The Kao Group's mission is to strive for the wholehearted satisfaction and enrichment of the lives of people globally and to contribute to the sustainability of the world, with products and brands of excellent value that are created from the consumer's and customer's perspective. In addition, the Group is conducting initiatives under the Kao Group Mid-term Plan 2025 "K25," which establishes a Vision of "Sustainability as the only path" and sets forth three objectives: (1) Become an essential company in a sustainable world; (2) Transform to build robust business through investment; and (3) Maximize the power and potential of employees.
However, with the global spread of the novel coronavirus (COVID-19), intensifying market competition, a changing market structure and volatility in raw material market conditions and exchange rates, the Kao Group's business environment remains uncertain. The COVID-19 pandemic has brought about changes in the attitudes of consumers regarding the environment, health, hygiene and other matters and associated changes in their purchasing attitudes. Moreover, amid the global expansion of business and the progress of structural changes in various fields, companies must respond promptly and appropriately to changes in the risks pertaining to their businesses. In this business environment, by placing ESG at the core of its management, further deepening its Essential Research and proactively proposing innovations on a level that impacts society, the Kao Group aims for profitable growth while contributing to people, society and the Earth. To do so, it manages the following risks and crises.
The Kao Group defines a potential negative impact on its management targets and business activities as a "risk" and the materialization of such risk as a "crisis." The Risk and Crisis Management Committee has established a system and activity guideline for risk and crisis management based on the Kao Risk and Crisis Management Policy. Divisions, subsidiaries and affiliates manage risks by identifying and assessing risks, and formulating and implementing countermeasures based on this activity guideline. In a crisis, the Kao Group works to minimize harm to people and property by establishing an Emergency Response Team Organization that corresponds to the level of emergency and responding promptly and appropriately.
After deliberation by the Risk and Crisis Management Committee and the Management Committee, the Kao Group has selected the following 14 particularly significant risks as the main risks that have a negative impact on its sustained profitable growth and contribution to the sustainability of the world through its business activities. Among these main risks, the Kao Group designates risks that would have a major impact on management and require an enhanced response as "corporate risks," and once a year, based on internal and external risk surveys and interviews with management, the Management Committee selects risk themes and the individuals (executive officers) in charge of handling each theme, while the Risk and Crisis Management Committee manages progress. (* Main corporate risk themes and countermeasures are presented in "Main Initiatives.")
These are the main risks that might materialize within five years as recognized as of the fiscal year ended December 31, 2020. In addition, there are risks other than the listed risks that may affect investors' decisions.
The global spread of COVID-19 is having a significant impact on the global economy, including delays in raw material procurement, manufacturing, distribution and other areas, immigration restrictions imposed in each country and region, restrictions on going outside and mandated temporary store closures. The COVID-19 pandemic has been recurring, with second and third waves in many countries and regions. The uncertain business environment is expected to continue, with years required for the impact of COVID-19 to be reduced through the introduction of vaccines and other measures, and for the global economy to recover.
Under these circumstances, in Japan, which is the Kao Group's main market, the cosmetics market shrank significantly from the previous year due to the impact of factors including a substantial decline in inbound demand and people's voluntary restraint in going outside, while the household and personal care products market has grown due to increased demand for hygiene-related products. The COVID-19 pandemic has caused changes in people's awareness of hygiene, and changes in values regarding makeup and related products as people have voluntarily refrained from going outside and wearing masks has become common practice. It has caused changes in consumer behavior including a rapid increase in the use of e-commerce.
Risks associated with the COVID-19 pandemic and related changes in people's behavior are as follows. Inability to take appropriate measures could cause net sales and profits to deviate significantly from targets.
･ Temporary suspension of operations or obstacles to providing products and services due to multiple infections (clusters) at the Kao Group's bases or in its supply chains
･ Delays in product development and launch plans due to a resurgence or prolongation of infections, because of work that cannot be performed remotely
･ Delays in the recovery of the Cosmetics Business or other businesses due to a resurgence or prolongation of infections
･ Inadequate response to changes in people's awareness and values, and changes in consumer behavior
In response to COVID-19, the Kao Group held a meeting of the Emergency Response Team Headquarters headed by the President and CEO to decide on Group-wide policies regarding (1) ensuring the safety of employees and their families, (2) continuity of business activities, and (3) contributions to society, and took the following actions. In addition, these actions have been reported to the Board of Directors.
