Corporate Governance

Basic Policies
1. We shall respect the rights of shareholders, and ensure the equal and fair treatment of all shareholders.
2. We shall take the interests of shareholders and other stakeholders into consideration and endeavor to appropriately
cooperate with those stakeholders.
3. We shall disclose not only information in compliance with the relevant laws and regulations, but also actively
provide important and/or useful information to stakeholders to enable well-informed decision-making.
4. The Board of Directors shall be cognizant of its ﬁduciary responsibility and accountability to shareholders, and shallappropriately fulﬁll its roles and responsibilities in order to promote sustainable and stable corporate growth andincrease corporate value, proﬁtability and capital efﬁciency.
5. We shall engage in constructive dialogue with shareholders, and make efforts to obtain their support regarding theCompany’s Business Policies and also reﬂect their opinions and concerns in efforts to improve management.

Basic Approach for Regaining Trust
We have established the Corporate Guiding Principles todemonstrate our values regarding appropriate cooperation withstakeholders, respect for their interests, and sound business ethics.
We have inculcated these principles and make efforts to ensurethat compliance extends to the front lines of business activities inJapan and overseas. For example, we hold brieﬁngs on the
Corporate Guiding Principles, conduct various types of complianceeducation, set compliance education as a requirement for
promotions, conduct in-person reviews of relevant employees, andensure that everyone in the Company is aware of the whistleblowing system. Through these and other venues we haveendeavored to broadly instill a sense of urgency among employees
by making them keenly aware that the products and services that
we supply through our businesses are connected to people’ssafety, physical wellbeing and ﬁnancial position, and that they are
involved in quality management both directly and indirectly, andthat laxity in any aspect of their work could impact society atlarge. In addition, we have widely communicated our Bad NewsFirst reporting system for identifying and resolving issues when
they are still minor. It calls for reporting any workplace

abnormalities whether favorable or unfavorable. However,improper acts occurred. As announced on October 16, 2018,
performance inspection data records were falsiﬁed for some of theseismic isolation/mitigation oil dampers shipped by KYB and a
subsidiary. Products that did not conform to performance
evaluation standards approved by the Minister of Land,
Infrastructure, Transport and Tourism nor met the standards of ourcustomers were installed in buildings. In addition, there were
improper claims in connection with a contract with the Ministry of
Defense for defense equipment.
To prevent recurrence of the improper acts and demonstrate
our commitment to regaining trust, we revised our Corporate
Spirit by adding the item “Follow all rules and face all issues withhonesty,” and, based on the revised Corporate Spirit and basic
policy, we will work to strengthen and enhance corporate
governance. Having clearly codiﬁed the prevention of qualityrelated misconduct in our Corporate Guiding Principles, we will
deeply inculcate these principles in all of our people at the frontline of business operations in Japan and overseas, and will
resolutely ensure compliance.

Overview of the Corporate Governance System
KYB is structured as a company with an Audit & Supervisory Boardin accordance with the Companies Act, and corporate governancecenters on the Board of Directors and the Audit & Supervisory
Board and its individual members. In addition, KYB has instituted
an executive ofﬁcer system to expedite decision-making andstreamline business execution.
Two of the six members of the Board of Directors are
independent outside directors, and two of the four members of the
Audit & Supervisory Board are outside Audit & Supervisory Board
members (including one independent outside Audit & Supervisory
Board member). KYB believes it has strengthened independent andobjective management supervision by the Board of Directors
because one-third of the board consists of independent outside
32

KYB Group Report 2019

directors. KYB determines whether outside directors and outside
Audit & Supervisory Board members are independent based on
KYB’s independence standards, and selects individuals who can be
independent of other members of management.
Furthermore, the Internal Control Department is the organization
responsible for overall planning and coordination of global
governance and compliance, and the J-SOX CorrespondenceOfﬁce within the Internal Control Department conducts
evaluations based on Japan’s Financial Instruments and Exchange
Law (J-SOX). We have also established the Special Audit
Committee on Wrongdoing Risk, which is chaired by an outside
director and has broad responsibility for detecting signs of
misconduct and situations that give rise to it.

