Many Japanese companies lost their integrity in the bubble economy of the late 1980s. “The end justifies the means” had become the order of the day, and in increasing numbers of companies the traditions of Japanese-style management, with its stress on the management process, were undermined.
The term “business ethics” did not gain currency in Japan until after the bubble burst. In 1991 the Federation of Economic Organizations of Japan (Keidanren) established its Charter for Good Corporate Behavior and strongly appealed to its member companies to respect business ethics. But the early 1990s saw the revelation of unlawful practices involving securities companies, including the Big Four—Nomura, Daiwa, Yamaichi, and Nikko—while banks and their borrower companies drew tough condemnation for having managed irresponsibly. In 1996 Keidanren revised the charter and issued a guidebook containing detailed instructions.
In 1997, however, further scandals came to light. A number of Keidan- ren member companies were found to have given payoffs to corporate racketeers in violation of Japan’s Commercial Code. These developments discredited Keidanren as the leader in business ethics in Japan.
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Antibribery Initiatives of
Japanese Companies: Changes in
Legislation and Corporate Efforts
Since then, several business organizations have played important roles in promoting better business ethics. The Kansai Economic Federation took over from Keidanren in conducting full-fledged discussions on business ethics. It launched the Business and Society Committee in 1997, and in its final report, in 1999, it urged Japanese companies to build management systems for complying with laws and ordinances relating to ethics.1
In 1997 the Business Ethics Research Center (BERC) was established, with the cooperation of the Japan Society for the Study of Business Ethics, as an independent nonprofit organization dedicated to promoting ethical business practices. By the end of 2002, 53 companies were affiliated with the center. BERC serves as a vehicle for the exchange of information and strategies among corporate ethicists through educational activities and resource assistance.
The Corporate Governance Forum of Japan, established in 1994, has played a leading role in raising awareness of corporate governance issues.
After years of discussion among its members—including top managers of leading Japanese corporations, scholars, and lawyers—in 1998 the forum published “Corporate Governance Principles,” which included specific proposals for achieving good corporate governance.
Also noticeable is a rising tide of shareholder activism, making shareholder relations a subject of increasing concern among boards of directors. The shareholder profile of Japanese companies has been changing: as cross-holding of shares among Japanese companies has declined, foreign investors have increased their share of company stocks, and many have been active in proposing corporate governance reforms to management. The 1995 amendment to the Commercial Code made it easier for shareholders to file a lawsuit against directors of corporations, requiring a payment of only 8,200 yen, or US$63, to go to court. Since then the number of suits filed by shareholders has grown. Some lawsuits implicate the directors of several general con- struction companies in bribery scandals; others accuse major securities companies of making illicit payments to racketeers. Among the com- panies surveyed for this study, directors of Kobe Steel and Sumitomo Corporation have faced litigation.
Recent legal judgments have also spurred concern among company directors about corporate governance. One such judgment, in September 2000, shocked directors across the nation: the court ordered the directors of Daiwa Bank to pay 82.9 billion yen in compensation to shareholders.
The court found that the directors had not exercised “due care” in that they had failed to prevent one of their employees from losing huge sums of money in fraudulent trading. This case triggered similar lawsuits focusing on directors’ lack of due care. More often, shareholders have
won court judgments that compensated them for losses or have reached out-of-court settlements in their favor. In several cases shareholders have induced companies to pledge to establish a compliance system in order to prevent a recurrence of irregularity.
Shareholders’ growing concern for socially responsible investing (SRI) is another trend with implications for corporate governance.
Recently, IntegreX, Inc., an institution dedicated to evaluating SRI, sur- veyed all 3,500 listed companies as to the status of their efforts in busi- ness ethics and compliance. A database of the survey findings will be released soon. There is little doubt that this type of study and the result- ing publications will further encourage individual companies to tackle compliance issues.
Meanwhile, the Japanese government is making efforts to promote compliance and ethics efforts. First, in 1999 the Financial Services Agency started undertaking comprehensive financial inspections, tar- geting financial institutions. Financial institutions are subject to strict inspections in regard to their compliance status, and if they fail to sat- isfy the compliance requirements, they may be ordered to suspend operations. The authorities have reduced the inspection burden for those financial institutions in which internal controls are functioning adequately.
Second, there is a new trend in the government not only to oblige com- panies to observe laws and ordinances but also require them to build a framework to observe the laws. Discussions on compliance started in 2001 in the Social Policy Council, an advisory body to the government, and similar discussions have begun in the Environmental Standards Division and the Product Safety Division of the Ministry of Economy, Trade, and Industry.
Third, a cabinet meeting in December 2000 adopted the Outline of Administrative Reform, which obliges companies to build a framework for assuming responsibility for their own acts, for the purpose of ensuring people’s safety and a fair society. This is explicitly stated as an issue that needs to be tackled simultaneously with the promotion of regulatory reform. Companies are also required to disclose information relating to such activities.
Fourth, attempts are under way to revise the country’s Anti-Monopoly Law so as to enhance the authority of the Fair Trade Commission of Japan (JFTC). Unlike the United States, with its Federal Sentencing Guidelines, and the United Kingdom, which has the Competition Act of 1998, Japan has no governmental provisions to reduce penalties for companies that have compliance systems. The proposed revisions would empower the JFTC to take account of a company’s anticorruption systems when decid- ing on penalties for breaking the law.