The NO&T Podcast - EN

Scrutiny from regulators outside Japan: Challenges for Japanese companies

Let’s assume that fraud does not occur more frequently at Japanese companies than at companies in other highly-developed economies. Even if this assumption is correct, several underlying factors in Japanese corporate culture and structures create an environment where identifying and then stopping fraud or misconduct is difficult. The result is that misconduct can continue for long periods.  When corporate fraud is uncovered in Japan, the problem is often more serious than it otherwise would have been if it had been detected and stopped earlier.  The length of the fraud is one of the key factors that non-Japanese regulators look at when evaluating the egregiousness of the misconduct and the amount of any penalties.

Are there certain aspects of Japanese corporate culture which make fraud difficult to stop once it occurs?

Scrutiny from regulators outside Japan: Challenges for Japanese companies

Public behaviour in Japan is often characterized as courteous, rule-abiding, and considerate — and this is largely true. This behaviour is driven by a feeling of ‘external observation’. Expressed differently: Japan is very densely populated and others are always around ready to judge; since inconveniencing others brings social opprobrium, public life plays out in very scripted ways. It is stressful to always be observed. So, in private settings, or when scrutiny is absent, many individuals understandably let their guard down. Sometimes this can lead to a disregard for legal or safety norms. But it is a mistake to rationalise or ignore misconduct on the assumption that it will remain internal or hidden.

How does the contrast between behaviour in public and private settings in Japan affect compliance, decision-making, and risk exposure at companies?

 Sources: Mitsubishi Electric: CEO exit will not end Japan Inc’scover-up culture. (2 July 2021). Financial Times.

Scrutiny from regulators outside Japan: Challenges for Japanese companies

In Japanese corporate culture, shoganai — the belief that ‘it can’t be helped’— can reinforce a fatalistic acceptance of problems within the organization. It can discourage employees from questioning authority, reporting misconduct, or pushing for change. When unethical practices, inefficiencies, or questionable decisions are met with resignation rather than resistance, harmful issues are allowed to persist unchecked.  

What steps can Japanese companies take to foster accountability and openness in the face of a shoganai mindset — especially when operating internationally where shoganai culture is not understood or accepted, and can be viewed as complacency or even a lack of integrity?

Scrutiny from regulators outside Japan: Challenges for Japanese companies

It is not uncommon for Japanese companies to retain employees who have engaged in wrongdoing without subjecting those employees to disciplinary action proportionate to the misconduct in question.  This can send a strong message to overseas regulators that the company condones the misconduct despite statements to the contrary. The company risks damaging its credibility with the regulator which can lead to the imposition of significantly harsher penalties.

 Why would any company want to retain employees who have committed crimes or whose conduct has caused the company to breach its legal and regulatory obligations?

Scrutiny from regulators outside Japan: Challenges for Japanese companies

Compartmentalisation and siloed thinking are common in many companies. When employees rigidly adhere to reporting lines and organisational structures, it can lead to dysfunctional reporting of compliance issues or misconduct. Decisions are then made withlimited, or even incorrect, information.

 What risks do compartmentalisation and siloed thinking create for Japanese companies responding to investigations by regulators outside Japan?

 Sources: Yoshimura, T., & Anderson, E. (2000). Inside the Kaisha: Demystifying Japanese Business Culture. Business Week Books

Scrutiny from regulators outside Japan: Challenges for Japanese companies

Many Japanese companies transfer their employees to new roles every two to three years.  These transfers can be to other departments or subsidiaries, either in Japan or overseas.  These rotations are not typically tied to expertise and, as a result, can perpetuate issues such as dysfunctional reporting and loss of organisational memory.

 What risks do rotational staffing policies create and how can these transfers impact Japanese companies facing regulatory investigations abroad?

Scrutiny from regulators outside Japan: Challenges for Japanese companies

Promotions of employees at Japanese companies are primarily based on the relevant employee’s length of service at the company. Performance-based factors are not irrelevant, but they are of secondary importance. As a result, companies sometimes have employees in senior positions who lack all the skills that the position demands.

Why do Japanese companies promote employees mainly based on length of service and what risks does this create when a Japanese company is involved in a legal dispute or investigation outside Japan?

Scrutiny from regulators outside Japan: Challenges for Japanese companies

In-house legal departments at Japanese companies are often not staffed by qualified lawyers. This can make it difficult for in-house Legal to convince others to address legal risks that materialize.

Why are in-house legal departments at Japanese companies often not staffed by qualified lawyers, and what risks does this create?

Scrutiny from regulators outside Japan: Challenges for Japanese companies

Historically, Japanese companies have saved money by having small Legal and Compliance functions compared to their peers outside Japan.  That makes sense when your company is highly unlikely to find itself involved in regulatory enforcement action and ultimately liable for significant fines and penalties.

Does having a small Legal and Compliance function at headquarters in Japan still make sense when your business becomes more exposed to regulatory and litigation risks in the rest of the world?

Scrutiny from regulators outside Japan: Challenges for Japanese companies

This episode discusses the assumptions and caveats to keep in mind when listening to this podcast series on ‘Scrutiny from regulators outside Japan: Challenges for Japanese companies’.

Scrutiny from regulators outside Japan: Challenges for Japanese companies

There are three cultural themes that consistently influence the way that Japanese companies interact with the outside world: (i) form over function, (ii) group over individual, and (iii) harmony.

These themes are not the main topics of this series, but they are constant threads that run throughout each episode.  Understanding these themes is essential for grasping the challenges faced by Japanese companies when dealing with scrutiny from regulators and litigants outside Japan.

Sources: Yoshimura, T., & Anderson, E. (2000). Insidethe Kaisha: Demystifying Japanese Business Culture. Business Week Books

Scrutiny from regulators outside Japan: Challenges for Japanese companies

As the domestic market shrinks and more Japanese companies look outside Japan to increase revenue, they expose themselves to increased legal and regulatory risk.