TOEIC: Where does the money go?

Nonprofit IIBC takes in ¥8-9 billion annually from English test fees

by James McCrostie

In a country of test-takers, the Test of English for International Communication has become one of Japan’s most recognized exams. In 2008, people in Japan paid ¥4,040 — or slightly less if their company or school paid a ¥100,000 membership fee — to take the TOEIC Institutional Program (IP) at their company or school 940,000 times. A further 778,000 test-takers paid ¥6,615 to take the TOEIC Secure Program, offered at official test centers at fixed times. Despite the test’s fame and the large sums involved, where the approximately ¥8-9 billion in test-taker fees end up remains relatively unknown.

People paid these fees to the Institute for International Business Communication, a nonprofit public-interest corporation with 156 employees that operates under the authority of the Ministry of Economy, Trade and Industry.

One of the IIBC’s biggest expenses is paying royalties to Educational Testing Service, the American testing organization that writes and owns the content of the TOEIC tests. No one working for IIBC or ETS would reveal the royalty fee for a single exam, but in fiscal 2007 testing royalties totaled a little over ¥800 million. For fiscal 2008, the IIBC budgeted to spend almost double that amount — over ¥1.5 billion — on royalties. IIBC spokespeople declined to provide an explanation for the sudden increase.

Test-takers paying for the standard listening and reading exam also subsidize the less popular TOEIC tests. TOEIC-brand interview and French tests together lost more than ¥32 million in fiscal 2007.

The newly established computer-based TOEIC Speaking and Writing test, taken 4,200 times in 2008, is IIBC’s biggest money-loser. According to their fiscal 2008 budget, the IIBC planned on taking in ¥78.8 million in fees and spending ¥664 million on administration costs, not including ETS royalty fees. IIBC spokespeople were unwilling to comment on these high costs.

Despite these and other expenses such as a utility bill that increased from ¥950,000 in 2007 to a planned ¥4.84 million in 2008, and more than ¥13 million spent annually on research into adapting to Chinese culture, Japanese students of English can sleep easy knowing the IIBC isn’t in any financial danger. While established to serve the public interest rather than generate profits, the IIBC remains comfortably in the black. In fiscal 2007, the IIBC had a surplus on its balance sheet of ¥130 million. For fiscal 2008, the IIBC estimated its surplus would be just under ¥100 million.

According to Christopher Gunson, an international transaction attorney with experience in structuring nonprofit entities in Japan, because public-interest corporations have no shareholders to distribute surpluses to, they face the dilemma of how these surpluses can be used. “There is no clear standard” when it comes to how much money a public interest corporation is allowed to make. The issue is not the amount of money but how it was made and how it is used, Gunson explained.

The IIBC seems to be saving for a rainy day. At the end of fiscal 2007, the nonprofit had ¥1.49 billion in cash on hand, and savings accounts as well as government bonds, time deposits and investment securities worth ¥210 million. All together, the IIBC had assets worth ¥3.37 billion. Minus liabilities, the IIBC remains in the black to the tune of ¥1.9 billion.

These figures don’t show all the money being made. Companies have been profiting from the TOEIC from its earliest days. Yasuo Kitaoka, the idea man behind the test and IIBC vice chairman from 1986 to 1997, also worked as representative director of his company International Communications Inc. It ran the TOEIC fan club, published its magazine and started TOEIC’s online application system. After a name change to T.F. Communications in 2003, the company was shut down in 2004 and control of its subsidiaries transferred to another for-profit called International Communications School.

ICS is a company with close ties to the IIBC. ICS and the IIBC have their offices in the same building. Stepping out of the elevator and into their shared 9th-floor lobby, ICS’ door is to the left of the security guard and the IIBC’s door is to his right.

The IIBC and ICS also share personnel. The new chairman of the IIBC’s board of directors, Takayuki Murofushi, was a member of ICS’ board of directors until 2008, when he replaced the retiring 89-year-old Sadayoshi Sakata at the IIBC.

IIBC Chairman Yaeji Watanabe has had a long relationship with Murofushi’s mother. Watanabe’s blog and memoirs discuss working with Jukan Murofushi to increase the popularity of Chinese poetry. The IIBC even supported the Chinese Poetry Recitation Association where Jukan Murofushi worked as a teacher. Starting in 1989, the IIBC sponsored the group’s Chinese poetry appreciation meetings both in Japan and other countries. In 2008, the IIBC removed links to the association from its Web site but it is unclear whether it still sponsors the group.

