MBAs can help stop the old-boys network


Corporate governance reform has been a hotly debated topic in Japan for more than 15 years. In 1997, Sony Corporation radically reformed its board of directors and replaced insiders with independent non-executives. But change in Japan has since come in fits and starts: legal reforms to allow firms to adopt a Western-style board with committees; changes in internal controls, modelled on the Sarbanes-Oxley Act of 2002; and the requirement that firms listed on the Tokyo Stock Exchange (TSE) have at least one independent director.

But in global corporate governance rankings, Japan remains at the very bottom, far behind the US, European nations and some other Asian countries. Today, only about half the TSE-listed firms have non-executive directors. Those that do, average only about two each and many of the directors are not independent but, rather, representatives of important clients or banks, or are retired government officials.

The Olympus scandal is all the more shocking because it occurred at a firm that, by Japanese standards, appeared to have relatively good governance. It looked better than average, having three non-executive directors who appeared to be independent. The firm was active and successful in global markets, and respected by investors worldwide. But perhaps the bombshell was that members of the board of corporate auditors ("kansayaku") were intimately involved in the fraud.

Since that scandal broke, there have been increased calls for independent directors, and for this requirement to be made law should firms be unwilling to reform.

However, the difference would be minor were more non-executives added without a deeper reform of the system and attitudes.

In most firms, chief or other senior executives select the non-executive directors. Should they speak up, ruffle feathers or ask difficult questions, their terms of service will not be extended. Compensation for non-executive directors is significant, especially compared to corporate salaries in Japan. Thus, no matter how independent directors may appear, they are compromised if their position and income depend entirely on the chief executive and internal directors.

Furthermore, because non-executives are usually selected because they are known to the chief executive and other board members, they are likely to be members of the same networks — such as schools and golf clubs. Even if non-executives are independent, their function is highly constrained on most Japanese boards.

One of the most important responsibilities of a good board is appointing a chief executive with the right skills and vision. Non-executive directors are critical to ensuring this is based on objective criteria, and not politics and loyalty.

Typically, the president selects his successor, becomes chairman, and then retires to be an advisor. Thus, a president owes his position to his predecessor, and is entangled in ties of loyalty — not only to the chairman, but to several previous generations of top executives who are often still in the building and active behind the scenes.

This suggests the need for a nominations committee dominated by independent, non-executive directors. Only a tiny fraction of firms have adopted a system that mandates nomination, compensation and auditing committees dominated by non-executive directors.

For most firms, the idea that non-executives could determine the next chief executive is too shocking to even contemplate. But the Olympus scandal shows very clearly what can happen when bonds of loyalty among several generations of insiders become more important than shareholders, employees and the future of the firm.

Why has change been so slow and why has there been so much resistance? In part, there is still a myth — left over from Japan’s high-growth days — that Japan is unique, that business here follows its own rules, and that Western models do not apply. Those who resist non-executive directors tend to frame it in cultural terms—that outsiders who have not spent their career at a firm cannot understand its DNA and are not qualified to make, or advise on, important decisions.

Perhaps there is some truth in this. Japanese firms remain far behind their global counterparts in creating transparent and objective systems of talent development and succession planning. Corporate executives, in many cases, are behind their global counterparts in basic management literacy, understanding basic principles of strategy formulation, corporate finance and supply-chain management.

This makes it easy for executives to say that important decisions regarding leadership and strategy must be made based on intuition, and that strong networks are built as a result of employees being at the same firm throughout their careers.

For corporate governance to be truly effective, however, executives and non-executives must move away from these old-fashioned notions. Management education, through MBA and executive programs, can provide executives with world-class management practices and a shared language of business and management, so that boardroom decisions are not based on intuition, loyalty, personal relationships and vague appeals to uniqueness.

© Japan Today

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It's easier to get away with financial crimes and illegally siphoning away money and covering it up when you're in bed with your close pals. I cannot see the old guard giving up their ill gotten gains easily. Share holder value... What's that they will say.

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But perhaps the bombshell was that members of the board of corporate auditors (“kansayaku”) were intimately involved in the fraud.

Really now? then what do you call an independent audit by a Big 4 firm? an optional extra?

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@NeoJamal: independent big 4 audit firm, eh? oh... do you mean like Chuo Aoyama Pricewaterhousecoopers? A Big 4 audit firm that got suspended & ultimately dissolved because of audit fraud at Kanebo (its Japanese client) back in 2006? Do you mean that sort of Big 4 Japanese audit firm? Oh no... obviously the Olympus scandal must just be some sort of misunderstanding... there is no way that a Japanese-managed Big 4 audit firm could be intimately involved with complying with its Japanese client to commit fraud.

