Challenges for Japanese Companies when Responding to Overseas Regulatory Investigations – Commentary

Investigations
Increased regulatory risk
Causes and Mitigation
Comment

Japanese companies’ focus on perceived customer satisfaction can be used to justify non-compliance with laws and regulations. Understanding the focus on customers may explain – to some extent – ​​why some of these companies are struggling to change the kind of practices that have led to damaging corporate scandals.

Investigations

When lawyers are assigned to investigate a corporate scandal in Japan, they usually conduct interviews with employees. During these interviews, employees report that complying with laws and regulations is costly: it takes time and is expensive. For example, Japanese manufacturing companies supplying goods to the US or Europe should invest in legal and compliance departments that have the ability to understand US or EU laws and regulations (or hire an outside attorney who has that expertise). ), then ensure that their colleagues are aware of and understand the relevant laws and regulations that affect them. This process takes time. Trying to comply with laws and regulations can lead to delays in production schedules if compliance issues are not funded appropriately and thought through well in advance.

Delays in agreed production schedules can cause companies to lose market share to competitors. Employees of Japanese companies are usually acutely aware of the inconvenience to customers, who expect a product to be delivered on a certain schedule or to perform in a certain way. Although the Japanese emphasis on customer service is generally commendable, the fear of causing inconvenience to customers can sometimes lead to non-compliance with contractual specifications or even laws and regulations. This non-compliance is of course not disclosed to customers or regulators. A company or its employees may then use the lack of a customer complaint that the product is “faulty” as an excuse to justify their behavior, even if the customer is unaware of the fault.

There seems to be a widespread view among employees of various Japanese companies that if a product has no safety issues, that excuses non-compliance with contractual specifications or laws and regulations. The excuse that a particular instance of non-compliance did not cause harm is often used, such as “We are not Takata”,(1) but that seems to miss the fact that there are less severe issues than Takata faced before its bankruptcy that may trigger regulatory intervention.

Increased regulatory risk

Sometimes historical misconduct is exactly that: historical. This is a one-time case caused by a peripheral event or a bad actor confined to the past. However, regulatory non-compliance due to a misguided focus on not inconveniencing the customer can often be a pervasive and ingrained part of corporate culture, not just a one-time event that happened in the past. . This makes stopping much more difficult, and even where historical issues have been identified, there is no guarantee that the misconduct will stop. If acting in this way is indeed part of a company’s culture, there is an increased risk that similar behavior will continue to occur even once the company begins to engage with regulators about historical misconduct. . This creates significant additional legal risk.

One of the prerequisites for reducing fines and creating a more favorable enforcement outcome is to ensure that the underlying behavior that led to the investigation has ceased, even if it leads to difficult discussions with customers (for example, the inability to fulfill order requirements until the product is redesigned). If the misconduct continues after it is discovered, regulators are more likely to take aggressive action against the business, and customers may drop out of the business and not return.

Causes and Mitigation

There are several reasons that lead to non-compliance in order to meet what Japanese companies perceive to be customer expectations (it is important to emphasize that this is indeed a perception, as customers generally do not wish to receive non-compliant products when they have contracted for products that comply with regulatory standards).

The first reason is the lack of a clear “top tone”. If the company’s senior management makes all employees aware that compliance with laws and regulations is the cornerstone or foundation of a successful business, others within the organization are more likely to focus on that and adhere to it.

The second reason is insufficient legal training and staff compliance. Regulations in some industries can be complex and difficult to understand – this is where staff legal and compliance training comes in. Everyone in the organization needs proper training on the relevant laws and regulations to protect the company, especially frontline employees, whose decisions determine whether laws and regulations are ultimately complied with. Corporate legal and compliance departments have an important role to play in this regard, but sometimes they will need the assistance of outside counsel. For example, it can be very helpful to have an outside lawyer conduct a company-wide risk assessment to determine:

  • what risks does the company face;
  • what risks it mitigates well; and
  • which areas need further development.

Finally, some Japanese companies use “paper” whistleblower systems (that is, their misconduct reporting systems only exist on paper). These systems often don’t work effectively in the real world because almost all employees cannot afford to report colleagues – especially more senior colleagues – who are at fault. Although not as critical as the first two points, it is clearly something that needs to change.

Comment

There is a certain irony in thinking that failure to comply with laws and regulations will benefit customers – it is in fact the opposite. Customers will not be happy to see their products recalled because they do not meet the required legal standards that they were required to meet. Not only will this cause enormous inconvenience to customers, but it will also lead to regulatory scrutiny which, in turn, can result in hefty fines and even criminal prosecution.

For more information on this subject, please contact Ayumi Fukuhara or John Lane at Nagashima Ohno & Tsunematsu by telephone (+81 3 6889 7000) or by e-mail (a[email protected] Where [email protected]). The Nagashima Ohno & Tsunematsu website can be accessed at www.noandt.com.

Endnotes

(1) Takata Corporation was a Japanese auto parts supplier that manufactured airbags with faulty inflators. The airbags would rupture and send debris into the passenger compartments of the vehicles. This resulted in a number of injuries and deaths. Takata filed for bankruptcy in 2017.

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