Introduction

I would like to begin this paper with an anecdote.

“Eight-year-old Jimmy comes home from school with a note from his teacher that says, ‘Jimmy stole a pencil from the student sitting next to him.’ Jimmy’s father is furious. He goes to great lengths to lecture Jimmy and let him know how upset and disappointed he is, and he grounds the boy for two weeks. ‘And just wait until your mother comes home!’ he tells the boy ominously. Finally he concludes, “Anyway, Jimmy, if you needed a pencil, why didn’t you just say something? Why didn’t you simply ask? You know very well that I can bring you dozens of pencils from work.” - The (Honest) Truth about Dishonesty (Dan Ariely, 2012)

Ariely uses this anecdote as an example to show how complex dishonesty, which everyone possesses as a human being, can be. However, here I would like to draw attention to the weakness in the normativeness of “things belonging to the company (the workplace is a part of this).” Compared with “things belonging to the company,” the “things belonging to the child next to you” have clear belongingness and is normative. In contrast, the concreteness of “things belonging to the company” is limited, and abstractness high. Even if people are strongly aware of students next to them in school or colleagues working with them in the workplace, they are generally not aware of the very existence of the school or workplace for the most part.

The low awareness in people’s regard to companies causes a peculiar difficulty in sudden company compliance issues. It must be said how more difficult of an issue it is to consistently make people conscious of the “things belonging to the company,” “corporate philosophy that the company believes in” and “company compliance” and adhere to them.

Of course, people have come up with many different ways to conquer this issue, and one of these methods is without a doubt law. This is where I would like you to try and consider some of the things that law can do for company compliance. The most perplexing problem should be given serious consideration at a later date.

What is company compliance?

What is company compliance? To clarify what this is, we need to first confirm the social significance of the company’s existence, because the relevance of company compliance in the relationship between people, companies and society must be clear.

So, why are companies meaningful to our society? I believe it is due to how they bring new wealth to our society, since without the creation of new wealth, our society will be forced into immiseration. The “commerciality of a company” is the act of creating profits and distributing it among members of the company, but this is none other than the company’s social existence being expressed as a rule in corporate law. People invest in companies to make personal profit, and companies respond to those expectations by creating profit and distributing them to people, who are investors. This is because companies are entities that utilize such people for business purposes.

Incidentally, it is inconceivable for a company’s profit-making activities to be detached from our society, as companies are based on the economic society. A company that is separated from our society would cease to exist, so to speak. In this very meaning, companies are members of society, thus naturally, they must also follow the expectations of society. This means, in other words, that companies must adhere to the social norms that we as a society consider important. In the end, company compliance simply refers to this.

Law and enforcing compliance

Everyone has different views on what is law. Even though it is a social norm, and many understand it as what you must and must not do. Naturally, that includes the state law along with the common law and autonomous codes. The so-called Hard Law and, of course, Soft Law are also covered. Law, in essence, is one kind of social norm that our society reveres.

Law requires people to undertake a set of actions such as “you must do this” and “you must not do this.” However even if law requires this, if people do not follow it, then it will be unable to elicit any effect. The usefulness and also enforcement of legal norms are essential. Only when law is effective does it become normative.

Criminal law is enforced by the state having considerable willingness to find noncompliance and requesting a verdict from a judicial court (prosecution). In comparison to this, civil law is enforced only when actions such as a claim for damages is filed in civil court. The state is involved with criminal and civil matters with variance in direct and indirect involvement, however effective enforcement is guaranteed by the state.

In comparison to this, the rules as well as the ideals and ethics of the company in company compliance become the target, so the content can vary greatly. In legal circumstances, there are also sections unrelated to company compliance which can be considered effective. For example, even if as a company they have still yet to acknowledge a crime – scandal, it is possible for criminal law to be enforced by the state; to go over the head of the company.

However, in terms of company compliance, enforcement carried out over the head of the company is not something entirely favorable, since a scandal that has not been acknowledged by the company is evidence that the internal control of the company is not functioning. Therefore, even in instances where a violation of the law has occurred, and a breach of criminal or civil affairs by the company has been discovered, enforcement via the state on the initiative of the company is preferred.

Then again, enforcement by the company is everything in terms of effective insurance of company compliance regarding company ideals and ethics outside of the law, and enforcement by the state is an area that in general cannot be expected. Company compliance, and perhaps this is the main feature of it, displays characteristics and individuality unique to each company. Companies should set up a suitable compliance guideline according to the environment they are in and the needs they have; it is truly something of extreme importance to a company’s strategies. Therefore, it is fair to say that building and maintaining a system to ensure effective enforcement in this area is the fundamental of compliance for a company.

Conclusion

When you remove the veil from a company, it consists of shareholders, creditors, employee, investors, and others and is a place to create self-interest for stakeholders and nothing else. The company itself is of no importance to the company, for stakeholders achieving their satisfaction is what is of true importance.

Naturally, company compliance functioning sufficiently along with enforcement is a merit to all stakeholders. If this is true, then realizing good company compliance is not simply dependent on building and maintaining an appropriate monitoring system. Rather it is essential that stakeholders in their various positions - shareholders, creditors, employees and managers - have active involvement in compliance. In the end, compliance is an issue for people, and it is unlikely for the law to have a major role in it.

Seiichi Ochiai
Business School Fellow, Graduate School of Law, Chuo University
Area of Specialization: Commercial Law, Consumer Law

The author was born in Tokyo in 1944.
He graduated from the University of Tokyo’s Faculty of Law in 1968, and worked as an assistant at the University of Tokyo and an assistant professor and professor at Seikei University before becoming a professor at the University of Tokyo’s Graduate School for Law and Politics and Faculty of Law in 1990.
In 2007, he worked as a professor at Chuo University’s Graduate School of Law and Business School.
He holds the following positions: board chairperson in the Japan Association of Private Law, Japan Law and Economics Association, Japanese Society of Insurance Society; president of the Quality of Life Council and committee chairperson of the Market Testing Management Committee. He is currently a fellow of Chuo University, Professor Emeritus of Tokyo University and president of the Compulsory Automobile Liability Insurance Council (financial services agency).
His recent interest has been in corporate governance. He is the sole author of An Outline of Corporate Law (Yuhikaku Publishing, 2010); Consumer Contract Law (Yuhikaku Publishing, 2001); The Issues and Development of Transport Law (Koubundou Publishers, 1994); The Basic Theory of Transport Law (Koubundou Publishers, 1979); and a coauthor to other books in addition to writing many research papers.