The recent removal and arrest of Carlos Ghosn, chairman of car maker Nissan is another corporate scandal to tarnish Japan Inc. in recent years, and once again raises fundamental questions about governance in the country. While some of the issues are deep-rooted and would require a serious change of mindset, senior in-house counsel can play their part in improving the culture going forward.
Jason Hall, general counsel, Renesas Electronics Corporation
Japan’s corporate culture has been shaped by cultural, historic and economic factors and the latest scandals are unlikely to transform the compliance landscape overnight. In the short-term, the significant public embarrassment may give in-house counsel a place at the table for decision making. However, for longer-term change, in-house counsel would do well to consider the following two points:
First, know the business and speak its language. In-house counsel that present legal and compliance issues in relation to their effect on the company’s business objectives will be able to retain more influence in the company to help transform the compliance culture over the longer term. This is especially important where compliance is not formally institutionalized, though it applies everywhere.
Second, promote diversity of opinion. An effective compliance culture relies on the ability of individuals to speak up and question management or leadership decisions, regardless of position and without retaliation. However, Japanese cultural norms typically emphasize conformity and hierarchy. At the most basic level, in-house counsel can establish and promote confidential whistleblowing channels to help employees report issues with protection from reprisals. Simultaneously, ensuring that the legal team includes voices that also represent the company’s client base, especially for Japanese companies operating internationally, can help promote diversity of thought in a way that remains tied to business realities. More inclusive and diverse legal teams can also educate local staff on the compliance expectations of client jurisdictions and how these regulatory regimes impact the operations in Japan.
Taai Izushima, trust & compliance officer, IBM Japan
I think companies in Japan rely too much on the belief that employees are disciplined and virtuous enough to follow the company’s vision of integrity. The role of the in-house counsel is to make sure the code of conduct, filled with sound moral and legal guidelines, do not become a mere platitude. While education is important, it is usually not the prime mover for an employee, nor is it the investigations or the enforcement action that deters our employees from wrongdoing. Rather, it is the tone that our leaders impart to our employees that integrity and a robust compliance culture is a critical priority of the company that provides the necessary impetus for compliance.
At IBM, our business leaders are personally involved in such controls and processes and they are the ones that own and inspect for proper compliance. This is natural as employees listen to managers and they are the biggest influencer of the employees’ conduct. Fusing the importance of business results and compliance is key, as we know that just one scandal could tarnish decades worth of hard-earned trust built with our clients, business partners and society. We, in-house counsel, do a comprehensive and continual assessment of the alignment of our processes to our integrity goals, provide education and partner with the company’s leaders to lead in a manner that creates a strong culture of integrity and compliance. This is one of the most critical roles of in-house counsel in my view.
Anonymous, senior legal counsel at international technology firm
Effective measures to strengthen corporate governance have been recognized as primary challenges for Japanese in-house counsel and legal departments. The Japanese government continues to set [this as a] high-priority for reforming corporate governance system in order for promoting investments, as stated in the Japanese Growth Strategy 2018 [Section II [2]-2], whereby in-house counsel are under pressure to update traditional systems.
According to the Japan In-house Lawyers Association, the number of in-house counsel in Japan has been increasing, and more Japanese domestic companies have started to hire qualified lawyers in their legal departments.
Although the Japanese government is still concerned about the current legal environment in Japan, with these trends in mind, the government has been trying to advocate changes from traditional legal department to a modern updated one, by comparing against/referring to U.S. companies.
The April 2018 study report of the government clearly and carefully covers the expected roles in-house counsel should/can play.
The report fairly encourages in-house counsel to play both “defensive function (guardian function)” and “offensive function (partner function).” Personally, to avoid becoming the next negative news story, I think it is time for in-house counsel to step in by playing partner function more proactively.
Instead of taking reactive actions against negative incidents, from the viewpoint of maximizing corporate value, offensive function will encourage companies to execute operations and business appropriately. Under the Japanese cultural norms, it will possibly be challenging, but by leveraging these series of systemic problems, in-house counsel may demonstrate leadership.
Japan Firms Have No Plans to Strengthen Governance After Ghosn Arrest
Reuters
Three-quarters of Japanese companies have no plan to create committees overseeing compensation or executive nomination, a Reuters poll found, reflecting indifference to boosting governance after the arrest of former Nissan boss Carlos Ghosn.
Ghosn, credited with rescuing Nissan Motor from near-bankruptcy two decades ago, has been charged with understating his salary for eight years and temporarily transferring personal financial losses to the carmaker's books.
He has been held at a detention centre for over two months and his lawyer said he may not face trial for at least six months.
Ghosn has denied wrongdoing. Both Nissan and affiliate Mitsubishi Motors have nevertheless stripped him of his titles, and his continued chairmanship of French affiliate Renault is uncertain.
The case has brought Nissan's governance to the fore, with critics saying there are few truly independent voices on its board capable of questioning leadership and looking out for regular shareholders ‘interests. Some managers surveyed agreed.
"I was surprised that Nissan's internal governance over its executives was practically not functioning," a manager of a wholesaler wrote in the survey.
Since Ghosn's Nov. 19 arrest, Nissan's board has created a special committee to improve governance, incorporating external independent experts, and which will likely recommend an increase in external board members and the creation of a committee to oversee compensation.
"Nissan acknowledges that the misconduct by its former chairman Carlos Ghosn and former representative director Greg Kelly was enabled
by shortcomings in the company's corporate governance," a Nissan spokesman told Reuters.
"The purpose of the committee is to find the root causes of this misconduct and provide recommendations for creating a more robust and sustainable governance framework worthy of a leading global company."
Some 64 percent of companies in the Reuters Corporate Survey have no plan to set up compensation or nominating committees, while 12 percent are considering the matter. Such committees are in place at 21 percent of responding companies and 3 percent plan to introduce committees shortly.
"We are strengthening compliance, but it is impossible to say that misconduct won't occur," a service company manager wrote.
Still, 87 percent of respondents believed it was unlikely their companies would face the same kind of problems over executive compensation, the Jan. 7-16 survey showed.
The Reuters Corporate Survey, conducted monthly for Reuters by Nikkei Research, polled 480 big- and medium-sized firms with managers responding on condition of anonymity. Around 250 answered the questions on corporate governance