ICS seems to exist primarily off the TOEIC. Atsuko Yoshida, IIBC’s public relations manager, says the ICS is mainly “responsible for promotion and sales” of the TOEIC IP. ICS sales staff work for one of two divisions selling the TOEIC IP to either businesses or schools.

While not a secret, the work of ICS’ 70 employees is not widely advertised. It has no Web site of its own and the only mention of ICS on the IIBC site appears to be on a privacy policy page.

“International Communications School was established purely for the purpose of promoting TOEIC business,” said Yoshida, who declined to speculate on why IIBC needed a for-profit partner to promote the test. “We of course have contracts between the IIBC and ICS,” added Yoshida, explaining how ICS generates revenue. “They don’t do promotions voluntarily. So that is how you can imagine they are making money by selling TOEIC.”

ICS makes money from the TOEIC in other ways as well. It acts as the publishing company for TOEIC preparation textbooks prepared by the IIBC and owns subsidiaries with their own TOEIC business connections.

ICS is the largest shareholder of a company called E-Communications Inc., which specializes in computer-based testing and data-processing services. Its office and 30 employees are located down the hall from ICS.

According to its Web site, E-Communications’ primary clients include the IIBC and ICS. E-Communications manages the Japanese online application system for TOEIC tests. It also offers an online program called Challenge for the TOEIC Test, which recycles questions from the old fan club magazine. In the past, it offered web-based practice lessons for the TOEIC speaking test.

E-Communications was established in 2000 as a subsidiary of International Communications Inc. After the latter was shut down, ownership of E-Communications and Odyssey Communications, a company that supervises the Microsoft Office Specialist exam in Japan, was transferred to ICS.

ICS Representative Director Hisao Noguchi also sits on E-Communications’ board of directors. The board members (Representative Director Shinya Sato, Noguchi and a third member) were paid a total of ¥33 million for their services last year.

The ownership of International Communications School is unclear. When pressed on this issue, ICS spokesperson Hirosuke Matsumoto declined to comment.

To comply with the law, the IIBC provides two years of financial statements on their Web site, but it’s impossible to track the movement of money between the IIBC and both ICS and E-Communications. Financial reports on E-Communications’ Web site indicate it made a net profit just under ¥30 million in the period May 2007 to April 2008 and had net assets worth ¥238 million.

When asked what public-interest corporations like the IIBC can do with their surpluses, Susan Carpenter, a lecturer at the University of Edinburgh Business School and author of a book about public-interest corporations called “Why Japan Can’t Reform: Inside the System,” says, “I can suggest that they may transfer their money to another corporation.”

IIBC also pays its dues to another public-interest corporation called the Beautiful Aging Association. In addition to his full-time job as IIBC chairman and work as a partner in his law firm, the 92-year-old Watanabe is BAA chairman.

Established by Watanabe and friends in 1992, the BAA operates under METI authority. It organizes activities for member-company retirees including karaoke outings, go tournaments and cooking classes. The association’s ¥17 million budget comes from fees paid by member organizations. Watanabe declined an interview request but the BAA’s Web site shows the IIBC and ICS near the top of the list of 41 members.

Money generated by TOEIC fees also appears to pay for an IIBC division called Global Human Resources Development. GHRD gathers information from around the world to help Japanese become better global managers. It circulates this information via the Internet, a magazine and seminars. IIBC’s spokespeople were unwilling to say how much money the IIBC provides to GHRD.

Watanabe’s IIBC salary is unknown, but financial statements show compensation paid to executives rising last year. IIBC executives received a total of ¥77.5 million in fiscal 2007, with plans to increase it to ¥100 million in fiscal 2008. There are at least four executives paid by the IIBC. Its Web site lists four full-time and nine part-time members on its board of directors but, according to Yoshida, the part-time members are unpaid volunteers.

Asked how much money public-interest corporation directors can pay themselves, Gunson says, “There’s no clear standard as to how much director compensation is too much. These institutions are designated as non-profit, and the authorities may begin to scrutinize a non-profit’s operations if they believe that the directors are profiteering.”