Corporate Governance Structure
General Meeting of Shareholders
Elect/Dismiss

Elect/Dismiss
Consult

Special Audit Committee on Wrongdoing Risk

Board of Directors
ReportAudit & Supervisory Board

Accounting Auditor

Audit

Audit

Advisory Committees(Nomination, Compensation)

Representative Director,
President Executive Ofﬁcer

General Manager
CSR & Safety Control Division

Board of Executive Ofﬁcers,
Other Management Committees

Internal Control Department
J-SOX Correspondence Ofﬁce

Audit Department

Evaluation based on J-SOX

Audit

Responsible head ofﬁce departments, operational headquarters, Group companies, branches, representative ofﬁces

Independence Standards for Outside Directors and Outside Audit & Supervisory Board Members
KYB Corporation (the Company) has established the following independence standards for outside directors and outside Audit & Supervisory
Board members based on the requirements for independent ofﬁcers established by ﬁnancial instrument exchanges. Ofﬁcers are deemed to lackindependence if any of the following apply.
1. Persons who have work experience at the Company or its subsidiaries (KYB Group)
2. Persons who have work experience at principal lenders1 to the KYB Group3. Major shareholders2 of the Company, or their members or executives
4. Major customers3 for the KYB Group’s products and services, or their members or
executives
5. Major suppliers 4 of products and services to the KYB Group, or their members or
executives
6. Consultants, accounting professionals, legal professionals and the like who receive
annual payments or other goods in kind exceeding ¥10 million from the KYB Group,
excluding officer compensation (if a corporation or other organization is the recipient
and the amount received exceeds 2% of the organization’s annual income, any
member or executive of the organization).

7. Persons who receive donations of more than ¥10 million annually from the KYBGroup (if the recipient is a corporation or other organization, any member or
executive of the organization).
8. Members or executives of corporations or other organizations that engage in themutual dispatch of directors or executive officers with the KYB Group.
9. Persons who have work experience at an audit firm that is an accounting auditor of
the KYB Group
10. Persons to whom any of 3 to 9 above are applicable over the past 10 years
11. A spouse or relative within the second degree of kinship of a person to whom any of
1 to 10 above are applicable
12. Other persons who have special reasons that may cause a conflict of interest with
the Company

Notes: 1. The KYB Group’s principal lenders are ﬁnancial institutions and other large creditors that the KYB Group relies on for funding and could not readily replace.
2. Major shareholders of the Company are those that hold 10% or more of voting rights at the end of the Company’s ﬁscal year, whether directly or indirectly(including rights held indirectly through a trust bank or other vehicle).
3. Major customers for the KYB Group’s products and services are those with an annual transaction amount exceeding 2% of the KYB Group’s consolidated sales.
4. Major suppliers of products and services to the KYB Group are those with annual transaction volume exceeding 2% of the consolidated sales of the supplier group.

Evaluation of the Effectiveness of theBoard of Directors
In each of the past three ﬁscal years, KYB evaluated theeffectiveness of the Board of Directors and disclosed a summaryof issues and initiatives in the Corporate Governance Report. For
example, we reviewed the standards for matters to be submitted
for discussion at meetings of the Board of Directors, establisheda Nomination Committee and a Compensation Committee, andconducted factory tours for individual shareholders.

Takeover Defense Measures
Countermeasures to Large-Scale Purchase of the Company’s
Shares (Takeover Defense Measures) is a KYB initiative toincrease corporate value and thus ensure the common interestof shareholders for the medium and long term. The 97th
Ordinary General Meeting of Shareholders on June 25, 2019
approved a resolution to renew this initiative until the end of the100th Ordinary General Meeting of Shareholders scheduled forJune 2022.

KYB Group Report 201933

Strengthening the KYB Group’s GovernanceInitiatives

FY2014

Initiated in-person interviews with relevant employees

FY2015

Appointed one independent outside director

FY2016

Appointed two independent outside directors and established a discretionary Nomination Committee

FY2017

Established a discretionary Compensation Committee

FY2018Established independence standards for outside directors and outside Audit & Supervisory Board members

FY2019Established the Special Audit Committee on Wrongdoing Risk and the Internal Control Department
Raised the ratio of independent outside directors on the Board of Directors to one-third

Non-Financial Corporate Governance Achievements
1. Corporate Guiding Principles now available in 14 languages(Japanese, English, Chinese (simpliﬁed and traditional script versions), Portuguese, Vietnamese, French, German, Czech, Thai, Indonesian,
Spanish (European and Latin American versions), and Tagalog
2. Ratio of independent outside directors on the Board of Directors now one-third
3. Independence standards for outside directors and outside Audit & Supervisory Board members formulated

Ofﬁcer Compensation
Compensation Structure
Ofﬁcer compensation consists of ﬁxed monthly compensation(basic compensation) according to position and responsibilities,
and performance-linked compensation (bonus) that varies
depending on the Company’s business results. Outside directors
Type ofCompensation

and Audit & Supervisory Board members only receive ﬁxed
compensation according to their respective roles, and inview of their independence do not receive performancelinked compensation.

