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Internal Control (Compliance and Risk Management)

Policies and Rules

NEC has established the Basic Policy on Internal Control Systems as a guideline for developing systems for ensuring that the performance of directors’ duties complies with laws and regulations and NEC's Articles of Incorporation,and systems for ensuring the appropriateness of other operations. (Article 362, Paragraph 4, Item 6 of the Company Law of Japan, etc.) Furthermore, NEC conducts annual evaluations of the establishment and operation of the internal control systems under this basic policy, as well as implementing the measures necessary for its improvement. In addition, NEC conducts consistent reviews of this basic policy in response to changes in the business environment and other developments. In this way, NEC confirms that the internal control systems have been established and are operating effectively. Two key themes with respect to internal control systems are compliance and risk management.

NEC believes that compliance is essential for a company to coexist with society and fulfill the expectations of stakeholders. Moreover, the NEC Group Charter of Corporate Behavior sets forth key corporate activities required of members of the NEC Group from the perspective of fulfilling the NEC Group’s social responsibilities. Furthermore, the NEC Group Code of Conduct specifies the behavior expected of each and every officer and employee of the NEC Group. The NEC Group Charter of Corporate Behavior and the NEC Group Code of Conduct have been established at all consolidated subsidiaries in Japan and overseas, and are positioned as the foundation of all of the NEC Group’s business activities.

Guided by the key concepts of "awareness" and "information sharing," the NEC Group’s basic approach to implementing compliance is to foster an awareness among every officer and employee so that irregularities are recognized as "abnormal," and to encourage officers and employees to consult with supervisors, related departments and the Compliance Hotline without brushing under the carpet any issues they may have noticed, with the view to resolving and improving those issues collectively as an organization.

Furthermore, NEC Corporation has established the Rules of Basic Risk Management. Under these rules, NEC effectively and comprehensively conducts risk management on the basis of an integrated, group-wide policy. Each division reinforces its risk management activities based on individual activities it has engaged in to date. For the company as a whole, every year NEC selects risks that require group-wide priority countermeasures (referred to as "Priority Risk") from a management perspective, examines those risks, and implements countermeasures.

Framework

To enforce compliance and implement effective risk management, NEC Corporation conducts activities led by the Risk Control and Compliance Committee, the Internal Control Division and the Risk Control and Compliance Promoters.

  • The Risk Control and Compliance Committee, whose members are officers, investigates the underlying causes of serious compliance breaches, studies related preventive measures, and discusses policies for risk management activities and measures to select and address priority risks.
  • The Internal Control Division exchanges opinions on various occasions with designated employees in corporate staff and other divisions specializing in matters described in the NEC Group Code of Conduct as concurrent assignment staff, and plans, formulates and implements various initiatives designed to enforce compliance, including instilling knowledge of the NEC Group Code of Conduct. In addition, the Internal Control Division provides necessary support and coordination, as well as guidance, to ensure that risk management at business divisions and corporate staff divisions is implemented systematically and effectively.
  • The Risk Control and Compliance Promoter system is a Company-wide framework designed to rigorously enforce compliance and risk management among all NEC Group employees. Risk Control and Compliance Promoters assigned to business divisions (415 people*) and NEC Group subsidiaries in Japan (139 people*) serve as points of contact for the Internal Control Division. (* As of March 31, 2012)
  • The Executive Committee deliberates important risks related to NEC's management strategies.
  • Given its oversight role with respect to business execution, the Board of Directors receives reports related to material misconduct along with reports on priority risks.
  • The Corporate Auditing Bureau and Corporate Auditors perform internal audits according to each of their roles to check whether there are any problems in the execution of business operations by NEC Corporation and NEC Group companies from the viewpoints of accounting and legal compliance.
Framework

Main Activities and Results (Fiscal 2012)

Compliance

Education and Awareness-Raising Programs

We offer annual web-based compliance training programs to all officers and employees of NEC Corporation. Risk Control and Compliance Promoters encourage participation in each business division. Almost all of our employees participated in the training within the allotted period of time, with 97% completing the training in fiscal 2012. In addition, we have put in place an environment in which even employees unable to complete the web-based training during the allotted period can engage in s elf-study over the NEC intranet at any time.
NEC subsidiaries in Japan also use the program. In fiscal 2012, approximately 29,000 employees at 34 NEC Group companies participated in the training, with 97% of those employees completing the training during the fiscal year. In addition, other NEC Group companies have offered their own compliance training programs with reference to this program. In this manner, compliance training programs are being actively implemented across the entire NEC Group.

