To counter the challenges of a fast changing global economy and the sustainability risk, LITE-ON adopts a robust risk management framework and an effective implementation roadmap that approach in four aspects, which are the environment, operation, strategy, and internal control, to identify and manage potential risks that may have an impact on a company's sustainable development. In addition, LITE-ON implements management strategies and takes measures to transfer, mitigate, minimize, or even eliminate risks entirely and turn them into business opportunities.
The risk management policy
LITE-ON's risk management policy defines risks according to the company's overall business plan. The policy also sets up risk management mechanisms for early identification, accurate assessment, effective supervision, and rigorous control to prevent possible losses and to continue to adjust with improvements of the best possible risk management practices, according to the changes in the internal and external environment, under certain affordable risks.. The goal is to protect the interests of LITE-ON's employees, shareholders, partners, and clients and to create more value and achieve optimal resource allocation for the company. Please refer to LITE-ON Risk Management Policy and Procedures
The risk management framework
LITE-ON's Board of Directors sits at the top of its risk management system. Its mission is to
comply with the laws and regulations and implement and enforce risk management in the company as a whole. The Board shall have a clear understanding the risks of company operation, maintain the validity of the risk management system, and take ultimately responsibility for risk management performance.
The Corporate Sustainability Committee is a functional committee that LITE-ON places under the Board of Directors. There are 2 categories: “Corporate Social Responsibility (E&S)”
and “Sustainability Governance and Ethical Management (G).”Nine subcommittees under the committee include a Risk Management subcommittee led by the head of the Operation
Management Department. The Risk Management subcommittee is the unit responsible for conducting risk management and reporting results of risk management activities regularly to the Corporate Sustainability Committee.
Given the increasing attention to risk management issues since 2019, the CSR Office and the Risk Management subcommittee follow the existing risk management framework and internal control system, and manage the risks associated with its operations in the most cost-effective
manner. LITE-ON puts all heads of functional units(or departments) in charge of overseeing risk management and analyzing and monitoring risks in their own units in order to ensure effective execution of risk controls and procedures. Meanwhile, Internal Audit department is responsible for assessing risks and presenting annual audit plans accordingly. The Internal Audit is also responsible for delivering reports on risk management performance to the Audit Committee. LITE-ON's risk management framework is shown as follows:
Risk management cycle
Identification of the Scope of Risk
LITE-ON has been able to develop a comprehensive and robust risk management framework with task functions and responsibilities clearly segregated for risk identification purposes. The LITE-ON Risk Management subcommittee follows the materiality principle and divides risks into 8 categories by economic (including corporate governance), environmental, social and other aspects as shown in the table below.
Each risk is further evaluated by probability and severity to determine critical material risks, and then mapped onto a risk map for ease of identification in 2019 by Risk Management subcommittee. This enables LITE-ON to take further steps to transfer, accept, mitigate, or avoid the identified risks. By executing the PDCA (Plan-Do-Check-Act) cycle, the company is able to improve its control over various risk factors and reduce the chances of risks occurring and the impact they might create.
Furthermore, as more categories are being added to emerging risks around the world and the probabilities keep rising, we have also made identification and management of long-term emerging risks part of the enterprise risk management plan. In 2019, we identified new critical material risks/emerging risks including (1) disruptive technology risk; (2) digital information security risk; and (3) human resource risk (human resource development system), and others.
The functional units, having identified potential risk factors, should implement adequate assessment methods to provide a basis for risk management.
Risk assessment covers risk analysis and evaluation. It analyzes the probabilities of risk incidents and the degree of adverse impact in the event of such an incident. The goal is to evaluate the effects of risks on the company so to provide a basis for deciding priorities in risk control implementation and response selection.
Rigorous statistical methods and techniques should be deployed to analyze and manage quantitative risks.
Qualitative methods will be used to assess other risks more difficult to quantify. Qualitative risk assessment refers to the use of words to describe the probabilities of risks and the degrees of impact.
The functional units(departments) should monitor risks in their business activities. The departments should propose countermeasures as appropriate, and submit the risks and their countermeasures to the Risk Management subcommittee to be presented in routine meetings of the Corporate Sustainability Committee.
Risk Reporting and Disclosure
To record risk management procedures and results in detail, the Risk Management subcommittee should update the Corporate Sustainability Committee regularly on relevant risks.
