as to ensure the smooth restoration of operations. This system includes a wide range of exercises and drills, including safety confirmation drills, emergency radio warning drills, comprehensive disaster drills, map-based simulation exercises and BCP drills.

  • Comprehensive disaster drill at the corporate headquartersComprehensive disaster drill at the corporate headquarters

  • Task force map–based simulation exerciseTask force map–based simulation exercise

  • BCP drill and trainingBCP drill and training

DIC Headquarters Emergency Response Pocket Book

DIC Headquarters Emergency Response Pocket Book
DIC Headquarters Emergency Response Pocket Book

Approximately 1,300 employees of the parent company and various domestic Group companies work at the corporate headquarters in Tokyo. This compact booklet, which is distributed to these employees and their families, provides instructions on advance disaster preparations and details corporate headquarters’ overall emergency response framework, as well as the responsibilities of individual floors and departments in an emergency situation. Space is also provided for employees and their families to provide contact information for use in the event of an emergency, while the compact size ensures portability.

A Stakeholder’s Perspective

The assistance of companies with strong local roots plays a key role in creating safe, secure communities.

DIC is involved in a wide range of social contribution activities. We are delighted to have their cooperation in efforts aimed at ensuring the safety and security of our community. As a member of the local neighborhood association, they assist with the annual Nihonbashi 3-Chome Nishimachi Neighborhood Association Comprehensive Disaster Drill—which is held under the guidance of the Nihonbashi Fire Station—by providing the venue and administrative support for the drill. They also support local disaster preparation efforts in other ways, including by allowing the installation of a local emergency supplies depot inside the DIC Building. Thanks to the cooperation of local companies such as DIC, our association’s disaster preparation efforts continue to earn high marks. In 2016, we received a Tokyo Fire Department Superintendent–General’s Award for excellence. We also received the Minister’s Award, which is the top honor in the Ministry of Internal Affairs and Communications’ awards recognizing community disaster prevention efforts. I am very proud of our achievement, but of course I recognize that there is always more to do. I look forward to DIC’s continued growth and evolution as a company with strong local roots and to the future of this mutually beneficial relationship.

Chairperson, Nihonbashi 3-Chome Nishimachi Neighborhood Association Kiichiro Nonaga

Chairperson, Nihonbashi 3-Chome Nishimachi Neighborhood Association Kiichiro Nonaga

  • Comprehensive Disaster DrillComprehensive Disaster Drill

  • Comprehensive Disaster Drill

  • Comprehensive Disaster Drill

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