Outside Director Lessons #4: What is Worse Than the Company Going Under?

BDTI - What is worse than bankruptcy?

Here is an example of the sort of thing that can happen at mid-size companies in Japan. Let’s say that at the time when you join the company as an outside director, the son of the founder is the CEO.  The son is an engineer by training, but when his father became too old to lead the company, the son took his place. The son is the nicest, most gentle man in the world, but he does not have enough management experience or the character to serve as a decisive leader at a time of disruptive technological change.  It is clear to you that that he will have to step down, and the board will have to find someone from the outside who has more managerial experience and decisiveness.

At that point, your self-appointed job becomes “finding a soft, smooth way to persuade the CEO to step down”.  If things go well, you might do this by having dinner with him in a private room at a restaurant, spending the first two hours or so discussing all the strategic challenges the company faces, and then saying something like “I need to ask you, are you confident that you can lead the company under these circumstances?”  Because he is such a good, trusting person, the son might honestly reply “no, I am not confident”.  You might then reply, “in that case, you are not the right person to be President of the company.” He will probably not disagree.  At that point, it would be clear to you that he took on the CEO role because his father had wanted that, – not because he actually wanted to be CEO and had a plan in his mind. In fact, what he probably most wanted to do was to get back to an engineering job.

Let’s suppose he then steps down smoothly when we find a replacement CEO.  Two years later, the replacement might CEO call you up and say, “banks are asking for my personal guarantee.. should I give it?”, and if you are like me, you would advise him to never give it, as doing so would unfairly expose him to far too much personal risk.  But in most cases you would never imagine that the founder’s son might have made such personal guarantees in the past.  Rather, you would tend to think that  the new CEO is just asking because the banks are getting finicky and asking for a CEO guarantee for the first time.

You could be dead wrong.  The founder’s son might have guaranteed almost all of the company’s bank loans, and then forgotten to remove his guarantee when he resigned.  Years later, if the company files in bankruptcy, he will have to to declare personal bankruptcy and then have a very large portion of his salary docked for years thereafter to pay what he can to the banks. In total, his payments to the bank might be less than a few percent of the total unpaid balance, but him, the series of events will ruin many years of his life and of course destroy his personal wealth at the time.

When I have seen things like this happen, I have realized that: a) good governance requires us to discuss and anticipate issues like this, and that b) when governance does not function well – for example, when a board cannot decide to sell the company to a willing buyer when it still has the chance,  – the damage is more than just financial loss. For some people, the damage is also personal, human pain, counted essentially in years of happy living that have been lost. Or worse, the damage can be physical pain and even death, as it was in the governance failures that led to minamata-byo, the opioid crisis, and Mitsubishi Auto coverup case. Institutional investors lose the money they put up for their shares, but that loss does not not have a personal impact.   You “lose” future compensation as a director.  In contrast, the founder’s son loses his family’s wealth, and suffers through a very frugal lifestyle for many years thereafter.

So over time, I have learned that the difference between good governance and bad governance can be personal pain.  I saw the same thing when I was appointed as an independent director at Livedoor after the scandal.  It was an emotionally painful, stressful time for many of the employees, who had done nothing wrong.

Nicholas Benes
(writing in his personal capacity and not representing any organization).

If you thought this post was helpful, here are many other posts in this series, which will continue! Please come back for more. 

Outside Director Lessons #11: Committees Need Rules(click)

Outside Director Lessons #10: Directors Set Direction(click)

Outside Director Lessons #9: Appointing the CEO(click)

Outside Director Lessons #8: The Role of the Board(click)

Outside Director Lessons #7: If No D&O…Get It Yourself(click)

Outside Director Lessons #6: Insist on Total Independence!(click)

Outside Director Lessons #5: Being a Whistleblower Hotline(click)

Outside Director Lessons #4: What is Worse Than the Company Going Under?(click)

Outside Director Lessons #3: How Suddenly Companies Can Collapse! (click)

Outside Director Lessons #2: My First Experience as an Outside Director (click)

Also, kindly please read the post below, consider making a donation(click) to BDTI so we can keep contributing to good governance, Japan’s future, and sustainability… and share these posts widely!

Outside Director Lessons #1: Genesis of Director Training Nonprofit BDTI(below)

On 4/16/2023 I became 67 years old. On this “occasion” I would like to ask you to consider donating to The Board Director Training Institute of Japan (BDTI), which I have led in offering director training in Japan for almost 14 years now, training about 3,000 persons in our programs, and many more via e-Learning.  At the same time, going forward, I also will attempt to make a series of posts (on this discussion forum) giving a perspective or story related to corporate governance, based on recent events and/or my own 15 years of experience sitting on boards here (or the experiences of people I know), that will be light, easy reading but hopefully also be thought-provoking.

BDTI’s work is “missionary work” that requires passion and commitment. Perhaps these stories will be of interest in terms of revealing why I do what I do, the challenges that face Japan and its companies and investors, and how they can be overcome.

Because Japan does not have a customary or mandatory requirement for serious director training, BDTI’s courses need to be “subsidized” in some way so that we can offer high-quality programs at a price point that is low enough to attract our (overly frugal) customers, –that is to say, at prices that on a per-person-per-hour basis are one-third of less than in other developed markets.  (Even paying low salaries and donating a lot myself, this is the market reality). Moreover, “G” is the foundation on which the “house of ESG” is built, but that fact is not as widely recognized as it should be.

We “subsidize” and lower our prices in three ways: 1) first, by skimping on all expenses at a small office in the suburbs of Tokyo; 2) second, by receiving donations from individuals and  institutional investors who think it is important to improve the effectiveness and trustworthiness of corporate governance in Japan; and 3) third, by collecting and normalizing a long-term “big data” structured  database of information (including text), and selling access to it to large fund managers, including large quantitative funds.

At long last, Japanese institutional investors are now considering to support us, but this will take a bit more time…so we need your help, even if it is just a few thousand Yen.

BDTI’s Update and Plans for FY2023:  https://blog.bdti.or.jp/en/2023/03/27/fy2023/  – This contains the most recent information, concisely.
BDTI’s Training Programs:  Best to look at:  https://bdti.or.jp/director-training/ using Google Translate.

To Donate: 

Please share this post widely !!!

Thank you,
Nicholas Benes
Representative Director, The Board Director Training Institute of Japan


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