The Obayashi Group will improve its corporate value and fulfill its social responsibilities to its stakeholders by accurately grasping and preventing risks associated with corporate activities and minimizing the impact of their occurrence. We have established a risk management system that encompasses the entire group.
Risk Management System
Important decisions are referred to the Board of Directors and Management Meeting for discussion. These bodies determine and evaluate the risks of each agenda item. They discuss whether we have found a response that would be appropriate in case a risk is manifested, and then a decision is made on the item.
Moreover, each department assesses the risks inherent to its business processes. It builds the necessary avoidance and mitigation measures into those processes before performing them. Meanwhile, the Business Administration Department, which is Obayashi's internal audit arm, audits each department's risk management efforts.
Risk Management System Chart
We have established a system of security to protect our information assets from three risks (the risk of natural disaster, infrastructure emergencies, and other acts of force majeure; the risk of internal information management; and the risk of external unauthorized access), and have taken preventive steps to prepare for emergency situations.
We promote the installation of file encryption software as a measure for maintaining confidentiality and preventing leaks of personal information files, and each and every employee works to ensure personal information is acquired, used and managed appropriately. The policy guides our effort to make sure all employees are properly handling customers' personal information.
Business Continuity Plan Initiatives
We formulated our business continuity plan (BCP) to anticipate risks from disasters like large earthquakes. Under it, we draft and implement measures to prevent business interruptions and recover quickly in case of occurrence.
For example, in addition to setting a target recovery time for resuming operations, we draft establishment of recovery support bases and emergency communication network, securing emergency communication methods. Cooperation with suppliers is prepared as well. In addition to disaster prevention drills, the effectiveness of BCP is continuously verified through regular safety check drills by all employees.
In preparation for the occurrence of an earthquake disaster, which is judged to have a particularly high risk of occurring for several years, we have set up an earthquake disaster response headquarters, and we carry out earthquake drills for various situations twice a year by all executives and employees at main offices and all branches.
For customers, we provide consistent services ranging from diagnosis of business continuity management (BCM) achievement to proposals for specific disaster risk reduction measures.
Earthquake Task Force Communication System Chart
Obayashi's internal audit department conducts a company-wide survey and interviews each year. The department identifies economic, social, and environmental risks and reviews the effectiveness of the risk management process. The contents of that assessment are discussed by the Board of Directors.
As for the financial auditor, we review its structure and quality every year, and select an appropriate company. Obayashi also communicates important information concerning the company to stakeholders in a fair and timely manner on the TDnet system provided by the stock exchange for timely disclosure.
Below business risks are listed on the 116th Securities Report, Section 2 [Business Risks*] (Available only in Japanese). These are information that is judged to have the potential to affect the Group's business performance or corporate evaluation. The forward-looking statements in the text are the judgments of the Obayashi Group as of the end of consolidated fiscal year ending March 31, 2020.
|Legal regulations on business||Amendment, establishment, or change of applicable standards of laws and regulations, such as the Construction Business Act, Building Standards Act, Real Estate Brokerage Act, Antimonopoly Act, and Industrial Safety and Health Act and the expenses associated with complying with such laws and regulations would be reflected in business income and expenses and could impact business results. The Obayashi Group continually monitors trends in the establishment, amendment, and abolition of legal regulations in each business division and the Legal Department, and works to accurately reflect the accompanying costs in income and expenditure forecasts for estimating costs and making decisions on business feasibility.|
|Construction market trends||If an economic recession in Japan and/or overseas significantly shrinks the construction market, this could cause a decline in orders received and impact the performance of the Obayashi Group in construction business, the core business of the Group.
To address such risks, the Obayashi Group formulates human resources plans that anticipate medium and long-term market trends, and is also working to further strengthen sales and procurement capabilities, and improve productivity and expand construction capabilities through development of next-generation production systems. The Obayashi Group is also working to diversify earnings sources through expansion of business domains while building a strong financial structure.
|Construction work problems and serious accidents||If a major defect occurs in any aspect of design, construction, etc., or a serious accident involving a person, structure, etc. occurs, this could result in the expense of a large payment for compensation and affect the performance and corporate value of the Obayashi Group.
To address these risks, the Obayashi Group acquired ISO 9001 certification, an international standard for quality management systems, and built a strict quality management system. The Group also established the Safety, Quality & Environment Division and established a comprehensive system for managing safety and quality. The Group also hedges such risks by enrolling in construction insurance, liability insurance, and other types of insurance.
|Customer/vendor credit risk||If the credit of a customer, subcontractor, or joint construction company becomes unstable and funds cannot be collected or construction is delayed, this could affect the performance of the Obayashi Group.
To address such risks, the Obayashi Group conducts thorough credit checks before and during transactions and secures transactions terms for receipt of payments for construction and payment for construction according to the degree of completion in its construction business, which is the core business of the Group.
|Changes in construction material prices and labor unit prices||A sudden rise in construction material prices, difficulty in procurement, rise in labor costs, or shortage of skilled workers, could cause a decline in profitability due to an increase in construction costs or payment of damages due to delays in the construction period, etc. in the construction business, which is the core business of the Obayashi Group. This could affect Group performance.
