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Risk Factors

In the fiscal year ended in March 2022, PERSOL Group (hereinafter “the Group”) convened the Risk Management Committee four times and selected six material risks having a large impact on the business and of great concern to society: “IT-related risk (including personal information leaks and system failure),” "Risks associated with investment for company acquisition," "Privacy infringement risk," “Business continuity risk in emergency such as natural disasters,” "Risks associated with climate change," and “Risks associated with human rights violations.” From the fiscal year ending in March 2023, we plan to perform monitoring on a regular basis focusing on these material risks.
Described in the table below are major risks which may affect the Group's business results and financial conditions, including the aforementioned six material risks. The risks which may have a material impact on the Group's financial conditions, business results, and cash flows as perceived by the top management are described in order of importance in the light of the probability of their occurrence and the degree of their impact on its business. The Group will try to avoid their occurrence and respond to them as they occur, based on its awareness of the possibility of their occurrence. Furthermore, forward-looking statements in this section are based on the judgments of the Group as of June 22, 2022 when the Group’s Securities Report was filed with the Financial Services Agency, and the matters noted below do not entirely encompass all risks relating to investment in PERSOL HOLDINGS (hereinafter “the Company”) shares.

List of Major Risks

Importance level
Name of risk
Significant Group risks
(1)
IT-related risk (including personal information leaks and system failure)
(2)
Risks associated with investment for company acquisition
(3)
Privacy infringement risk
(4)
Business continuity risk in emergency such as natural disasters
(5)
Risks associated with climate change
(6)
Risks associated with human rights violations
(7)
Risks associated with compliance including observation of laws and regulations
(8)
Risks associated with COVID-19
(9)
Risks associated with macro-economic changes due to business fluctuations
(10)
Risks in developing and securing human resources
(11)
Risks associated with overseas business expansion
(12)
Risks associated with technical innovation
(13)
Risks associated with competition
(14)
Risk of failure to respond to demographic changes

(1) IT-related risk (including personal information leaks and system failure)

a. Risk of personal information leaks
The Group has established rules regarding information security and the handling of personal information as information security measures. The Group also endeavors to establish and maintain appropriate information management structures both in IT terms and human terms, including creating an IT environment in line with such regulations, inspecting the security status of the IT environment and each group company under the leadership of a business unit which oversees Group security, and providing training to employees on a periodic basis. However, if such personal information leaks out due to security breaches by third parties in cyberattacks or the like, inappropriate system settings, employees' misconduct or negligence or the like, the Group's brand would be damaged, the number of its service users would plunge, its corporate reputation would be harmed, public trust in it would be lost, and claims for damage compensation would be raised, with the result that its business operations as well as its financial conditions and business results may potentially be affected significantly.

b. Risk of system failures and the like
The Group's businesses, both in Japan and abroad, depend greatly on computer systems and their networks, and the Group recognizes that the importance of this risk has increased even more due to more widespread teleworking within the Group in recent years. In addition, part of system maintenance work and the like is contracted out to outside companies, including cloud system operators. For that reason, various measures have been put in place as a contingency, such as developing structures in case of system failure, strengthening systems security, and augmenting communication lines and hardware etc. However, in spite of such measures, if human errors, cyberattacks, wide-ranging natural disasters, or troubles at third-party suppliers prevent the use of computer systems and communication networks, the Group's business operations and services may be suspended, and the persistence of such a situation could lead to a loss of confidence in the Group and may potentially have a substantial impact on the Group.

