Among the matters relating to the business and accounting etc., of the Group, major risks recognized by management as risks that could have a material impact on the financial condition, operating results and cash flows of the consolidated companies include the following. However, the statements below do not cover all risks, and the Group may be impacted by risks in the future that cannot be foreseen or are not perceived to be material risks at the present time. Based on the risk management system and methods stated in (1) and (2) below, the Group makes efforts to avoid risk and, if they have occurred, take appropriate measures.
* Forward-looking statements in this document are based on judgments made by the Group at the end of the consolidated fiscal year under review.
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To manage the risks faced by the Group, the president, who is a responsible official with final authority over risk management, appoints an officer in charge of risk management, and MRI has established the Risk and Compliance Management Division to be the department supervising risk management.
The Risk and Compliance Management Division detects risk predictors and practices risk management in emergencies in cooperation with the risk management departments of the Group companies. Risk predictors are detected monthly by all the Group companies by the risk management method below and reported to the Management Meeting, and the Internal Control and Risk Management Committee (chaired by the president) meets four times a year to submit the review of risk management and an annual policy and an annual plan for risk management to the Management Meeting once a year or more for discussion before reporting to the Board of Directors.
① Risk detection and assessment
The Risk and Compliance Management Division continuously examines and detects risks relating to businesses of the Group. Detected risks are assessed according to the probability of occurrence and impact, and focused, proactive measures are taken for risks that are determined to be high priority as a result of the examination.
② Risk monitoring and measures
The Risk and Compliance Management Division collects risk situations and predictors from all the Group companies monthly to detect risks at an early stage, prevent them from surfacing, and take appropriate measures to address them. To manage progress in its risk management, the Risk and Compliance Management Division compiles the results of its risk management and reports monthly to the Management Meeting.
③ Response to risks that have surfaced
If a risk surfaces, the Risk and Compliance Management Division considers and implements appropriate measures to minimize its impact. When the situation is a crisis alert or crisis outbreak as specified in rules, the Risk and Compliance Management Division will immediately shift to crisis management headed by the officer in charge of risk management or the president.
The COVID-19 pandemic is having an extreme impact on the real economies of Japan and other countries. It could have a significant impact on the business activities and financial results of the Group, depending on the prolongation of the period until the settlement of COVID-19 and its resulting impact on customers' businesses. The risks that the Group can expect at present are stated below. The Group will take steps to minimize the effects. The impact of the COVID-19 pandemic, however, is highly unpredictable and may affect the financial position and operating results of the Group depending on future developments.
Risks of effects on the Group’s results
1) Falls in sales and profit due to the suspension of operations in progress, changes in specifications, etc.
2) Falls in orders, sales and profit due to cancellations of offers, delays in orders, etc.
The Group was put on crisis alert ,as specified in the rules, in January 2020 and shifted to crisis management in February 2020 when the expanding trend of COVID-19 infections was revealed to implement prompt and fine-tuned measures.
Additionally, establishing action guidelines for preventing COVID-19, the Group fully enforces basic measures to prevent it, such as avoiding the three Cs (closed spaces, crowded places and close-contact settings), washing hands, wearing masks and gargling, in addition to initiatives such as employee's health management, and arrangements/ measures in terms of commuting, travel, use of communal areas, and business meetings. The Group also builds infrastructure to prevent infections inside the company and fully enforces sterilization procedures.
The Group also shares information on its analyses and proposals for crisis measures addressing the COVID-19 pandemic in a column on its website.
（４） Particularly significant risks
Because the Group handles a great deal of personal information and confidential information of its customers, information management and security management are important matters that are directly linked to the Group's business credibility. Therefore, if a situation such as the leakage, loss or destruction of information has occurred due to unauthorized access from the outside such as a computer virus infection or a cyber attack, the occurrence of natural disaster or imperfect information management, this may result in customers claiming compensation and a loss of confidence in the Group, etc., and these events could have an impact on the Group's financial results.
To address these risks, the Group strengthens and fully enforces information management, including access control for rooms, security measures for information and network equipment, the development of rules for sending email, and regular training for employees, etc. In addition, in response to an increase in remote work, the Group has set rules for handling information.
a. Risks relating to Group governance
MRI has subsidiaries and affiliates including Mitsubishi Research Institute DCS Co., Ltd. (DCS). While the Group has developed a system to enhance its corporate value and ensure operations are conducted appropriately, a delay in responding to an incident that has occurred due to insufficient governance of subsidiaries could impact the Group's financial results if it occurs.
