Sekisui House -- Female Slate Director is a professional in Scandal Management

One of the weaknesses of Japanese companies is inability to keep the top management on track

April 15, 2020

Tadashi Fujioka

JB Press

 

The shareholder proposal that Mr. Isami Wada, former Chairman, and Mr. Fumiyasu Suguro, Director and Senior Managing Officer, made to Sekisui House is becoming the topic of conversation lately.  A female slate director is drawing attention due to her unique career.

 

Ms. Hitomi Kato – She resigned in 2014 as general manager of legal, license & patent department at Takasago International Corporation, and now manages her own consulting firm.

 

Sekisui House is a two trillion yen leading housing company.  An outside director with such a top-notch company is normally a former or current manager of a leading public company, a university professor, or a lawyer with an outstanding career.

　

Ms. Kato, however, has never been a board member.  She serves a private company as an executive officer but it is not like a career that you will often see for an outside director of a company like Sekisui House.  Further, she is not only a slate director but also a shareholder-proposed candidate for Chairperson of the Board.  Why?

 

The answer lies in her skills in belling top management of a company.  She is a whistleblower system expert.

 

Correct the nature of covering up

 

One notable aspect of the shareholder proposal by Mr. Wada and Mr. Suguro is the commitment to re-investigate the land fraud incident.

 

The land fraud incident in June 2017 threw Sekisui House into great turmoil.

 

An internal investigation concluded that Mr. Toshinori Abe, current Chairman, should be held heavily responsible for the incident, but the current management team led by Mr. Abe forced Mr. Wada to resign in a coup, and they have been resisting to disclose the investigation report that details the incident as well as the current management team’s responsibilities for the incident.

 

Messrs. Wada and Suguro have pointed out that the transaction was an improper one as a result of a number of incredible misjudgments by the current management team.  Also they have determined that it is a cover-up not to disclose the investigation report and that it is total absence of governance.  Therefore it sounds natural for us to see Ms. Kato’s name in the slate.

 

What is Ms. Kato’s view of Sekisui House?

 

“In 2003 I served as a steering committee member at the Association of Corporate Legal Departments that was formulating the “Whistleblower System Guidelines.”  I was proud of the Guidelines that help prevent corporate scandals by employees, but there is a remaining issue, which is the lack of a system to prevent a scandal by executives.  I would like to resolve that issue at Sekisui House.”

 

What does she mean by “lack of a system to prevent a scandal by executives?

 

She made some insightful remarks, but before that I would like to describe her career to date.

 

Best of the best corporate law experts

 

Ms. Kato joined Mitsubishi Oil (now JXTG Nippon Oil & Energy Corp) in 1977.  After working for a patent office she joined Takasago International in 1996.  Her career has entirely been in corporate laws.

 

During her career she had to deal with a number of corporate scandals, with the first one being “Kerosine Lawsuit” at Mitsubishi Oil.

 

During the Oil Shock in 1970s there was an oil cartel case where top executives of oil firms colluded on pricing, and they were very criticized.  A news report back then described a cartel meeting at one of Mitsubishi Oil’s meeting rooms where corporate executives from oil companies got together and agreed on pricing.　　The Fair Trade Commission accused the oil companies of violation of the Antimonopoly Act, and the Kerosine Lawsuit was filed.  Ms. Kato was hired by Mitsubishi Oil to work on the Lawsuit.

 

Even after she moved to a patent office, she was concerned about Mitsubishi Oil.  Another corporate scandal, improper financing to oil wholesalers happened in 1996.  It was led by Chairman and Vice President of Mitsubishi Oil, and there was a limited involvement by President but the President was determined to be liable in a shareholder derivative lawsuit, and he and Vice President were ordered to compensate 180 million yen for the damage.

 

 

Ms. Hitomi Kato

 

“A scandal can change one’s life.  After the scandal Mitsubishi Oil was acquired by Nippon Oil, and the new company does not have Mitsubishi in its name.  A company can start following a course of decline as a result of a scandal.”

