Has Japan’s corporate culture not died out?

Small boats floating in the rough seas of globalization—perhaps this is an accurate description of the vast majority of companies in Japan today. If you are unlucky, a small mistake in steering the vessel might cause it to be hit by a huge wave and sink to the bottom of the ocean. In order to avoid being shipwrecked, the boat needs to be equipped with the latest technology (global standards). However, the old captain is not familiar with the new equipment and shouts, “We don’t need new equipment to steer a boat because the equipment we have is enough for us!” Japanese companies are now pursuing a variety of measures in order to change such attitudes.

One of the key concepts here is “improving corporate value.” The critical task for shareholders is to increase the amount of corporate value of companies. If we take an example of external directors (or external auditors), it is easy to imagine that their appointment would lead to the increase of corporate value, however, empirical research has shown that appointing full-time external directors does not immediately lead to increase corporate value and that corporate value increases only under certain circumstances. While the reasons for this have yet to be debated, the traditional route to promotion at Japanese companies has been for the employees to become directors (executives). If the traditional Japanese corporate culture still pervades in which the board of directors is controlled by promoted former employees who have curried favor with the president, it would be possible to explain the results of the above empirical research by adding “Japanese corporate culture” to the variables.

Various measures aimed at improving corporate value

On the other hand, the latest trend is to add regulation through so-called “soft law,” instead of relying solely on corporate law. The Corporate Governance Code, which has just been published, was formulated by Japan’s Financial Services Agency and the Tokyo Stock Exchange (TSE) and targets listed companies. The aim is to face squarely up to the fact that productivity is lower at Japanese companies than European and American companies, and to strengthen corporate governance in order to increase their medium to long-term profitability and productivity. The content of the Corporate Governance Code is very wide-ranging, but the items that have been commonly discussed in the newspapers and other media are appointment of several independent external directors and strengthening of disclosures about “policy shareholdings” of stock held for non-investment purposes, including the goal of maintaining a trading relationship (so-called “cross-holdings”). In Japan, there was a tradition of listed companies possessing cross-holdings of shares and corporate culture of using cross-holdings to establish secure status of management teams at each other’s companies. However, from the perspective of ordinary shareholders and investors, such a corporate culture does not contribute to corporate efficiency and does not help to increase the corporate value. The aim of the Corporate Governance Code is to carry out proper assessment and monitoring of managers as well to eliminate so-called cross-holdings, which are economically irrational, through implementation of the above policies. The strategy is to globalize Japanese companies through efficient operation.

The “Japanese Version of the Stewardship Code” is another innovation. Set out by the Financial Services Agency, the Japanese Version of the Stewardship Code is a code of conduct for institutional investors that calls for the promotion of sustainable growth at companies through dialog between institutional investors and the companies being invested in, at which corporate reforms are expected to go forward as a result. By diversifying channels for communicating to the companies, it is likely that the Code will have the effect of promoting the increase of corporate value.

These two policies encourage a transformation in Japan’s traditional corporate culture and promote further improvements in corporate value.

Globalization forces changes in corporate culture

In a global perspective, Japanese companies have been hit by even bigger waves. There are numerous important regulations that need to be adhered to in addition to Japanese law, including the competition laws of each country, anti-corruption laws (such as the FCPA in the United States and the Bribery Act in the United Kingdom), and the Privacy Act in the EU. For example, in the field of competition law (Anti-Trust law), cartels are prohibited and the sanctions are extremely severe. In the EU, cartels operated in relation to a company’s products can result in fines of a fixed percentage of the EU sales of the product in question, up to 10% of the company’s total global turnover (turnover is not restricted to the product in question). Fines handed out in the EU in fiscal 2014 totaled EUR 85.8 million, 5% of which were handed to Japanese companies. In the United States, in addition to fines being levied, the involved parties can be sent to prison. Recently, a succession of cartels has been uncovered in relation to automotive parts, and more than 50 people are currently being prosecuted. It is no longer unusual for the officers of Japanese companies involved in a cartel to go to the United States specifically for the purpose of being sent to jail. What’s more, in the United States public punishments for cartels are later followed by huge class action lawsuits filed by consumers who have suffered damages. The waste of time, labor cost and expenses in such cases are impossible to measure. Japanese companies were slow to react in the past. This is the reason for Japanese companies to have received almost 30% of the total EUR 1.85 billion fines handed out in the EU in FY 2012. However, a lot of Japanese companies have now realized the importance of protection against cartels. What’s more, as is clear from the dramatic decrease in the size of fines levied on Japanese companies in the EU over the past two years, receiving fines in various overseas countries has led Japanese companies closer to appropriate conducts which adopted globally. This is a good example of how observing compliance has led to a reduction in damage to the corporate value. In addition to refusing any involvement in cartels, it is particularly effective to make a leniency application for fines. However, in order to achieve this, well-organized behavior is required at the company. Unless the headquarters and overseas subsidiaries (affiliated companies) work in tandem there is a risk of huge losses. This field is referred to as Antitrust compliance, but it is not something that can be handled by the Japanese headquarters alone. It is also necessary to carry out investigations under the local competition law at the locations of overseas subsidiaries. The Japanese headquarters would work closely with its overseas subsidiaries. By globalizing and standardizing these types of collaborative relationships, it becomes possible to handle not only the field of competition law but also the various regulations in each country. The company’s value will increase as a result.

How to change corporate culture in more creative ways

In some ways, the waves of globalization are a test for Japanese companies. If they can pass this test, their corporate value will increase. However, in any case the Key is personal of the companies. It is not just the employees involved in cartels or employees who hand over the bribes who are the problem. The attitude and mindset of executives regarding compliance as a whole play a big role in identifying the type of organization and its attitude towards compliance. Executives have the ability to make their company’s corporate culture more global, raise awareness among management, and increase corporate value. We can see that the diligent characteristic of the Japanese people naturally provides a foundation for developing human resources with strong awareness for compliance. I have high hopes that these companies that attract and develop these individuals with strong potential capabilities will most certainly become successful key players in the global society.

Shinichiro Abe
Specially-Appointed Professor, Chuo Law School, Chuo University
Areas of Specialization: Corporate Reorganization and Reconstruction, Competition Law, M&A, and Legal Disputes

Professor Abe was born in 1964 in Miyagi Prefecture. In 1989, he received an LL.M in 1989 from the Graduate School of Law, Waseda University. In 2001, he received an LL.M from the University of California, Los Angeles. Since 2007, he has been a partner at Baker & McKenzie, the world’s largest law firm, and since 2009 he has been a Specially-Appointed Professor at Chuo Law School. He is a member of the Grants-in-Aid for Scientific Research program led by Professor Shinichiro Toyama of the Chuo Law School on the theme of “improving corporate value through compliance.” Recent publications include: Practical Q&A in Corporate Law [Kigyo Homu No Jitsumu Q&A] (compilation, Sankyo Hoki); Debate Series, Company Act 4 [Ronten Taikei Kaishaho 4] (co-author, Daiichi Hoki); and An Overview of the Bankruptcy Law of the United States [Wakariyasui Amerika Renpo Tosanho] (co-author, Shojihomu). He contributed an essay “Creditor Reorganization Procedure Strategy” [Kigyo Saiken Ni Okeru Saikensha No Tachiba Karano Taiou] in Final Results of Reorganization [Kigyo Saiken No Kyukyoku Ni Aru Mono] (edited by Tadashi Shimizu; Shoji Homu). He has also written numerous essays in English.