The Party is Over
Asia Business - July 1998
by Mariko Hayashibara

The Japanese tradition of junkets, gift giving and lavishly entertaining clients at the company's expense is coming to an end. But can a Western-style code of ethics work in the East?

If it comes down to a choice between making a desire profit and doing it right, we don't have a choice.

While Minoru Otsuka was working as a salesman at Ricoh, it was not uncommon for him to spend more than 20 times his monthly salary entertaining clients at expensive restaurants and hostess bars at his company's expense. This was the way business was supposed to be done in Japan.

But since setting up his own company in 1961, Otsuka has forbidden his employees from wining and dining clients with company money. In the process, he has helped blow away the long-cherished myth that in Japan you cannot close deals without entertaining clients.

'We believe that we can still do good business without having to entertain our clients,' says Hiroshi Kitaguchi, manager of corporate planning at Otsuka Shokai. With turnover in excess of 330 billion yen (about US$2.34 billion) a year, Otsuka Shokai, one of Japan's biggest computer trading companies employing 6,500 people, has an entertainment budget amounting to less than 0.1% of its annual turnover.

Gift or graft?

The example set by Japanese companies like Otsuka is significant when a prolonged economic slump is making a big dent in corporate profitability. What's more, the demand for a stronger code of ethics has called attention to entertainment and gift giving as a form of graft. This year a number of senior officials at the Ministry of Finance and the Bank of Japan were publicly reprimanded for tipping off banks and finance companies about government inspections in return for expensive junkets and gifts.

National Tax Administration Agency statistics show that total entertainment expenses of Japanese companies increased to 5.4 trillion yen, or 0.36% of total revenue, in 1996, up 1.6% from a year earlier. 'The custom of entertaining clients, or settai, has been regarded as an essential way of doing business in Japan,' says Masakazu Mizutani, professor of business administration at Kanagawa University. Indeed, corporate entertainment expenditure has supported hundreds of thousands of bars, nightclubs and restaurants in Tokyo, Osaka and other Japanese cities. 

'It is a matter of the amount that people spend,' says Mizutani. 'Everything is so expensive in Japan. For example, in the United States, people will have a very nice meal for US$20 but in Japan that meal would probably cost more than US$100.'

After a spate of high-profile scandals involving questionable entertainment expenses, more and more Japanese corporations are redrawing their ethic codes. In a survey conducted early this year by the Japan Federation of Economic Organisation, or Keidanren, about 60% of the 700 respondents said their companies have established or are going to establish some form of rules and guidelines concerning corporate ethics and behaviour. But Mizutani believes most corporate ethics codes in Japan are still too abstract. Matsushita Electric Industrial, for example, recently revised its code of conduct for the first time in six years. 'The business environment has changed so much in recent years and our company has globalised so  rapidly that we believed there was a need to bring our code of conduct up to internationally accepted standards,' says Koichi Ikeda, general manager of planning at Matsushita's legal affairs department. 'We now derive about half of our annual revenue from overseas operations.'

Serious business

Drawing up the code is usually the easy part. Implementing it is another story.

'The problem is that most of our staff don't seem to be taking the code of conduct seriously,' Ikeda says. 'I am sure that most of our employees take a glance at it and put it in their drawer and never look at it again.'

Chiaki Nakano, associate professor of the International School of Economics and Business Administration at Reitaku Univiversity, says that the common problem among Japanese companies is that they do not specify what their employees are not supposed to do. 'A code of ethics needs to be as specific as possible,' he says.

In the US, for example, government workers are restricted to receiving gifts of no more than $20. The code also requires government workers to submit annual details of their income and assets. In Japan, there is no ethics code for government employees, although the ruling Liberal Democratic Party's special committee is currently drawing up a bill which, if passed, will introduce a formal code of ethics for government officials.

Foreign, especially US, companies operating in Japan usually require their Japanese employees to observe specific codes of ethics. For example, Texas Instruments (TI) Japan states clearly in its guidelines to employees that profit must take second place to business ethics. 'If it comes down to a choice between making a desired profit and doing it right, we don't have a choice. We must do it right, in every detail. Expedient compromises or short-cuts for near-term gains are not acceptable,' the TI Japan guidelines say.

Every TI employee pins a credit card-sized badge to their jacket that says Ethics Quick Test. The card asks questions such as 'Is the action legal?' or 'If you do it, will you feel bad?'

'This is to help everyone make value judgements quickly,' explains Shin Ohkura, ethics officer at TI Japan. 'This is also designed to make all employees develop a habit of asking themselves these questions.'

In addition, TI has the resources to answer queries from employees.  Supervisors, human resources and the legal department are available and there are many areas on the company's Intranet where employees can refer to case histories for guidance. They can also consult the TI ethics office.

'Business ethics may not be linked directly to company profitability,' Otsuka says. 'But is a really good company based only on its financial performance? Social contribution and the company image are also very important. I think business ethics will affect a company's performance in the long-term.' 

To help Japanese companies take further action, five years ago Kanagawa University's Mizutani established the Japan Society for Business Ethics, the first business ethics organisation in Japan. Half of its 250 members are academics, with the remaining members coming from the business community. 'While there are about 40 different business ethics organisations in the US, we have just started to see a few in Japan,' Mizutani says.

'This is not only a matter of corporate ethics, but ethics for society as a whole. In the US, business ethics have been discussed on a daily basis. Business schools educate students about business ethics. But in Japan, only a small number of universities do that.'

'When a country's economy becomes mature, it needs strong ethics. In this matter, Japan has not become a mature society.'

Relying on relations

However, whether an American-style code of ethics can be adapted to Japanese companies is doubtful. 'The reason why business ethics in Japan is behind compared with the US is that Japanese business is still largely based on long-term reliance or credit that stems from personal relationships,' Nakano says, 'It'll be difficult just to bring American standards on business ethics to Japan.'

According to a study conducted by Nakano, company policy is the critical factor influencing decisions by Japanese managers, while American managers make decisions based on their own personal codes of behaviour.

'This finding may indicate the Japanese tendency for organisational  personality taking precedence over the individual personality, or may symbolise the often mentioned Japanese characteristic, "groupism",' he says.

The Values and Ethics of TI
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* Is the action legal?

* Does it comply with our values?

* If you do it, will you feel bad?

* How will it look in the newspaper?

* If you're not sure, ask.

* Keep asking until you get answer.

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Added July 21,  1998