Risks Associated with Businesses, etc.

Risks associated with businesses that may have a serious impact on our group have been identified as follows. In identifying the risks, they were determined by the Board’s resolution after deliberations in the Risk and Compliance Management Committee. We have determined the departments responsible for each risk, formulated countermeasures that could be assumed to the extent possible, and been serially executing them; however, not all the risks are covered. As for our group's businesses, the situation may have an impact on our group’s financial condition and business performance if economic activities and markets do not function normally due to the following risks: a risk that is unknown at the present moment, other risks that are not deemed to be important at the present moment, or a risk that will have an immense impact throughout the entire world (large-scale war, terrorism, natural disaster, pandemic, etc.).

Risk Management Process Flow

• After extracting and classifying the risks that may have a serious impact on our group, set the responsible departments that will respond to the risks.
• Responsible departments for each risk comprehensively evaluate the risk from the both aspects of the possibility of the risk becoming apparent and the extent of damage when the risk becomes apparent and rank the risk according to the importance.
• For important risks, which were ranked high, formulate and execute the risk measures on an annual basis. Report the risk measure execution status to the Risk and Compliance Management Committee and conduct progress management.
• After reporting the risk response status in the Board, resolve the descriptions in the securities report.

1.Disaster/Environment	（1）Spread of infectious disease
	Risk Awareness	Response to a Risk
	Impact on production, logistics, sales activities, business environment, and overall business operation due to the spread of an infectious disease, such as a novel virus	Setting of the measures for the infection prevention and the prevention of the spread and setting of the flexible work shifts Establish guidelines for countermeasures in an emergency and accumulate adequate stockpiles Selection of multiple suppliers of raw materials and securing of the BCP inventories
	（2）Occurrence of natural disasters
	Risk Awareness	Response to a Risk
	Impact on production, logistics, and sales activities, as well as the destruction of infrastructure, disruption of supply chains etc. due to an earthquake, tsunami, typhoon, etc.	Securing of human life safety, countermeasures for key facilities and important systems, organization of the response manuals, and securing of stockpiles based on the Disaster Countermeasure BCP Manual Selection of multiple suppliers of raw materials and securing of the BCP inventories Asset protection and risk hedge by nonlife insurance in preparation for the opportunity loss due to business interruption
	（3）Environment related items・climate change
	Risk Awareness	Response to a Risk
	An increase in cost burden and compensation liability associated with the environmental laws and regulations Impact of climate change on production, procurement, logistics, and other aspects of supply chain Capital investment and energy cost increase involved in shift to a low-carbon society	Operation of the environment management system based on ISO 14001 Compliance with legal requirements, such as waste management, and improvement of rules to reduce environmental risks Compliance with the environmental rules and execution of internal auditing toward the continuous improvement Identification of key risks and opportunities related to climate change and sharing them with divisions and group companies
2.Business Environment	（4）Fluctuations in new housing starts and floor areas
	Risk Awareness	Response to a Risk
	Shrinking of the markets due to a decrease in population and a decrease in the number of households associated with the low birthrate and longevity	Focus on nonresidential public and commercial structures as the priority market and expand product sales, as well as the engineering business Launch high value-added products in overseas markets, especially North America, and expand sales channels for industrial-use products
	（5）Fluctuations in the raw wood and plywood prices
	Risk Awareness	Response to a Risk
	Tightening regulations over illegal logging of tropical hardwood and fluctuations in the supply demand balance, ocean freight, and foreign exchange	Conduct technical studies for switching to raw materials whose supply is expected to be stable To ensure the stable procurement of raw wood, conclude contracts with suppliers and strengthen procurement from multiple suppliers
	（6）Fluctuations in the crude oil and petrochemical product prices
	Risk Awareness	Response to a Risk
	Situations of the producing countries and the international supply demand balance Fluctuations in the petrochemical products, such as paints and adhesives, and the energy cost at the time of production	Suppression of a rapid impact on the profit and loss by setting about one year, instead of six months, for the condition determination for transaction prices Reflection of the portion that cannot be absorbed by the self-help efforts on the selling prices Promotion of both the reduction of greenhouse gas emissions and cost reductions by shifting energy from fossil fuels to woody biomass
	（7）Foreign exchange fluctuations
	Risk Awareness	Response to a Risk
