Secrecy, hierarchy haunt Japan corporate culture despite Abe's reforms

Whistleblowers often more disdained than admired

TOKYO (Reuters) — A spate of high-profile scandals at leading Japanese companies show reforms and rhetoric aimed at improving the country's corporate governance do not go far enough to unwind the culture of secrecy and hierarchy that plagues Japan Inc.

Prime Minister Shinzo Abe won applause for introducing new corporate governance rules over the past two years in bid to attract foreign investment and shake-up Japan's too-cozy corporate culture.

But scandals including Mitsubishi Motor Corp's admission that it used non-compliant fuel economy testing methods for decades and last year's admission by laptop-to-nuclear conglomerate Toshiba Corp that it had inflated profits suggest much more remains to be done.

Nearly five years after Michael Woodford was fired for exposing a cover-up at Olympus Corp, the British ex-CEO of the Japanese medical imaging gear maker says he's still treated like a pariah in Japan, a view not uncommon in a corporate culture where whistleblowers are more often disdained than admired.

"It is evident to me that 80 per cent or more of senior business leaders (in Japan) consider me as someone who betrayed my company," Woodford, who now runs a business consultancy and lives in London, told Reuters in a telephone interview.

"I'm seen to be a leper in Japan."

Better protection for whistleblowers, training for board directors and stiffer penalties are among the measures experts prescribe to change an inward-looking corporate culture that values unquestioning loyalty to top bosses.

"Japanese corporations still have significant problems with the secrecy of their corporate dealings and lack of transparency in their finances and operations," said Thomas Clarke, director of the Key University Research Centre for Corporate Governance at the University of Technology in Sydney.

Abe's policy team introduced a new corporate governance code in 2015, setting rules on disclosure, shareholders' rights and independent directors.

While not legally binding, the Tokyo bourse requires listed firms to "comply or explain" why not, and a "stewardship code" introduced the year before was supposed to encourage disgruntled investors to speak out.

Experts laud the changes and say they may even be partly responsible for recent scandals coming to light.

"Bad things happen at big companies. The question is, how are they dealt with," said Jesper Koll, CEO of fund manager WisdomTree Japan. "Sweeping them under the carpet is no longer an option."


Experts also warn against wholesale adoption of a U.S. model tying executive compensation to short-term investor returns. Some caution against at pointing the finger just at Japan, given scandals around the world, including Volkswagen's cheating on emissions.

"If you start looking around the world, Japan has its problems, but are they really any worse than anywhere else?" said Andrew DeWit, a professor of policy studies at Rikkyo University in Tokyo.

Still, big gaps remain to be filled in Japan.

"At the level of policy, it is dramatic, but the content is underwhelming," Jamie Allen, secretary general of the Hong-Kong based Asian Corporate Governance Association, told Reuters.

Requiring two outside directors — Toshiba had four on its 16-member board even as the scandal brewed — is insufficient if they lack they lack the authority or independence to challenge the CEO and other inside directors.

"Most outside directors won't feel they ought to be questioning the corporate culture. They were invited to the board and they feel they ought to be polite," said Nicholas Benes, representative director of the Board Director Training Institute of Japan.

Better protection for whistleblowers like Woodford would help. The government has a hotline for anonymous complaints but provides little protection or incentive for employees to speak out. Bolstering such protection would tell companies they have no alternative than to run a clean ship, Benes said.

Glimmers of change have emerged.

Retail group Seven & i named an executive backed by U.S. activist investor Daniel Loeb as president of its parent company earlier this month, prompting its 83-year-old patriarch Toshifumi Suzuki to resign.

Battered Sharp Corp's  recent choice of Taiwan's Foxconn as its successful takeover suitor may also reflect the drive for better corporate governance.

Still, broader and deeper change will take time, bolder reforms and education at all corporate levels, as well as among institutional investors often wary of challenging management.

"It is a cultural issue — they have to give up hierarchical obedience," said University of Technology's Clarke. "They have to do this because if they cannot be more alert and agile as companies, they will not succeed in the modern world."

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