Risk Governance

Approach to Risk Management

The NGK Group addresses the issue of serious risk by empowering the following committees to facilitate risk avoidance and prevention, in accordance with the Basic Rules of Crisis Management. Additionally, in the event of some particularly significant risk, the vice president in charge of the Corporate Planning Office can call a meeting, which would include the president, to develop countermeasures.
In times of increasing socio-economic uncertainty, it is important to have a heightened awareness of risk and to act before risks turn into crises. Therefore, in addition to the five committees, which we maintain in order to oversee matters of day-to-day risk, we also have in place a system by which top management can coordinate a rapid response to growing risks.

Risk Management Framework

Risk Identification Process

All risks discovered through the standard risk management process, which have the potential to affect the operational or financial situation of the Group are collected and reevaluated in order to identify any which may be serious risks. The ESG Committee will then deliberate and designate those risks that need to be managed by the Group ass a whole.

Risks, Risk Summaries, Risk Responses

Risk	Summary	Response
1.Business operation risks	All operations
	Demonstrations, terrorism, war, infectious or communicable disease, and other unforeseen matters	Construct globally distributed, alternative systems
	1.Ceramic Products Business
	Drop in demand for NGK Group products due to decline in demand for internal combustion engine vehicles Drop in market share due to rising competition from Chinese market Inability to recover prior investment due to downturn in business, delayed timing of regulations, or other factors	Compensate for drop in demand by increasing number of new and high-performance products in line with stronger exhaust regulations Strengthen competitiveness via technical responsiveness that anticipates environmental regulations, and via supply stability Respond appropriately to automaker planning and changing business conditions, and then make revisions to capital investment planning
	2.Process Technology Business
	Deterioration in performance and financial status due to declining demand for semiconductors Delayed responsiveness to customer needs Emergence of innovative semiconductor manufacturing process Drop in market share due to growth of competition in kilns for lithium-ion battery cathode materials and electronic components	Work together with direct customers who manufacture semiconductor manufacturing equipment, and make revisions to equipment capacity and personnel and production systems, etc., where appropriate Carefully monitor semiconductor manufacturing process trends and revise production systems where appropriate to ensure quick response to changes in demand Carefully monitor customer trends and pursue production system innovation where appropriate to ensure quick response to changes in demand
	3.Electronics Business
	Sudden drop in base station and data server demand Inability to develop new technology or release products compatible with customer technology innovations	Carefully monitor customer trends and pursue production system innovation where appropriate to ensure quick response to changes in demand Carefully monitor customer trends and pursue timely technological development
	4.Energy Infrastructure Business
	Change in energy policies overseas Capital investment cutbacks by power companies in Japan Trends among competitor companies and products Delay in timing of market expansion for large-capacity and long-life batteries Spread of competitors’ products, such as lithium-ion batteries, that use innovative technologies	Carefully monitor energy policy trends in each country and revise production systems where appropriate to ensure quick response to changes in demand Strengthen competitiveness via technical responsiveness and supply stability Carefully monitor customer trends and revise production systems where appropriate to ensure quick response to changes in demand Strengthen partnerships with leading overseas companies
2.R&D-related risks	Inability to achieve adequate results with the input received due to increasingly complicated technological competition	A total of 300 billion yen will be set aside for research and development expenses over the next 10 years, 80% of which will be allotted to the carbon neutrality (CN) and digital society (DS) Set a target of 100 billion yen in sales from new products and new businesses by 2030
3.Legal compliance, human rights and safety, and quality-related risks	1.Legal compliance-related risks
	Decline in NGK Group’s reputation due to actions in opposition to society’s expectations with regard to legal and regulatory compliance, respect for human rights, contract compliance, etc.	Utilize employee training and handbook distribution to ensure employees are familiar with relevant laws and regulations and have a more compliance-focused mindset The Business Ethics Committee, which comprises outside directors and compliance officers, investigates serious improprieties or legal/regulatory violations that could have a significant impact on management, and recommends preventive and corrective measures. Reducing the possibility of compliance violations through a whistleblowing system
	2.Human rights and safety-related risks
	Human rights violations in the Group’s business activities Employee occupational hazards, illness, or physical and mental health problems	Formulation of the NGK Group human rights policy Undertake human rights due diligence via HR Committee In accordance with NGK Safety and Health Policy, identify serious hazard risks and use risk assessment to facilitate strengthening of preventative measures Follow up on employees who work long hours, and conduct job grade-specific mental health education
	3.Quality-related risks
	Quality-related risks such as loss of trust or profits, or contraction in growth, due to serious market complaint, contractual violation, or other unsatisfactory operations	Have Quality Management Department perform monitoring of each Business Group’s quality activities, in line with NGK Quality Policy and under direct supervision of senior management Regarding serious issues, convene quality review meetings in order to find a solution quickly Company-wide deployment of quality risk elimination process activities
4.Information systems-related risks	Negative impact on societal trust or business continuity due to shutdown of data processing, or to theft, destruction, manipulation, loss, etc., of data, following external cyber-attack or unauthorized system access, or after unexpected system failure or security issue	Establishment of an IT security system based on the Basic NGK Group Information Security Policy Conduct information security training for employees
5.Currency exchange, capital, and procurement-related risks	Decreased sales and profits and deterioration of business performance due to strong yen Risk of negative impact on business operations, performance, and financial situation of NGK Group as a result of financing difficulties stemming from serious regional financial crises and other factors Rising production costs due to rise in prices of certain materials and equipment	Keep production close to local demand centers, perform financing in local currency, and optimize purchasing according to currency exchange situation Hedge risks with forward foreign exchange contracts and other financial instruments Reflect risk in sale price Reduce costs through competitive purchasing, increased productivity, and other means
6.Climate change and disaster-related risks	Deterioration in business performance due to additional costs incurred by future international GHG regulations, environmental taxes, carbon taxes, etc. Operational decline due to global warming-caused sea level rise, increased size and magnitude of typhoons, increased frequency of local torrential rains, etc. Deterioration in business performance due to shutdown of production following major disaster, fire, or other serious incident or accident Serious damage to facilities at major production bases due to disasters, fires, or other serious incident or accident Decline in operations and negative impact on product manufacturing and sales due to emergence and spread of major infectious disease, such as influenza or COVID-19 pandemic	Formulation of the NGK Group Environmental Vision Begin looking into disclosing information on risks and opportunities based on recommendations from the Task Force on Climate-related Financial Disclosures (TCFD) Development and introduction of products and services that contribute to the realization of a carbon-neutral society Establishment of a production system that enables alternative production Promote business continuity plan (BCP) for entire Group

Legal Risk Management at Group Companies Outside Japan

The NGK Group is engaged in strengthening its ascertainment of legal risk management status in overseas business to minimize the globalizing and diversifying risks associated with business expansion.
We ask all Group companies outside Japan to report information pertaining to the status of lawsuits, legal affairs and consultation with lawyers twice a year, and whistleblowing system usage, export controls and access to legal-related information once a year. Major issues found in such reports are reported to the Compliance Committee to share information. Consultations from bases outside Japan are handled by lawyers and legal departments to avoid risks.

Identifying and Preventing Risks Based on Questionnaire

As part of efforts to enhance risk management practices, in fiscal 2019 NGK and its Group companies in Japan conducted the second CRS (Corporate Risk Survey). Combining the previously administered CSA (Control Self-Assessment) questionnaire and the compliance awareness survey, the CRS checks the understanding of respondents regarding the possibility of risk and its implications with the goal of grasping and preventing various potential risks arising from daily business operations. Based on the results of the survey, the relevant divisions and departments create measures to reduce risks.