Compliance has been called for for a long time now. However, many Japanese corporations have been fed up with compliance. They seem to feel that compliance involves tedious procedures which take away from the core business activities. Indeed, the true intention of corporations may be “we want to concentrate solely on increasing profit without worrying about compliance.” However, this is a misunderstanding.

Ideologies of compliance and modern law

Compliance is a catchphrase which was first taken up in the U.S. in the late 20th century. In a broad context, compliance is the act of obeying. As such, in addition to legal compliance by corporations, the term of compliance can also encompass patient obedience to doctor’s orders on medication and the elasticity shown by an object exposed to an outside force. The etymology of the term compliance can be traced to the Latin verb “complere” (having all parts or elements; lacking nothing). Complere is also the source of the English word “complete”. Compliance consists of being amenable, being obedient to the other party, and fully meeting demands. In a legal context, this means to obey legal orders and fully realize the rule of law. Within the concept of corporate compliance, the rule of law (a principle of political governance) is applied to corporate governance, with the goal of increasing business efficiency, reducing risk, and heightening confidence from the market. This is all based on strong trust in law.

The cornerstone of law in modern society is the ideological image of a human being as espoused in contemporary Europe; in other words, a free and equal individual who is independent from others. Specific legal systems differ depending on whether emphasis is placed solely on freedom, as in how the U.S. draws from the ideas of Locke, or placed equally on freedom and equality, as in how France and Germany follow the principles of Rousseau. However, the stance of upholding human dignity in accordance with the rule of law is common among Western countries. Laws which should be observed by corporations differ depending on nations or times. Even so, the values of upholding legal compliance and human dignity are generally shared by modern Western corporations. Corporations which dispose of wastes inappropriately, deceive consumers, or ignore labor law are subject to market reprisal. Without legal compliance, corporations cannot gain trust from the market. In other words, there is inherent incentive for corporations to comply with the law. Nevertheless, in any countries, there are cases where corporations violate the law due to a variety of reasons. Consequently, it is especially necessary to advance the concept of compliance and to work to eliminate the causes of non-compliance.

Generally speaking, the same conditions exist in Japanese corporations. Now, why do many Japanese corporations view compliance as disagreeable?

What is the company system in the first place?

The company system was created in modern Europe. In the era of Roman law, there were partnerships but not corporations. It is preferable for the supply of goods or services which are beneficial to society to continue even after the death of the natural person who is the supplier of those goods/services. Accordingly, legal practice was created that conceived a body implementing business through the broad recruitment of funds from society as a corporate body (a diversion of the concept of corporate body generated by the medieval church law). Early corporations such as the Anglo-Dutch East India Company were founded based on patents of national power and were expected to contribute to national profit. However, in such cases, beneficiaries were limited to a few wealthy individuals. After passing through the French Revolution and its ideas of egalitarianism, the company system in Western nations shifted to a legal mechanism effective at enhancing the welfare of society as a whole. In summary, this system uses the free entrepreneurial spirit of citizens in order to efficiently supply goods and services to the market, thus creating a prosperous life for all citizens. This system was led by the aforementioned principles of modern Europe which prioritized the individual. From this perspective, corporations are not the sole domain of shareholders, managers, and employees; rather, they exist for all citizens who participate in the market. The modern market is supported by the behavior of autonomous individuals who legislate themselves as sovereign members of society and take the initiative to comply with the law. Laws which corporations are required to obey are also created within this environment. Although there are laws which restrict corporate activities, these laws do not unfairly bind corporate activities; rather, they establish minimum requirements demanded by society for protecting human dignity. Before being members of a corporation, managers and employees are first and foremost individuals with human dignity. The choice of a corporation to defy the law is unthinkable.

Of course, this is nothing more than idealism. In reality, it is difficult for corporations to view regulatory law as welcome obligations. Even so, when examining history in periods of 100 years, the form of corporations is slowly approaching this ideal. In the past, there were corporate activities in which people did not recognize the dignity of other human beings (corporations which sold slaves in the 18th century, corporations which exploited laborers in the 19th century, corporations which polluted the environment in the 20th century, etc.). During legislative processes restricting such activities, there was opposition between corporations and citizens. In many cases, this led to distortion of legislation or delay in legal compliance. As this dialectic game of cat-and-mouse continued over a period of 200 years, laws were reformed and malicious corporations were weeded out. Ultimately, respect for human dignity and awareness/systems for legal compliance have taken root in most corporations.

