Interview February 2013

Corporate Governance: The Western Way

Simon Chelton is co-founder of Engress Intercultural Senior Leadership (ISL), a UK-based consultancy that provides offsite workshops for Japanese business leaders to enable them to develop Western approaches to working with customers, clients, partners, employees, shareholders and regulators.

The organisation specialises in intercultural aspects of senior leadership through wider consultancy, coaching and mentoring. This applies equally to other intercultural transfers, including from the UK to Japan.

Along with three other like-minded organisations—Japan Intercultural Consulting, Board Evaluation Limited and The Board Director Training Institute of Japan—Chelton recently took part in a seminar arranged by the London branches of the Japan External Trade Organization (JETRO) and the Japan Chamber of Commerce & Industry.

The seminar specifically looked at the changing environment and the UK requirements for the boards of firms.

Why are we seeing a change in corporate governance requirements globally?

Over the past 20 years or so, regulatory and legislative changes in corporate governance requirements have been introduced, often following instances of perceived major failings.

In the early 1990s, the collapse of media proprietor Robert Maxwell’s UK empire prompted a substantial rethink. Numerous reports, the introduction of new legislation and the UK Corporate Governance Code followed.

In the US, the failure of the energy, commodities and services company Enron Corporation (December 2001), saw the introduction of the Sarbanes-Oxley Act.

Last year’s problems at Olympus Corporation may cause changes in Japan.

While legislators and regulators mostly drive the changes, organisations are starting to recognise that, to be successful and do business in the global market, they need to demonstrate that their corporate governance follows best practice principles.

There is a growing understanding that effective corporate governance leads to improved commercial performance.

What does this mean for Japanese firms that are doing business in the UK?

Increasingly, they find that directors of boards are required to show how they have been conducting their fiduciary duties.

Mere attendance at board meetings will be insufficient. Through records of board meetings, they will have to demonstrate how they have monitored and reacted to risks, and how they have identified and set the strategies for their companies.

It is important to note that regulators and stakeholders in the UK expect high levels of independence, challenge and transparency in the boardroom.

Japanese companies must not only meet these challenges, but also must be able to demonstrate that they have done so.

Beyond the corporate requirements, has the recent increase in international mergers and acquisitions given rise to issues surrounding cultural aspects of integration?

As a result of the strong yen, many Japanese businesses have invested in UK and other overseas firms.

These companies are usually very successful and have given their new Japanese owners access to international markets with proven strategies and track records.

However, in some cases, there is a sense that these international assets are handled at arm’s length and are not integrated into either the management or the strategies of the new global group.

This will not always cause problems, but there is a danger that cultural dissonance and misunderstandings between the different parts of a group will lead to suboptimal performance at the very least, and—in the worst case—business failure, or sale of the overseas subsidiaries at a loss.

What can the four firms offering the global executive support package do to assist firms when cultural issues arise?

These companies have a range of skills and experience, including the support of board activities and organisation, training in legal and legislative responsibilities in both Japan and the UK, and education in senior leadership across cultural boundaries.

The partner companies intend to respond to each request from a Japanese company on a case-by-case basis, in order to understand their particular concerns.

This will also enable them to find ways to assist the Japanese firms to meet both existing and future legislative and regulatory requirements, and to optimise board performance to the best advantage of their company.

Is there recognition among Japanese firms that they need to change and are they looking for assistance?

There are indications that Japanese firms recognise that new demands in overseas markets will require more active compliance with local regulatory requirements and some degree of convergence in governance practice and structure.

However, there may not yet be a collective recognition leading to a critical mass response.

Some companies are waiting to see how the broader international corporate governance environment develops before deciding what action is necessary.

We hope that appropriate information events, such as the JETRO-sponsored seminar in London, held on 9 November, will provide an improved level of awareness to allow Japanese firms to decide on the action that would be most suitable for their company.

Has there been any reluctance or resistance to change?

It is probably not unfair to suggest that Japanese firms, like those of many countries, are cautious about the new corporate governance requirements.

The management of boards requires different skills to those needed to manage companies internally, as well as a different understanding of strategy and external environments.

When operating internationally, there is also a need to be more familiar with local cultural dynamics.

We believe that Japanese companies will want to fully understand the new requirements before deciding how to change, after which they will be extremely effective in implementation.

What are the risks involved in non-compliance with evolving regulatory and legislative standards?

The clearest risk is that of punitive action, whether through fines or restrictions on trading.

Our aim is to ensure that companies are well aware of the risks and ways to both minimise those risks and optimise their performance within the appropriate market, long before there is any likelihood of punitive action.

The next most significant risks are that Japanese companies will fail to attract the outstanding foreign executives and employees that they need, and that business partners—and potential partners—will choose not to develop business relationships.

We want to emphasise that the global executive support package is more about using the corporate governance structure to optimise company performance, than just to minimise negative risks.

Engress Intercultural Senior Leadership (ISL)
Japan Intercultural Consulting
Board Evaluation Limited
Board Director Training Institute of Japan