Maximum Total
Compensation

Date of Resolution of theGeneral Meeting of Shareholders

Calculation Process

Directors¥30 million per month(¥360 million per year)

June 27, 1997
75th Ordinary General Meetingof Shareholders

Consultation with
Compensation Committee

Audit & Supervisory
Board members¥8 million per month(¥96 million per year)

June 24, 2011
89th Ordinary General Meetingof Shareholders—

Directors(Excluding outside
directors)

40% or less of total compensation(Fixed compensation +Performance-linked compensation)

Approval annually by resolution
at the Ordinary General Meetingof Shareholders

Consultation with
Compensation Committee

Eligible Ofﬁcers

Fixedcompensation

Performancelinked
compensation

Note: The limit on total ﬁxed remuneration for directors does not include salary for employees concurrently serving as directors.

Compensation Decisions
For director compensation, the discretionary Compensation
Committee composed of representative directors and outside
directors veriﬁes the propriety of the criteria for calculating ﬁxed
and performance-linked compensation and reports the proprietyof criteria to the Board of Directors.
Fixed compensation for directors is determined by resolutionof the Board of Directors upon receiving the report from theCompensation Committee, within the limit on total compensation

34

KYB Group Report 2019decided at the Ordinary General Meeting of Shareholders.
Payment of performance-linked compensation for directors(excluding outside directors) is approved annually by resolution at
the Ordinary General Meeting of Shareholders.
Fixed remuneration for Audit & Supervisory Board members isdetermined in consultation with Audit & Supervisory Board
members, within the limit on total compensation decided at theGeneral Meeting of Shareholders.

Corporate GovernanceCalculation and Determination of Performance-Linked Compensation to Be Paid
1. Criteria and Business Results That Serve as the Basisfor Calculation
Performance-linked compensation is calculated according to thedegree of achievement in the preceding ﬁscal year (the “baseﬁscal year”) of the consolidated performance forecast according
to the following calculation criteria (four items).
Calculation Criteria

TargetResult22,00022,0105.30

5.34

Proﬁt (loss) attributable to owners of
the parent (Millions of yen)

16,600(24,757)

Proﬁt (loss) margin attributable toowners of the parent (%)

4.00(6.01)

Segment proﬁt (Millions of yen)Segment proﬁt margin (%)

Note: The targets are the consolidated ﬁnancial results forecast for the base ﬁscal
year (FY2018, or the ﬁscal year ended March 2019) described in the ﬁnancial
statements at the end of the ﬁscal year prior to the base ﬁscal year (FY2017, orthe ﬁscal year ended March 2018).

2. Calculation of Amount to Be Paid
Total performance-linked compensation is limited to 1.0% of
proﬁt attributable to owners of the parent. Moreover, the ratioof performance-linked compensation to total compensation(ﬁxed compensation + performance-linked compensation) of
directors (excluding outside directors) shall not exceed 40%.

The total amount to be paid is calculated by multiplying the
maximum amount payable by a payout ratio derived from thenumber of calculation criteria targets in 1. that were achieved.
Performance-linked compensation is not paid in the case of aloss attributable to owners of the parent.
Calculation
criteria
targets
achieved

4

Payout ratio 100%

3

2

1

0

Loss
attributableto owners of
the parent

80%

60%

40%

20%

0%

3. Determination of Amount to Be Paid according
to Position
The amount of performance-linked compensation to be paid toindividual directors (excluding outside directors) is calculated
based on proportional distribution of the total amount to be
paid in 2. to each director according to the following payment
points for each position. Amounts are rounded down to thenearest ¥100,000.

Position

Chairman

Payment points

8

SeniorVice
Vice
Managing
President
ChairmanPresident Executive
Ofﬁcer

7

10

6

5

Total Compensation for Each Officer Category, Total Compensation by Type, and Number of Eligible Officers
Compensation by Category (Millions of yen)

Total Compensation(Millions of yen)Fixed compensation

Performance-linked
compensation

Directors(Excluding outside directors)

225

225

—

7

Outside directors

17

17

—

2

Audit & Supervisory Board members(Excluding outside members)

