Japan's J-SOX targets corporate crime

Scandals at Japanese corporations are prompting the government to curb white-collar crimes in a more, well, American way.

Japanese companies have been tainted in recent years by accounting scandals reminiscent of Enron. In response, the government has approved its own version of the Sarbanes-Oxley Act of 2002.

The new guidelines, known informally as J-SOX, are intended to make executives accountable for actions they take and to protect investors with greater transparency.

"The new guideline is a departure from the traditional Japanese business style based on trust and belief that humans are fundamentally good," says Shinji Hatta, a professor at Aoyama Gakuin University in Tokyo. Mr. Hatta chairs the government committee that crafted the guidelines.

The law doesn't go into effect until April 2008. But companies are expected to start implementing it this April as, experts say, such rules have become a worldwide standard with publicly traded companies.

What's unique about the Japanese guidelines is that they give pointers on reporting requirements, but leave executives room to interpret what should be covered.

That provision is a response to perceived shortcomings of the US law. But, says Nobuhito Utsunomiya, consulting-service business unit manager at NTT Data Corp., "J-SOX's strength of not being specific is ... creating confusion. Corporations and auditors are having a hard time agreeing on ... an acceptable level of implementation."

The wake-up call for reform came with the Seibu Railway scandal. The company was delisted from the stock exchange for falsifying financial records.

Other spurs came from the Livedoor and Murakami Fund scandals, still on trial, which rocked the nation with accounts of inflated profits through stock transactions and insider trading.

The rise in accounting fraud is due in part to a more profit-driven American style of business over the past decade, says Hatta.

As regulators impose the law, however, they hope to avoid some of the pitfalls of the US version of the act. J-SOX asks companies to take a top-down risk approach, forcing executives, for example, to take responsibility for their company's accounting.

Like the US version, J-SOX's intention is to forestall the actions of executives like Horiemon, the nickname of former Livedoor CEO Takafumi Horie. Horiemon has pleaded not guilty to any criminal charges of falsifying financial statements.

The growing clout of shareholders in Japan can also be linked to the creation of J-SOX. Marc Goldstein, of Institutional Shareholder Services Japan, a proxy advisory service, says that J-SOX is part of a social trend. "Japanese regulators are much more willing to penalize companies for crimes that were overlooked in the past," Mr. Goldstein says.

For example, Goldstein points to a crackdown on bid-rigging, or dango. "Dango has been going on for decades and everybody knew about it," Goldstein says.

But in 2006, several sitting and former governors were arrested for dango. The cases accelerated passage of a new law this past December that forbids public employees from such activity.

The trend is the result of globalized capital markets, Goldstein says. "Investors want to know capital markets are fair and the rules are enforced equally," he says.

The shifting relations between Japanese firms and shareholders, who have been more willing to dissent from corporate initiatives, has also had an influence. Notable is the emergence of institutional investors such as the well-regarded Pension Fund Association, which manages 11 trillion yen and represents Japan's corporate pension funds.

"I think domestic Japanese investors are less forgiving than in the past," says Goldstein. "Domestic investors are exercising their voting rights more than ever and they are taking a harsh attitude toward corruption and antisocial behavior."

Ryoko Ueda, of Japan Investor Relations and Investor Support, Inc., points to Japan's now-frayed lifetime employment system. "[It] was a social structure that prevented the need for something like J-SOX," she says. "There may have been some corporate culture for coverups. Now companies need to have rules clearly outlined."