Business | FOCUS

Governance improves at Japan Inc., but scandals show compliance remains a challenge

by Noriyuki Suzuki

Kyodo

It’s not rare to see Japanese corporate executives bowing in apology for scandals resulting from weak governance and compliance, and then vowing to prevent a recurrence.

A year after the introduction of a governance code urging companies to appoint multiple outside directors, many firms are trying to boost transparency and strengthen monitoring.

Corporate governance experts believe Japan Inc. is moving in the right direction. But some argue having a governance mechanism in place is not a panacea for rooting out scandalous behavior and that instilling a culture of compliance among employees is a more difficult task.

A recent scandal involving vehicle fuel figures at Mitsubishi Motors Corp. highlighted the difficulty of making a drastic change from within, as the automaker was also engulfed in recall cover-ups in the 2000s.

“Mitsubishi Motors lacked a sense of unity in developing, manufacturing, and selling cars,” a third-party panel said in a report in early August after spending three months looking into the scandal.

The assessment came as Mitsubishi Motors is tapping outside help to change what the panel described as a “closed” corporate culture and rebuild itself after the scandal, which damaged consumer trust. The company has installed Mitsuhiko Yamashita, a former Nissan Motor Co. executive, as executive vice president overseeing development and reform.

Nissan, once on the brink of bankruptcy in the late 1990s, carried out a drastic revamp in its organizational structure together with its French peer, Renault SA.

Nissan is expected to complete its due diligence in August before taking a 34 percent stake in Mitsubishi Motors, a deal that will enable Japan’s second-largest automaker by volume to appoint a third of Mitsubishi Motors board members.

Japanese companies have been said to have “inward-looking” governance mechanisms.

Nobutaka Kazama, professor of comparative management at Meiji University, supports the idea of making them more open.

“When it comes to improving governance, it largely concerns management and shareholders,” Kazama said. “But we also need to remember the roles of employees, along with consumers and society as a whole.”

“The influence of middle managers who can say no to their bosses and also check on and give advice to subordinates has been weakening,” Kazama said.

Mitsubishi Motors said in April it had manipulated data to make four of its minicar models, including two supplied to Nissan, look more fuel efficient amid tough competition with rivals. The scandal then widened to include other models as it was found that the automaker had used noncompliant testing methods and desktop calculations instead of actual tests to obtain fuel economy figures.

The investigation panel, consisting mainly of lawyers, found factors behind it included poor communications, indifference between corporate divisions, and a lack of manpower and other resources to develop cars.

At Mitsubishi Motors, Yamashita found multiple managerial layers that would slow information-sharing. He is now aiming to communicate directly with the workers who develop vehicles.

“It boils down to how much we meet face-to-face and communicate,” Yamashita said.

Mitsubishi Motors Chairman Osamu Masuko has acknowledged that efforts to renivent the company after past scandals failed to examine in-house information in 2005 and 2011. Had it done so, the improper practices might have been revealed.

For years, compliance specialists have argued that insufficient protection for employees, lifetime employment — a common practice in Japan — and a corporate climate that demands full dedication from workers tend to discourage whistle-blowing.

Japan has witnessed a series of corporate scandals in recent years that pointed to the need to raise awareness about compliance among employees.

In 2015, Toshiba Corp. admitted to overstating profits for years. The accounting scandal forced the industrial conglomerate to restructure its unprofitable businesses and go ahead with job cuts.

Suzuki Motor Corp. revealed in May that it, too, had used unapproved testing methods since around 2010.

“It’s a big test for Japanese companies on how to improve governance and compliance,” said Hidetaka Aoki, an associate professor at Chuo University and a specialist in corporate governance.

“We are in the midst of a transitional phase where the employment system is changing and information can be easily shared via the internet … and people have started to believe wrongdoings will be exposed sooner or later.”

Tokyo Stock Exchange data show some 77.9 percent, or 1,525, out of the 1,958 companies listed on the main section of the bourse had two or more independent outside directors in 2016. That marked a 29.5 percent rise from a year earlier.

Mitsubishi Motors’ investigation panel did not present specific steps to be taken to prevent a recurrence on the view that its employees should first and foremost discuss and share the same future corporate vision.

Yamashita is seeking to boost the morale of its employees and get them all involved in the revival process by each identifying challenges facing Mitsubishi Motors.

“We may need outside help, but the power comes from inside,” Yamashita said.

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