KYB Group Report 2019
(April 1, 2018 - March 31, 2019)

To Our Stakeholders

I am pleased to present you with KYB Group Report 2019.
Until now we have published an Annual Report and an Environmental andSocial Activity Report to keep you informed about our business and CSR
activities, respectively. This year, we have issued KYB Group Report 2019, ourﬁrst integrated report, featuring enhancements including details on our new
management structure and non-ﬁnancial information. We hope that this reportwill be a starting point not just in terms of content, but for deeper dialoguewith our stakeholders.
We have positioned FY2019 as the ﬁrst year of KYB’s recovery. The entire KYBGroup will conduct various measures as it returns to the basis of monozukuri.

Regaining Trust

The First Year ofKYB’s Recovery

In FY2018, we announced nonconforming acts byKYB Corporation and one of its subsidiaries
associated with building-use seismic isolation/

We will drastically reform our corporate
culture as we rebuild the KYB Group,by returning to the basis of monozukuri,
Japanese manufacturing expertise, andsteadily implementing measures toprevent the recurrence of improper acts.

mitigation oil dampers, as well as improper claims
related to working hour billing for defense
equipment. I would like to offer my deepest
apologies for the trouble and concern we havecaused our stakeholders.
We are addressing nonconforming acts
associated with seismic isolation/mitigation oil
dampers by seriously embracing the guidance andrecommendations of the external investigative

committee, implementing measures to prevent recurrence, and posting
quarterly progress reports on our website. With respect to these acts,
eliminating concerns among related parties as quickly as possible is a top
management priority. In addition, the improper claims related to working
hour billing for defense equipment are currently under investigation. We willpromptly report the details as soon as they have been clariﬁed.
We revised our Corporate Spirit* on October 1, 2019 as one measure toprevent recurrence of improper acts. Our Corporate Spirit is based on the spiritof creative development inherited from founder Shiro Kayaba. The revised
Corporate Spirit remains true to this spirit, but we have added “We shall follow
all rules and face all issues honestly.” This expresses our intention to comply
and face the facts, given that the guidance of the external investigative
committee pointed out a lack of compliance awareness and a corporate culturethat did not face up to inconvenient facts. It also expresses our determination

to preclude improper acts in the future. In addition, fostering complianceawareness among all employees is a top priority because it is crucial for
supporting quality management, which has always been one of our coremanagement tenets.
* For details, please see page 4.

Our Future Approach
FY2019 is the ﬁnal year of the FY2017-2019 Medium-Term Management Plan.
During FY2017 and FY2018, we largely completed preparations for launching
high-value added automotive products and consolidating the production lines
for our construction machinery products to increase efﬁciency. However, there
are still issues that require attention. We have been slow to restructure
unproﬁtable businesses, and we have experienced construction machinery
production delays because our manufacturing capacity has not kept pace withgrowth in demand.
We are now working to bring our seismic isolation/mitigation oil dampers
into conformance with required standards as quickly as possible, and in view ofissues in the past two years, we are restructuring our organization, including
closing unproﬁtable businesses and locations, in order to sharpen our focus
on our core operations. We are also preparing for the next medium-term
management plan that will begin in FY2020 by developing competitive new
products and innovative monozukuri.
The KYB Group will continue to devote itself to the challenging task of
implementing reforms while fundamentally reviewing conventional approachesto its businesses with the goal of creating a fair and honest corporate groupthat has high ethical standards and places the highest value on compliance.
We will transition to an operating structure that ensures stable earnings while
appropriately fulﬁlling our corporate social responsibilities. We are determined
to regain trust in the KYB brand, so that it can continue to contribute to anafﬂuent, vibrant society through the power of monozukuri.
We look forward to your continued support as we take on the challenges ahead.

Masao Ono
Representative Director,
President Executive Ofﬁcer

KYB Group Report 201901

Nonconforming Acts in the Inspection Process for
Seismic Isolation/Mitigation Oil Dampers and Other Matters
Outline of Improper Acts
1. Falsiﬁed Coefﬁcients: In the inspection process, measurement results for damping force were deliberately increased or decreased bymultiplying them by designated coefﬁcients to keep them within an intended range.
2. Origin Adjusting: In the inspection process, measurement results for damping force were deliberately changed to keep them within adesired range by using a Balance ON function (a program that moves the median damping force on extension and compression in thedirection of the origin) and an Ampliﬁer function (to adjust the zero point of the load on the inspection machine) of the personal computers
installed in inspection machines.
3. Use of Materials That Did Not Conform with Speciﬁcations Certiﬁed by Minister: Materials were used that did not comply withspeciﬁcations certiﬁed by the Minister for seismic isolation oil damper components, including the pistons, packing and paints.
4. Falsiﬁed Device Coefﬁcient of Stiffness: Figures for device stiffness (the ability to resist deformation when force is applied) were deliberately
increased to desired values when customers agreed that device stiffness values exceeded prescribed values.
5. Screw Problems: Galling prevents screws used to attach the piston and piston rod from tightening fully. As a result, the seismic isolation oil
dampers were shipped with a gap between the piston and piston rod.