NEC also uses opportunities provided by new graduate recruit programs, programs specific to rank, and training upon promotion to management positions to impress upon its employees the importance of complying with the NEC Group Code of Conduct. Moreover, once a year, the Company holds the NEC Business Ethics Forum. In 2011, NEC President Nobuhiro Endo gave the keynote address at the eleventh NEC Business Ethics Forum, where he stressed the importance of compliance in the context of global business expansion under the theme of "Addressing Compliance and Global Business Expansion."

NEC is also striving to improve internal communications. A section of the NEC intranet is dedicated to the latest compliance issues. NEC has posted 150 realistic case studies of possible incidents on this intranet site titled "What Would You Do If You Were Involved?" (in Japanese only). This initiative continuously raises compliance awareness by familiarizing employees with case examples of ethical and legal issues that could arise during everyday work. In addition to disclosure on the intranet, NEC distributes booklets containing 150 case studies to new employees each year for training purposes. The booklets are also used as educational materials for training employees upon promotion to management posts.
At certain overseas NEC Group companies, the booklet is being used as a reference for internal training purposes. Every quarter, NEC prepares a compliance quiz that is posted on the NEC intranet. The compliance quiz is designed to increase employees’ familiarity with compliance issues by having them casually answer compliance-related quiz questions.
From 2012, NEC began distributing "Compliance News," a monthly internal e-mail newsletter covering topics related to risk and compliance both within and outside the company.

Disclosure of Information and Prevention of Incident Reoccurrence

From the standpoint of preventing the reoccurrence of incidents, NEC has developed materials that use charts and illustrations to easily explain past incidents of improper transactions and accounting practices within the NEC Group. These materials have been disclosed internally via e-mail and the intranet to make these incidents known to all NEC Group officers and employees, and raise their awareness of such incidents.

Addressing Global Business Expansion

As global business expansion proceeds, the enforcement of compliance at overseas business sites has become an ever more urgent priority. For this reason, NEC has helped to raise compliance awareness among employees of overseas NEC Group companies by conveying messages from top management, such as by distributing transcripts of the NEC president’s keynote address at the NEC Business Ethics Forum to overseas subsidiaries. Moreover, NEC has provided individual compliance guidance to personnel who will be stationed at overseas subsidiaries as senior executives. NEC strives to ensure that these personnel are well aware of warnings specific to the regions where they will be stationed.
In addition, NEC presents a list of examples of high-risk issues as regards compliance at meetings of presidents of overseas subsidiaries, with the view to preventing compliance breaches. At the meetings, countermeasures for each issue and other related topics are discussed.
In 2004, NEC established the NEC Group Code of Conduct for overseas consolidated subsidiaries. Through various measures, NEC has striven to rigorously enforce compliance at overseas Group companies.

From fiscal 2012, NEC began developing compliance systems at its five regional headquarters around the world, in order to further strengthen how it addresses compliance in step with global business expansion. For example, NEC has delegated internal audit, compliance and legal affairs functions to the regional headquarters after clarifying once again the job descriptions for each of these three functions. Moreover, NEC has clarified the system for escalating information to headquarters in Japan by developing escalation channels to be followed in the event of a compliance issue arising, at each regional headquarters.
Furthermore, given that regulations regarding bribery prevention and enforcement have been tightened in various countries, NEC established the Basic Rule on Anti-bribery (basic guidelines on prevention of bribery) in October 2011, with the view to developing and building systems to address this issue. NEC is also working to increase knowledge of this issue through implementing measures such as holding presentations.