(2) Risks associated with investment for company acquisition

The Group has so far achieved growth by acquiring companies and finding business partners, and intends to further enhance its corporate value from now on by similar methods.
Full due diligence is performed on the financial details, contractual arrangements, and the like of target companies for acquisition and business alliance in order to mitigate risks. However, if sufficient due diligence cannot be performed due to the nature of the opportunity or limited time available, and incidental liabilities arise or unknown obligations come to light after acquisition, or the relevant business deviates greatly from the original earnings plans, it may potentially be necessary to invest a large amount of fund, and the Group's business development and business results may potentially be affected by the reappraisal of affiliated companies' shares or goodwill impairment losses. Goodwill acquired through company acquisition was worth 61,674 million yen as of the end of the fiscal year ended in March 2022, of which large portions were made up by PERSOL CAREER CO., LTD. (former Intelligence Holdings, Ltd.), which belongs to Career SBU, and Programmed Maintenance Services Limited, which belongs to Asia Pacific SBU. As for overseas business, impairment loss of goodwill was recorded in fiscal year ended in March 2020 in relation to staffing business of aforementioned Programmed Maintenance Services Limited that was acquired in the fiscal year ended in March 2018, in addition to impairment loss recorded in fiscal year ended in March 2018 in relation to subsidiaries acquired with regard to PERSOLKELLY business. In this regard, the Group has strengthen the governance structure in relation to business investment projects. As a new reinforcement to its governance structure, the Group established the Investment Committee in April 2020. This committee gives an advice to the management team about large business investment projects after deliberating on them from a professional perspective. The purpose of the Investment Committee is to deliberate over important issues with regard to the Group’s investments in general and to transform various knowledge and insight regarding promotion of investments into the Group's organizational knowledge. The Investment Committee presents the results of its deliberation to the Headquarters Management Committee (HMC), serving as a supplementary organization to ensure right decision making by HMC.
The Group considers that each of its acquired companies will exhibit its brand power and compatibility with the Group which will potentially create extremely beneficial business synergies. However, if the business environment and situations of these businesses change significantly in the future and, for some reason or other, their business results do not progress as anticipated, additional losses may potentially be incurred as a result of impairment loss accounting applied to these assets, which may potentially impact the business results of the Group.

(3) Privacy infringement risk

In the business operations, the Group companies possess and handle a large amount of personal information regarding the registered staffs, temporary staffs, job seekers, client companies, employees, and other related parties.
The handling of personal information in the possession of the Group is governed by the personal information laws of the relevant countries. In Japan, a country where its core businesses are pursued, the information needs to be handled in compliance with the Act on the Protection of Personal Information, the Employment Security Act, the Act on Securing the Proper Operation of Worker Dispatching Businesses and Protecting Dispatched Workers (hereinafter "Temp Worker Act"), and the like. These laws and regulations have become increasingly sophisticated as a result of recent growth in concerns about the protection of personal information and privacy rights, and efforts to bring them into alignment with global standards. The Group carefully examines and determines their interpretation and application from the viewpoint of both legal compliance and information security. However, the practical requirements under these laws and regulations are open to interpretation and, depending on the Group's interpretation, the Group's handling of personal information could inadvertently be deemed inappropriate, leading to the Group potentially receiving business suspension orders from the authorities or potentially being sued by the individual or corporate providers of the personal information.
Furthermore, even if the Group uses the information in compliance with laws and regulations, when the data providers suffer disadvantages or develop a distrust, the Group's brand and corporate reputation may potentially be weakened or its credibility may potentially be damaged.
Personal Data Utilization Council was established in the fiscal year ended in March 2021 to discuss an overall personal data utilization strategy of the Group for the purpose of ensuring the Group-wide consistent utilization of personal data. When launching new services or utilizing new personal data, the Group endeavors to earn the trust of users and others by establishing a structure through a privacy review process carried out by a dedicated department, fully examining possible effects on the individuals in advance, and taking appropriate countermeasures.

