How Japan's corporate culture allows corrupt CEOs to win

After his arrest, Nissan removed Carlos Ghosn as chairman due to his suspected acts of financial misconduct:...

Posted: Nov 28, 2018 4:12 AM
Updated: Nov 28, 2018 4:12 AM

After his arrest, Nissan removed Carlos Ghosn as chairman due to his suspected acts of financial misconduct: understating his income and misusing the company's assets. But the Nissan scandal is just the latest in a long line of mishaps to rock the Japanese corporate world. Other manufacturers, such as Kobe Steel, Takeda and Toray Industries, have shocked the public in recent years, admitting to violating safety rules or falsifying data.

But the scandals are not only a shock to Japanese consumers — they leave a mark on Japan`s reputation as a reliable and quality-oriented manufacturer and business partner. Japanese corporate structures offer some explanations for the events.

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In most Western companies, employees are hired with a detailed work contract, and only do what's agreed on in the contract. In Japan, employees are hired with no job description, and can be assigned any task.

Since there is no work division in most Japanese companies, all employees can be transferred within a day to a new department, or even location. Companies usually have employees change departments every two years. This job rotation allows company members to know the basic job functions in every part of the firm, so by the time they become top managers, they truly know the company inside-out.

However, this often means that many Japanese firms lack specialists since most managers had a short time to learn about particular business processes. And they're often not up to date when it comes to emerging business topics, such as compliance, diversity management or digitization.

Lifetime employment

Japanese companies provide lifetime employment, and they expect employees to stay with them until retirement. In fact, many Japanese are hired by their companies right after graduation and stay in their companies for their entire work lives. But a lifetime in the same company with the same colleagues makes it difficult to raise concerns and question existing processes. Even on company boards, we find mainly Japanese managers know only one company and have spent decades working there. Often, new international standards are recognized very late or not at all.

What's more, new hires are trained in each department by older members, or sempai, who are role models and informal leaders at the same time. This creates a strong bond between employees, but having such close-knit units and strict hierarchies makes it difficult for new ideas to flourish.

Labor laws

Japanese labor law makes it difficult to fire full-time employees. They can stay in the same company until retirement and enjoy full protection by the law as long as they dedicate themselves fully to the firm and rotate throughout the company for the first 10 years of their career.

Many Japanese employees do not question internal processes because they cannot compare to processes in former work places or other companies. The one-company-per-lifetime system creates a strong bond between employee and firm and makes it difficult for employees to question or criticize internal processes, even if they perceive them as wrong or unethical.

What's next?

Now that trust in Japanese companies has been deeply shaken, it's obvious that Japan needs to beef up corporate governance regulations.

The government has already taken some first steps. As of 2015, Japanese boards are supposed to have two external directors. Though the code itself isn't legally binding, companies have to declare why they're not following it, which puts pressure on them to do so. The government hopes diversifying traditional boards will lead to more innovative decision-making amongst board members.

Changes in Japanese society will also have an effect on Japanese companies. Japan is currently facing a very serious labor shortage because of a population decline. The unemployment rate is at a record low of 2.3%, and companies regard recruiting as their biggest future challenge.

The Japanese government has reacted to this population decline by relaxing immigration laws and making it easier for international managers to enter Japanese firms. These international employees may bring more international perspectives, as well as implement new procedures in traditional Japanese firms to make them more competitive on a global scale. In the coming years, they may also influence attitude toward compliance and safety standards.

Furthermore, whistleblowing has become more common in Japan in recent years. Many of the scandals in recent months have resulted in security risks for the Japanese population, so more employees have begun reporting them to authorities.

The Nissan scandal is a wake-up call for Japanese companies to rethink their processes and install effective compliance management processes. We will see what they learn from it.

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