A spate of corporate scandals have rocked Japan this year. Snow Brand Foods Co. and Nippon Ham Co. mislabeled beef, abusing the government’s buyback program that was set up to bail out the beef industry following the outbreak of mad cow disease in Japan. Trading giant Mitsui & Co. was implicated in a payoff scandal involving a Mongolian project funded by Japanese official development assistance. And Tokyo Electric Power Co. falsified inspection reports for its nuclear reactors.
Tepco is a blue-chip company whose executives served as leaders of major business organizations, such as the Japan Business Federation and the Japan Association of Corporate Executives. The Tepco scandal has damaged the reputation of Japan’s business community.
The Mitsui imbroglio has tarnished the image of Japan as a major ODA provider. All of these scandals stemmed from cozy ties between business executives and bureaucrats. The basic problem, however, lies with Japanese companies’ lack of self-control.
Shareholders, labor unions and companies’ main banks should — but fail to — supervise top management. Shareholders’ meetings have little influence on corporate behavior. Major corporate shareholders rarely exercise their rights at these meetings largely because the companies in which they invest also hold shares in their companies. Meanwhile, most labor unions are company unions, and at many companies, union leaders eventually rise to top management.
Companies’ main banks, as shareholders and creditors, lead rehabilitation efforts when the companies get into financial trouble, but usually do not intervene in day-to-day operations. It is also common for companies and their main banks to have cross-shareholding arrangements.
Many Japanese companies have more board members than their Western counterparts, with members promoted from among employees. It is unusual for a board of directors to resist unilateral action by the president. Outside directors have limited influence on management.
Japan’s traditional lifelong employment and seniority-based wage systems have contributed to corporate loyalty, but have failed to raise corporate social consciousness. Most board members are appointed on the basis of seniority and tend to be interested mostly in self-protection, often delaying settlement of problems to prevent their exposure. “Customers are always right” is an empty catchphrase, and consumer protection is secondary. Priority is given to protecting the company from trouble.
The Japan Business Federation, under its 10-point charter established by its predecessor, the Federation of Economic Organizations, requires that member companies, among other things:
* Develop and provide socially useful goods and services, giving full consideration to safety.
* Engage in fair, transparent and free competition, while maintaining healthy and sound relations with politics and the government.
* When the charter is violated, have top executives promptly disclose all relevant information to the public, meting out stern punishment to those responsible, including the executives themselves.
These clauses are often contravened when executives are busy concealing corporate wrongdoing. Without public pressure, they are unwilling to take responsibility for their companies’ illegal activities. Business ethics means nothing.
According to a report published last month by a Berlin-based nongovernment organization, Transparency International, Japan ranked 20th among 102 countries and territories on an index of perceptions of clean politics and corruption-free government. Japan had one of the worst ratings among industrial countries and ranked lower than Singapore, Hong Kong and Chile.
For the past decade, the Japanese business community has been pursuing liberalized markets, fairness and global standardization. It has been most laggardly in achieving fairness. The business community has had a long tradition of conspiring for profits. Despite repeated warnings from the Fair Trade Commission, the problem remains uncorrected.
China’s steady economic development is often blamed for the deindustrialization of Japan. The real problem, however, is that Japan has long curbed foreign investments. Foreign investments account for only 1 percent of Japan’s gross domestic product, compared with 25 percent in the United States and 4.2 percent in Germany. This reflects the exclusivity of the Japanese market. By creating a fairer market, Japan would encourage a greater inflow of foreign capital to help it out of its long-term slump.
To maintain a fair domestic market, the judicial system must be improved. Japan has long been plagued by a shortage of judges, public prosecutors and lawyers, a cause of lengthy trials. Government efforts to reform the judicial system should give priority to expediting trials.
Many recent corporate scandals, including the Nippon Ham and Tepco affairs, have been exposed by whistle-blowers. With the lifelong employment system showing signs of change, whistle-blowing is likely to become more common.
Unlike in the U.S. and Britain, there is little legal protection for whistle-blowers in Japan. The Cabinet office plans to revise the consumer protection law to create a system for protecting whistle-blowers. I hope this legislation is enacted.
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