(4) Business continuity risk in emergency such as natural disasters

The Group engages in business activities in Japan and the Asia-Pacific (APAC) region. In the event that a natural disaster (earthquake, typhoon, flood etc.), fire, power-outage, war or terrorist act occurs and the Group’s employees are endangered or the Group’s corporate assets are damaged, or in the event that a pandemic occurs and many employees are infected and business operations are restricted due to restrictions on activities, the Group’s business operation, financial conditions and business results may be affected. Furthermore, as part of the qualitative aspect involved in the HR services, it is conceivable that there may be a substantial burden of tasks to respond to clients in emergency situations (confirming safety of temporary staffs, as well as reorganizing contract arrangements with client companies, etc.). In turn, this may potentially have an impact on the Group's business operations, financial conditions, and business results.
The Group has established a department to oversee crisis management at the Company and built a structure to take appropriate measures in an emergency based on the fundamental policies: (1) securing the safety of employees and temporary staffs, (2) protecting clients’ assets and corporate assets, (3) business continuity, and (4) stakeholder communication. In addition, positioning payment of salary to employees and temporary staffs, which is fundamental to HR service business, as the most important task of the Group, the Group has established a business continuity plan to continue payment to its employees and temporary staffs to support their livelihoods even in the event of a large-scale natural disaster or pandemic. The Group also works to improve the effectiveness of the business continuity plan through regular training. To realize a rapid and efficient initial response, in Japan, the Group has developed a system for collecting information in the event of disaster utilizing IT and has introduced a safety confirmation system as well as a system that automatically identifies offices that are highly likely affected in the event of large-scale disasters.
In addition, the Group has overseas representatives in the APAC region and has implemented initiatives to protect the safety and health of its overseas representatives in case of war, terrorist act or other emergency, including implementing safety measures and providing training and medical support, as well as establishing rules for confirming safety in an emergency. Furthermore, in anticipation that the impact of the COVID-19 pandemic will be mitigated and the number of overseas business trips will return to normal, the Group will endeavor to strengthen safety measures for those going on overseas business trips in the future.

(5) Risks associated with climate change

On the global issue of climate change, the Group supported the final recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and has been making disclosures based on scenario analysis to identify climate change-related risks and opportunities since May 2022.
To gain a concrete understanding of the business impacts of climate change and climate-related risks and opportunities, the Group has conducted an analysis using the 4 degree Celsius scenario (a world with more frequent and severe natural disasters due to climate change) and the 1.5 to 2 degree Celsius scenario (a world with rapid rates of decarbonization) published by external organizations such as the International Energy Agency (IEA) and the Intergovernmental Panel on Climate Change (IPCC) as benchmarks.

Annual emissions of greenhouse gases associated with the Group's business activities are approximately 25,350 tons in terms of CO2 (actual results for the fiscal year ended in March 2022 including some undetermined estimates) and approximately 99% of these are emissions from power use and fuel combustion on the use of vehicles. As a new target for greenhouse gas emissions, the Group has set itself the target of becoming carbon neutral, in other words, achieving net zero greenhouse gas emissions*1 associated with business activities, by the fiscal year ended in March 2031.
The Group is implementing various initiatives to reduce its emissions.
To reduce power usage at offices throughout Japan, the Group is working on energy saving and resources saving activities through the creation of environmentally friendly offices and integration of environmental considerations into office life. In addition, by encouraging teleworking among employees through the use of ICT and helping reduce the frequency of commuting and reduce power usage, the Group aims to achieve both workstyle reform and reduction in CO2 emissions. The Group is also considering switching the electricity used in its offices to renewable energy.
Meanwhile, Programmed Maintenance Services Limited, which has especially high vehicle usage compared with the Group's other business activities, is working to reduce emissions through initiatives such as switching to renewable energy and establishing carbon neutral business units.

*1 Greenhouse gas emissions associated with business activities is the combined total of Scope 1 emissions and Scope 2 emissions.

(6) Risks associated with human rights violations

The Group has business units in Japan and in the APAC region and the people it deals with including client companies and job seekers are spread across many countries. In recent years, interest in Business and Human Rights is increasing, especially in developed countries, the growing demands of stakeholder with regard to human rights from an ESG perspective are also having a considerable impact on the Group's business activities. Whilst the Group has already implemented various initiatives, including establishing the Group Code of Conduct, it will push ahead with preparations for the development of a framework, including (1) formulating a human rights policy, (2) carrying out human rights due diligence, and (3) establishing a remedy mechanism.
However, in the event that the Group, which provides HR services, finds itself in a situation that falls under a human rights violation, the Group could potentially receive an administrative penalty in the country in question, lose social credibility, or suffer damage to its brand status, and its business may be impacted as a result.