(1) Ensuring the safety of employees and their families
･ As crisis management measures, followed national and local government policies, and implemented work systems and styles compatible with the status of infection in each country and region (promotion of remote work/teleworking, restrictions on business trips, restrictions on training/events/tours, etc.)
･ Identified the status of infected employees and family members or those who have been in close contact with infected persons, and implemented care as applicable, and measures to prevent the occurrence of clusters
･ Launched the Infectious Disease Risk Assessment Project to reinforce infection prevention measures in the workplace and at home
(2) Continuity of business activities
･ To maintain the supply chain, implemented higher-level infection control measures at production sites and rolled them out to subcontractors and other related parties, in addition to conducting relevant activities for raw material procurement
･ Enhanced information systems for remote work and promoted digitalization of operations
･ Reviewed Group systems for new work styles
･ Formulated and implemented a business strategy for dealing with COVID-19 (main response initiatives related to the Cosmetics Business are presented in "Risks related to Changes in the Retailing Environment")
(3) Contributions to society
･ Provided a continuous supply of hygiene-related products for cleanliness and worry-free daily life
･ Increased production of alcohol disinfectants to 20 times the previous level and supplied them on a priority basis to medical institutions, nursing facilities and other locations with urgent needs.
･ Through its website, provided information on hygiene in daily life, based on the knowledge of experts and its own know-how. Also, for hygiene researchers, medical professionals, public health nurses working at educational institutions and other professionals, provided a wide range of information, including expert knowledge on measures for preventing the spread of infection based on academic papers
･ Contributed to the development of therapies and diagnostic tools for COVID-19, including the discovery of VHH antibodies that can be expected to inhibit infection
●Main Corporate Risk Themes and Countermeasures
Pandemics: The Kao Group implemented the above measures by applying to COVID-19 the guidelines and action plans it had been considering for responding to global pandemics of new strains of influenza and other diseases.
The Kao Group's Consumer Products Business and Chemical Business are affected by economic cycles and changes in the needs of consumers and customers.
The marine plastic waste problem, climate change, depletion of water resources, and environmental and human rights issues in raw material procurement, as well as growing social issues such as the aging society and hygiene have increased consumer awareness about the environment, health and other matters, leading to the trend of ethical consumption and customers' increasing needs for sustainability. Moreover, the global spread of COVID-19 is further heightening these trends. Inability to provide appropriate products and services in response to changes in consumer awareness and customer needs relating to these social issues may reduce competitiveness, making targets for net sales and market share unattainable. In addition, if efforts to address social issues are deemed inadequate, corporate value could decline.
Under the "Kirei Lifestyle Plan" (KLP), an ESG strategy that integrates an ESG perspective with business strategy, the Kao Group aims to contribute to the sustainability of the world through technology innovations at every stage from raw material procurement to production, point of use and product disposal, and KLP promotion activities to ensure all Kao Group members correctly understand the purpose and content of KLP so they can fulfill their respective roles and responsibilities. In addition, while steadily conducting initiatives, the Kao Group is working proactively to disclose these initiatives to stakeholders in order to demonstrate their results at an early stage.
In the Consumer Products Business, the Kao Group clarifies social issues to be addressed through its brand, which is a point of contact with consumers, and considers social and environmental issues from the product design stage. The Kao Group strives to contribute to better lives for consumers and the sustainability of society by maximizing the Group's assets.
In the Chemical Business, the Kao Group helps to resolve social issues through innovations in chemical technologies to respond to changes in customer needs and advances in technology. By strengthening the development of natural fat and oil derivatives and other sustainable and distinctive products, the information materials and performance materials businesses are developing innovative products that offer greater customization, with the aim of further reducing environmental impact.
The retailing environment in which the Kao Group operates is changing significantly. The growth of E-commerce is accelerating due to the COVID-19 situation, and brick-and-mortar retailers are also responding to this changing environment based on discrete strategies such as combinations of offline and online retailing and mergers or integrations across business formats. If appropriate sales activities cannot be developed in response to these changes in the retailing environment and their accelerating pace, targets for net sales, market share and profits may be unattainable.