To respond to this risk, the Group will improve its internal control and position governance improvement such as the sophistication of consolidated management including the cultivation of human resources and organizational culture reforms as important issues in the medium-term management plan, thereby promoting organizational and climate reforms that are conscious of cooperation between the Group companies, including personnel exchanges and mutual coordination of measures to raise awareness of compliance.
(Relationship between MRI's subsidiary DCS and its non-controlling shareholder (Mitsubishi UFJ Financial Group, Inc. (MUFG))
As of the end of the consolidated fiscal year under review, the shareholding structure of DCS, which plays a key role in the IT services segment of the Group, is that MRI has an 80% stake and MUFG has a 20% stake. MUFG Bank, Ltd. (MUFG Bank), a subsidiary of MUFG, is a major and important business partner of DCS.
In the consolidated fiscal year under review, transactions between DCS and MUFG Bank (including its information system subsidiary Mitsubishi UFJ Information Technology, Ltd.) account for about 30% of the net sales of DCS. Given the history of being entrusted with the development, operation and maintenance-related work of the core systems of MUFG Bank for many years, the Group expects that the good business relationship will be maintained between the companies in the future.
At the end of the consolidated fiscal year under review, out of the 11 Directors and Audit & Supervisory Board Members of DCS, four served concurrently as officers of MRI, two served concurrently as officers of MUFG Bank, Ltd., and those three were originally from MUFG Bank.
On October 1, 2019, MRI dispatched a person who concurrently serves as an officer of MRI to DCS as its president and representative director to further improve Group governance. MRI will also continue striving to promote competent and appropriate personnel with business expertise and business experience from inside and outside the company.
b. Risks relating to intellectual property rights
Intellectual property rights are important management resources from the perspective of ensuring business competitiveness, and the Group is actively working to protect them and to respect and not infringe on the intellectual property rights of third parties. However, if MRI infringes on the intellectual property rights or any other rights of another entity, this may impact MRI's financial results due to claims for compensation or the loss of confidence in the Group.
To respond to this risk, MRI has developed internal rules regarding copyrights and provides education and training programs every year. MRI also checks deliverables before their delivery.
Sales to public-sector customers accounted for 26.8% of consolidated net sales in the consolidated fiscal year under review.
In the public sector, active fiscal actions based on measures addressing the COVID-19 pandemic and growth strategies with a view toward the post-pandemic society, as well as the promotion of more complex and sophisticated projects is expected.
While the shift of policy focus to areas where the Group has a proven track record and can demonstrate its strengths will benefit the Group, a delay in any response to the content of projects that continue to become increasingly complex and sophisticated, or intensifying competition to win orders could impact the Group’s financial results if they occur.
In addition, there are increasing requirements regarding the prohibition of anticompetitive behaviors and the transparency of accounting procedures to conduct transactions with public-sector customers. If there is an inappropriate response regarding this, it may impact the financial results of the Group.
To address these risks, the Group is continuously engaging in improvement activities in the proposal stage through the collection of many kinds of information, the analysis of factors for results and improvement activities in the execution stage and improve the quality of deliverables, aiming to provide more value to customers.
a. The business environment in the information service industry
In the information service industry that the Group is a part of, fierce price and technology development competition continues to accelerate due to new competitors entering the market from outside the industry into areas where the expansion of IT investment aimed at strengthening business competitiveness is expected, and also due to continuing progress in the reduction of costs for the sourcing of IT resources. Therefore, if price competition intensifies, the degradation of quality or delays in responding to technological innovation could impact the Group's business results.
To address these risks, the Group is laying out a framework for providing consistent services from consulting to system development, operation and BPO (business process outsourcing), and is working to further enhance its project proposal capabilities in addition to quality and productivity.
b. Information processing service
The information processing services provided by the Group require new and replacement investment in operational equipment and systems relating to data centers, the amount of investment is recovered over multiple years through information processing service contracts. Therefore, if there is an unexpectedly significant change in the economic environment or changes in the management status of major customers, it may not be possible to recover the investment and business results may be impacted.
To respond to these risks, investment is determined after comprehensive consideration of customer needs, business forecasts, investment profitability, etc.
While the Group’s business is performed in individual projects, mainly based on service contracts, projects which were expected to be profitable when the order was received may become unprofitable due to an increase in the labor necessary if there are problems following delivery, customer requests for changes during performance, or the addition of specifications. In addition, if quality deteriorates due to inadequate management or the deterioration of profitability due to unexpected circumstances, business results may be impacted.