(7) Risks associated with compliance including observation of laws and regulations

For the Group, it is a matter of course that it must comply with the laws of those countries and regions where it engages in business. In particular, as an HR service provider, the Group places emphasis on complying with labor related laws and regulations. The Group defines “compliance” not narrowly as compliance with laws and regulations, but more broadly as “meeting the demands and expectations of society and conducting business activities with integrity”. To achieve this, the Group established the PERSOL GROUP Code of Conduct in the fiscal year ended in March 2020 and directors and employees of the Group are required to act with fairness, honesty, respect, integrity and good faith.
The Group established Compliance Control Department at the time of expanding business and built a compliance system, including preparation of the Group’s compliance-related regulations, providing education/training sessions continuously, and setting an internal whistle-blowing system in the Group. In the event, however, of a violation of any law or regulation applicable to the Group, or a failure to meet requests and expectations from society, this would damage the Group’s social credibility or brand status and would likely have an adverse impact on the Group’s business results. Possible risks are listed in a, b and c below.

a. Temporary staffing business
In Japan, the temporary staffing business, a mainstay of the Group, is conducted under worker dispatching permits under the Temp Worker Act. The Group's understanding is that based on Temp Worker Act, there are no material facts that would give rise to revoking its worker dispatching permits at the moment. However, if in future due to some sort of reason or other one of the Group companies, or an officer/employee of the Group contravenes Temp Worker Act, it is assumed that the Group's principal business activity may potentially be disrupted in general, which in turn could potentially have a major impact on the Group's financial conditions and business results. Furthermore, in response to changes in Japan's working environment to date, apt amendments have taken place in respect to Temp Worker Act and various related laws. The Group for its part, adopts a range of measures to address such amendments to various laws whenever they occur. In cases where further amendments take place that lead to major operational changes arising, the future business strategy of the Group along with business results may potentially be affected to no small extent.

b. Placement business and job recruitment media business
The Group's placement business and job recruitment media business in Japan are conducted under permits to engage in the fee-charging employment placement business under Japan's Employment Security Act. The Group is currently not aware of any fact that constitutes grounds for revocation of its permit to engage in the fee-charging employment placement business under Japan's Employment Security Act. However, if in the future due to some sort of reason or other one of the Group companies, or an officer/employee of the Group contravenes Employment Security Act, it is assumed that the Group's principal business activity may potentially be disrupted in general, which in turn could potentially have a major impact on the Group's financial conditions and business results. Employment Security Act and related laws and regulations have been revised in the past in accordance with changes in the labor environment and mostly recently, in March 2022, there was a change in the law consisting of the establishment of a registration system for some job advertising agencies. Whenever the law changes, the Group adopts various measures to comply with such changes in the law. In the event that further revisions are made in the future, resulting in major changes to operations, this could have a considerable impact on the Group's operating policies and business results in the future.

c. Outsourcing business
The Group's outsourcing business covers a wide range of sectors spanning business consulting of clerical work and the like, business operation and management, and manufacturing and development in the IT and engineering sectors. The Group receives outsourcing business orders from a wide range of clients including government offices, local public authorities, and private sector companies. Satisfying the requirements of clients is the top priority in performing the business. In the case of business projects received from government offices or local public authorities, in particular, the success or not of the project may also have a significant impact on Japanese society or a local community. The Group conducts an assessment of a project before deciding whether to accept it or not, and when accepted, strives to fulfill or operate the business project in a proper manner. In the event, however, of a failure to fulfill or operate properly any outsourcing business of public nature, in particular, it would damage the Group’s social credibility or brand status and it is likely to have an impact on the Group’s business results.

