Nobuhiro Oka: Compliance and Modern Corporate Management

2024/09/02

It must have been over 20 years ago. I was asked to speak at a training session for newly appointed directors at a listed company. I believe the theme was "Compliance and Corporate Management."

After the lecture, the company's senior managing director happened to approach me. He whispered in my ear, "Mr. Oka, you can't put food on the table with compliance."

Using a car analogy, it was an era when profit-generating businesses were seen as the accelerator, while compliance was viewed as the brake. Compliance was considered a troublesome and annoying presence that didn't earn money. Time has passed since then. Today, compliance has become the standard of conduct that drives corporate management, and a single violation can lead to a situation that threatens a company's very survival. However, ever since that lecture, the question of whether compliance and profit are in conflict has always remained within me.

By the way, there are various definitions of what compliance is. In a broad sense, it is understood to include not only legal compliance but also adhering to social and corporate ethics, following a company's own internal rules, responding to social demands, and acting with integrity.

So, what are these "social demands"? The complexity of modern society knows no bounds. Not only are laws revised, but the substance of required corporate ethics deepens by the moment. The values of individual citizens have also diversified. Lifetime employment in Japan has collapsed, and employee loyalty to companies has weakened. Under the Whistleblower Protection Act, internal reporting systems are well-established, and social media has turned individuals into information broadcasters. To gain trust from a constantly changing society, compliance should not be viewed as a static, fixed concept. The essence of compliance lies in cultivating the ability to constantly ask oneself: what actions are necessary to correctly face a changing society, to not betray social trust, and to earn that trust? To achieve this, corporate ethics should be the most emphasized part of the definition of compliance. Business and ethics may seem incompatible at first glance, but corporate ethics exists precisely in the balance between the two. It is vital for a company to pursue profit and maintain efficiency and rationality while upholding integrity, responding sincerely to social demands, and providing value. Compliance is a dynamic and continuous corporate mission to sensitively understand society in unpredictable circumstances, respond to its demands, and continue striving to earn trust.

Now, let us return to the opening question: "You can't put food on the table with compliance." Since a company is a legal entity aimed at profit and focuses on external activities to gain earnings, there is no doubt that a corporation exists to pursue profit. For those on the front lines, the pursuit of profit is a serious and always urgent issue. From one perspective, a compliance violation only becomes a problem once it is discovered, whereas profits are presented strictly as figures right in front of one's eyes—not just annually, but every quarter. When an as-yet-unseen compliance violation clashes with the acquisition of immediate profit, human beings, due to their weakness, naturally prioritize profit regardless of whether there is malice, resulting in a compliance violation.

The manifestation of this is what the world calls a corporate scandal, and this is one reason why corporate scandals never disappear. The question of compliance versus profit from over 20 years ago is a fundamental and essential problem inherent in modern corporate management—a deep-rooted issue that is still alive today.

In modern corporate management, compliance and profit should be viewed as one and the same. Managers are now required to state clearly that profits obtained through compliance violations are no longer considered profits, that they do not want such profits, and that they should not be acquired. Indeed, "trustworthy profit" and "rightful profit" are what corporations in modern society should pursue. When every individual in a company asks themselves what social trust is and what actions should be chosen to earn that trust, they finally face the essence of compliance in modern society. Ethical companies, without exception, set forth a purpose or mission backed by a management philosophy. This serves as a management guidepost in times of doubt or trouble. By accepting social changes based on a management philosophy, companies can earn profits compatible with compliance, create new value, and contribute to society. This is the key to compliance in modern corporations. By looking closely at modern society and continuing to ask what management should be for that purpose, companies can walk the path toward improving corporate value over the medium to long term.