	Fluctuations in tropical timber plywood of which the major application is the materials for flooring, import transactions from the group MDF plants in Malaysia and New Zealand, and the foreign currency transaction adjustment in overseas investments	Switching to domestic timber plywood that is not affected by the foreign exchange rates Market fluctuations that cannot be absorbed will be reflected on the selling prices while monitoring the movements of competitors Hedging transactions by the foreign exchange reservation in accordance with the stipulations of the Financial Derivatives Management Regulations
	（8）Stock price fluctuations
	Risk Awareness	Response to a Risk
	Booking of the appraisal loss and loss on sale due to a decline in the prices of holding shares	Review holding shares from both the qualitative and quantitative aspects once a year and report the result to the Board Reduction of the shares that are judged where the significance of holding is unsatisfactory
	（9）Interest-rate fluctuations
	Risk Awareness	Response to a Risk
	Impact on interest expenses due to interest-rate fluctuations	Utilization of financial derivatives for long-term financing that is one year or more in accordance with the stipulations of the Financial Derivatives Management Regulation
3.Business Operation	（10）Quality assurance
	Risk Awareness	Response to a Risk
	Generation of the compensation costs for the amount of damage, lowering of the brand image, and customer defection due to product defects	Operation of the quality management system based on ISO 9001 Setting of the rules concerning design development management, product safety inspections, etc. Inspections by the exclusive members centering on the quality assurance division at the Head Office that is independent of the development/manufacturing division
	（11）Acquisition and alliance related items
	Risk Awareness	Response to a Risk
	Shortfall of the investment effect by M&A, etc.	Verifications and inspections in the Investment Committee that give consideration to the management strategies, synergy, the market environment, risk factors, the capital cost, etc. Implementation of periodic reviews in the management meeting and the Board for verification of the effects after acquisition
	（12）Fire and facility trouble in production plants
	Risk Awareness	Response to a Risk
	Disruption of product supply due to fire or a serious facility trouble in a production plant	Disaster Countermeasure BCP Manual, rules, a supervisory organization, in-advance countermeasures, response manuals, and securing of BCP spare articles Implementation of the group-based Plant Mutual Safety Diagnosis that incorporates an objective perspective of other plants Risk hedge by nonlife insurance in preparation for unforeseen risks
	（13）Intellectual properties
	Risk Awareness	Response to a Risk
	Generation of the litigation cost concerning the intellectual property right	Improve the rules concerning intellectual property rights in the rules that manage the design development processes Establishment of the dedicated department that will manage intellectual property rights and improvement of the checking system for various R&D cases and products from the design development phase
	（14）Information security
	Risk Awareness	Response to a Risk
	Occurrence of a compensation of damage and degradation of the brand image associated with the leakage of the privacy or credit information of customers	Improvement of the internal rules, such as the Information Management Rules, Personal Information Protection Management Rules, IT Security Rules, etc. Introduction of various security measure systems, management of access authorizations, and implementation of security education for employees
	（15）System trouble
	Risk Awareness	Response to a Risk
	Occurrence of the delivery delay, additional production cost, loss on disposal of products, etc. associated with the ordering and order receiving core system failure	Improvement of the organizational structure that will integrally manage the series of mechanisms from order receipt to shipping, delivery, etc. Enhancement of the ordering and order receiving core system’s processing capacity and enhancement of the countermeasures for the backup function in case of failure
	（16）Raw material procurement trouble
	Risk Awareness	Response to a Risk
	Occurrence of problems in the supply chain, such as supply disability due to fire, facility trouble, and disasters, in the supplier of the major raw materials	Formulation of the Disaster Countermeasure BCP Manual Selection of multiple suppliers of raw materials and promotion of the countermeasures, such as securing of BCP inventories
	（17）Insufficient human resources
	Risk Awareness	Response to a Risk
	Difficulty in recruiting human resources with advanced expertise and experience required for the development and expansion of business domains	Strengthening human resource management systems to facilitate the exercise of diverse values and abilities Maximizing employee performance by promoting health management
4.System	（18）Accounting related items
	Risk Awareness	Response to a Risk
	Booking of impairment loss on non-current assets, introduction of new accounting standards or tax system, or a difference of opinion with the tax authority concerning tax declaration	Verifications and inspections of the consistency with the management strategies in the Investment Assessment Committee, the investment effect that gives consideration to the capital cost, and the safety, quality, environmental consideration, etc. Sufficient consideration by the external experts, such as a tax accountant corporation, and advance referral to the tax authority as needed
	（19）Regal regulation related items
	Risk Awareness	Response to a Risk
	Stricter laws and regulations, licensing and approval systems site in Japan and overseas	Legal regulation through collaboration between business management division in Japan and overseas and legal departments Implementation of proactive training for employees to acquire knowledge on laws and regulations