Sense of community unique to Japan

Japanese corporations also have a similar past. However, in terms of respect for human dignity and awareness/systems for legal compliance, Japanese corporations are far behind Western corporations. One reason for this is Japanese culture. Values which prioritize the community over the individual are deeply rooted in Japan. There are many types of community you can be in, from the family and the friend circle to schools and corporations. Each of these communities are closed from the outside. Even within corporations, each organization (from the board of directors to the smallest working units) tends to become a closed sub-community. Each community is pervaded by an ethical code which is represented by peer pressure. This code is the origin of Japanese virtues such as the spirit of teamwork and harmony. However, the code is also the origin of negative aspects such as selfless devotion which undermines identity (uncompensated overtime work, etc.) and a tendency to cover up incidents in order to avoid aggravating matters (for example, the falsifying of fuel economy tests by Mitsubishi).

Although the idea of prioritizing the community has existed in Western nations from the time of Aristotle until contemporary philosophers such as Sandel, the overall emphasis on human dignity and affinity is very high. Aristotle viewed the ancient Greek city-states as a prototypical example of communities. He believed that each individual within the community should contribute to the continued prosperity of the community by fulfilling their own unique roles (as free people, as slave, etc.). Conversely, Aristotle lived in the city Athenai (modern-day Athens), where the precept of free citizens behaving as independent individuals to a certain extent had taken root. Sandel is a philosopher who has reproduced this Aristotelian framework in present-day America (a multiracial nation in which various groups are crowded into multiple layers). Although Sandel prioritizes dialogue among groups, he does not deny the individual. In contrast in Japan, the very establishment of individuals is thwarted from the start. Individuals who have nowhere to go run to the philosophy of nothingness as represented by Zen (other escapes include complaining while drinking at bars and the special worlds of hobby enthusiasts).

When immersed in this cultural tradition of Japan, it is difficult to cultivate awareness of one’s self as person with individual dignity rather than a member of a community. Instead, affiliation with a community becomes the basis for one’s identity (a short time ago, this phenomenon was represented by people living for their company). As such, people would accept the idea that they must cease resistance to given trends within the community and surrender their individuality. Without a doubt, employees who followed orders to window-dress accounts at Toshiba had resigned themselves to such ideas. Ultimately, this tends to establish a norm in which corporations are the sovereigns, and natural persons are the servants. This is in direct contrast to the contemporary European principles discussed above.

Toward compliance welcomed by corporations

Additionally, since the Meiji Period, corporations (the increased profit of corporations) had been prioritized over individuals in Japan for a variety of reasons such as forming a rich country and strong army, reconstructing Japan after World War Two, and achieving a high level of economic growth. In Japan, although the dignity of individuals is important, everything depends on the profit of corporations. Abenomics is also based on this idea. Furthermore, since the 1980s, the British- and American-led principle of prioritizing short-term profit had taken over Japan and our nation had embraced the value of throwing away everything which did not lead to immediate profit. However, the principle of prioritizing short-term profit failed to fairly distribute wealth and there is now a global movement to correct this principle (for example, enthusiastic supporters of the politicians Trump and Sanders in America, and the result of the British national referendum on EU participation which can be interpreted as showing the dissatisfaction of middleclass). In the market, autonomous correction such as CSR and ESG investment has already started. A utilitarian vector of free maximization of profits and an egalitarian vector of protecting dignity coexist within the market. These two vectors constantly search for equilibrium. Although the pendulum had swung close to the former since the time of Reagan and Thatcher, it is now gradually swinging in the direction of the latter. Although environmental issues, worker protection, and legal compliance may seem to be unrelated to the core business of corporations, we must reaffirm the awareness that they are indeed related.

How can we ensure that corporations will welcome compliance? To accomplish this goal, it is necessary for shareholders, managers, and employees to possess strong self-recognition as responsible citizens. Then, even when faced with rules which create complications in the short-term, if those rules are required from the perspective of citizens, the rules will be understood as a positive factor for corporate activities in the long-term. It should also be possible for corporations to acquire the skills to promote legal compliance at a low cost.

Hirokiyo Furuta
Professor, Faculty of Law, Chuo University
Areas of Specialization: Philosophy, Ethics

Hirokiyo Furuta was born in 1963. He graduated from the Faculty of Letters, Kyoto University in 1986. He completed the Doctoral Program in Philosophy (Doctor of Philosophy) at LMU Munich (Germany) in 1993.
After serving as a full-time instructor and Assistant Professor in the Faculty of Law, Chuo University, he assumed his current position in 2004.
He has authored numerous works in the fields of philosophy and ethics. Currently, he writes a series entitled Origin and History of Translation for Legal Terminology for the Business Law Journal, a publication of LexisNexis. The 1st to 30th installments of the series are summarized in Origin and History of Translation for Legal Terminology (Chuo University Press, 2015).