Compliance Hotline (Whistle-blowing system for employees and business partners)

NEC believes that creating a positive working environment for all is important to enforcing compliance. Accordingly, we are raising employee awareness so that they can discuss any issues that may arise in the workplace with their superiors, colleagues, and people from related divisions. At the same time, the Corporate Auditing Bureau has established the Compliance Hotline to provide a system that is easy for all employees to consult in cases of known or suspected violations of the NEC Group Code of Conduct.
NEC has also established an additional contact point for the Compliance Hotline at a third-party institution in order to enhance convenience and to address a broader range of risks at an early stage. This contact point fields consultations and reports from not only NEC officers and employees, but also NEC Group companies and suppliers in Japan.

In fiscal 2012, the number of cases reported to the Compliance Hotline contact points reached 65. Also, to ensure that officers and employees know that the system is functioning effectively, we post on the NEC intranet examples of cases where consultations and reports with the system triggered fact-finding inquiries that led to the correction of problems. As in Japan, internal consultation and reporting systems have been set up at NEC Group companies overseas. Third-party consultation and reporting systems have also been established in North America, Australia, and Europe and have been made available to officers and employees of multiple overseas subsidiaries in these regions.

Survey on Corporate Ethics Initiatives

NEC Corporation conducts online surveys on an annual basis to gauge ethical awareness among officers and employees and to evaluate the status of information sharing on this important subject. The results are put to good use in developing and implementing business ethics policies.

According to the results of the survey conducted in fiscal 2012, a large number of respondents noted that compliance has become well entrenched within the company.
We disclose information to NEC Group officers and employees by posting some of the survey results on the NEC intranet.

Risk Management

Selecting Priority Risks and Countermeasures

Every year, the Internal Control Division identifies group-wide important risks, selected on the basis of risk assessments for each organization obtained through a questionnaire-based risk management survey and interviews, the risk management effectiveness evaluation by the Corporate Auditing Bureau, findings of the corporate auditors and accounting auditors, and other information. The Internal Control Division additionally considers perspectives including the need for countermeasures, the magnitude of impact on business continuity, and the impact on society.

From among group-wide important risks, NEC Corporation selects priority risks following deliberations by the Risk Control and Compliance Committee and the Executive Committee on risks deemed to require new countermeasures, including improvement of existing countermeasures, and on risks that may significantly impact the NEC Group's continuity. The division nominated by the Risk Control and Compliance Committee then takes the lead in devising countermeasures.

Risk Management Activities

NEC Corporation verifies the status of risk management in all divisions using the risk management survey. Specifically, (1) with respect to the risks that each division prioritized in a given fiscal year, we verify risk countermeasures and divisional self-evaluations of implementation status and (2) with respect to risk to be prioritized in the subsequent fiscal year, we confirm scheduled risk countermeasures, including those already implemented or begun.

The Internal Control Division regularly feeds back the survey results to various divisions, with the aim of sharing information on improving and enhancing risk management activities. The Division also interviews core divisions every six months to verify the progress and effectiveness of measures reported in the risk management survey.
Furthermore, the Risk Control and Compliance Committee receives quarterly reports on the status of examining specific priority risk countermeasures and progress of implementation from each division in charge. Through these reports, the committee supervises the group-wide implementation of risk management by verifying the implementation status of countermeasures, related improvements and remaining issues, schedules and other matters, and by issuing instructions as necessary on the direction of improvement measures.

NEC Corporation believes that one issue going forward is to continuously enhance the quality of risk management activities, which vary across internal divisions and its subsidiaries.
Through the annual risk management survey for each division at NEC Corporation and interviews with subsidiaries in and outside Japan, NEC Corporation will strive to gauge the extent to which risk management is an integral part of each division, while offering continuing support to divisions, including subsidiaries, chiefly by providing them with its extensive expertise. In this manner, NEC Corporation aims to bolster the entire group's risk management capabilities.

Participation in Activities of External Organizations

Business Ethics Research Center

NEC Corporation has been a member since the center was established in 1997. We participate in a variety of study groups and committees, where we strive to absorb knowledge of examples of the ethics activities of various companies, while introducing examples of NEC’s ethics activities.

Caux Round Table-Japan

NEC Corporation has been a member of this committee since it was established in 2000. At the round table, NEC exchanges information and collaborates in promoting the spread of CSR in Japan. In addition, these meetings help in proposing measures to promote CSR activities in NEC.