“Business management in the age of cutting the head and not the tail of the lizard
(The responsibility of top management)”
October 10, 2007
Mr. Hideaki Kubori,
Founding Partner, Attorney at Law,
Hibiya Park Law Offices
1. A company’s value is in its credibility
The standard for valuing whether a company is good or bad has changed. It is not the size of sales, profits, or number of employees. Now, the most important thing is the brand image and credibility of the company.
The actions of the company executives, such as structuring internal control and compliance, leads to this credibility. Compliance is sometimes thought of as just abiding by law, but it is actually more flexible. Compliance is originally a word from physics, meaning to “bend when pressure is mounted”. This means that compliance for a company means to change flexibly according to the demand of the society.
Of course, law is also a demand of the society, but just following the law is not enough. There has been a change in the types of company scandals. In the 1980’s, it was crimes by top management, such as the Recruit incident, where the problem was caused by the top individual. In the 1990’s, incidents occurred where the top management and rank and file collaborated illegally, such as in bid rigging (Dango). The rank and file took the illegal actions which top management acknowledged and did not stop.
In the 21st century, things changed. Top management were no longer directly involved in the company incidents. In the Yukijirushi, Nippon Ham and Zenno incidents, top management were not involved but lost their jobs. That is why I call this the age of cutting the head of the lizard. In the United States, due to Enron in 2001, Sarbanes Oxley Act was enacted quickly in 2002. In Japan, the company law was enacted in 2007, and structuring an internal control system became mandatory for companies.
The fact is internal control was necessary before the enactment of the company law, but they made it into law because not all companies followed the necessary internal controls.
In recent legal courts, the responsibility of the top management has become heavier. In the past, if the top management were not directly involved in the incident, they were not held responsible. But now, things have changed. If top management were not aware of the incident, it is now considered that it was because top management did not structure an internal control system. This was the case in the Daiwa Bank and Yakult incident. There was even a scarier legal case of Duskin. In the Duskin case, management were held responsible for not disclosing the use of unapproved food additives in meat balls found in internal investigations.
The Financial Product Trading Law was enacted. As long as the correct accounting and financial reports are produced, there is nothing to worry about in the new law.
2. Analyzing recent incidents
There are complaints that to document all work and production/sales data is too time consuming. I would like to explain why such documentation is necessary.
In the recent Fujiya case, there was no criminal or administrative penalty, nor a health hazard regarding Fujiya’s actions, just an administrative guidance. But, Fujiya products disappeared from the shelves of stores. This is a case where a company lost its credibility from the public.
One of the internal documents leaked to the press stated that Fujiya used milk one day past the expiry date. Since there was no data documenting the usage of milk, the company could not fully deny these allegations. Therefore, documentation is necessary for a company’s survival, not just to abide by law.
The fabrication incident by Kansai TV should not have occurred if the company considered the company’s mission to report the truth to the public.
Similarly, the gas water heater incident occurred because the company could not react to the changes in consumer knowledge and behavior.
In this way, as long as one does not forget the mission statement of the company, structuring compliance, governance, and internal controls should not be a thing to be afraid of.
3. Change in legal structure
Recently, there has been changes in anti-trust laws and unfair competition protection law. One change I would like to point out is the leniency rule in anti-trust law, where if you confess to the legal authority before legal action was taken, you do not have to pay a penalty fine. By using this leniency rule, directors will be protected from lawsuits by shareholders and the obligation to repay the company regarding penalty fines. I look forward to the implementation of this leniency rule, and hope it will stop bid rigging (Dango) in Japan.
4. What should companies do
Management should focus on what risk the company should take to generate profits, and what risks to avoid.
In the consumer finance industry, the gray zone interest rates was declared illegal by the Supreme Court. As the gray zone was legal before this verdict, it shows that just abiding by laws are not enough.
There should also be independent board of directors to keep an eye on the president of a company. An organization to protect the president from the mass media is also necessary.
The mass media is always trying to have the president resign over an incident. Structuring internal controls and keeping in-house lawyers will become necessary to protect the president from resignation in times of an incident.