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Compliance Intended to Increase Corporate Value at “Small Offices”—Fostering Small-Scale Legal Departments with a Big Role—

2017.03.13
Nobuhide Yamamoto



Nobuhide Yamamoto
Senior Legal Manager, Corporate Administration Division, Solar Frontier K.K.


This work was supported by JSPS KAKENHI Grant Number 15K03220. (Public Relations Office)

Introduction

・The difficulty of small-scale legal departments

Early in the morning, I arrive at my office before anyone else and set my schedule for the day. I have to review the possibility of adding wording to the system maintenance agreement which I started to work on yesterday, I have to finish our discussions on the applicability of law regulating a certain industry with the relevant government authorities, and I have to...

Then a member of the sales department asks for a moment of my time. It seems that bad debts were discovered, and I instructed this person to immediately visit the business partner in question and write a report to his boss, as well as checking any illegal transactions. Grumbling about a troublesome morning, I was contacted by a business planning department member regarding the partial revision of an amendment for approval regulations to discuss at tomorrow’s meeting of the board of directors. I handled the matter by pointing out insufficient wording in the main issue of the revision. Just as I thought that I wouldn’t be bothered by any other unexpected happenings, I was summoned by an executive director and a manager of the management planning department. They explained that they were scheduled to attend the party of a certain Diet member, and wanted to check if there were any problems associated with making a donation. They wanted me to immediately come to the executive director’s office to discuss the matter.

Ultimately, despite coming to work early in the morning, I lost my fruitful time and was unable to prepare for my work...

・The organizational culture of small-scale legal departments

The situation described above might be an extreme example. Normally, a legal organization follows its management policy and business strategy, and legal staff handle matters while consulting with supervisors.

However, these “normal” conditions mainly apply to legal and compliance matters at large-scale legal departments (a legal organization containing 11 to 30 staff members; hereinafter referred to as a “large-scale legal department”) at major corporations. In contrast, different conditions exist at small-scale legal departments at small- to mid-size corporations and venture corporations, or even at small-scale legal departments at corporations of any size (a legal organization containing less than 5 staff members; hereinafter referred to as a “small-scale legal department”).

The situation described in the opening to this article is something which I have experienced in the past. I am sure that similar conditions exist at other companies.

In this article, I would like to offer recommendations for small-scale legal departments which exist as “small offices” within such organizations. Specifically, I will offer advice on the most important aspects of handling legal affairs with a small number of personnel.

Challenges of small-scale legal departments

・The latest data

Today, there are numerous publications and much discussion on compliance such as handling scandals. On the other hand, it seems that there are not enough practical cases about the way how to manage a small-scale legal departments as pertains to operation of legal and compliance organizations which are responsible for handling compliance matters.

According to statistics from FY2014, there are almost 4 million corporations in the Japanese market. About 99.7% of these corporations are small- and mid-sized corporations. From the numerous perspective, as the legal requirements placed on corporations become more complex, a heavy burden is placed on small- and mid-sized corporations.

In Japan, according to a report analyzing the actual conditions at legal departments in the company today, the average number of personnel at legal departments in the company is 8.8 people. When looking at these numbers in further detail, there is major difference between the average of 17 people at large-scale legal departments and 2.5 people at small-scale legal departments. Furthermore, in terms of the number of the corporations, large-scale legal departments account for 15.0% of all departments, while small-scale legal departments account for 50.1%. Moreover, in terms of the ratio for recognition of current challenges, small-scale legal departments deal with antimonopoly law at a rate which is about one seventh times that of large-scale legal departments, while the rate of correspondence for the law revision is less than one third. These are the significant differences.

On the other hand, when compared to large-scale legal departments, analysis reveals that small-scale legal departments are particularly inferior in terms of acquiring in-house lawyer, influencing the behavior of management, frequency of the handling of consultation from management team, and collaborating with other departments.

Also, consultation from management team on legal matters (average for all legal organizations) is increasing in the following order, starting from the most frequent: corporate governance, anti-fraud, legal risk management.

These facts indicate a notable lack of response at small-scale legal departments, both in terms of quantity and quality. Indeed, these are a group of corporations which have a considerably high possibility of becoming emergency reserve. Ben W. Heineman, Jr., a senior fellow of Harvard Law School has stated in his assertion: “Small and medium-sized companies have the same obligation to obey the law as large companies. They must prioritize their compliance risks and spend more where the risks are higher. But they cannot ignore the law. If the acquirer finds a problem, as noted earlier, it may tell the target: "drop the purchase price," "turn yourself in or deal is off" or simply "sayonara." So, not addressing the compliance issues creates deal risk as well as enforcement risk for small and medium-sized companies.”

These results and opinions must be rationally accepted by small-scale legal departments, and those departments must immediately work to appropriately strengthen legal organizations.

Proposals for the methods of solving the challenges of small-scale legal departments

・Tips for strengthening corporations with small-scale legal departments

Although methods of implementing compliance system generally differ depending on differences such as market of the industry and size of the company, at the very least, I would like to present the following ideas.

Firstly, ensure the thorough sharing of information inside the company.

