Key impacts, risks and opportunities
HARMAN’s corporate responsibility team has identified certain environmental aspects and corresponding impacts as being most material to the company’s strategic focus and reporting.
These impacts include natural resource usage, air emissions, water usage and solid waste generation.
Risks and opportunities
HARMAN uses a Risk Framework to prioritize risks and opportunities:
Step 1 – Risk inventory
The Executive Committee (EC) conducts an annual risk inventory, typically at the first EC meeting in the new fiscal year. This inventory includes risks that link to climate change.
Step 2 – Risk assessment
In conjunction with the annual risk inventory, the EC also assesses each risk in terms of its potential financial impact to the organization as a whole, as well as the likelihood of the risk to occur. Risks are ranked based on this review, and actions, if any, are prioritized accordingly. These assessments are reviewed periodically over the course of the year to determine whether the risk ranking needs to be updated in light of current conditions.
Step 3 – Risk response
The EC identifies the appropriate responses to the risk. Typically, the goals and objectives that the EC establishes for the fiscal year are intended to address the risks that were identified during the risk assessment.
Step 4 – Risk control
The EC determines how to best monitor the risks (e.g., by reviewing key performance indicators).
Although most components essential to our business are available from multiple suppliers, a number of components are currently obtained from limited sources. We use rare earth minerals in our products, specifically rare earth neodymium magnets. We also use externally sourced microchips in many of our products. In addition, several independent suppliers manufacture loudspeakers and electronic products for us. The loss of any one of these suppliers could have a material adverse impact on our consolidated results of operations or consolidated financial condition.
Many of our suppliers have in the past, and could in the future, decrease their manufacturing capacity and inventory levels. If these steps are taken by our suppliers, it could make us more vulnerable to disruptions in the supply chain.
In the near term, an increase in our demand for parts may place an undue strain on our suppliers. Additionally, the supply of raw materials including, without limitation: petroleum; copper; steel; aluminum; synthetic resins; rare metals and rare earth minerals, such as neodymium used in the production of loudspeakers, has been and could continue to be significantly constrained. This is likely to result in continued elevated price levels.
Furthermore, the Dodd-Frank Wall Street Reform and Consumer Protection Act included disclosure requirements regarding the use of “conflict” minerals mined from the Democratic Republic of Congo and adjoining countries (DRC) and procedures regarding a manufacturer’s efforts to prevent the sourcing of such conflict minerals. These rules could limit the number of suppliers who can provide us officially designated DRC “conflict-free” components and parts, and we may not be able to obtain DRC conflict-free products or supplies in sufficient quantities or at competitive prices for our operations. We may also face challenges with our customers and suppliers if we are unable to sufficiently verify that the metals used in our products are conflict-free. As a result, we may not be able to obtain the materials necessary to manufacture our products, which could force us to cease production or search for alternative supply sources, possibly at a higher cost. Such disruptions may have a material adverse effect on our business, financial condition, results of operations and cash flows.
To that end, the company seeks opportunities to mitigate such risk. For example, HARMAN acquired certain IP assets from Sentient Magnetics, Inc., an Audera Acoustics company, including the patented SAMdriver™ technology, which utilizes electromagnets to power speakers. SAMdriver is an audio transducer technology that replaces permanent neodymium and ferrite magnets within an audio speaker with a fixed magnetizing coil.
People as our greatest competitive advantage
HARMAN’s success largely depends on the performance of our management team and other key employees. We must be able to attract and retain talented, highly qualified leaders to protect our future operations. In addition, we must effectively provide for the succession of senior management, including our chief executive officer by following a disciplined, ongoing succession planning process.
HARMAN utilizes an Enterprise Risk Management (ERM) process to identify and evaluate risks to the company at an enterprise-wide level. HARMAN’s continuous ERM framework includes six interrelated components: gathering information; identifying and assessing; assigning ownership; prioritizing; responding with risk management; and monitoring and reporting. The process includes a review of strategic, operational, people, financial, reputational, regulatory/external and asset-level risks.
A number of risks do have a link to climate change, namely: innovation/disruptive technology, and commodity and supplier risk management. HARMAN conducts, at a minimum, one annual review to assess the increase or decrease of risks to the company. For risks that become greater concerns, HARMAN conducts reviews more frequently.