Risk Management - Hon Hai Technology Group

Hon Hai Precision Industry Co., Ltd. (“Hon Hai”) places considerable emphasis on risk management and corporate governance, actively adhering to the relevant requirements outlined in the “Risk Management Best-Practice Principles for Taiwan Stock Exchange and Taipei Exchange listed Companies” and the “Corporate Governance Evaluation System” by the Taiwan Stock Exchange. Hon Hai has established a comprehensive corporate risk management framework, developed and implemented risk management systems, ensuring that business operations comply with relevant legal requirements. There are corresponding measures in place to effectively manage and respond to risks, protect investors’ interests and maintain market stability. Hon Hai is committed to continuously improving risk management and corporate governance to ensure sustainability and long-term development of the company.

Risk Management Policy

In August 2024, Hon Hai’s Board of Directors approved the Group’s “Risk Management Policy,” which aims to further enhance Hon Hai’s capability in managing and responding to risks. The approval of this policy reflects Hon Hai’s emphasis on risk management and underscores its commitment to risk management.
The “Risk Management Policy” clearly defines the following:

· Purpose and Objectives of Risk Management

It provides clear direction and guidance for risk management at Hon Hai, ensuring effectiveness and alignment of risk management activities with Hon Hai’s strategy and operational objectives.

· Sources and categories of risks

Hon Hai categorizes risk events into the following six (6) segments:

Strategic Risk (S)

This refers to risks arising from changes in business strategies /plans, their implementation, or alterations in the external business environment, which may impact Hon Hai’s long-term objectives.

Operating Risk (O)

This is defined as risks caused by Hon Hai’s daily operations, or other risks that may affect Hon Hai’s efficiency, productivity, reputation, etc., including information risk.

Human Resources Risk (H)

This involves various potential threats and challenges related to human resource management within Hon Hai.

Compliance Risk (C)

This pertains to risks resulting from changes in law and regulations, non-compliance with laws, integrity, and regulations or internal policies and procedures, as well as any legal actions/disputes.

Financial Risk (F)

This refers to risks that arise from transactions, financial activities, or the use of financial instruments or other risks that affect Hon Hai’s finances.

Emerging Risks (E)

This refers to risks that arise due to changes in society, science and technology, politics and economics, or the natural environment, which have significant uncertainty and potential impact. This includes environmental and sustainability risks, climate change or epidemic risks and the like.

· Organizational Structure of Risk Management

Define the allocation of responsibilities for risk management, including the roles and duties of all levels of management and relevant departments in risk management.

· Risk Management Procedure

Establish a systematic procedure to ensure that Hon Hai can continuously and proactively identify and manage the risks that it faces.

· Risk Management Activities:

accordance with the organization-formulated strategies and procedures, validate the effectiveness of the risk management activities, and achieve the objectives of risk management.

Through the “Risk Management Policy”, Hon Hai has demonstrated its commitment to establishing a comprehensive and effective risk management system, strengthening/enhancing its capabilities in the assessing and identifying risks. It is used to formulate management strategies for different types of risks, establish effective supervision and control measures, and ensure the effective implementation of risk management strategies. Hon Hai also emphasizes training in risk management, advocates a risk management culture, and enhances the awareness and capabilities of all employees regarding risk management.

Organizational Structure of Risk Management

Board of Directors

As the highest governance unit for risk management, the Board of Directors aims at complying with laws and regulations, promoting and implementing overall corporate risk management. It ensures a clear understanding of the risks faced by operations, guarantees the effectiveness of risk management, and bears the ultimate responsibility for risk management.

Audit and Risk Committee

The Audit and Risk Committee is responsible for handling issues related to risk control and supervising overall implementation, coordinating, and operations. Members of the Audit and Risk Committee are appointed by the Board of Directors from among the directors. The membership, number, term, authority, and rules of procedure of the Audit and Risk Committee are spelled out in Hon Hai’s “Audit and Risk Committee Charter.”

Risk Management Promotion and Enforcement Unit

The Risk Management Promotion and Enforcement Unit includes the Risk Management Advisory Committee, representatives of the Risk Management Enforcement Team, and the Central Risk Management (“CRM”). The CRM is responsible for coordinating the company’s risk management affairs, assisting the Risk Management Advisory Committee, the Risk Management Enforcement Team, and the Daily Operation Team for Risk Management, as well as coordinating and managing risk management matters within the company.

Daily Operation Team for Risk Management

The Daily Operation Team for Risk Management is responsible for managing daily risks.

