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November 30, 2000

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Asiaweek Time Asia Now Asiaweek story


Current scandals may help reinvent Japan

By Cesar Bacani and
Murakami Mutsuko / Tokyo

Go to a list of new and old business practices

Go to a list of newcomers

ANOTHER DAY, ANOTHER ARREST. OR SO IT SEEMS to corporate Japan. On June 13, police picked up Fujita Ichiro, who in May was designated president of giant Dai-Ichi Kangyo Bank (DKB). Last week, they rearrested Sakamaki Hideo, until recently the head of Nomura Securities, the country's largest brokerage house. He was first detained in May. Twelve other current and former senior executives and managers from the two companies are being held at the Kosuge Detention Center in Tokyo. Their alleged crime: paying off sokaiya, gangsters that disrupt stockholders' meetings by asking embarrassing questions and engaging in unruly behavior.

Over at All Nippon Airways (ANA), a purge of a different sort is in progress. Honorary chairman Wakasa Tokuji, chairman Sugiura Takaya and president Fukatsu Seiji have all announced their resignations. The moves came after 300 ANA middle managers signed a petition supporting Fukatsu, who had earlier protested the appointment of Wakasa's son, Wakasa Masaharu, as president of an ANA subsidiary. The junior ranks are also making a difference at Bandai, maker of the current hit toy Tamagotchi. After nearly all of them objected to a merger with videogame specialist Sega, Bandai president Yamashina Makoto called off the plan -- and then stepped down.

What is going on? "Japanese business is embarking on a journey to reinvent itself," says Fujie Toshihiko, a professor of business management at Shukutoku University. He points to a growing militancy among the junior ranks as a key reason: "Middle managers were the ones whose salaries were cut [during the 1991-96 recession]. They are furious to discover what their superiors were doing while they were suffering." There is pressure higher up too. Prime Minister Hashimoto Ryutaro is widely seen as the force behind the anti-sokaiya crackdown. He is also pushing the "Big Bang" reforms that would open the financial markets to new competition, including from foreigners, by 2001.

Japan is being dragged kicking and screaming into a new way of doing business (see box, right). At the annual meeting in late May of the powerful business group Keidanren, the federation's chief and Toyota chairman Toyoda Shoichiro urged members to focus on corporate behavior. He described the sokaiya scandals as a problem not only of Nomura and DKB: "They can shake up Japan's entire corporate world." In a survey of investors in April, the majority of respondents said the upheavals are early signs of the pain Japan Inc. will experience as it is reborn. The watchwords of the new era: ethics, compliance and accountability.

The question is whether corporate Japan is up to the challenge. "It will require a drastic change if businesses are to cut their historical ties with sokaiya," says Kubota Hideaki, a Tokyo lawyer who specializes in gangster cases. Everyone remembers how Sakamaki got the top job at Nomura in 1991. A similar sokaiya scandal had rocked the company and the man rearrested last week had vowed to stop the practice once and for all. Other observers worry about the government's resolve. "Mr. Hashimoto is exercising strong leadership in pushing his reform plans," says Wada Jun, an executive director at a major Tokyo retailer. "But can he really fight conservative politicians and government bureaucrats?"

Since the sokaiya scandals broke in March, Tokyo prosecutors have been relentless in gathering evidence and filing charges. The message: forget Nomura circa 1991. This time, executives would not be allowed to simply resign -- and then rejoin the company as board directors later, which is what happened to the Nomura officials implicated in the sokaiya affair six years ago. Hashimoto had made his feelings known when DKB announced in May that its top officials were stepping down to take responsibility for the scandal. Calling them "cowards," the PM implied stiffer punishment: "Resigning [alone] does not solve the problem."

Parliament grilled both Sakamaki and Kondo Katsuhiko, who was DKB president when the sokaiya payments came to light. The Finance Ministry banned the two companies from underwriting government bonds and bidding for them at auctions. Institutional investors, including pension funds and local governments, stopped dealing with the two firms. Ordinary citizens also shunned them. Even as DKB was bombarded by protest phone calls, depositors pulled out more than $1 billion from what until recently was Japan's fourth-largest bank.

The sokaiya -- gangster -- at the center of the scandals is Koike Ryuichi, who has been arrested. The prosecutors say DKB and its subsidiaries lent him some 50 billion yen ($438 million at the current exchange rate) without any collateral since 1985. Koike allegedly used some of the money to buy shares in Nomura, thus gaining entry to the company's stockholders' meetings. In 1995, the investigators charge, Sakamaki paid the racketeer $436,000 so he would not question the rehiring of the Nomura executives who resigned in 1991. Koike is also said to have received more than $100 million as compensation for his stockmarket losses between 1989 and 1996.