(8) Risks associated with COVID-19

The COVID-19 pandemic which began in early 2020 caused a dramatic contraction in global economic activity, creating an unpredictable situation, and the Group's business activities and business results were heavily impacted, primarily in the fiscal year ended March 2021. The extent of the impact of the COVID-19 pandemic on business results was greatly reduced in the fiscal year ended March 2022, but depending on the extent and duration of COVID-19 outbreaks and government restrictions on activities in the future, the Group's business operations and business results could potentially be severely affected again. In the temporary staffing business in Japan, the Group has sought to create an environment that allows temporary staffs to work from home. However, if temporary staffs take more paid holiday, arrive late or leave early for whatever reason including temporally closure of primary schools and their work hours decrease, the Group's business results may be impacted. Also, in the marketing sector, effects of the COVID-19 pandemic such as shorter store opening hours may have an impact. In the placement business, the form of interview has been changed from face-to-face to online. However, moves to scale back recruiting activities among companies due to COVID-19 could have an impact, including slowing down employment decisions and causing recruitment to be postponed. The overseas business situation differs widely from country to country depending on the spread of COVID-19 but certain regions continued to be affected in the fiscal year ended March 2022. In the temporary staffing business and the placement business in Asia, some regions have introduced teleworking. However, in the event of orders for strict restrictions such as lockdown, the Group's business operations and business results could potentially be impacted. Similarly in Australia and New Zealand, in the event that a lockdown or other strict restrictions are ordered in the future, the staffing and maintenance businesses could continue to be impacted in the future.

(9) Risks associated with macro-economic changes due to business fluctuations

HR services provided by the Group are susceptible to business fluctuations, and if such macro-economic changes are not handled successfully, the Group's financial conditions and business results could be affected significantly. In particular, the economy of each country where we are doing business tends to be increasingly influenced by other countries' economic conditions, international politics, geopolitical conditions, international money markets, and the like. In fact, we were confronted with hardly foreseeable events such as the world financial crisis in 2008, the outbreak of COVID-19 pandemic since the beginning of 2020, and geopolitical conditions which led to the quick shrinking of economic activities around the world. Ups and downs due to ordinary economic cycles are handled by each Group company, each SBU, and the Company, which has corporate functions, through cost management and other managerial efforts to control their impact on the Company's results. However, if a serious economic crisis like the world financial crisis in 2008 happens, the Group's financial conditions and business results may potentially be affected significantly. In particular, the table below shows those which may affect the Group's earnings in order of degree of impact in a depression.

Expected situation
Degree of impact
Major affected segment
Job advertising business - Reduction of recruiting budgets among companies; decrease in the number of job advertisements due to cutbacks in recruiting activities

- Decline of advertisement unit rates due to harsh competition
- Business sensitivity is the highest.

- Sales and profitability declines.
- Career SBU
Placement business - Decrease in the number of successfully placed candidates due to client companies' cutbacks in employment

- Longer lead times to formal job offer notification
- Business sensitivity is high.

- Sales and profitability declines.
- Career SBU

- APAC SBU
Temporary staffing and outsourcing businesses - Decrease in the number of temporary staffing contracts due to client companies' cutbacks on labor costs in general

- Termination of temporary staffing contracts due to client companies' shutdowns and the like

- Considerable sales decrease due to the worsening of large client companies' business results

- Decrease in the number and size of contracts in businesses using regular employees, such as outsourcing and temporary staffing

- Cancellation of projects due to client companies' cost reduction; and decrease in outsourced projects due to budget cuts
- Business sensitivity is relatively low and slow-moving.

- Sales and profitability declines.
- Staffing SBU

- Professional Outsourcing SBU

- APAC SBU

(10) Risks in developing and securing human resources

For the implementation of the Group's medium- to long-term strategies and its sustainable growth, developing and securing various types of human resources in various areas is indispensable. In order to realize the Group's vision "Work, and Smile," the Group endeavors to create good workplaces where all employees of the Group can have job satisfaction and a sense of attachment to their organizations. However, human resources who meet the requirements in some areas, such as IT engineers, digital transformation promotion specialists, globally oriented personnel, and other human resources who will be drivers of the Group's future growth, are very rare assets in the market, too, and it is possible that the Group cannot secure these personnel as expected. If it is difficult for the Group to create ideal working environments, it may potentially be unable to develop excellent human resources as expected and conduct business operations as planned.

