“Is Olympus a Company-Specific Problem, or a Systemic Problem?” – Neither, Really

We should keep in mind two things:

First, that this is neither an isolated incident, nor a systemic effect. The social rules – the way things *ought to be* – used to be relied on control things in Japan. For example, ostracism for bad behavior. Kikukawa and others will probably be punished in that way at least. That said, the rules seem to be breaking down because of economic changes stating in 1990 or the trend oflayering US concepts onto the Japanese system. As old controls fail, the Japanese system can facilitate self-interested behavior. So, we should expect some more of this, but not a lot more. But it is useful to keep in mind that the Japanese system does have some advantages. Insiders, for example, are experts in the companies they direct. Stakeholders and insider coalitions on Japanese boards seem to control some bad behavior like excessive CEO pay. Of course, the downside is obvious in the Olympus and other cases.

Second, the US does not show much better. The US system is broken because the directors and managers have no negative consequences for failure like ostracism or prosecution in Japan. No corporate governance system canwork without agreed and shared beliefs supporting it and punishment consequences like ostracism or worse. In the US we are numb and lack outrage so there is no shared agreement about the way it ought to be and we allow behavior that should shock us to go without comment. We are in worse shape, I think, than Japan. At least in Japan they are still embarrassed and apologize. In contrast, managers of conflicted firms in the U.S. like our investment banks are walking around proudly in the US – pockets full. It is not at all clear that things will get better in Japan if they adopt U.S. style corporate governance.

What is a better system? We need to agree (among all of us) on a shared idea of what is fair and proper dealing in corporate relations. And, second, we need the laws and institutions that formalize that understanding with appropriate consequences for bad behavior.

I think we are a long way off and a big economic crisis away from that.

Posted on behalf of:

Robert N. Eberhart

Stanford Program on Regions of Entrepreneurship and Innovation, Graduate School of Business, Stanford University
Project Leader, Stanford Project on Japanese Entrepreneurship

The Board Director Training Institute (BDTI) is a "public interest" nonprofit in Japan dedicated to training about directorship, corporate governance, and related management techniques. It is certified by the Japanese government to conduct these activities as a regulated nonprofit. Read a summary about BDTI here, and see a menu of its services for both corporations and investors here.

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