The functional units, having assessed and summarized the risks, should take appropriate actions in response accordingly.
Risk Management Projects and Culture
In order to address high probability high impact external and operational risks, LITE-ON has made the risk management plan an integral part of the risk culture. The plan focuses on "raising safety awareness", "improving critical asset protection", and "establishing safety systems and rules", all of which are interconnected.
- Raising safety awareness
The Risk Management Department arranges regular training and seminars to help employees learn from past mistakes, and hence raise their awareness towards safety and risk management.
- Improving critical asset protection
Important equipment, logistics processes, and final products are inspected every year in order to examine the practices at individual business units from product design and production to liability risk management after sales.
- Establishing safety systems and rules
Through regular inspections and improvements, LITE-ON is able to optimize the risk profiles of its production sites, reducing the possibility of accidents and hence minimizing loss of workers, plant, equipment, raw materials, and operations.
2019 Risk Identification and Control Measures
＊Details of risk management in terms of financial, environmental, and social concerns above are shown in the Annual Report and the appropriate chapters of the CSR Report.
Management of long term emerging risks
Risks of disposable plastics use
The problem of plastic waste has become a global disaster second only to climate change, so many countries have specific policies on how to reduce the use of disposable plastics in priority. For example, the European Parliament passed a new act to ban designated disposable plastic projects by 2021. In addition, the Allen MacArthur Foundation and the United Nations Environment Programme work together to promote the "Global New Plastics Economic Commitment". LITE-ON's business model is based on B2B and ODM/OEM. The main customers are world-renowned brand companies, including Apple, HP, Dell, Microsoft, and Logitech, and the product sales are around the world. There will be more stringent restrictions and regulations on the use of disposable plastics for imported products, such as tariff up or not preferentially purchasing. Under the pressure of cost, regulations, and brand image, customers might ask LITE-ON to propose solutions that can reduce the use of disposable plastics.
LITE-ON is a global key component supplier of ICT equipment, including keyboards, mice, power supply products and LED components. The shipments are among the top three in the world, so the demand for raw materials is very large. Among them, the proportion of plastic usage accounts for at least more than one-third of all raw materials. Taking desktop keyboard products as an example, the plastics used each year are up to more than 10,000 tons, except for some models that are designated by customers for post-consumer recycled (PCR) plastics, most of the others are disposable plastics refined from petroleum. In addition, because the processing of PCR plastics is more complicated, the material cost is usually higher than that of disposable plastics. Therefore, once the customer requests the product to increase the proportion of PCR plastics, but the order price is not willing to increase in proportion, LITE-ON will have a significant impact on product cost structure and profitability.
In response to the risk of shrinking the use of single-use plastics in the future and the gradual increase in the cost of post-consumer recycled plastics, LITE-ON is committed to reduce, reuse and recycle of material and product. Since 2019, we also have independently developed open-loop recycled plastics, and applied for PCR certification. This recycled plastic is mainly from Styrofoam marine waste and is used in the company's products and packaging materials after treatment and modification. This recycled plastic not only can reduce the virgin plastic refined from crude oil, but also reduce the carbon emissions generated by the incineration of marine waste plastics, which can effectively reduce the external impact of the environment. At the same time, LITE-ON also has more control over the price of recycled materials. Starting from this year, we will use more than 20 metric tons, and in the future, we will aim to use more than 100 metric tons per year.
Climate change risk management
LITE-ON sees climate change as a major risk and an important opportunity. The Climate Change Risk Task Force is in place to identify potential physical risks and transformation risks for LITE-ON to arise from climate change. We take further steps to analyze climate related risks and opportunities and assess the probability and severity of each. We also follow the Task Force on Climate-related Financial Disclosures (TCFD) and disclose climate change data and the associated risks and opportunities. Please see Environmental Sustainability Policy and Commitment for more details on strategies and response measures.
Under the issue of global climate change, extreme weather events, and the gap between NDC targets and 1.5°C Paris Agreement, in COP25 Chile - Madrid 2019, countries have committed to setting more ambitious targets in 2020 and may require Companies are increasing the use of renewable energy. For example, Taiwanese government, where the headquarters of the LITE-ON Group is located, passed the Renewable Energy Development Act in 2019 to require the user who the chartered capacity more than 5000 KW, shall install more than 10% of renewable energy installations, and review the applicable user every two years. LITE-ON is currently not the user regulated by regulations. However, with the expansion of business or the adjustment of the applicable objects, this company’s existing renewable energy strategy may not meet the requirements of the regulations and may be fined by the authority.