Changes in the market environment due to COVID-19 have also had a significant impact on the retail industry. If response to the disappearance of inbound demand and the shrinking cosmetics market is inadequate, targets for net sales, market share and profits may be unattainable.
The Kao Group is proactively addressing E-commerce by rolling out products and services favored by E-commerce users and promoting the evolution of its digital marketing activities. Going forward, the Kao Group will further promote digital transformation (DX) and new initiatives such as D2C.*
The Kao Group will also promote co-creation initiatives with retailers to meet cosmetics needs through non-contact methods such as online counseling and live commerce, and to respond to growing hygiene-related demand.
As one of its growth strategies, the Kao Group is rolling out its businesses outside Japan, with a particular emphasis on strengthening its operations in Asia and other regions where the economic growth rate is high and market expansion is forecast. However, in each country or region, in addition to the impact of COVID-19, in the course of business there is the possibility of events arising including a slowdown in economic growth, political or social instability, problems at retail outlets, agents or other business partners, sudden changes in laws, regulations or tax systems, a spate of counterfeit products, or reputation risk.* If there is a substantial delay in the implementation of business plans due to the impact of these events, targets for net sales and profits may be unattainable.
The Kao Group routinely collects information on the laws and regulations of each country relating to its business, in addition to the economic, political and social conditions of the countries in which it produces or sells products, and takes necessary measures in response. The Kao Group pays particularly close attention to tightening regulations in each country relating to the environment, product safety and quality, and the impact of changes in import and export regulations on the Group. With regard to intellectual property rights infringements such as counterfeit products, the Kao Group is focusing on countermeasures against counterfeit products, especially in the Asian region, in an effort to ensure that consumers and customers can use its products with peace of mind.
●Main Corporate Risk Themes and Countermeasures
Risks related to environmental laws and regulations outside Japan: Among changes in laws and regulations outside Japan, the Kao Group pays particular attention to the risk of inability to adapt to changes in environmental laws and regulations that lead to the suspension of business and operations. In this regard, the Kao Group strengthened its monitoring and response system in China using an external specialist organization to address the impact of a sudden change in environmental laws and regulations on its local plants and major suppliers.
The Kao Group conducts proactive capital investment and M&A for business growth based on investment decisions using EVA, which is highly correlated with corporate value. The Kao Group will continue to make these investments for growth while striving to enhance corporate value through ongoing improvements in EVA. However, if the market and business environments deteriorate at levels not anticipated at the time investment decisions were made and the expected cash flows cannot be generated due to a deviation from business performance plans or other factors, impairment of property, plant and equipment recorded due to capital expenditures or impairment of goodwill and intangible assets recorded due to M&A could have an impact on financial condition and business results.
For major investments, the Kao Group checks performance at the time quarterly results are calculated to ensure that there is no significant deviation from the initial plan, and the results are reported at the Management Committee meeting. As necessary, relevant departments consider future direction and measures to improve business performance.
The basis of the Kao Group's product quality management activities is Yoki-Monozukuri with a consumer/customer-oriented perspective, as set forth in the Kao Way. At every stage from raw materials to research and development, production, transportation and sales, the Kao Group pursues a high level of product safety and strives to constantly improve quality from a thoroughgoing consumer/customer perspective. However, the occurrence of serious product incidents or concerns about product safety and environmental issues could lead to a decline in credibility, not only with regard to the problems with the brand concerned, but for the entire Kao Group.
The proliferation of incorrect methods of use of hygiene-related products during the COVID-19 pandemic and the risk of product incidents involving the elderly are increasing. In addition, there are changes in laws and regulations in each country as well as growing requirements for contribution to the resolution of safety and environmental issues and transparency in relation to product ingredients, safety and other matters. Furthermore, product retailing at an international level is increasing due to globalization, and product quality management activities and response to consumers may become inadequate.
The Kao Group designs and manufactures products in compliance with product-related laws and regulations and in conformance with strict standards it has set voluntarily. At the development stage prior to launch, the Kao Group thoroughly carries out testing, studies and research to confirm safety. After launch, the Kao Group strives to further improve quality by collecting feedback, requests and other information regarding products through the Customer Communication Center.