My first recommendation is to ensure the thorough sharing of relevant compliance information inside the company. It is important to create a useful intranet page. However, simply creating such a page isn’t enough; legal staff should also schedule visits to each department in order to explain about the intranet page. Even a short explanation is sufficient. Many people spend a lot of time and effort creating intranet pages, but they don’t put any thought into actual usage. Can the intranet page be easily understood by salespeople who return to the company in the later afternoon after being out on business all day? Can the page be understood by manufacturing staff who are extremely busy dealing with production processes? Will such employees even take the time to carefully read the page? Working overtime is not an option. Therefore, in order to instill employees with a true understanding of matters such as laws and internal authorization table, visits should be made to each department to explain the content listed on the intranet. Nonsense? No, it makes sense. Legal staff should attend the regularly-scheduled meetings of each department and hold short information sessions. This will enable the creation of a compliance environment which is far better than the existing environment. This method may seem clumsy, however, it is unexpectedly effective. For the management team, it is effective in terms of internal control and reporting system. For individual employees, it is efficacious in creating their awareness of avoiding scandals.

Secondly, promote your own position.

Furthermore, when seeking to improve legal risk compliance system at small-scale legal departments, it is important for legal staff to promote themselves. In doing so, it is essential to perform extremely troublesome work such as making daily independent insights, making notes of themes, and keeping a record of results. This is the basis for presenting problems to supervisors, gaining their attention, and creating the impression that you are an interesting manpower. Repeating this process will make you successful and will garner you transfers at the time of personnel changes. There is even a high possibility of obtaining an executive position.

Finally, make “small-scale legal departments” into “mid-scale legal departments.”

Personally, despite being in charge of legal matters during the implementation of compliance system at a small-scale legal department, I entered business school (MBA). As a staff member responsible for promoting new business, I gave serious consideration on how legal functions could be utilized in management at a small-scale legal department at that time. In addition to reviewing regulations such as rules for business activities and rules for protecting stakeholders, I contemplated how such rules were correlated with corporation financial analysis and corporate value assessment. While considering matters through a variety of perspectives, I have presented the results of my findings to companies where I worked in the past.

In a magazine article published in 2008, the general manager of the legal department at Teijin Limited made the following statement: “It is important to look at the financial statements of business partners. Legal affairs cannot be kept separate from actual numbers.” This statement clearly indicates the necessity of legal staff to possess accounting ability in order to create a trusting relationship with the other party when creating business contracts.

In addition to legal knowledge, legal staff must also obtain and apply extended knowledge to risks occurring at the company. It is essential to package this knowledge and present it to executives in a short period of time. This is effective at securing budgets and personnel by convincing management team of the need to acquire resources for a small-scale organization.

Summary

Compliance forms the core of corporate management. There are many issues which must be addressed, and high expectations for small-scale legal departments.

“There’s no time to do such things” ”Even if an effort were to be made, it’s difficult to obtain results.”—I don’t think so. Ultimately, it is essential to motivate others through the ability to act effectively (the ability to organize information, discern, and express yourself). I am in the middle of learning these things myself.

The difficulty of small-scale legal departments. Because I understand the situation, I hope to dig deeper into the most important aspects of handling legal affairs at these departments and support next-generation legal staff who will lead “small offices”.
Nobuhide Yamamoto
Senior Legal Manager (legal affairs), Corporate Administration Division, Solar Frontier K.K.

Nobuhide Yamamoto was born in Tokyo in 1969.
In 2012, he completed the course at the Chuo Graduate School of Strategic Management (MBA in business legal affairs).
In 1992, he entered Sharp Corporation. He was stationed in the Overseas Television Sales and marketing Department at the International Business Division.
In 1999, he changed his careers and assumed responsibility for corporate legal affairs at Titus Communications Corp. (currently Jupiter Telecommunications Co., Ltd.)
In 2002, he became Associate Manager of corporate legal affairs at Sony Broadband Solutions Corp, (currently Sony Business Solutions Corporation). And became Senior Legal Manager.
He entered Solar Frontier K.K. in 2014. After serving as Assistant General Manager of the Legal Department, he assumed his current position in 2017.

Main written and edited works:
Consideration of Important Legal Points When Concluding a Joint Venture Agreement (Chuo Graduate School, 2012)
The Association of Corporate Legal Departments Report: Special Feature to Commemorate Publishing of the 500th Issue—30 Years of Corporate Legal Affairs history from the Frontline of legal affairs (the Association of Corporate Legal Departments, 2015)
Analysis Report for the 11th Field Survey of the Corporate Legal Department (Shojihomu, 2016)

Main activities:
Executive Secretary of the Chuo University Compliance Research Society (from 2013)
Member of the Committee for Review of Legal Training, New Business Law at Shojihomu (from 2014)

Reference literature:
Hideo Iwakura, Compliance Theory and Implementation (Shojihomu, 2008)
The Association of Corporate Legal Departments, Separate NBL No. 160—Analysis Report for the 11th Field Survey of the Corporate Legal Department (Shojihomu, 2016)
Shinichiro Toyama, February 2017 Edition of Business Legal Affairs—Welcome to the World of Compliance for Improving Corporate Value (Chuokeizai-sha, 2016)
Heineman, Ben W., author “The inside counsel revolution: resolving the partner-guardian tension/Ben W. Heineman, Jr.,” Chicago: American Bar Association, 2016