 

“Whistleblower System” study group

 

In 2002 after she moved to Takasago International, a meat product mislabeling scandal by Snow Brand Food happened.  It was a fraud where the company deceived Ministry of Agriculture, Forestry and Fisheries because the Ministry was purchasing meat products in the wake of BSE (Bovine Spongiform Encephalopathy).  Snow Brand Food went bankrupt and no longer exists.  Many former employees of the company came to work for Takasago International.  Ms. Kato experienced firsthand unhappiness brought about by a scandal since she had to learn what those former Brand Food employees had to go through during the scandal.

 

“I saw that a company could die as a result of a scandal.  Once a scandal is known to the media, a company will be criticized and then die.  A company has to have powers of self-cleansing.   That is why I started working on the Whistleblower System Guidelines.”

 

In 2003, Ms. Kato joined the “Whistleblower System Guidelines” study group at the Association of Corporate Legal Departments.  The Japanese government was developing Whistleblower Protection Act back then but it was not an easy system to use since you could not remain anonymous to be a whistleblower.  She therefore pursued to develop a whistleblower system to detect a cause of a scandal while a whistleblower can remain anonymous.

 

Corporate legal experts from about 1,200 companies are the members of the Association of Corporate Legal Departments.  The Association was founded in 1971 and started discussing pollution issues.  It was a place for discussion on companies’ social responsibilities from a law and compliance perspective.  The study group had members from such companies as Kansai Electric, Nippon Steel, Toyota Motors, Matsushita Electric (Panasonic), and Mitsubishi Electric.

 

The system was formulated and it was published as “Whistleblower System Guidelines” by  Shoji Houmu.  However there was one issue that remained unsolved.

 

“It was a scandal by executives.  We found that the higher you are in the organization, the less the system works for you.

 

If you report any wrongdoing by the president of the company you work for, it will be ignored by the president. You may feel hesitant to even make a report.  So the whistleblower system never plays a supervisory role for top executives.

 

And even now few Japanese companies have any system in place to control and supervise top executives.”

 

If you leave the issue unresolved…

 

　No system in place in Japan – it is understandable since corporate scandals in recent years have mostly been by top executives.

 

In the accounting fraud at Olympus in 2011, the then President Michael Woodford was ousted by other directors including Chairman.

 

In 2015 an accounting fraud by the management of Toshiba was unveiled.  In 2019 there was a gift scandal at Kansai Electric.

 

A cover-up led to a scandal in all of these cases.  Then stock price tanked.  Shareholders have never got back what they lost even through legal proceedings like shareholder derivative lawsuits.  Employee salaries were cut and some lost their jobs, significantly damaging the Japanese economy.

 

The sense of crisis Ms. Kato had 17 years ago was right.

 

It drove Ms. Kato to be a slate director for Sekisui House.

 

Who will bell top executives?

 

Cover-ups by the Ministry of Finance over the Moritomo Gakuen scandal, a Ministry employee’s suicide note was made public and it is now a topic of conversation.  A misjudgment by a top executive could ruin somebody’s life in Japan.

 

One of Ms. Kato’s friends at the Association of Corporate Legal Departments committed suicide.  Another slate director Mr. Yasushi Okada, who started his career at the Long-Term Credit Bank of Japan, lost some colleagues when the Bank was going bankrupt.

 

Nobody can bell top executives – this concern is one of the bases for outside director candidates in the shareholder proposal to Sekisui House.

 

Ms. Kato says:

 

“Sekisui House’s whistleblower system is very well structured.  However it can function only for employees up to managers, not for top executives including directors.  It is sad.”

 

Another outside director candidate, Mr. Jiro Iwasaki who was Director & Executive Vice President at TDK Corp., has been serving as an outside director at such companies as Renesas Electronics.  I asked Mr. Iwasaki why he accepted a nomination to be a slate director.

 

“There are seven outside directors out of our 11 slate directors.  Outside directors can fire internal directors anytime.  This power is effective in supervising internal directors.

 

There is no conflict of interests between the outside directors and Sekisui House.  None of the outside directors need to work for living, so you can resign anytime if you are not happy.  This is important and we are targeting to create a model for corporate governance in Japan.”

 

Sekisui House plans to add one more outside director as part of what they call “Governance Reforms.”

 

The meeting of shareholders is scheduled for April 23, 2020.  Is it going to resolve a corporate scandal and crisis?