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Just like MBAs helped stop the old-boys networks in the USA eh? Its absolutely no surprise that we see a disproportionate amount of Harvard MBAs as CEOs and on the board of directors of fortune 500 companies. They all keep it in the same club!!!

There is no guarantee that if you employ people with MBAs that all of sudden your corporate governance will change overnight, some people are just as greedy no matter what their education is. You don't have to look any farther than Wall St and the housing/financial crisis, we had well educated people, some with harvard, yale, columbia MBAs doing very very dirty things behind closed doors and what happened? We had a large investment bank collapse, insurance companies on the brink of insolvency, crash in the markets, mortgage companies taken apart, government bailouts... in other words, one giant mess that is still being cleaned up today.

Its not a question of putting people with MBAs in the top positions, if they are unethical they'll still screw over the shareholders at the drop of a dime.. you need to have government oversight to make sure that these people don't try their shady tactics again, or at least a strong independent watchdog, that doesn't cowtow to corporations, that oversees corporate boards.

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the author works at a uni, perhaps biased me thinks

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Where is your proof Napolean?

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Nope, I think you will find that even with an MBA boardroom decisions will still be based on intuition, loyalty, personal relationships and vague appeals to uniqueness for a long time to come.

GW yes you hit the nail on the head. And after the title I was searching the entire article for the relevant bit - which came right at the bottom with no hint as to HOW exactly an MBA will overturn decades of old-fashioned notions. They already KNOW it, they just dont want to DO it.

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Nicky, yes if you click that external link & click once or twice more you find the writer is a biz dean at a uni.........and I kinda laughed when it all came down tot he last paragraph do DOH!

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Im not so convinced that any of this reallymattersso to speak. If creditors and equity investors were really interested in corporate governance, you would expect them to be punishing firms that maintained older insider dominated forms with a higher cost of capital while Sony and other firms that adopted the company with committee system (or which at least appointed a high proportion of outside or independent directors) would be rewarded. This hasnt happened. Most firms, even ones with a very high percentage of foreign shareholdings, do little more than meet the minimum obligations imposed by the Tokyo Stock Exchange`s listing rules and the Companies Act. In fact, about a third of the companies that adopted the Committee system have already abandoned it and proposals for yet another type of board structure in the Companies Act have already been released (this time for a board having only one committee instead of three).

Im also a little unclear about how MBAs are going to solve the problem. If, as the author says, the current system rewards loyalty and inside connections, then there is going to be little incentive for executives to get MBAs. If institutional investors were demanding it and punishing companies who didnt invest in it, then it might happen. Which brings me back to my previous paragraph - they dont seem to be doing this. So even if more MBAs were an effective solution to the perceived problem (not an established premise I should add) the incentives for it just dont exist right now.

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Yep. Got it GW. Hitotsubashi Business School. Good school actually. And whaddya know, they are recruiting for the MBA course right now!

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Japanese firms remain far behind their global counterparts in creating transparent and objective systems of talent development and succession planning. Corporate executives, in many cases, are behind their global counterparts in basic management literacy, understanding basic principles of strategy formulation, corporate finance and supply-chain management.

Completely true. And these shortcomings, disguised for many years by Japan's rapid growth based on a highly-protected home market and a under-valued yen, are becoming fatal flaws for Japan Inc. as the global economy of the 21st century continues to move forward unabated. Capital and talent will flow to the companies/countries with the best management and governance practices. And, as the article states, Japan is way down the list on these.

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an MBA..... the most overrated, overpriced, waste of time a person can do. The "I have no idea what I want or can do" Degree.... but I'm looking forward to you paying me over-inflated prices for my newly acquired 'expertise'. I would not touch one, or hire a person with one for any reason.

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At least one of the people who just got arrested for his role in he Olympus fraud went to business school. Hisashi Mori, the guy who took Woodford's phone off him and told him to get the bus to the airport, went to NYU Stern in the US. And somewhere called Hitotsubashi in Japan, which the writer of this article may have heard of.

But maybe they've revised the curriculum since then?

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Snarking at the author aside, Olympus's problems seemed to start when their career optics-company managers weren't making enough money making optics products, and let a bunch of financial whizzes from Nomura Shoken through the door.

I wonder if a lot of their problems, and the economic problems the rest of the world has had over the last few years, don't come down to too much power being given to people who are experts in things called "Business" and "Finance" and not enough to people who are experts in the thing their company is actually supposed to be making.

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We don't want to change the old boys network. We will never let it change.

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