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Scandals and compliance

2016.05.19




Noboru Kashiwagi
Fellow, Chuo Law School
Areas of Specialization: International Trade Law, International Economic Law

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

I am currently a member of the Study Group of Compliance for Increasing Corporate Value, a group led by Professor Shinichiro Toyama of Chuo Law School. When the term “increasing corporate value” is added to compliance, it becomes an extremely difficult issue. If the concept of increasing corporate value includes the reduction of negative elements in terms of preventing damage to corporate value, then compliance should naturally prevent such damage and it is not necessary to add the qualifier of “increasing corporate value”. Judging from this, it seems that Professor Toyama also understands compliance in terms of positively increasing corporate value. If that is the case, then I have yet to find an answer regarding the essence of “compliance for increasing corporate value”, and remain perplexed.

For the time being, let's leave the concept of increasing corporate value and look at compliance in Japanese corporations. Compared to the past, it is clear that there is more awareness of compliance in Japanese corporations today. The advantage of being old is having knowledge of the past. When I was a child, Japan was very loose and irresponsible when it came to compliance. At that time, people who committed traffic violations had their driver's licenses temporarily seized by the police. However, the many people would ask the favor of influential individuals such as a member of the Diet or a city councilman, and have their licenses returned by the police. Any penalties for traffic violations were nullified in such cases. Playing mah-jong and making bets were also extremely popular, and I'm sure that the police also engaged in such gambling. Bribery was also rampant, including the scandals known as the Showa-Denko bribery scandal and shipbuilding scandal. Although large-scale bribery seemed to have gradually decreased following the Lockheed scandal, there were still cases of large incidents such as the Recruit scandal in 1988, the bribery scandal involving the construction industry in 1993, and the Nishimatsu Construction scandal in 2008. Small-scale bribery scandals are still reported even now. However, as a general trend, the number of cases involving large bribes seems to be decreasing rapidly.

According to the 2015 Corruption Perceptions Index issued by Transparency International, an NPO which investigates the level of corruption caused by acceptance of bribes throughout the world, Japan is ranked 18th out of 168 countries, tied with Hong Kong and Ireland. Hong Kong's rank is gradually descending. Incidentally, Singapore is by far and away the purest country in Asia, with a global rank of 8th. The cleanest country in terms of bribery is Denmark, while Finland is 2nd. Germany is ranked 10th, the U.S. 16th and France 23rd. Although South America has a rampant image of bribery, Uruguay is ranked immediately after Japan at 21st (as the result of three countries being tied for 18th), and Chile is tied with France at 23rd. The worst-ranked country is Somalia at 168th, while North Korea ranks one place above it.

When I was a child, falsification of the production region and expiration date for food products was an everyday occurrence. No one was surprised when they heard rumors that Japanese sake breweries in Fukushima Prefecture actually wholesaled Japanese sake to those in Nada Ward, or that kamaboko (a processed seafood product) from Iwaki City in Fukushima Prefecture was supplied to kamaboko vendors in Odawara City. Today, falsification of the production region or expiration date is severely condemned by consumers.

Offering benefits to shareholders was defined as a crime in response to the custom of using an extortionist to have shareholders' meetings ended in a short period of time. Today, after a series of battles between courageous corporations and extortionists, the use of extortionists seems to have been eliminated.

Price-fixing agreements also seem to be decreasing thanks to the success of the leniency system that creates suspicion among companies. As a result of American antitrust laws being actively applied abroad, some Japanese corporations were forced to pay large amounts of fines to the United States Department of Justice, thus leading to lawsuits by shareholders seeking to hold the presidents of those corporations responsible in Japan. This situation has also contributed to a reduction in price-fixing agreements by Japanese corporations which do business internationally. It is clear that shareholder lawsuits have forced corporate management to strengthen compliance.

In terms of insider trading, there were cases in the past in which even a top partner attorney of a major law firm conducted insider trading. However, insider trading today seems to have decreased significantly.

In this way, since the end of World War Two, corporate scandals in Japan have steadily decreased starting with major corporations with international activities. Conversely, conditions have advanced to the point where compliance awareness is gradually reaching mid- and small-sized corporations doing domestic transactions. When I was employed at a trading company many years ago, I told a member of the sales department that a certain clause was illegal and could not be included in a contract. I was surprised when the salesperson responded that the clause should be included in a memorandum separate from the contract to be kept secret. Actually, this sort of thing happened several times. Later, the casual attitude towards creating such secret contracts also disappeared. Without a doubt, Japanese corporations have become cleaner. However, as Ishikawa Goemon (a legendary Japanese outlaw hero thought to abuse ninjutsu to steal valuables to give to the poor) once said, "Even if the grains of sand were to disappear from the beaches, the seeds of corruption would still remain in our world." While we were shocked to hear of the Toshiba accounting scandal, there was another scandal that popped up at Volkswagen regarding the modification of diesel engine data. Of course, Japanese corporations are not the only ones involved in scandals; indeed, the same things happen at American and European corporations. I have purchased some literature regarding the measures to prevent scandals in America and Europe, and intend to research the topic in the future how American and European corporations are doing in order to prevent the scandals and illegal acts.

As I wrote in the introduction to this article, Professor Shinichiro Toyama has raised the issue of compliance for increasing corporate value. This concept requires both eliminating the negative elements in corporation activities and reducing the chance of damage to corporate value, and also positively increasing corporate value through compliance. This is a Copernican change in the concept of compliance. This issue cannot be solved through an understanding of compliance as observing laws and regulations. I believe that it may be possible to find an answer to this by including soft law such as customs, social norms, ethics and values in compliance, in addition to hard law such as laws and regulations. Fortunately, it seems that there is now strong support in Japan for including soft law in the concept of compliance. (Takashi Fujii, Compliance Swept Up in the Times, NBL #1071 (2016) p. 1) Even so, unless rational restrictions are placed on the targets of compliance, the elements of compliance will become increasingly diluted.

In comparison, as above , I would like to research measures to prevent scandals in America and Europe. However, the majority of literature which I have read thus far focuses on the argument that it is important to change awareness among top executives. Much to my dismay, I have yet to encounter academic and empirical arguments.

Noboru Kashiwagi
Fellow, Chuo Law School
Areas of Specialization: International Trade Law, International Economic Law
Noboru Kashiwagi was born in Iwaki City, Fukushima Prefecture in 1942. In 1965, he graduated from the Private Law Course in the University of Tokyo Faculty of Law and entered employment at Mitsubishi Corporation, where he was assigned to the legal department. In 1993, he left Mitsubishi Corporation and was appointed as Professor at the International Center for Comparative Law and Politics of the University of Tokyo Faculty of Law. In 2003, he left his position in the University of Tokyo and was appointed as Professor in the Chuo University Faculty of Law. In 2004, he was appointed as Professor in the Chuo Law School. In 2012, he retired from the Chuo Law School upon reaching mandatory retirement age. Currently, he serves as Chairman of the Japanese Law Translation Council (the Ministry of Justice) and as Chairman of the Foundation for Research in Civil Dispute Resolution (a public interest incorporated foundation).
Kashiwagi spent many years researching scandals at Japanese corporations. Currently, he spends the majority of his time on tackling issues related to translation of Japanese laws into English. His major written works include International Trade Law (co-written; Yuhikaku Publishing, October 1999).