What is the root cause of corporate failure?

Hisashi Kawahara, a former executive of failed Yamaichi Securities Co., spent four years pondering this question. He interviewed some 100 former Yamaichi employees and pored over hundreds of companies’ annual reports and technical books on such subjects as management, corporate governance and even history.

Kawahara’s quest led to a 383-page dissertation and a doctorate degree in commercial science from Meiji University in March. He now has the answer: corporate ethics — or rather, the lack of it.

“Companies that survive have strong corporate ethics within them,” Kawahara, now 71, said in a recent interview.

“The negligence of corporate ethics — rather than violation of laws — is the underlying cause of collapse in every failed company, be it Yamaichi, Snow Brand (Foods Co.), or Enron Corp.”

Kawahara, who joined what was once the nation’s fourth largest brokerage in 1953, said he would not have been able to reach that conclusion had he stayed with the firm all his life.

After working his way up to managing director, Kawahara made a major career change in 1986. He became a top adviser to the newly established Japanese brokerage division of Union Bank of Switzerland, now UBS Warburg (Japan) Ltd.

He then moved on to serve as president and chairman at Warburg Investment Trust Co., now Merrill Lynch Investment Managers Co., until 1995.

Kawahara explains how his experience at foreign-owned companies made him skeptical of Japan’s unique corporate system, such as its trademark traditions of lifelong employment and company loyalty.

Kawahara categorizes the November 1997 collapse of Yamaichi as a very “Japanese” one. He says it was induced not only by the mistakes of top management, but also by rank-and-file employees. For example, he says, the rank-and-file knew about unethical practices — including the hiding of massive losses from “tobashi,” or off-the-book trading — but failed to take action.

“Top management has the ultimate responsibility, of course,” he said. “But more than 100 others also knew at least part of what was going on, and yet they pretended not to. That means that it was, in a way, a crime committed by a group.”

In preparing to write the dissertation, titled “The Failure of Yamaichi Securities Co.,” Kawahara met with nearly 100 former employees. He pressed each of them about their role in the brokerage’s demise and asked them if their failure to oppose company practices might have contributed to it.

“None of them admitted (to their share of the blame), though,” he said.

Kawahara says it takes a very long time for corporate culture to change in Japan. Despite its modernization, he explains, the country still retains a feudalistic mentality from the Edo Period; employees are rewarded for loyalty rather than individuality.

“While corporations might evolve technologically through the introduction of information technology and so on, it takes ages to change a company’s culture,” he said. “As long as the corporate culture (that fosters unethical behavior) persists, we will see more bankruptcies.”

Now that he has achieved an academic feat, the next project for Kawahara involves bridging the gap between the securities industry and the public.

Kawahara, who lives in the coastal town of Hayama, Kanagawa Prefecture, plans to set up a nonprofit organization in the prefecture’s Kamakura-Shonan area to teach the elderly about investment.

“The fact that direct financing has not caught on in Japan is attributable to all parties concerned — companies with insufficient disclosure, securities firms that have lost public trust due to unethical practices and investors who are not vocal enough,” he said. “I want to educate the public so that capital markets play a bigger role in corporate financing.”

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