46

46

—

2

Outside Audit &Supervisory Board members

47

47

—

3

Category

Number of Eligible
Ofﬁcers

Notes: 1. Total compensation for directors (excluding outside directors) does not include salary for employees concurrently serving as directors.
2. The above data includes one director and one outside Audit & Supervisory Board member who retired at the conclusion of the 96th Ordinary General Meeting of Shareholders on June 22, 2018.
3. KYB abolished the retirement beneﬁts system for directors at the conclusion of the 89th Ordinary General Meeting of Shareholders on June 24, 2011, but the payment of
retirement beneﬁts according to tenure as of the close of that meeting was also approved. Based on this approval, in addition to total compensation shown above, thefollowing retirement beneﬁts for directors (excluding outside directors) were paid for FY2018.
¥14 million (one director)
Note: This amount includes the payment of ¥12.1 million to one director, which was disclosed in previous years as allowance for retirement beneﬁts.
Retirement beneﬁts are paid to one director who retired during FY2018.
4. FY2018 retirement beneﬁts for directors will not increase because the retirement beneﬁt system for directors was abolished as described above.

KYB Group Report 201935

Internal Control and ComplianceInternal Control System
Basic Policy
The Board of Directors of the Company ensures effective
corporate governance by instituting the Basic Policy for Internal
Control System1 in accordance with the Companies Act, and byimplementing various measures including a risk management
system, a Group management system and an internal
compliance system. The KYB Group also maintains and assesses
the implementation of internal control over ﬁnancial reporting
using the procedures stipulated by the Financial Instruments andExchange Act. In this way, the KYB Group ensures reliable ﬁnancial
reporting and appropriate information disclosure through internal
control reports.

Key Points for Internal Control
1. Internal Control Department
The Internal Control Department is responsible for overall planningand coordination of global governance and compliance. The
J-SOX Correspondence Ofﬁce in the Internal Control Department
maintains and assesses the implementation of internal control
over ﬁnancial reporting.
2. Basic Policy for Internal Control System
The Company’s Board of Directors has instituted the Basic Policy forInternal Control System and monitors the status of related activities.
Summaries of its ﬁndings are disclosed in business reports.
3. Strengthening Systems for Sharing Information and
Collaborating among Group Companies
We are enhancing meetings between the Company and Group
company management. We are increasing the frequency of
meetings, and mainly at top management meetings, Domestic
Afﬁliated Companies Management Meetings and at global
division meetings, we are intensifying discussions about
identifying and preventing misconduct.
4. Upgrading the Business Organization
We enhance mandatory checklists used in planning new productand business development at product development assessment
meetings and executive ofﬁcer meetings in order to upgrade oursystem for verifying the adequacy of technologies, productperformance, quality inspection systems and manufacturing
capabilities.
5.Ensuring Personnel Rotation
We are developing effective lines of succession in ways such as
ensuring transparent operations through sharing knowledge andexpertise internally. In this way, we will conduct appropriate
personnel rotation.
6. Rigorous Application of Internal Regulations during
Emergencies
We remind all employees of the Company and Group companiesof their reporting obligations to ensure rigorous reporting underinternal reporting rules that include the Rule of Prompt Report2 andBad News First system, which calls for employees of the Company
or Group companies to immediately report to the Company should
they become aware of a potential serious problem.
7. Review to Improve the Effectiveness of the
Whistleblowing System
We conduct education concerning the whistleblowing systemusing e-learning for indirectly related departments, throughbrieﬁng sessions for frontline personnel, as well as bycomprehension tests and in-person interviews.3 In addition, weare considering measures including mandatory reporting to
improve the effectiveness of whistleblowing for improper acts
related to product quality and safety.
Notes: 1. Please refer to the Company website for additional details.
https://www.kyb.co.jp/english/company/governance.html
2. A core component of the KYB Group’s crisis management system, inwhich department heads and production base managers promptly andaccurately report important information to the president of the Company.
3. We proactively gather frontline information in ways such as conducting
in-person interviews to announce, explain and conﬁrm compliance withinternal regulations while collecting information about issues thatinterviewees are experiencing in their workplaces.

Compliance
Basic Policy
We regard compliance as adherence to the laws, orders and rulesof society at large, as well as to the Company’s articles ofincorporation, rules and agreements associated with businessactivities, in addition to corporate ethics that promote soundbusiness activities.
1. We have developed the Corporate Guiding Principles as rules forthe execution of business activities by ofﬁcers and employees,
and are focusing on initiatives including establishing legal
compliance and corporate ethics.

36

KYB Group Report 2019

2. We are implementing compliance education through training
sessions by job title and section.
3. We have established communication channels to management
by using the Rule of Prompt Report and Suggestion Box as asystem for the Company and all Group companies to identify
company risks in a prompt manner. We have also establishedand are operating contact points for whistleblowers.

