Basic Risk Management Policies
As a general trading company, the Sojitz Group is engaged
in a diverse and globally dispersed range of businesses. Due to the
nature of its businesses, the Group is exposed to a variety of risks.
In compliance with its Basic Code of Corporate Risk Management, the Sojitz Group defines and categorizes risks, specifies an individual in charge of each category of risk, and manages them according to the nature of each risk. The Risk Management Policy and Plan is formulated by the officers in charge of each risk, which is then resolved on, monitored, and delegated by the Board of Directors.
Measurable risks such as market risks, credit risks, business investment risks, and country risks are measured and managed based on a calculation of risk assets.
Risks that cannot be easily quantified; such as legal risks, compliance risks, environmental and social (human rights) risks, funding risks, disaster risks, and system risks; are managed in the same manner as measurable risks, with the status of the risks and other issues being reported to management based on the Risk Management Policy and Plan. This Policy and Plan is formulated by the executive officers responsible for managing those risks.
The Internal Control Committee (chaired by the President & CEO) monitors the management of these risks. In addition, the Board of Directors regularly receives reports from organizations including the Internal Control Committee, supervising risks by delegating appropriate actions to be taken.
Management and Control of Measurable Risks
The aims of risk measurement are to 1) control quantified risks to keep them within the scope of the strength of the Company (total equity attributable to owners of the Company), and 2) maximize earnings in line with the level of risk exposure. The Sojitz Group manages risks with a focus on both acceptability and profitability, setting its objective for risk control as managing risk assets so that they total less than total equity attributable to owners of the Company. The ratio of risk assets to total equity attributable to owners of the Company was 0.6 times as of March 31, 2017, within our target range. Risks for all projects are measured quarterly and reported to the Board of Directors and the Management Committee, and each business department receives the results of analysis of the change in risk assets for application in day-to-day risk management activities. We will continue our risk control efforts to maintain the ratio at or below 1.0 times.
For investments and loans, we will increase speed and feasibility by focusing on three fundamental policies based on our Medium-Term Management Plan: enhance existing capabilities and acquire new functions; expand, capture and create markets; and extend operations into new fields to strengthen division foundations. Accordingly, we will enhance asset quality and simultaneously improve the quality of our asset portfolio by strengthening risk management capabilities throughout the Company and at business sites, as well as by continuing to replace assets.
The external environment affecting the Sojitz Group’s businesses is constantly changing, with uncertainty in global politics, geopolitical risk, macroeconomic conditions, and volatility in markets (exchange rates, interest rates, stocks, commodities, etc.) all on the increase. The Sojitz Group promptly conducts appropriate risk management for this external environment. As a specific response, risk assets are calculated factoring in stress to stock price and exchange rate volatility and country credit ratings, and the ratio of risk assets to total equity is monitored to remain within 1.0 times even under stress conditions. In addition, as a countermeasure to tail risk, Sojitz analyzes the impact on its business portfolio under stress scenarios.
Risk Management Organization
The risk management organization consists of the Risk Management Planning Department, the Risk Management Department, and the Controller Offices. The Risk Management Planning Department plans and establishes rules, systems and risk management policies, quantifies risk, and manages country risk. The Risk Management Department deliberates on business investment proposals and monitors businesses after investments have been made. In 2012, Sojitz established Controller Offices with risk management functions in its business organization. The Controller Offices are placed in business divisions, and by sharing information closely with the business divisions, they enable faster structuring of project proposals and sharing of risk management expertise on the front lines of business.
Business Investment Proposals
Business investment proposals are deliberated on by the Finance & Investment Deliberation Council, which consists of a chairman and members appointed by the President. In order to visualize risks and facilitate deliberation, the council examines downside scenarios as well as expected scenarios, and decides whether or not Sojitz should invest in projects. More specifically, it assesses the feasibility of the overall business plan, including the cash flow plan, and sets internal rate of return (IRR) hurdles in order to select projects that can be expected to produce returns commensurate with the risks. Each corporate department deliberates on proposals in advance from its respective specialized viewpoint.
In management of the operating company after an investment is executed, attention is given to “value for Sojitz” and “value for society” to ensure the practice of the“two types of value” concept. This enhances the value of the business by increasing its competitiveness and profitability. For ongoing projects, careful operational management is conducted to decide whether to continue with each business, including assessments of commercial viability and profitability while also paying attention to changes in the external environment. Exit rules are set for identifying problems early on and withdrawing from business investments in order to minimize losses on withdrawal or reorganization. These criteria are used in making decisions on investments that are not expected to produce returns commensurate with the risks.
Risk Management Training
Establishing rules alone is not sufficient to enhance Company-wide risk management competence; all employees throughout the Company must have risk management capabilities. In addition to training to familiarize employees with the rules, Sojitz provides training using case studies of actual situations, as well as on measures to avert and mitigate country risks and transactions with inherent market risks, such as inventory transactions. Training is provided for employees at various levels, including young employees three to ten years after they join the Company, employees prior to their promotion to management positions, employees in management positions, and Group company managers. Training is based on the knowledge and on-the-job experience of employees directly involved in daily operations. To date, 1,800 employees have taken these training courses. Workshops by external specialists on topics such as political and economic conditions are also held regularly, to foster an ability to respond flexibly to changes in the business environment as a trading company employee. In addition, efforts are made to further instill risk management capabilities throughout the Company by bringing staff from the business group and overseas operating bases into the risk management departments, and through other personnel exchanges between the Head Office risk management departments and Group companies.