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Japan: dealing with corporate scandals

Tadashi Sato

What is the "Guideline for Independent Committees relating to Company Scandals"?

In July 2010, the Japan Federation of Bar Associations (JFBA) formulated and published its Guideline for Independent Committees relating to Company Scandals. It was partly amended in December 2010. The Guideline can be found online (in Japanese only) at www.nichibenren.or.jp/library/ja/opinion/report/data/100715_2.pdf.

The term "independent committee" is used here as the English equivalent of the Japanese term daisansha-iinkai, the direct translation of which is "third-party committee." Also, the term "company" refers here not only to companies but also to various other organisations and entities including Japan's national government and local governments.

In recent years, there have been an increasing number of cases in which independent committees mainly consisting of lawyers are formed in response to company scandals: criminal, illegal or unethical behaviour by a company or its representative(s) that results in strong public criticism.

Factors contributing to this trend include a growing awareness of compliance requirements and increasing social demand for appropriate corporate operations. Consequently, if a company fails to deal with a scandal appropriately, it will be subjected to harsh criticism from the public and media and, ultimately, public trust in the company will be lost.

Under such circumstances, one means of crisis management for the troubled company is the formation of an independent committee to perform a full investigation of the relevant facts and to recommend measures to prevent recurrence. The ultimate aim here is to restore public trust and preserve the sustainability of the company.

Before the Guideline was published, there were no rules governing independent committees. Therefore, although compliance is not mandatory, the Guideline is important to the actual practice of independent committees and is widely known to Japanese companies.

Outline of the Guideline

The Guideline applies only to independent committees that consist entirely of members who are independent from the subject company and does not apply to committees whose members include at least one of the subject company's directors or employees. It is also stated that it represents best practices but compliance is not mandatory.

The purpose of forming an independent committee is to ensure accountability to its stakeholders in terms of corporate social responsibility. To ensure this accountability, an independent committee should conduct a thorough investigation of the background of the scandal, make relevant findings of fact, properly assess these facts and analyse the causes of the scandal, and make recommendations for measures to prevent the recurrence of such scandal.

The scope of an independent committee's investigation should include not only the events of the scandal itself, but also other factors including the internal control system and corporate culture of the subject company. An independent committee should make findings of fact by careful examination of the evidence. It can determine not only that a certain fact exists but also that a certain fact is suspected to exist to a certain indicated degree of certainty. The committee should disclose the results of its investigations to the company's stakeholders with the ultimate aim of restoring the company's trust and sustainability.

The Guideline provides that an independent committee must conduct neutral, fair, objective investigations for the sake of the affected company's stakeholders, from a standpoint that is independent from the affected company. For example, any person who has an interest in the company (the company's lawyer, for example) may not be a member of such independent committee. The committee should request the affected company to take concrete measures to fully cooperate with the investigation and such company must fully cooperate with the investigation conducted by the independent committee.

Upon the formation of an independent committee, the affected company and such independent committee must execute a document that sets out certain understandings and obligations that are in line with the Guideline. The terms of the Guideline thereby become contractually binding on the parties to such document.

An independent committee may communicate with public institutions, such as the public prosecutor's office and the Securities and Exchange Surveillance Commission, in the course of its investigations.

Finally, the Guideline also makes reference to the number and the eligibility criteria, of committee members, and the method/technique for performing investigations.

Future outlook

Now that three years have passed since it was first published, various questions and issues have arisen regarding the Guideline and compliance with it. Further in-depth discussions regarding the Guideline are now needed to clarify its requirements and improve its application, thereby improving the practices of independent committees.

Tadashi Sato

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