History of Compliance

Compliance is now publicly known. Almost all companies, and even research institutions, universities, government offices and local governments implement compliance programs, and bookstores are crammed with a number of books describing compliance. When did people start to talk about compliance in Japan? I once worked at the Legal Affairs Division of Toshiba, and there I witnessed the so-called Toshiba-Kongsberg scandal. Very few people in the present day know CoCom (Coordinating Committee for Multilateral Export Controls). In 1987 when the scandal happened, the U.S. and the Soviet Union fought in the Cold War. Western countries entered into an agreement in CoCom, an international committee, not to export military technologies and strategic materials to the Communist bloc, which was overseen by each of such countries in accordance with each country’s export control-related laws and regulations (in Japan, Foreign Exchange Control Law and Export Trade Control Ordinance). However, Toshiba Machine Co., Ltd., a subsidiary, violated the said agreement, exporting an extraordinarily outstanding machine tool which contributed to lowering the screw noise of submarines and technological information related to it to the Soviet Union. As a result, Toshiba received severe criticisms and bashing not only in Japan but also in the U.S. and was on the verge of going out of business.

Therefore, for the purpose of quelling the anger of the U.S. who enacted even a law to punish Toshiba, a compliance program was established and introduced. I was involved in this and sent to Munich in order to investigate the compliance program created by Siemens, a company which committed a similar error in the past. Anyway, although this compliance program was related only to export controls, a considerably robust compliance program was established in Toshiba. Although I have not made any precise confirmation, the reason why I mentioned this scandal here is that I believe this was probably the first compliance program instituted in Japan.

Evolution of Compliance

Afterward, compliance programs spread to other companies and expanded its scope, including many other juridical fields such as Antimonopoly Act in addition to the field of export controls. As mentioned above, each program was established in individual juridical fields, and comprehensive rules such as code of conduct which integrated such programs were gradually enacted, building up the present form of compliance.

Here, compliance certainly corresponds to conformity with laws and regulations. This means that what follow the phrase “comply with” are predominantly words associated with the law including industry laws and administrative laws. However, the concept related to this has varied or expanded with the times, and currently, it is considered that social, moral and ethical standards should also come after the phrase “comply with.” For example, so-called staged scandals hardly infringe any law. In 2011, I served as a member of the independent committee for the scandal of a scripted e-mail at Kyushu Electric Power Company. This is the case where one of the employees of Kyushu Electric Power sent an e-mail to other employees to encourage them to agree on a restart of the Genkai Nuclear Power Plant in the public hearing about the propriety, held by the Ministry of Economy, Trade and Industry and the Nuclear and Industrial Safety Agency. Although this scandal cannot be regarded as a contravention of the law, it is one of the typical scandals that are socially unacceptable. This made Kyushu Electric Power institute a compliance system which encompasses even such unacceptable scandals.

Competition with Concepts of CSR and Sustainability

In a narrow sense, compliance just means the conformity with law, but in a broad sense, it can be said to mean the observance of social, moral and ethical standards. However, when it comes to this perspective, some more points of relation or competition with other concepts further come to my mind. They are so-called CSR (Corporate Social Responsibility) and sustainability. These concepts do not have any clear and universal definition. CSR can be considered to indicate how much a company can operate and develop its corporate activities while contributing to all stakeholders and even their society. Sustainability can mean corporate activities considering the so-called triple bottom lines (economy, environment and society) under the broad themes including CSR, environmental conservation, and poverty eradication

Here let me refocus on the concept of compliance. In general, the answer to a question whether the concept of compliance includes even CSR and sustainability seems unclear at this point. However, when factors and objectives of enhancement of enterprise value, the subject of the research supported by Grants-in-aid for Scientific Research (JSPS KAKENHI 15K03220) that we are currently working on, are added as a new approach to compliance, it seems that part of a perspective which enables us to associate compliance closer with CSR and sustainability can be visualized.

To Compliance which Enhances Enterprise Value

The necessity and importance of the so-called conventional compliance whose objective is to conform with law have never changed; however, mere strict compliance may just emphasize that company members got daunted, may make compliance extreme, ceremonial, or irrelevant, threatening even achievement of the original objective to conform with law, and may impede proper functions of compliance in scandals where a whole company is involved or which are caused because company management is going out of control. Under such circumstances, I wonder whether we can provide more positive meaning for compliance. That is the factor and the objective to enhance enterprise value. I believe, of course, that debasement of enterprise value can be prevented and enterprise value can be enhanced, in some cases, through improvement of reputations just by strictly preventing so-called corporate scandals as well as stringently and appropriately taking actions to scandals that have happened. However, if fully satisfied with such approaches, we cannot go forward from the idea of conventional compliance. In addition to preventing the debasement of enterprise value, it is essential to aim to positively enhance enterprise value.

What are Specific Compliances for Enterprise Value Enhancement?

One is to increase incentives for compliance by positively treating stakeholders. What is the most important is how companies treat their employees. It is vital to improve the working environment where employees work on compliance of their own accord by respecting each employee (including part-time workers in some types of industry) as equal human beings, keeping their diversity (such as race, gender, beliefs, age and nationality) in mind, focusing on the importance of communication and work-life balance. In services, actions such as installation of screen doors at station platforms and assistance for physically handicapped people in getting on trains, are specific examples of contribution that lead to high reputations from society.

There are also issues associated with the environment, labor and poverty from the perspective of social contributions of corporate activities, although it is not related directly to stakeholders. In relation to the environment, it is not only important to send energy-saving or resource-saving products to the market. It is more meaningful to reduce the companies’ total burden and how it affects the global environment. It is also essential not to accept products that are made and distributed under harsh labor conditions (such as late-night overtime and child labor) in developing countries. Promoting the so-called International Fair Trade, aiming at better conditions and independence of manufacturers in vulnerable developing countries by continuously purchasing raw materials and products at reasonable prices from such countries, will also contribute to long-term enhancement of enterprise value.

As mentioned above, of course, these, especially the latter that are actions for environment, labor and poverty, may be regarded as the concepts of CSR and sustainability themselves. At the same time, compliance for enterprise value enhancement seems to be outlined by considering the foregoing as one of the compliances in a broad sense.