To address such risks, the Obayashi Group continually ascertains the future construction capacity of the Group based on assessment of excess construction capacity of subcontractors, etc., and strives to maintain the level of orders received in line with this. The Group also works conscientiously to purchase early, ascertain accurate costs, including future predictions, and calculate appropriate cost estimates. The Group also formed the Rin-yu-kai, an organization of suppliers that provide mutual support, in each region and is working to build a safe supply chain, while also working to develop labor-saving technologies, machinery, and other equipment.
|Price fluctuation of assets||If the market value of real estate for sale, business real estate, investment securities, etc. held by the Group declines significantly, this could result in the recognition of impairment losses and affect the performance and financial base of the Obayashi Group.
To address such risks, the Obayashi Group formulates investment plans that balance investments with consideration of the financial base in its medium to long-term business plans. The Group also sets decision-making and screening standards for individual investments and investments are strictly screened in advance by the Investment Committee, etc. After acquisition, the management of the entity acquired, business conditions, and market price of investments are checked regularly.
|Long-term business risks||If a significant change occurs in the business environment during a PPP project or renewable energy project that has a long project term, or a serious accident occurs during the course of a project, this could result in deterioration in the profitability of the project in question and the posting of losses due to the cost of the response, and could affect the performance and corporate value of the Obayashi Group.
To address such risks, the Obayashi Group prepares in advance by formulating medium to long-term investment plans that take the balance with the financial base of the Group into consideration and strictly screens investments, as stated above in "Price fluctuation of assets." The Group also hedges risks through appropriate allocation of risk with business partners and subcontractors, enrolling in insurance, and taking other steps to mitigate risk according to the business scheme. Moreover, the Investment Committee and related divisions also monitor a project as needed after it begins, and endeavor to prevent the expansion of losses by exiting projects, depending on the profit conditions.
|Risks in overseas business||In Asia, the U.S. and other countries where the Obayashi Group operates its business, a significant change in the business environment, such as political instability due to terrorism or conflict, fluctuation in economic conditions, sudden fluctuations in exchange rates, change in legal system, or other significant change could affect the performance of the Obayashi Group.
To address such risks, the Obayashi Group operates its business in countries and regions having relative stable political climates and works to accurately ascertain conditions in the supervised region and respond in a timely manner in the Asia and North America Group branches (located in Singapore and the U.S.). To mitigate currency risk, the Group also receives payment for contracted work in the local currency and pays subcontractors in the local currency and uses the same currency for net sales and costs, in principle. When procuring materials overseas for domestic construction, the Group enters forward exchange contracts as needed to hedge exchange rate risk.
|Confidential information leaks (*1)||If personal information or confidential information is leaked due to external attacks, employee fraud, etc., this could result in a loss of social trust, or compensation for damages, etc., and could affect the performance and corporate value of the Obayashi Group.
To address such risks, the Obayashi Group formulated the Rules on Protection of Personal Information and the Information Security Policy and established an information management system. Also, to respond to new risks such as cyber attacks, increase in employees taking computers to their home accessing to company systems outside the company due to the normalization of telework, the Group also regularly evaluates risks and continually responds to changes in risk through technical measures and human management through education, training, etc. to manage personal information and confidential information appropriately.
|Risks related to violation of the antitrust laws by Obayashi||On October 22, 2018, Obayashi was judged guilty of violating the Antimonopoly Act by Obayashi in the bidding for the Chuo Shinkansen maglev line project and was assessed a penalty of 200 million yen. The investigation by the Fair Trade Commission continues and this could affect the performance of the Obayashi Group, depending on the results of the investigation.
The Obayashi Group has already posted the estimated amount of the surcharge for violating the Antimonopoly Act in the project mentioned above to "Provision for Loss on Antimonopoly Act" in fiscal year ended March 31, 2018.
|Risks related to the spread of the novel coronavirus||The spread of the novel coronavirus resulted in the temporary suspension of construction projects in Japan and overseas. The impact from the pandemic also caused economic decline in Japan and overseas. If it causes significant shrinkage of the construction market, this could affect performance of the Obayashi Group.
To address such risks, the Obayashi Group established the Task Force on The Emergence of the Novel Coronavirus, implemented telecommuting in principle in all administrative divisions while the declaration of the State of Emergency by the Japanese Government was in effect, and temporarily suspended some construction projects to help prevent the spread of the virus and safeguard the lives of and health of those involved. The Group took steps to prevent infection through strict avoidance of the three crowded conditions of "close contacts, crowded places and closed spaces" at construction sites where construction work is continuing and to ensure business continuity.
In the future, the Group will closely monitor the latest trends in the novel coronavirus and economic trends, and will work to allocate management resources appropriately, maintain the supply chain, and secure diverse revenue sources. Moreover, as the Group is implementing the Basic Plan of Action to Prevent the Spread of the Novel Coronavirus (specifying flexible workstyles and formulating common guidelines for the entire Company such as a policy on preparing work environments) to mitigate transmission of the virus and the impact due to infection. It also intends to maintain business activities and achieve results at the same level as before the pandemic.
The risk of a shrinking construction market due to an economic recession and measures to mitigate such risks are detailed in "Construction market trends," above.
*1 Includes information on the 117th Querterly Financial Results (April 1, 2020 to June 30, 2020) (Available only in Japanese)