Key Points for Compliance

5. Organizational Upgrades
We will establish committees as necessary. For example, we haveestablished the Personal Information Protection Management
Committee to encourage the proper acquisition, use, management
and storage of personal information and prevent its leakage. We
have also established the Export Control Management Committee
to ensure full compliance with export-related laws and regulations
and to prevent illegal export of our products and technologies(including services), either directly or indirectly.

1. Fostering Compliance Awareness in the KYB GroupWe will reconﬁrm employee responsibilities after reﬂecting on
issues concerning improper acts. Based on this, we will use
training and education to change the mindset of all executives
and employees.
2. Education and Training to Raise Awareness of Social
Responsibility
We will systematize repeated top-down education on corporate
ethics. We will also proactively review the content of teachingmaterials to incorporate multiple case studies that lead to change
in the awareness of all executives and employees.
3. Emphasize the Importance of Compliance Regularly
Top management of the Company will consistently emphasize theimportance of compliance within the Group. In addition, top
management will visit Company production bases and otherlocations, and Group companies in Japan and overseas, toprovide guidance on fostering compliance awareness.

6. Initiatives to Prevent Recurrence of Antitrust Violations
We are working on the following measures to prevent violationsof antitrust laws based on lessons learned from violations in the
United States.
1) Establishing an anti-monopoly compliance policy2) Securing written pledges from sales personnel that they will
not violate antitrust laws
3) Formulating rules for contact with competitors
4) Conducting educational activities related to antitrust laws5) Conducting in-person interviews with sales personnel

4. Personnel Evaluations and Related Measures
Personnel evaluations will include a system for evaluating
attitudes toward compliance initiatives, such as compliance withlaws and internal rules. In addition, we will conduct small group
activities with the theme of preventing misconduct and commend
useful activities and conduct other initiatives to support thedevelopment of executives and employees who think
independently and make improvements themselves.

7. Initiatives to Prevent Bribery-related Violations
We are working on the following measures to prevent violationsof bribery-related laws and regulations.
1) Establishing an anti-bribery policy
2) Establishing internal regulations3) Conducting educational activities related to briberyrelated laws4) Conducting in-person interviews with sales personnel

Current Internal Control System (From April 2019)
Managing Executives Organization

Independent ofManaging
Executives

Impartial Organization
Supervise

Report監査部

Special Audit Committee
on Wrongdoing Risk

Risk and compliance management(Supported by external attorneys)

EntrustChair: Outside director

KYB President Executive Ofﬁcer
Board of Executive Ofﬁcers

Risk Management Committee
Departments withhead ofﬁce functions

Chief Compliance Ofﬁcer(In the future, we will consider
expanding and transitioning to a
standing Compliance Committee)
Support asneededLegal Affairs Department

Business operations

Internal Control Department

Identiﬁcation, evaluation andmanagement of risks

Each headquarters or division
Key compliance personnel

Overall planning and coordinationof corporate governance and compliance
Enhance support
for targeted
expansion

Non-compliancerisk

Quality Control Department
ReportGroup companies
Compliance ofﬁcer

Outside Directors and Outside Membersof the Audit and Supervisory Board

Board of Directors

Audit Department
Wrongdoing risk
investigation

Request for investigation
Support as needed

External investigative
companyKYB Group Report 201937

Internal Control and Compliance

Initiatives to Prevent the Recurrence of Nonconforming Acts Associatedwith Seismic Isolation/Mitigation Oil Dampers
Establishing Compliance Management
The KYB Group will use all of its capabilities to change the Group mindset to one that places the highest
value on compliance.
Measures to Emphasize in Preventing Recurrence
We will implement the following initiatives as effective measures to encourage all executives and employees to autonomously
promote compliance.
① We will promote awareness among executives and employees through education and training based on case studies andanalysis of examples at other companies to bring attention to the adverse effects of compliance violations on society as a whole.
② We will measure how well corporate ethics have been inculcated among executives and employees.
③ We will add compliance issues to themes for improvement in each department.
The progress of measures to prevent recurrence is reported to the Company’s Board of Directors and on its website every three months.

