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Publication of Principles for Preventing Corporate Scandals

Japan recently solidified its commitment to stem corporate misconduct by putting the onus on companies to foster a culture of compliance with the Japan Exchange Regulation’s (JPX-R) publication of a set of guidelines entitled “Principles for Preventing Corporate Scandals” (the “Principles”).

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These Principles aim to prevent the type of deficiencies in corporate governance at the heart of recent high-profile corporate scandals that result in negative financial and reputational consequences for companies and the loss of consumer confidence in the financial markets as a whole.

JPX-R expect compliance as routine business operation

The JPX-R is an independent self-regulatory body with authority under the Financial Instruments and Exchange Act to monitor corporate regulatory compliance in the Japanese securities markets. In February 2016, the JPX-R issued similar guidelines on how it expects companies to respond when facing a corporate scandal in its Principles for Responding to Corporate Scandals. These new guidelines now aim to prevent such scandals in the first place by stressing regulators’ expectations that companies make culture and conduct risk part of their routine business operations.

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Principle 1: Gain a thorough understanding of actual situation
This principle essential highlights the importance of performing an assessment of —

  • Corporate risks;
  • Its policies and procedures for compliance;
  • Whether its existing measures are effective;
  • How it can proactively identify and resolve potential issues; and
  • Whether it is transparent and honest with stakeholders, such as business partners, customers and employees.

The principle also stresses the need to be sensitive to changing social perceptions and willing to change their compliance efforts accordingly. Finally, companies should ensure compliance measures function on a continuous and autonomous basis.

Principle 2: Fulfill responsibilities with sense of mission
This principle emphasizes the importance of management support for effective compliance functions. Specifically, management should —

  • Enthusiastically promote its commitment to compliance;
  • Actively support compliance initiatives, for example, by ensuring the investigation of compliance failures;
  • Avoid sending inconsistent messages by establishing reasonable business goals in line with the company’s actual abilities and market environment to avoid situations that could induce non-compliance;
  • Empower those responsible for compliance function with the appropriate authority, structure and resources; and
  • Hold those responsible for non-compliance accountable based on the objective analysis and evaluation of established information.

Principle 3: Encourage two-way communication
This principle highlights the important deterrent effect of open and free-flowing information within a company. Under this principle, management should:

  • Promote open communication within the organization by actively engaging with the workforce on relevant issues and encouraging employees to promptly raise any issues as soon as they arise to help detect non-compliance early; and
  • Ensure proper training of middle management and empower them to encourage two-way communication within an organization.

Principle 4: Detect non-compliance early and respond swiftly
This principle acknowledges that promptly identifying and addressing compliance issues can control their negative impact. Under this principle, management should :

  • Instill an awareness of compliance throughout the company to increase vigilance against compliance violations;
  • Regularly review and enhance compliance functions to ensure they keep pace with potential risks;
  • Clearly define compliance messages and objectives; and
  • Embed processes for early detection, rapid responses and subsequent corrective action into the corporate culture.

Principle 5: Execute consistent business management throughout entire corporate group
This principle stresses the importance of a consistent approach to compliance across a corporate group. It cautions against a one-size-fits-all approach and advocates an approach that assesses each particular situation so companies can implement appropriate compliance measures for the particular compliance risks of each group. In particular, the Principle advises companies to assess acquired entities and instill in them the appropriate culture of compliance.

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Principle 6: Be accountable in view of relevant supply chain
Principle 6 advises that companies should be aware that their compliance-related obligations may extend to their business partners, suppliers and entire supply chain. It provides that companies should —

  • Take into account their and position in the respective market/supply chain; and
  • Impress the importance of compliance upon a company’s subcontractors and business partners and take reasonable steps — including the use of contractual provisions — to ensure such parties appropriately satisfy their compliance obligations.

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Companies may use these guidelines to better understand how Japanese market participants are expected to manage compliance within their culture to avoid corporate scandals and/or regulatory fines. The Principles put the onus on companies to implement policies and procedures that are appropriate based on the relevant facts and circumstances. This suggests a more risk-based approach to compliance in Japan and greater burden on companies to be vigilant and proactive in carrying out their compliance functions.

Embedding compliance into corporate culture means all employees must be able to appropriately weigh the risks and rewards of their actions, including the risk of non-compliance. Employees will only be aware, prepared and motivated to do so, however, if they understand what compliance entails and how it affects them. Thomson Reuters’ specializes in providing training solutions — such as our Conduct Risk Suite, as well as online Code of Conduct and Ethics and Compliance training courses — that teach employees what various laws and regulations require, the most effective way to comply with them and how to address issues that arise.

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