In addition, to respond to changes in risks relating to product quality management, the Kao Group is enhancing its communication of information through product FAQs and other methods to disseminate correct methods of use; improving product satisfaction for diverse customers by promoting universal design and by providing multilingual information; ensuring competitiveness by developing alternative technologies that anticipate new requirements in relation to laws and regulations in each country, and to safety and environmental issues; increasing reliability by promoting visualization of product quality management activities and by engaging in communication with all stakeholders; and building a system capable of promptly confirming compliance with the laws and regulations of each country, introducing a mechanism for centralized collection of consumer feedback across countries and regions and implementing other measures to enhance quality management activities on a global scale.
●Main Corporate Risk Themes and Countermeasures
Risk of occurrence of serious product quality issues: The Kao Group is strengthening its Group-wide response in the event serious damage occurs due to product quality issues and is enhancing awareness within the Group to prevent the occurrence of such issues.
For companies with large-scale plants, process safety needs have increasingly heightened in the context of accidents at chemical plants and the many natural disasters that have occurred recently.
A major obstruction to the supply of products to the market due to injury to employees or damage to facilities or supply chains resulting from a large-scale earthquake or other natural disaster such as a large-scale typhoon or flood brought on by climate change could have a significant impact on business results. In addition, the occurrence of substantial injury to employees or damage to the surrounding area due to events such as a fire or explosion at a plant of the Kao Group could have a significant impact on business results, with a resultant loss of social credibility.
The Kao Group prevents fires, explosions and chemical spills while maintaining safe and stable operations, and prepares for emergency situations by conducting measures for facilities and periodic training premised on a natural disaster. The Kao Group has built a framework to keep track of accidents or disasters worldwide when they occur through its emergency reporting network. In addition, the Kao Group is strengthening its response to disasters so that it can execute a plan for countermeasures that place top priority on the safeguarding of human life and a business continuity plan (BCP). To achieve this, the Group has established organizational units for disaster response in both Eastern Japan and Western Japan premised on damage to the Kao Head Office from an earthquake in the greater Tokyo metropolitan area and is establishing an Emergency Response Team Organization headed by the President and CEO.
●Main Corporate Risk Themes and Countermeasures
Large-scale earthquakes and other natural disasters: In response to recent large-scale typhoons, floods and other natural disasters brought on by climate change, the Kao Group conducted flood risk surveys at each site, stepped up countermeasures in both physical and intangible terms and carried out disaster prevention education for employees regarding hazard maps and evacuation. In addition, the Kao Group has strengthened its disaster response capabilities by implementing emergency response training and BCP training to address the possibility of large-scale earthquakes.
The Kao Group uses IT to promote efficient business and operations and conducts business using data. The Kao Group possesses confidential information (trade secrets) relating to research and development, production, marketing, sales and other matters, and retains the personal information of many customers and consumers for sales promotion activities, member site management and E-commerce. The Kao Group is working to strengthen information security in order to protect information assets including trade secrets and personal information, as well as IT hardware, software and many kinds of data records, in accordance with Kao's Information Security Policy. However, a leak of confidential information or personal information outside the Kao Group could occur due to an error or to intentional actions including a cyberattack. In addition, the supply chain and other business activities may be temporarily suspended as a result of such actions. If such an incident occurs, credibility could decline and targets for net sales and profits may be unattainable.
As personal and organizational measures for information security, the Kao Group has established rules and systems globally and implemented activities to protect trade secrets, personal information and information security using the PDCA cycle (awareness-raising activities, self-checks, and the setting of improvement targets). The Kao Group is also strengthening its system for responding when an incident occurs. As technical measures, the Information Security Committee has determined a policy on security measures to be implemented, and has implemented measures including the elimination of vulnerabilities by introducing anti-virus software and updating software, the prevention of unauthorized access, and the prevention of e-mail phishing.
●Main Corporate Risk Themes and Countermeasures
Risks related to cyberattacks and personal information protection: The Kao Group has created response procedures in the event that an incident occurs, and has conducted relevant training. The Group is also reinforcing its global information security and personal information protection systems.