Nomura moved to limit the damage by naming 51-year-old Ujiie Junichi to replace Sakamaki, 61 (see story, page 56). A U.S.-educated economist, Ujiie spent most of his career running Nomura operations in Switzerland and New York before returning to Tokyo headquarters to head the corporate planning office. But DKB was not as smart. After company president Kondo resigned, the bank named now-detained Fujita Ichiro as his successor -- never mind that Fujita was in charge of loans when DKB was supposed to have given racketeer Koike millions in unsecured borrowings. The bank had to withdraw the appointment when this little detail leaked out.

The fiasco highlights the tradition of tasukigake. The posts of chairman and CEO are rotated among executives who originally belonged to the constituent companies of a merged firm, Dai-Ichi Bank and Nippon Kangyo Bank in this case. The new DKB president, Sugita Katsuyuki, 54, joined Dai-Ichi Bank before it merged with Kangyo in 1971. But instead of bringing in a Kangyo executive as chairman, he is keeping the post vacant. The bank's middle-ranked managers applaud the decision. Says a junior executive: "We expect the sense of crisis to deepen if top executives were to remain unaware of growing public criticism and continue the same old tasukigake appointments."

Another practice is under fire. At ANA, Wakasa was named to the top spot in 1971 after a stint as a vice minister at the Ministry of Transport. The practice of a regulator moving to a company formerly under his jurisdiction is known as amakudari (literally, descent from heaven). Wakasa was later arrested and convicted for violating foreign-exchange laws in connection with the 1970s Lockheed aircraft bribery scandal, but he remained at ANA's helm. Talk of nepotism joined the murmurings against amakudari when Wakasa's son was named to head an ANA-affiliated hotel in May. (He decided not to accept the post and left ANA last week.)

For the airline's middle ranks, the point of no return was reached when Wakasa, 82, pushed through the appointment of a fellow amakudari to replace president Fukatsu, who had announced his resignation to protest what he regarded as Wakasa's high-handed ways. "Many of us were getting ready to leave too," recalls a manager who persuaded his peers to sign the protest letter at beer halls after work. A non-amakudari and Fukatsu ally, Nomura Kichisaburo, 60, has now been named ANA president.

"Many senior executives still live in the past, unaware of the changes that are sweeping their own companies," says management consultant Morizono Yoshio, who is acting vice chairman of the 680-member Tokyo Managers' Union. He believes that younger managers and employees will continue agitating for new ways of doing business. "They belong to the generation born after the war," says Morizono. "They grew up and were educated in the precepts of democracy. Perhaps the majority of salarymen prefer not to question their superiors, but top management cannot ignore the new voices. That is why Nomura, in the end, ushered out the old guard to start anew. What is happening today is similar to the situation after the war, when the old power holders were swept away by a new group of untainted individuals."

What would the reinvented Japan Inc. look like? More accountable and open, ideally. "Corporations can no longer afford to secretly raise dubious money for dubious uses," says Morizono. "They have to move away from scandals." That means standing up to sokaiya -- and the best way for executives to arm themselves against blackmail is by making sure business operations are above-board. When the inevitable lapses occur, they have to learn to take responsibility and tell shareholders what is being done to rectify them.

"Japan has to build a new management system with strong surveillance functions," says academic Fujie. Nomura has formed an Internal Surveillance Committee with three outside lawyers as members. DKB plans to set up a body that will monitor the bank's compliance with laws and company regulations. Fujie expects more changes: "In the new Japan, there may be more lay-offs and early retirement. Lifetime employment will be a privilege granted only to some people. And managers will give priority to new corporate values such as streamlined operations and efficiency."

Much depends on the fresh batch of CEOs and the middle ranks from which they sprang. "We came through the student riots of the 1960s," says executive director Wada, 56. "At school homecoming days, many of us reminisce about the time 30 years ago that shook the nation." They know that Japan is facing another revolution. "Unless companies change, they may not survive the competitive era that the Big Bang and the further globalization of the economy will bring," warns Wada. If they strengthen Japan Inc. for the coming wars, the scandals will be worth all the current pain.

This edition's table of contents | Asiaweek home



U.S. secretary of state says China should be 'tolerant'

Philippine government denies Estrada's claim to presidency

Faith, madness, magic mix at sacred Hindu festival

Land mine explosion kills 11 Sri Lankan soldiers

Japan claims StarLink found in U.S. corn sample

Thai party announces first coalition partner


COVER: President Joseph Estrada gives in to the chanting crowds on the streets of Manila and agrees to make room for his Vice President

THAILAND: Twin teenage warriors turn themselves in to Bangkok officials

CHINA: Despite official vilification, hip Chinese dig Lamaist culture

PHOTO ESSAY: Estrada Calls Snap Election

WEB-ONLY INTERVIEW: Jimmy Lai on feeling lucky -- and why he's committed to the island state


COVER: The DoCoMo generation - Japan's leading mobile phone company goes global

Bandwidth Boom: Racing to wire - how underseas cable systems may yet fall short

TAIWAN: Party intrigues add to Chen Shui-bian's woes

JAPAN: Japan's ruling party crushes a rebel at a cost

SINGAPORE: Singaporeans need to have more babies. But success breeds selfishness

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