LONDON — Some Japanese company presidents and board chairmen have probably been laughing quietly to themselves over the scandals that have engulfed some large American companies from Enron to Xerox and WorldCom. After all the lectures they have heard from Americans about the superiority of American accounting and corporate governance, an element of schadenfreude is understandable.

But Japanese company boards would be wise to avoid complacency. They should look carefully at their own arrangements. They need to ensure greater transparency in their own accounts and give more information to their shareholders.

There is always the danger in any economy that corruption and greed will undermine efficiency and fairness. This is even more likely in a socialist economy than in a market economy. If competition is encouraged, anticompetitive devices are outlawed and accounting practices are adequately policed, there is at least some protection for the shareholder and the consumer.

The problems in American companies have arisen from a combination of greed, lax corporate governance and inadequate supervision of the accountancy profession. Senior executives in many companies have undoubtedly received excessive remuneration packages, including stock options, guaranteed bonuses and payments into pension funds — despite falls in the price of their company’s shares — due to inadequate controls by boards of directors and the unwillingness or inability of large shareholders to challenge the executives.

One problem has been that too many nonexecutive directors have too cozy a relationship with the executives and do not press for answers to difficult or embarrassing questions. Nonexecutive directors serving on remuneration committees are often themselves executives at other companies and — thinking in the manner of “if I scratch your back, you’ll scratch mine” — connive at these excessive packages.

Audit committees for some companies have shown that they are at best feeble watchdogs. Often beholden to executives or to accountancy firms, they are liable to be bamboozled by accountancy jargon if they are not accountants themselves.

The accountancy firms, meanwhile, have often developed too close a relationship with the company whose accounts they are auditing. They may have underbid to get the role of auditor with the understanding that their advisory and management-consultancy arm will be also employed by the company. Such practices are unethical and inevitably lead to conflict of interest.

The rules governing company audits and the operations of accountancy firms will have to be strengthened. There should be a rule against an accountancy firm providing both audit and advisory services to the same company. It may also be necessary to force companies to change their auditors after so many years, although this could be expensive as the new group of accountants will have to go over every aspect of the company’s accounting practices from the beginning before they can produce an adequate report.

Even the best audits by the most experienced accountants cannot totally prevent fraud. Ultimately every company is dependent on the honesty of its employees. This can never be guaranteed because of human frailty. However, honest behavior is more likely to be found in companies where there are good and fair employment practices and where whistle-blowers are not harassed and bullied.

Nonexecutive directors need to make up a majority on the boards of public companies. They should be experienced people with sufficient time to devote to their tasks. The number of boards on which a nonexecutive director may sit should be limited to three or four. They should be able to demonstrate their independence and, in particular, avoid any appearance of conflicts of interest.

U.S. President George W. Bush has been talking tough, but his unwillingness to support legislation initiated in the Senate by Democratic Party members suggests that his public comments may be primarily designed to mollify public opinion. The crisis of confidence in American-style capitalism is real and will undermine stock markets for some time to come. Investors will be reluctant to believe profit figures unless these can be properly verified. Strong equity markets require confidence not only in the economy but also in the strength and reliability of individual companies.

In Japan the role of company auditor (“kansa-yaku”) is generally regarded by foreign investors as an inadequate safeguard. No doubt the vast majority of these are conscientious and honest people, but many are former employees of the company and few have the expertise and resources to effectively vet company accounting practices.

The accountancy profession in Japan has many experienced professionals with high qualification standards, but Japanese company accounts are still not regarded as comparable in reliability and transparency with those of companies quoted on the New York Stock Exchange.

Very few Japanese companies have more than a handful of nonexecutive directors, and these are generally not in a position to penetrate the inner workings of the company or act as whistle-blowers if something goes wrong. Nonexecutive directors are supposed to defend the interests of shareholders; in fact, all directors are responsible to shareholders.

One problem that has led to complacency in some Japanese companies has been the extent to which shares have been held by other companies in the same “keiretsu.” Such shareholdings have generally not been actively managed, not least because they are often cross shareholdings. The gradual decline in keiretsu holdings and the increasing need for most Japanese companies to demonstrate a more efficient use of capital has to some extent reduced but not eliminated this problem.

Small shareholders have little or no chance of influencing company policies, although they can and should make themselves a nuisance at annual general meetings. Large shareholders in Japan and abroad should be much more active in scrutinizing the accounts and the policies of companies in which they invest. Many mutual and pension funds tend to be too passive. Their attitude is often to simply sell the shares of a company when things don’t look good, rather than get involved in trying to force the company to improve performance and accountability.

The current crisis of confidence in the market economy is a threat to growth and prosperity.

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