Causes of Improper Acts
Contents

Corporate
cultureBusiness
operationsystemQualityinspection
systemInternal audit
system02

Cause

Comments

Lack of complianceawareness

Inspectors at KYB Corporation and Kayaba System Machinery Co., Ltd. (KSM) who acted improperly,
the supervisors who were aware of their improper acts but did not correct them, people in otherdepartments, and certain managers and executives, lacked the fundamental compliance awarenessthat is an essential part of monozukuri.

Corporate culture that
did not face up toinconvenient facts

Certain managers and executives in the oil damper business at KYB Corporation and KSM were in
positions where they should have stopped improper acts and rectiﬁed the situation in the ﬁrst
place. Instead, they perpetuated a corporate culture in the oil damper business of failing to faceinconvenient facts by directing or giving their tacit approval for improper acts.

Factory management
focused on simply ﬁllingorders received

In their factory operations, KYB Corporation and KSM accepted orders that exceeded theirtechnical capabilities and production capacity for multiple reasons including a lax view of productperformance requirements for sustaining the oil damper business and their focus on sales targets
and delivery dates.

Incomplete informationsharing systems

The systems for sharing information among KSM frontline operations and senior management,and between KYB Corporation and KSM, were deﬁcient. Moreover, the Group’s whistleblowing
system was ineffective.

Important business
operations dominated byentrenched personnel

Certain entrenched management and frontline personnel dominated important operations in theoil damper business of KYB Corporation and KSM.

Problems related tocommercialization

The oil damper business relied heavily on specialized technicians before mass production began,and a system that would allow other managers to carefully and conservatively verify factors
including oil damper technology, performance, quality inspection and production capacity was not
fully in place. This situation was not remedied even after mass production began, so management
was not able to properly monitor the business on a continuous basis as it expanded, or to
implement appropriate improvements as they should have.

Deﬁcient inspections

Manufacturing departments with a strong incentive to falsify inspection data had conducted
performance inspection of themselves, which made it difﬁcult to adopt cross checks, and therefore
effective checks and balances were lacking in manufacturing departments.

Lack of mechanisms toprevent improper acts
involving inspection
machines

Inspection equipment lacked systems to prevent improper acts, such as automatically recording raw
data that would expose subsequent falsiﬁcation of that data. Inspection machine administration
was also inadequate, as it allowed inspection machine software itself to be improperly modiﬁed.

Deﬁcient internal audit
system (deﬁcient qualityaudits)

Quality audits by KYB Corporation or KSM were insubstantial and ineffective because they wereconducted perfunctorily using a checklist of predetermined questions prepared in advance. In
addition, companies were selected for audits on the basis of quality and percentage of process
defects, but not on the basis of investigating improper acts.

Deﬁcient internal auditsystem (deﬁcient auditsof similar qualitymisconduct)

There were deﬁciencies in the internal audit system of KSM and our system for internal audits ofKYB Group companies. Therefore, internal audits did not function properly. For example, internal
audits conducted for improper acts similar to quality misconduct lacked rigor.

KYB Group Report 2019On its website, KYB periodically posts reports* of its progress in preventing the recurrenceof improper acts and measures to identify and address such acts.
*First report posted in July 2019. Second report posted in October 2019.

https://www.kyb.co.jp/english/company/progress/index.html
The KYB Group released the report by an external investigative committee and published the results of the Group’s
internal investigation of the causes of improper acts and measures to prevent their recurrence. Please refer to thesereports for details.
• Report by the external investigative committee on nonconforming acts in the inspection process for seismic isolation/mitigation oildampers manufactured by KYB Corporation and its subsidiary for buildings
https://www.kyb.co.jp/company/progress/progress_20190213_02.pdf (Japanese only)• Investigation into the causes of nonconforming acts in the inspection process for seismic/mitigation oil dampers manufactured by KYBCorporation and its subsidiary for buildings, and measures to prevent their recurrence
https://www.kyb.co.jp/company/progress/progress_20190213_01.pdf (Japanese only)

Outline of Measures to Prevent Recurrence

Foster strict
complianceawareness andreform thecorporate culture

Evaluate businessfeasibility, andrevise business
operations,informationsharing systems
and other matters

Improve inspection
systems andmethods

Strengthen internal
audit and control
systems

Establish compliancemanagement• Establish compliance awareness at KYB Corporation and KSM• Foster compliance awareness throughout the Group• Revise the Corporate Guiding Principles and other guidelines• Emphasize the importance of compliance regularly• Implement personnel evaluations and related measures

Change the mindsetof all ofﬁcers
and employees• Conduct education and training to raise awareness of social responsibility• Conduct education that incorporates numerous case studies and best practices fromother companies• Conduct education on laws and regulations speciﬁc to businesses and products• Make education regarding quality mandatory