Due to the regulation and the demand from the high chartered capacity users, the price of renewable energy has risen. In 2019, the cost of green power purchase meant in Taiwan is about 50% to 80% higher than the grey energy(mix with renewable and non-renewable energy), which may lead to an increase in operating costs or the fined by the authority. Base on the amount of electricity consumption in LITE-ON’s Taiwanese plants, the potential financial losses in the next 20 years reach to 0.32 billion TWD. In addition, this company may lower its company reputation, stakeholders' trust, and customer stickiness caused by legal compliance events.
In order to reduce the risks from regulation in Taiwan and enhance the benefits from carbon reduction, in 2018, this company has started a project to build its self-renewable energy plants to meet its SBT target and to achieve 100% renewable energy usage in Taiwanese plants. The Renewable Energy Power Plant construction project has been reported to the Sustainable Development Committee in the first quarter of 2020.
Disruptive technology risk
To adapt to emerging/disruptive technologies and create good sources of profits, LITE-ON continues to complete business transformation by change of operating model and product portfolio. In addition, the group transformation project focuses on five areas of IoT application. They are cloud computing, LED and outdoor lighting, auto electronics, industrial automation, and smart healthcare, all of which are aimed at creating a safer, friendlier, and more energy efficient user experience. Regarding storage devices, for example, as the data oriented ODD gradually becomes obsolete, LITE-ON turns to invest in the silent, low power consumption SSD. In addition to SSD for personal computers, LITE-ON has succeeded in pushing for its use in cloud storage. SSD has now become one of LITE-ON's core products. Please see Environmental Sustainability Policy and Commitment, Climate Change Strategy, and 4.5 Green in the Factory of the LITE-ON CSR report for more details on strategies and response measures.
Digital information security risk
While driving digital transformation in the company, LITE-ON came to identify digital information security as a major risk and an important opportunity. It has created a cross-departmental and cross-functional InfoSec organization to performs InfoSec tasks. The Information Security Policy has been implemented to provide the basis for management and compliance with ISO 27001: 2013 standards. Meanwhile, InfoSec tools and ongoing improvements are being introduced alongside regular internal InfoSec audits and training to ensure effective information security and privacy protection. Please see Information Security and Privacy Management for more details on strategies and response measures.
Supply chain risk management
As part of its effort to build a sustainable supply chain, LITE-ON performs supplier sustainability risk assessments every year. LITE-ON screens supplier risks on a preliminary basis by analyzing potential risks in terms of location of a supplier, amount of procurement, and production process of a supplier. Furthermore, to better understand a supplier's risks, we survey sustainability risks in all key suppliers and first tier suppliers, and require key suppliers complete and return sustainability risk questionnaires. When the questionnaires are completed, we will perform a more detailed risk assessment on high risk suppliers identified in the process. High risk key suppliers will be subject to onsite audits or be required to complete the RBA Validated Audit Process (VAP). High risk first tier suppliers will be required to complete and return the RBA Self-Assessment Questionnaire in order to verify and keep reducing their risks. The risk assessments above are performed to identify potential economic, environmental, and social risks in the supply chain as well as suppliers with potentially higher risks. We target suppliers with potentially higher risks and perform audits and provide assistance to ensure their risks are effectively kept under control and minimized. Please see Supply Chain Management for more details on strategies and response measures.
Human resource risk management
According to reports released by research institutions, the changing global environment and the rise of social enterprises are transforming the labor market and altering the landscape in human capital. For example, employers have to recruit through a wider range of channels, provide more comprehensive training, and offer more flexible and more competitive benefit and compensation packages. LITE-ON is aware of the importance of the current transformation. For recruitment, we have started exploring talent through industry-academia cooperation in addition to the conventional recruitment channels. Please see 6.3 Supporting Internships for more details. The training system is built on four tiers, new employees, field of training, level of authority, and self development. The learning blueprint consists of 12 modules aimed at helping employees to improve and adapt to a company's constantly changing social role. Please see Human Capital Development for more details.
Sustainable Governance ▸