https://www.kyb.co.jp/english/company/progress/index.html

Tighten the Subsidiary Management System
We will work to review and strengthen our management system in order to conduct integrated
management with Group companies.
Strengthen System for Sharing Information with Group Companies• Enhance meetings between the Company and Group company management. Increase the frequency of meetings, and mainly
at senior management meetings, management meetings at Group companies in Japan, and international meetings, intensify
discussions about identifying and preventing misconduct.
Review Management Systems for Group Companies• Make the Internal Control Department responsible for comprehensive planning and coordination of Group governance, andstrengthen systems that provide deeper understanding of Group companies.
• Conﬁrm the effectiveness of the Regulations on the Promotion of Group Compliance to strengthen the required systems, andstrengthen external risk audits of business execution.
• We have established the Special Audit Committee on Wrongdoing Risk, which is chaired by an outside director. It has broad
responsibility for uncovering signs of wrongdoing and conditions that give rise to it. Its purview includes quality misconduct,
as well as accounting fraud and bribery. We will consider expanding and transitioning to a standing Compliance Committee(tentative name).
• The Audit Department investigates misconduct and reports monthly to the Board of Directors and other bodies. We will use
external companies if more specialized investigation is required.

Analyze and Monitor Business Risks at Group Companies• We will identify speciﬁc laws and regulations that apply to each subsidiary’s business and conduct risk analysis and required
education.
Reorganize Group Companies• We will consider reorganizing the Group in light of compliance management.

38

KYB Group Report 2019

Initiatives with Suppliers
Basic Policy for Procurement
KYB works to fulﬁll its corporate social responsibility (CSR)
and continues to be a company that society can rely upon.
Suppliers are important partners for us in continuously
developing our business through monozukuri (Japanesemanufacturing expertise) and contributing to realization of
an afﬂuent society.
Our basic policy for procurement is described below.

Basic Approach to Procurement① Procurement activities aimed at the coexistence and mutual
prosperity of KYB and its suppliers② Legal compliance③ Quality ﬁrst
④ Safety and health, human rights and labor⑤ Continuous cost reduction activities⑥ On-time delivery⑦ Protection of the natural environment⑧ Construction of global procurement system⑨ Risk management⑩ Classiﬁed information management⑪ Prevention of corruption▶ For details, please see the corporate website.

https://www.kyb.co.jp/english/company/csr.html

FY2018 Procurement Policy Brieﬁng
In April 2018, we invited
231 suppliers that havebeen involved in KYB
manufacturing to the KYB
Procurement Policy Brieﬁng
at the Palace Hotel in
Chiyoda-ku, Tokyo tostrengthen cooperation
with our suppliers. KYB senior management explained our
corporate policy, procurement policy and quality policy torepresentatives of our suppliers, commended excellent
suppliers who contributed greatly to QCD,* and presented
mementos. After the brieﬁng, we held a social event thatfacilitated and deepened discussion with suppliers.
* Quality, cost and delivery

Final Report Meeting of Theme Study Groups
In April 2018, six study
groups composed ofmembers from 42 suppliersbegan improvement
activities for FY2018 under
the themes of quality,
delivery, productivity andbusiness continuity plans(BCP). In March 2019, we held the FY2018 Final Report
Meeting of Theme Study Groups at Wink Aichi (Aichi
Industrial Labor Center, Aichi Prefecture) for these groups topresent their ﬁnal reports on the year’s achievements. The
comprehensive activities of these groups have resulted in safety

improvements, fewer quality defects, faster delivery times andgreater productivity among suppliers, and have led to thecreation of a BCP crisis management system. New teams arecontinuing these activities in FY2019.

Survey of Status of BCP
In preparation for the three anticipated interlocked earthquakes(Tokai-Tonankai-Nankai) in Japan, we provided an explanationof BCP at the Procurement Policy Brieﬁng and at meetings
regarding production trends at each plant.
As in FY2017, in light of the importance of understanding
the BCP status of suppliers we conducted a questionnaire forself-assessment consisting of 100 items in seven categories(actions for anticipated risks; securing personal safety andemergency evacuation; emergency measures taskforce;
conﬁrmation of employee safety; conﬁrmation of property
damage; instructions for returning home and measures forpeople who have difﬁculty returning home; and restoration
taskforce). Moreover, we surveyed the status of readinessof ﬁrst-, second- and subsequent level suppliers with regard
to a major earthquake. In this way, we have all suppliers
review the status of their BCPs and encourage them to study
issues requiring improvement and systematically implement
BCP activities.