The rapid penetration of social networking services (SNS) on a global scale has enabled a wide range of interactive communication among consumers or between consumers and companies. In addition, while leading lives of voluntarily refraining from going outside due to the COVID-19 pandemic, a wide range of people, regardless of age or gender, have come to use SNS in search of extensive information and connections.
However, SNS comments also include negative evaluations and comments about companies, and there are concerns about an increase in reputation risk through their dissemination that could inflict financial or non-financial loss from a decline in brand value and corporate credibility.
The Kao Group expects to continue increasing communication of various information and brand marketing activities using SNS. However, the spread through SNS of inappropriate expressions in the advertisements or other publications of the Group, or the spread of negative evaluations or erroneous information about the Group's business activities or brand image could lower the Kao Group's brand value or credibility.
From the perspective of ESG, the Kao Group is establishing a pre-check system and conducting internal education as measures to prevent inappropriate expressions in advertising and SNS messages. The Kao Group also globally monitors external information, including information on SNS, and strives to discover risks at an early stage. If a reputation risk incident occurs that adversely affects business and brand activities, the Kao Group responds promptly and strives to maintain its reputation by publicly announcing information, its corporate stance and other matters, as necessary, at the appropriate time.
●Main Corporate Risk Themes and Countermeasures
Reputation risk: The Kao Group has established a system for monitoring SNS and other external information and is further strengthening its emergency response system in the event a reputation risk incident occurs.
Risks associated with the use of digital media: The Kao Group established a pre-check system, enhanced internal education and conducted a review of guidelines and other matters for risks that could become reputation risks, such as inappropriate expressions and stealth marketing in advertisements, and promoted the establishment of advertisement distribution tools for improving and maintaining brand value.
Market prices for natural fats and oils and petroleum products used as raw materials for the Kao Group's products are affected by factors including global business conditions, geopolitical risks, the balance between supply and demand, abnormal weather, and currency exchange rate fluctuations. A sudden change in market prices could render the Kao Group unable to attain its target for profits. In addition, some of the raw materials used in the Kao Group's products are rare, thus entail risks relating to stable procurement. If the supply of products to the market is disrupted due to a sudden change in demand or difficulties at suppliers, the Kao Group may not only be unable to attain its targets for net sales and profits, but its credibility could also decline.
At the same time, the Kao Group is largely dependent on natural capital such as palm oil, paper, and pulp for its raw materials, and it must fulfill its corporate social responsibility by realizing sustainable procurement with extensive environmental considerations including resource conservation, global warming prevention and biodiversity preservation, as well as social considerations including safety, sanitation, labor conditions, and human rights. However, if the Kao Group's efforts for sustainable and responsible procurement are deemed to be inadequate due to reasons in the supply chain, the Group's brand image and credibility could decline.
The Kao Group is working to reduce the impact of increases in raw material prices by reducing costs and conducting measures to pass increases on to selling prices. In addition, for risks relating to stable procurement, the Kao Group is augmenting facilities at its main suppliers and cultivating secondary suppliers to diversify risks. The Kao Group also reviews contracts and proactively cooperates with suppliers to reduce risks.
On the other hand, to address risks relating to sustainable and responsible procurement, the Kao Group conducts human rights due diligence based on the Kao Human Rights Policy and risk assessment of suppliers based on the Guidelines for Supplier's Assessment for social issues. For environmental issues, the Kao Group promotes sustainable procurement of palm oil, paper and pulp based on the Guidelines for Sustainable Procurement of Raw Materials. Over the medium to long term, the Kao Group is also working to thoroughly reduce the amount of raw materials it uses and to switch to raw materials from non-food biomass sources. The Kao Group is also strengthening coordination with suppliers through initiatives such as the use of Sedex for supplier monitoring, establishment of an auditing system to eliminate compliance violations by suppliers, and the CDP Supply Chain Program.
In addition, with the aim of building a sustainable supply chain for palm oil, in 2020 the Kao Group began a program in cooperation with local partners to help oil palm smallholders in Indonesia improve yields and acquire sustainable palm oil certification.
The Kao Group strives to disclose these initiatives to its stakeholders proactively and transparently.