To address these risks, the Group assesses the risks of projects in their entrance management based on Group-wide criteria. In their management of execution, line managers examine risks, in addition to monitoring projects that require it, an automatic alert mechanism regarding profitability, and the daily management of project managers.
The Group’s net sales to the financial industry in the fiscal year under review comprised 46.4% of consolidated net sales.
In business for the financial industry, the need to investment in information technology and information security relating to legal and regulatory responses is rising, and we receive orders on an ongoing basis for product development based on analyses of internal data and for consulting services related to risk management. The Group expects transactions with the financial industry to remain steady. However, if there is sudden change in the business environment, business conditions or information system investment policies of major customers, business results may be impacted.
To address these risks, the Group will aim for the sustainable growth of business following the medium-term management plan to increase its growth potential and profitability and enhance the value it provides by strengthening business development in fields where the Group can make the most of its strengths.
The Group is proactively promoting VCP (value creation process) management, carefully considering the process from research through recommendation and implementation. As a result of this, we expect new business and business requiring operational tie-ups or capital alliances to increase in the Group. However, if there is greater-than-expected change in the business environment or in the situations of business partners, business results may be impacted.
The priority areas for new businesses the Group is focused on include energy, healthcare, wellness and transportation and traffic. In business including field work in the energy field, work is performed with full attention to occupational health and safety, but accidents may occur due to inadequate management.
In business providing new services using AI in the digital transformation (DX) business, etc., if there is an inadequate response to fairness, transparency and safety necessary for the use of AI or insufficient measures for the establishment of accountability for it, this could lead to the suspension of business, to some users claiming damages, and to the loss of confidence in the Group. This may impact business results.
To address these risks, we judge the implementation of these businesses after confirming business forecasts, investment profitability, and overall risk with third parties.
In addition, when promoting business utilizing new AI technologies, we develop business based on our own Guidelines for Promoting AI Businesses which we have established.
The Group outsources a part of its work to utilize the knowledge and expertise of outside experts and to improve productivity.
In addition to the outsourcing of programming duties in system development in the IT services segment, we outsource various surveys and data entry duties in the think tank and consulting services segment.
However, if unexpected circumstances arise within an outsourcing partner, cost may increase to maintain quality and it may be necessary to compensate customers for damages due to delayed deliveries, and this could impact business results.
To respond to these risks, the Group regularly inspects its outsourcing partners' quality and management systems and strives to stably secure excellent outsourcing partners by providing guidance on improvements as necessary.
For the Group to respond to the diverse needs of society and its customers and achieve sustainable growth, it is extremely important to secure and develop human resources with a high level of expertise, uniqueness and creativity, and provide opportunities for active participation.
However, if it is not possible to adequately secure human resources with a high level of expertise due to recruitment difficulties, increased liquidity across the labor market, or a deterioration in the working environment of the Group, business results may be impacted.
To address these risks, the Group strives to ensure a pleasant and rewarding work environment that are comfortable and enable employee vitality through a multifaceted human resources policy that includes the enhancement of recruitment and training, the promotion of diversity, the enhancement of welfare programs such as childcare support systems, the improvement of the work environment including working hours, and the prevention of harassment.
Furthermore, for human resources staying and performing work overseas, we are working towards the strengthening of safety measures, the double-tracking of information gathering, the alerting travelers to dangers, and other measures.
The corporate activities of the Group may be affected by restrictions on the attendance of employees due to large infectious disease outbreaks such as the COVID-19 pandemic or large disasters such as earthquakes.
In addition, because the stable operation of systems is an important element of information processing services, business results could be impacted if a natural disaster, accident or human error causes a defect or failure in systems.
To address these risks, we will consider and implement appropriate measures to minimize their impact by promptly taking steps to address risks according to the aforementioned risk management system and procedures.
a. Risks relating to retirement benefit obligations
The Group’s retirement benefit expenses and retirement benefit obligations are calculated based on actuarial assumptions such as the discount rate and the expected rate of return on pension plan assets. If retirement benefit expenses increase due to a decline in the market value of the pension plan assets or changes in the interest rate environment, business results may be impacted.
b. Seasonal variations in performance
Because there are many projects which usually finish in March or April in an average year due to the fiscal years of the Group’s main trading partners, government and public offices and companies, business results in the second and third quarters are relatively better than other quarters. The second quarter in particular, due to a high operation rate, usually has the highest operating profit of the fiscal year.
In addition, in the first and fourth quarters, which have lower net sales, an operating loss is sometimes posted because expenses such as selling, general and administrative expenses occur almost equally in every quarter.