Prologue

Whenever I give a lecture on compliance to a Kao Group company, I start by asking the audience “why is compliance so important in our business operations?” Although no employee ever denies the importance of compliance, I also rarely get answers that are clear and precise. When I do get responses, they are usually along the vein of “illegal acts by the company are prohibited” and “[noncompliance means] the possibility of administrative sanctions, large fines, criminal penalties and loss of reputation.”

An almost universally known traffic rule is to “Stop on red.” However, when I ask the audience why it is important to stop on red, I again do not get a very clear response. Usually, the comments are “because I have been told to do so since my childhood” “it’s just the rule” or “it’s common knowledge.”

To train and enlighten those employees who stayed silent or provided the answers above is the most challenging, as it is necessary to change such persons’ perspective. My response to the question concerning the purpose of compliance is that it is ultimately for your own benefit. It allows you to work with peace of mind and security. As for the red light, traffic laws forbid crossing on red to maintain traffic safety and to avoid collisions. For this reason, “green is for go” and “red is for stop” and, as a result, we can cross the street or go through an intersection safely without worry. The reason why I use the analogy of a traffic signal is that traffic safety is something that is easy to relate to and is highly persuasive – with perpetrators and victims of traffic accidents telling very vivid stories of their painful experiences. Point 1: I urge you to think about the important of compliance by treating compliance as your own responsibility.

Compliance doesn’t have to be difficult. You do not have to memorize long and detailed legal provisions. Rather, you would be able to take the proper steps in 99% of situations just by understand why laws and rules exist and the purpose behind such laws and rules. Point 2: I urge you to understand the reason why laws and rules exist and the true spirit behind such laws and rules.

Driving to increase corporate value

Let’ go back to the traffic signal analogy. What if one day people decided to ignore traffic signals and started to enter intersections from every which direction. Not only would multiple traffic accidents occur, but it would cause a massive traffic jam. By following traffic signals, not only does it allow for safe and worry-free driving, but it also allows for smooth and more efficient transportation free from unnecessary traffic jams. In a corporate setting, this translates into efficiency in business operations and enhancement of corporate value. Point 3: Making clear and appropriate rules and compliance therewith helps increase corporate value by improving efficiency and by allowing the company to avoid reputational risks.

A well designed computer program can provide us the correct answer in an efficient manner, provided that we input the correct data. However, is it possible to develop a computer program that anticipates all situations?

One day I was driving over a bridge and entered the lane for on-coming traffic in order to pass a car that was in front of mine despite the fact that it was a no-passing zone. As a result, a police car drew up along my car and signaled for me to pull over. The policeman let me go without any ticket or penalty after I had explained the reason why I had passed the car. The reason that I gave was that the car in front of mine stopped suddenly. I had pulled into the lane for on-coming traffic as an emergency measure. Please remember the purpose behind traffic laws -- it is to make driving safe and to avoid accidents. As my action was in keeping with the purpose of traffic laws, the police officer made the reasonable determination that I should not be ticketed. Similarly, firemen were allowed to destroy houses near fires to prevent the spread thereof. Point 4: In order to comply with the spirit of laws and rules, in certain cases it may be necessary for you to think and make a reasonable judgment not to comply with operational laws and rules. About months ago it was reported that a driver was killed in a self-driving car. There are situations that are unexpected where a computer cannot respond appropriately. In such cases, it is necessary for a person to think and take action.

Cultivate corporate culture for growth

I attended a global compliance and ethics summit that was held this spring in New York City sponsored by a US think tank specializing in corporate ethics.[2] Most of all the speakers stressed the importance of both top down and bottom up approaches: a strong commitment by top executives and appropriate educational and training programs relating to the code of conduct for all employees and implementation and operation of compliance hotlines for receiving reports. You may have heard of the Broken Windows Theory, the theory that preventing small crimes helps to create an atmosphere of law and order, thereby deterring more serious crimes. A famous example of this is when Professor George L. Kelling of Rutgers University proposed removing all graffiti in the New York subway to deter violent crimes. During a five year period along with removal of graffiti, the rate of increase of violent crimes slowed and eventually reversed. In our compliance promotion activities, a top management with a strong commitment should be responsible to establish and maintain a compliance culture in the company and to establish an environment where each employee can participate in compliance activities. It is the most efficient scenario that all employees shall be responsible for improving compliance culture.

Establishment of a rule and system, such as a code of conduct and compliance hotlines, are effective ways of compliance promotion. However, I believe what is most important is to cultivate and maintain a good work environment, which is possible only when there is motivation, a sustainable corporate culture, good results and appropriate salary and benefits. Point 5: In other words, a corporate culture where each employee develops and prospers in line with the company’s growth is most important for compliance promotion.

Verification and PDCA cycle (Plan Do Check Analysis)

Point 6. As the effect of compliance activities cannot be measured using numbers, it is important that some method of periodically evaluating the effect of compliance activities is adopted. It is necessary for our evaluation to receive feedback of our compliance promotion activities from top management (top down) and from our employees (bottom up). Specifically, what I mean is that there needs to be 1) reporting on compliance promotion activities to top management on a regular basis and 2) feedback from employees on compliance promotion activities through the use of questionnaires. At Kao, compliance related topics are reported annually to Kao’s Board of Directors, including information on relevant social trends, analysis of inquiries and reports to the hotlines, update on educational activities, progress on the annual plan, disciplinary actions taken and violations of laws and regulations. The Board of Directors provides feedback regarding any gaps between their expectations and the current status of Kao’s compliance related activities. Kao also receives feedback from employees through periodical questionnaires and roundtable discussions. In addition to those self-evaluations, we also go through the evaluation process for the annual World's Most Ethical Companies award. We carefully respond to the questions in the questionnaires and analyze the feedback received from the Ethisphere Institute, the think tank responsible for the award. Through this process of evaluation, feedback and subsequent improvement, Kao is able to remain innovative in its compliance activities.

There are five categories of questions in the World's Most Ethical Companies’ questionnaire that span a total of 94 pages. The categories are: Ethics and Compliance Program; Corporate Citizenship and Responsibility; Culture of Ethics; Governance; and Leadership Innovation and Reputation. A detailed description of topics covered that I have taken directly from the questionnaire, “2016 Ethics Quotient^TM Survey” is as follows:

It is very difficult and time consuming for us to answer the question because we have to ‘translate’ the questions from a US corporate and cultural perspective to a Japanese one. The questions cover a variety angles in the compliance area from the level of contribution and commitment by top management to disclosure policy, system, procedure, etc. As feedback, we receive comparisons between the status of our compliance activities and the average of all award winning companies in each category. We are currently waiting for feedback from the Ethisphere Institute regarding our score in each category. Points to address the following year are the items that we could not answer “yes,” and, as a result, received a lower evaluation or score.[3]

I would like to share with you an example of the type of question we are asked and guidance given by the 2016 Ethics Quotient^TM Survey.

Closing

　Lastly, please allow me to introduce to you the Value of “Integrity” as described in “The Kao Way” our corporate philosophy.

This value originates from the message left by Kao’s founder on his deathbed regarding how top management should behave.