Initiatives to Prevent Human Rights
Violations in the Supply Chain
Companies today are expected to prevent human rights
violations globally, including in their supply chains.
For example, under the Dodd–Frank Wall Street Reform andConsumer Protection Act, companies are required to perform
due diligence and identify whether their products containtantalum, tungsten, tin or gold purchased from mines in the
Democratic Republic of Congo (DRC) and nine neighboring
countries, where the extraction of such mineral resources may
be used to ﬁnance or beneﬁt armed groups that are causing
human rights violations and environmental destruction. The aimof the Dodd–Frank Act is to indirectly cut off ﬁnancial sourcesfrom these “conﬂict minerals” to prevent such human rights
violations. The EU has taken a broader approach to restricting
conﬂict minerals by requiring all companies importing mineral
resources into the EU to take similar actions.
In light of the Dodd–Frank Act, the KYB Group annuallychecks its products with the cooperation of its suppliers,
summarizes the results and reports to customers that request
such information.
In addition, according to the U.K. Modern Slavery Act 2015
we annually release a statement on KYB Group business activities
and initiatives to prevent slave labor and human trafﬁcking in our
supply chain, including the above-mentioned conﬂict mineralmeasures. We will carry on with our awareness-raising activities
on prohibiting human rights violations and slavery labor.
▶ The details are available in our Modern Slavery Act Transparency

Statement for Fiscal Year 2018 released on September 27, 2019.
https://www.kyb.co.jp/english/media/ir_20190927_02.pdf

KYB Group Report 201939

Risk Information

This section explains the major risk factors relevant to the KYB Group’s operating results and ﬁnancial
condition that may have a signiﬁcant effect on decisions by investors. Forward-looking statements inthis section represent the judgments of the KYB Group (KYB and its consolidated subsidiaries) as ofMarch 31, 2019.

Economic Risks
Economic Conditions
The KYB Group’s consolidated net sales primarily derive from the
supply of components to automobile manufacturers, construction
machinery manufacturers, commercial vehicle manufacturers andother customers. Component manufacturers have accelerated
overseas operations to address the increase in the overseas
production bases of customers. The Group also has production
bases in the Americas, Europe and Asia, and supplies products tocustomers in each of these regions. Overseas production bases
have a signiﬁcant impact on the Group’s operating results andﬁnancial condition, and are subject to the inﬂuence of changes incustomer production volume resulting from factors includingchanges in regional economic conditions.

Fluctuations in Exchange Rates and Interest
Rate Increases
With an overseas sales ratio of 55.2%, the KYB Group relies
heavily on markets outside of Japan. As a result, ﬂuctuations inforeign exchange rates have a signiﬁcant impact on the Group’s
exports from Japan and the performance of Group companies inother countries. An increase in interest rates in Japan or othercountries could have a signiﬁcant impact on the KYB Group’s
operating results.

Risks in Business Operations
Demand Trends

Procurement of Materials and Components

Sales of the KYB Group’s Automotive Components andHydraulic Components Operations segments depend greatly on
the global production volume of automobiles and construction
machinery. A decline in demand for these products caused by aglobal economic downturn could have a signiﬁcant impact on
operating results. The KYB Group sells most of its systemproducts, aircraft components, special-purpose vehicles andelectronics components in Japan. In particular, demand for theKYB Group’s special-purpose vehicles, which are primarily
concrete mixer trucks, can ﬂuctuate signiﬁcantly due to changes
in the amount of construction activity, which is closely correlatedwith the economic outlook.

The KYB Group purchases materials and components from a large
number of suppliers. Prices of these items are closely linked toprices on international commodity markets. The KYB Group may
not be able to fully reﬂect an increase in the cost of materials orcomponents in its selling prices, or to reduce prices of materials
and components sufﬁciently to reﬂect a reduction in selling prices,which could have a signiﬁcant impact on operating results.

Prices and Quality
The KYB Group’s products are subject to intense price-based
competition in both domestic and international markets.
Customers regularly request cost cuts and lower prices. Quality
is also critical. The Group supplies vital automotive components,
such as shock absorbers that maintain vehicle stability and power
steering systems. For construction machinery and commercial
vehicles, the Group supplies key functional components suchas motors and hydraulic cylinders that drive the main unit.
Consequently, the Group may incur substantial expenses,
including the payment of damages demanded by customers,
if it supplies defective products. Furthermore, sales volume andprices for aftermarket automotive shock absorbers are subject
to the impact of regional economic conditions and competition.
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KYB Group Report 2019

Funding
The KYB Group obtains loans mainly from ﬁnancial institutions inJapan and other countries to fund capital expenditures and tosecure working capital. The Group obtains these loans while
carefully monitoring ﬁnancial markets. However, it may be unable
to procure funds when needed at favorable terms due to events
including a broad decline in the prices of the Group’s products, aneconomic recession, a credit crunch, or a decline in the Group’s
credit rating, which could affect the Group’s ﬁnancial conditionand operating results.