In conducting its business activities, the Kao Group is subject to various laws and regulations on matters including product quality and safety, process safety, environmental protection, chemicals management, accounting standards, taxation, labor, and transaction management. As competition intensifies globally, there is concern of growing temptation to commit improprieties due to factors including difficulties in achieving product differentiation, meeting product launch schedules and delivery timelines, and pressure to achieve performance targets. The risk of harassment may increase due to the generational gap in values and growing employee diversity.
A serious violation of compliance by the Kao Group, its subcontractors or other related parties could have an impact on the Group's credibility, financial condition and business results.
The Kao Group regards "Integrity" (behaving lawfully and ethically, and conducting sound and honest business activities) as the starting point of compliance, and promotes it as a foundation for earning the respect and trust of all stakeholders. As such, the Kao Group promotes activities such as ongoing education about the Kao Business Conduct Guidelines, which are its code of conduct, and responding appropriately to communications received via the compliance hotlines. In addition, as activities focused on reducing serious compliance risks, the Kao Group systematically promotes compliance with laws and regulations that apply to its business, and the Compliance Committee monitors the implementation status of particularly important laws and regulations. Furthermore, the Kao Group is conducting activities designed to create an open workplace that allows immediate reporting to management and an appropriate response in the event that a serious violation of compliance occurs.
The Kao Group strives to secure diverse and talented human capital in order to achieve its business targets globally. Meanwhile, with the advent of the digital revolution and low birthrates and aging populations in some countries, employment conditions, expertise requirements, and values with respect to working styles are changing significantly amid the trend to promote ESG management. In addition, COVID-19 is having a significant impact in areas such as people’s values and working styles.
An inability to systematically implement hiring, development and assignment of human capital with the advanced expertise required in each area, as well as leaders who anticipate major environmental changes, could create a bottleneck in business activities or other factors that have a negative impact on business results.
Based on the recognition that human capital is the Kao Group's most important asset, the Human Capital Development Committee, with top management as members, discusses and promotes the assignment and development of the human capital and effective organizational management that support sustainable growth.
In addition, in order to generate great vitality by drawing out the unlimited potential of individual employees and to maximize that vitality as an organization, the Kao Group employs measures such as using its global human capital information system, improving organizational capabilities through an employee opinion survey, conducting human capital management through job rank, evaluation and training systems and compensation policies that are shared globally, and implementing a health promotion program. To maximize the power and potential of employees, the Kao Group will further develop its cultivation of a corporate culture in which employees are willing to take on challenges, and further promote diverse work styles.
The Kao Group also conducts business activities outside Japan, and currency exchange rate fluctuations affect foreign currency-denominated sales and the cost of procuring raw materials. They also affect the conversion into yen of the amounts on the financial statements of consolidated subsidiaries outside Japan for the consolidated settlement of accounts.
Larger-than-expected fluctuations in foreign currency exchange rates against the yen, which is the Kao Group's functional currency, could have an impact on financial condition and business results.
The Kao Group mitigates the impact of foreign-currency denominated transactions on business results by hedging risk of currency exchange rate fluctuations through measures including using foreign currency accounts for transaction settlement and derivative transactions such as forward exchange contracts and currency swaps. The Kao Group does not engage in derivative transactions for the purpose of speculation. In addition, the Kao Group monitors fluctuations in major currencies and the impact of these fluctuations on its business, and reports its findings to the Management Committee in a timely fashion. Under the direction of management, relevant departments consider measures to mitigate the impact on business as required.
During the fiscal year ended December 31, 2020, no lawsuit or other legal action was filed that had a material effect on the Kao Group. However, the Kao Group conducts diverse businesses globally, and various types of litigation or other action may be brought against it. The result of such litigation or other legal action could have an impact on the Kao Group's financial condition and business results.
The Kao Group complies with various laws and regulations relating to its business, and strives to prevent disputes by providing safe and reliable products, properly acquiring and using intellectual property rights, clarifying contract conditions, negotiating with other parties, and other methods. In addition, the Kao Group has created a global mechanism for prompt and reliable reporting on the filing of important lawsuits and their current status, and has established a system for responding to litigation or other legal actions in cooperation with the individuals in charge at related companies in each country, law firms and other parties.