Establish abalanced business
operation system• Ensure appropriate business management at KSM• Review how decisions to accept orders are made at KSM• Develop business systems• Revise use of mass-production evaluation procedures for individual and small-batch
products

Ensure personnel
are rotated• Nurture successors by sharing expertise/know-how in the Company through effective
job rotation and by increasing the transparency of operations

Collect informationand establish afeedback system• Ensure thorough documentation of meetings, reports and instructions at KSM• Ensure that internal regulations are applied in the event of an emergency• Review the internal whistleblowing system to improve its effectiveness• Clarify the actions to be taken when quality misconduct is detected• Create a mechanism for extracting information

Implement inspection
systems• Strengthen the independence of quality assurance• Improve methods for onsite oil damper inspections with the customer present• Review inspection manual

Implement preventive
measures against
fraudulent operationof inspection machines• Tighten internal procedures for changing the software of oil damper inspectionmachines• Regularly monitor the software of oil damper inspection machines• Automatically record inspection results without human involvement• Automate inspection processes• Tighten controls on access to oil damper inspection machines• Ensure traceability of performance test data

Enhance internal
quality inspection
system• Perform audits that consider quality misconduct• Perform audits that effectively verify inspection data
• Institute audits by KYB Corporation• Leverage the support of external experts

Tighten the subsidiarymanagement system• Strengthen systems for sharing information and collaborating among Group companies• Review management systems for Group companies• Analyze and monitor Group companies’ business risks• Reorganize Group companies

KYB Group Report 201903

Corporate Spirit

Imbued with the spirit of creative development of founder Shiro Kayaba, the KYB Group will
dedicate its collective strengths toward being a highly ethical, fair and honest corporate group inorder to regain trust in its brand through monozukuri (Japanese manufacturing expertise) thatdelights people and consistently contributes to a prosperous society.

Corporate Spirit (What KYB Aims to Be)
By serving technologies and products that make people’s livessafe and comfortable, KYB group dedicates to the society.
1. We shall follow all rules and face all issues with honesty.
2. We shall build a corporate culture full of vitality, and hold high goals.
3. We shall value sincerity, cherish nature and care for the environment.
4. We shall constantly pursue creativity to contribute to the prosperity of customers,shareholders, suppliers and society.

VisionWhat the KYB Brand Can Do for the World

Monozukuri That Delights People
KYB aims to support the development of society through the joy ofmonozukuri, and to make people happier as a result.

VisionMission
The Mission of the KYB BrandMonozukuri Taken One Step FurtherValue
MissionValue
The KYB Brand Delivers Value

Technology for Comfortable Living
Sensory value: Comfortable living and the joy of monozukuri
Functional value: Reliable quality
The value KYB promises end users is greater comfort fromcreative technology and honesty in product development.
The value KYB promises clients is the reliable quality that comesfrom thinking of end users as clients.
The value KYB promises employees is the joy of monozukurithat comes from knowing they are changing the world.

04

KYB Group Report 2019

KYB draws on technical expertise acquired over many years tocontinue delivering value to clients and markets. Using ourunique capabilities, we take monozukuri one step further toprovide clients with new value and greater satisfaction.

Contents
To Our Stakeholders

Foreword

Nonconforming Acts in the Inspection Process
for Seismic Isolation/Mitigation Oil Dampers andOther Matters

02

Corporate Spirit

04

Feature: The History of KYB and Its Businesses

06

KYB Group Business Activities

12

Stakeholder Communications

18

Environmental Management

22

Quality Management27Human Resources Management

28

Corporate Governance

32

Internal Control and Compliance

36

Risk Information

40

Management Team42

Financial Highlights

44

Global Network

46

Corporate Information/Shareholder Information

47

Editorial Policy
From FY2019, the KYB Group issues this integrated report tocommunicate its management policies, business strategies and CSR
activities to shareholders, investors and all other stakeholders. We
hope to create new opportunities for dialogue by covering businessperformance, management strategies and other ﬁnancial
information, as well as the environment, society, governance (ESG)
and other non-ﬁnancial information in order to inform readers about
our efforts to increase corporate value over the medium to long term.
For a better reading experience, we will continue to improve thereport based on stakeholder feedback. We welcome yoursuggestions.
Reporting Period
FY2018 (April 1, 2018 to March 31, 2019)(Includes efforts that are outside the above reporting period)

Scope
The report covers KYB Corporation and subsidiaries and afﬁliates
in Japan and around the world. Environmental data is for KYB
Corporation (Sagami Plant, Kumagaya Plant, Gifu North Plant, Gifu
South Plant and Gifu East Plant) unless otherwise annotated.
Date of Issue
December 2019 (We plan to issue our next report in August 2020.)
Forward-Looking Statements
This report includes plans and forecasts as of the issue date, andestimates based on our business plans and management policies.
Forward-looking statements are based on information available atthe time of report preparation, and actual results may differ
depending on changes in relevant conditions.

KYB Group Report 201905