Japan's J-SOX targets corporate crime

The nation's version of the Sarbanes-Oxley Act is intended to hold executives accountable and protect investors.

from the March 1, 2007 edition

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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."

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