This content is from: Local Insights

Japan: Prevention of corporate scandals

In recent years, the number of corporate scandals occurring at listed Japanese companies has been increasing. These risk not only damaging the company itself but potentially might also result in a loss of credibility of the capital market as a whole. With that in mind, it has become increasingly necessary for listed companies to implement continuous measures to prevent such scandals from occurring.

On March 30 2018, the Japan Exchange Group announced the Principle for the Prevention of Corporate Scandals at Listed Companies (Principle) to assist Japanese corporations with their efforts.

The Principle is intended to act as a guide, from the viewpoint of preventing the impairment of corporate value, for all listed companies in Japan taking measures to prevent the occurrence of scandals and to prioritise the expected principles of conduct. The Principle includes the following six tenets of conduct to serve as the basis for the prevention of corporate scandals at listed companies. Although only brief descriptions are provided, the general content of each principle is as follows.

  • Principle 1: Understanding the actual conditions;
  • Principle 2: Fulfilling responsibilities purposefully;
  • Principle 3: Two-way communication;
  • Principle 4: Detecting 'the seeds of fraud' and responding quickly;
  • Principle 5: Applying consistent management to the group as a whole; and
  • Principle 6: Maintaining a sense of responsibility for the entire supply chain.

Principle 1 sets out the importance of ascertaining the state of compliance in the listed company as the first step in efforts to prevent corporate scandals.

Principle 2 explains the importance of fulfilling the responsibilities of management and the auditing and supervisory functions.

Principle 3 explains the need to foster a sense of unity throughout the company by enhancing communication between management and front-line departments.

Principle 4 explains that compliance violations, which can lead to serious scandals, are 'the seeds of fraud' and that, through the efforts in Principles 1 to 3, perceiving and responding quickly to these violations is at the core of the prevention of corporate scandals.

Principle 5 discusses the importance of ensuring that effective compliance management is carried out across an entire group.

Principle 6 concerns issues in the modern trading structure, focusing on the possibility that corporate scandals involving parties other than the company itself may still impact the company's main business.

Listed companies are not mandatorily required to comply with the Principle, but rather the Principle is positioned as a voluntary policy. Accordingly, no penalties or sanctions will be imposed on any listed companies if they do not adhere to the Principle. However, if the management of a listed company fails to respond in a genuine fashion to the Principle, it is likely to be subject to strict evaluation by the stakeholders. It should be noted that if a corporate scandal resulting in impairment of corporate value and damage to the stakeholders occurs in a non-compliant company, the Principle may be referred to in determining management's breach of its duty of care regarding its legal responsibility to the stakeholders. As mentioned above, the Principle merely provides guidelines for listed companies and does not provide any specific measures. The actual implementation of the Principle is left to the discretion of each listed company.

Yosuke Konno

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