Organizational Structure of Risk Management

Risk Management Procedures

Hon Hai’s Risk Management Procedures include five (5) major processes: Risk Identification, Risk Analysis, Risk Evaluation, Risk Response, and Risk Oversight and Examination.

Hon Hai categorizes risk events into six (6) segments, including Strategic Risk, Operational Risks (including information Risk), Human Resources Risk, Compliance Risk, Financial Risk, and Emerging Risk (including environmental and sustainability risks, climate change or epidemic risks).
The analysis and measurement standards for risk incidents are divided into two segments: “degree of impact” and “probability of occurrence”. Hon Hai proposes appropriate quantitative or qualitative metrics based on its risk features as the basis for risk analysis.

Risk Identification, Analysis and Evaluation

In 2024, CRM collected risk incidents through methods such as risk questionnaires and interviews with senior executives from thirty-eight (38) departments. After taken into account the probability of occurrence and degree of impact of these incidents, two (2) significant risks were identified – Geopolitical Risks and Overseas Expansion and Transfer. The potential significant impacts on Hon Hai were analyzed, and risk response measures were provided. These significant risks shall continuously be reported to CRM monthly, with corresponding records kept and regular reviews conducted by the Audit and Risk Committee and the Board of Directors.

Risk Management Operation and Enforcement Status

Hon Hai proactively promotes the implementation of risk management policies. The main operations and enforcement status in 2024 are as follows:

· Hon Hai has established a primary-level organization, set up functional committees, and refined the top-level framework documents for risk management.

i. Renaming the “Audit Committee” to the “Audit and Risk Committee”

This is referenced in Article 14 of the “Risk Management Best-Practice Principles for Taiwan Stock Exchange and Taipei Exchange listed Companies,” risk management is formally included within the committee’s scope of authority.

ii. Refining the Organization Structure of Hon Hai Risk Management

Drawing from industry practices and relevant international standards (such as ISO 31000, etc.,), Hon Hai clearly defines the roles and duties of each risk management level and corresponding departments. Meanwhile, Hon Hai also establishes a central first-level organization for comprehensive management.

iii. Top-level framework document reviewed and approved by the Board of Directors on August 14, 2024

To implement Hon Hai’s direction, guidance, and methods for risk management, ensure the effectiveness and alignment of risk management activities with the company’s strategy and operational objectives, and guarantee continuous and proactive identification and management of corporate risks, framework documents such as the “Risk Management Policy” have been established.

· Hon Hai implements group risk identification and response, reports the enforcement status of risk management to the Audit and Risk Committee and the Board of Directors.

i. Conduct risk interviews with the heads of central management functions, product business groups, and independent business divisions of the company, introduce risk identification and assessment methods, and understand the current risk management measures and their operational status.

ii. Report the annual operation status of risk management to the Audit and Risk Committee and the Board of Directors on November 14, 2024, including identified significant risks.

· Hon Hai promotes risk management and advocates a risk culture, having conducted multiple risk management educational trainings

i. April and May 2024: Implement basic concept training courses on risk management for all units, covering substantive topics from the “Risk Management Best-Practice Principles for Taiwan Stock Exchange and Taipei Exchange listed Companies”, provide an introduction to ISO 31000 standards and industry practices.

ii. June 2024: Conduct trainings for colleagues in Financial and Accounting Departments on Hon Hai’s risk management project, covering basic concepts of risk management, substantive topics from the “Risk Management Best-Practice Principles for Taiwan Stock Exchange and Taipei Exchange listed Companies” and self-assessment requirements for risk management, thereby promoting the awareness of risk management among the trainees.

iii. August to October 2024: Provide risk management training to representatives of the Risk Management Enforcement Team and the Risk Management Advisory Committee. The training contents include the Company’s “Risk Management Policy” and “Risk Management Procedures” framework, supply-chain sustainability risks and resilience challenges, as well as sharing of other practical experiences in risk management.

In summary, Hon Hai conducted in excess of five (5) sessions of risk management training in 2024, with more than 200 participants and a total of more than twenty (20) hours of training. It is particularly noteworthy that some department heads attended the training themselves and proactively requested to expand the scope of training to include more colleagues within their departments. This highlights Hon Hai’s strong commitment to risk management and provides strong support for the company’s sustainable development and the effectiveness of its risk management activities.

· Hon Hai’s Sustainability Development Team will continue to focus on responding to and managing climate change, advancing issues related to the environment, society and corporate governance through the ESG framework. This will strengthen Hon Hai’s efforts in mitigating the impacts of climate change and adaptation strategies.