(11) Risks associated with overseas business expansion

The Group provides HR services, including temporary staffing, placement, and outsourcing business, in the APAC region as well as Japan. Expansion of the business overseas has been accompanied by moves to strengthen support structures and management control functions. However, due to sudden changes in political/social situations in each country, amendments to laws, unanticipated foreign currency fluctuations etc., and significant swings in business environments etc., in some cases it is not possible to solidly entrench competitive advantage in the APAC region. As such, there may be instances that have a negative impact on the Group's business results.

(12) Risks associated with technical innovation

For the HR related services conducted by the Group, the use of IT is indispensable. The Group uses IT to develop new services and improve operation systems. However, if it cannot secure or develop engineers or planners with high expertise in new business development, it may not be able to make accurate forecasts of technological innovation trends or make timely decisions regarding the application of new technologies, which may potentially lead to its competitiveness declining or its existing business models themselves becoming obsolete. If the improvements and the introduction of new IT requires a large amount of expenses, or for some reason it is difficult to secure the originally planned quality of service, or expected effects are not derived from the introduction, or new products and services embodying never-heard-before ideas, which are called disruptive technologies, quickly achieve widespread use around the world and destroy existing markets, it may potentially have an impact not only on the Group's business operations but also on its financial conditions and business results.
Artificial intelligence (AI) and robotic process automation (RPA) are being introduced at a rapid pace as technologies for realizing work efficiency and productivity enhancement in companies. For example, the introduction of RPA requires certain skill, and the Group is providing services designed to meet new needs among corporate clients, including temporary staffs with RPA skills and providing services ranging from assistance in the introduction of RPA to training for the routinization of its operation. However, if the Group cannot secure or develop engineers or planners with high expertise in technological innovation, it may not be able to make accurate forecasts of technological innovation trends or make timely decisions regarding the application of new technologies, which may potentially lead to its competitiveness declining or its existing business models themselves becoming obsolete. If the improvements and the introduction of new technologies such as AI and RPA requires a large amount of expenses, or for some reason it is difficult to secure the originally planned quality of service, or expected effects are not derived from the introduction, it may potentially have an impact not only on the Group's business operations but also on its financial conditions and business results.

(13) Risks associated with competition

In the HR business market where the Group is active, there are many competitors in every sector in every country. If these competitors offer similar levels of services as the Group's at lower prices, or they succeed in providing client companies with processes and mechanisms which do not require the Group's services or in making such processes and mechanisms permeate and spread through society, or they offer more attractive services to individual job seekers and client companies, or the Group fails to implement service and function improvements in response to the needs, it may potentially lead to declines in the Group's market shares and a negative impact on its business results.
In order to attract temporary staffs, job seekers, and other individual clients, the Group places job advertisements using search engines and the like operated by other companies in some cases. If the providers of such platforms increase their ability to attract clients in the job advertising industry and establish monopolistic positions, it may potentially have an impact on the Group's ability to attract clients and sales.

(14) Risk of failure to respond to demographic changes

The services provided by the Group are affected by demographic changes in the countries where it is doing business. Japan's population is quickly aging with declining birthrates, and it is possible that the working-age population will decrease further. Given the working-age population decreases, the Group has implemented business strategies in response to changes in the labor market and has endeavored to offer diverse work styles and expand the labor market, including paying attention to the enhancement of workforce participation rates among women, elderly persons and foreign nationals, and working on the development of services and new businesses which are responsive to the needs of society and users. An increasing number of companies are introducing AI, RPA, and other technology-assisted work efficiency enhancement solutions for worker shortage issues. The Group is providing services designed to meet new needs among client companies, such as “PERSOL’s RPA” which includes dispatching staffs with RPA skills and providing services ranging from assistance in the introduction of RPA to training for the routinization of its operation. However, if the Group fails to grasp such changes properly in a timely manner or fails to offer services at appropriate points in time due to delays in making decisions, or the development of such services costs more than expected, or positive responses are not received from client companies, the labor market will shrink further and this may potentially lead to a reduction of the user base for the Group and a negative impact on its business results.