Business Downturn
Bankruptcy at KYB Group overseas production or sales bases
caused by factors including a decline in orders or proﬁtability
could signiﬁcantly impact the Group’s operating results.

Counterparty Credit Risk
The KYB Group sells its products to automobile and construction
machinery manufacturers and many other customers. An
unexpected problem involving customer credit risk could affect
the Group’s operating results.

Nonconforming Acts in the Inspection
Process for Seismic Isolation/Mitigation Oil
Dampers
The Company and its subsidiary Kayaba System Machinery Co.,
Ltd. manufacture and sell seismic isolation/mitigation oil dampers
for buildings. We recently determined that some of the seismic
isolation/mitigation oil dampers (“Nonconforming Products”)
shipped and installed in buildings (“Target Properties”) did notconform to performance evaluation standards certiﬁed by the
Minister of Land, Infrastructure, Transport and Tourism (the“Minister”),* or to the standards of customers, because offalsiﬁcation of performance inspection record data (the“Incident”). We reported the Incident to the Ministry of Land,
Infrastructure, Transport and Tourism (MLIT) and announced
the status of our response on October 16, 2018.
On November 15, 2018, we uncovered additional mattersthat we should conﬁrm. On December 19, 2018, we announced
that in addition to the falsiﬁcation of performance record data,
the inspection measurement results submitted for damping
force had been changed by moving the median damping force
on extension and compression in the direction of the origin. At
the same time, we presented the results of our investigation. In
addition, as a result of ongoing analysis of data remaining in theinspection machines, on March 15, 2019 we revised the numberof Target Properties and products that we had announced on
December 19, 2018.
The Company’s basic policy is to promptly ensure conformity of
products that do not conform to the Minister’s certiﬁed standards
and products for which conformity is uncertain. For items that
conform to the Minister’s certiﬁed standards but not to customer
standards, we will take appropriate measures according to thewishes of property owners, residents and other stakeholders. Our
management priority is to eliminate worries and concerns, so wewill carefully explain matters to owners and other stakeholders.
Considering the gravity of the Incident, we established an
independent external investigative committee chaired by Koichi
Namba, a lawyer from Mori Hamada & Matsumoto legal ofﬁce
and former Chief Judge at the Tokyo High Court, to review thefacts of the Incident, analyze its causes, and recommend
measures to prevent recurrence. On February 4, 2019, we
received the committee’s report on the results of the investigation,
and accepted its ﬁndings and proposed preventive measures.
Based on these recommendations, we will take appropriate steps,
further strengthen corporate governance and the internal control
system, thoroughly implement measures to prevent recurrence,and take action to restore trust.
The Company provides for product warranties for seismic
isolation/mitigation oil dampers using information and facts
currently available and considered reliable. Provisions have beenrecorded in our accounts for costs to produce seismic isolation/
mitigation oil dampers, to replace seismic isolation oil dampers, tomake structural modiﬁcations, and to cover expenses incurred byrelevant headquarters and divisions. Therefore, future expenses
associated with the Incident, including compensatory damages,
could signiﬁcantly impact the Group’s operating results.
*There is no Minister’s certiﬁcation system for seismic mitigation oil dampers.

Impact of Improper Claims to the Ministryof Defense
The Company has recorded a provision in its accounts for loss
related to repayment and other expenses associated withimproper claims regarding working hours that were found tohave been made to the Ministry of Defense in connection with adefense equipment contract. The Ministry of Defense has been
conducting a special investigation since March 14, 2019, and weare cooperating fully. This provision is a reasonable estimate of
expenses at this time, and may change depending on the
progress of the special investigation.

Risks Associated with Signiﬁcant Lawsuits or Other Legal Action
If the KYB Group is the defendant in a lawsuit and the outcome
is unfavorable, the resulting payment and other demands may

have a signiﬁcant impact on the Group’s operating results.

Risks Associated with Fires, Accidents and Natural Disasters
Many plants of the KYB Group produce hydraulic products thatutilize the properties of oil. In addition, some plants have coating
equipment that uses organic solvents, and storage tanks forhydraulic oil, chemicals and other substances. A ﬁre or hazardous
substance leak could temporarily shut down manufacturing
activity. In Japan, many plants of the KYB Group and many of its
suppliers are located in the Chubu area. A major earthquake orother event in this area that prevents these plants from operating
could cause a substantial decline in the Group’s production
capacity. In addition, an earthquake, ﬁre, conﬂict, act of terrorism
or other event in an area outside of Japan where the KYB Group
has a plant could cause a substantial decline in the Group’s
production capacity.
KYB Group Report 201941