Dr. Karthik Ramanna (right) and Mr. Kotaro Tamura (left)

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How are the roles of corporations changing in the world after the 2008-2009 financial crisis? From the recent scandal at Olympus, Toyota’s highly publicized recalls of 2010, the challenge of sustainability for globalized corporations, and the changing nature of leadership, how can businesses meet the needs and expectations of today’s ever-widening stakeholder base?

A Special Open Discussion: How Asian Corporations deal with Globalization – Recent Issues and Challenges

Speaker: Dr. Karthik Ramanna, Harvard Business School
Dialogue Partner: Mr. Kotaro Tamura, Invited Fellow at RAND Corporation
Date and Venue: November 21, 2011 at GLOBIS Tokyo Campus

MC: Good evening, ladies and gentlemen. Welcome to this special open discussion at GLOBIS University. Thank you for coming. My name is Kenya Yoshino, and I’m the student services manager at GLOBIS University. I will be serving as your guide for tonight’s event.

Tonight, we are privileged to have Dr. Karthik Ramanna of Harvard Business School, and Mr. Kotaro Tamura, Invited Fellow at RAND Corporation, and former Senator of Japan. Tonight’s topic is “How Asian Corporations Deal with Globalization: Recent Issues and Challenges.”

Before we begin, I would like to briefly go over tonight’s agenda. First, Dr. Ramanna and Mr. Tamura will have a dialogue. Then we will have an open discussion session, where you can ask questions and make comments to tonight’s speakers.

Now it is my great pleasure to briefly introduce Dr. Karthik Ramanna before we call him to the podium. Dr. Karthik Ramanna is an assistant professor of business administration in the accounting and management unit at Harvard Business School. His research interests are in the political economy of systems of accountability; specifically, he investigates how institutions such as regulation and lobbying shape the nature of accounting standards and financial reports. He has explored these ideas in the context of the globalization of financial reporting practices, as seen through the adoption across countries of international financial reporting standards.

Dr. Ramanna is also interested in the politics and economics of various accounting phenomena, such as accounting conservatism and fair value accounting. More recently, he has begun work exploring the role of transparency across countries as an instrument of accountability.

Dr. Ramanna has received awards for his publications and research. He has a Ph.D. in management from the Massachusetts Institute of Technology.

Now, please also let me briefly introduce Mr. Kotaro Tamura. Mr. Kotaro Tamura has been a senator from 2002 to 2010 in the Japanese Diet and while in government held positions as the Deputy Minister of Fiscal and Economic Policy Making and Financial Affairs, and also as the Chairman of Japan’s Ministry of Land, Infrastructure, Transport and Tourism.

Though he has taken a break from politics, Mr. Tamura is known as an advocate and principal initiator to set up the sovereign wealth fund for Japan. Before entering politics, he was an investment banker and CEO of a newspaper company. He is the owner of the largest custom-made business suit supplier, F-one.

Mr. Tamura has earned several degrees, including his M.B.A. from Keio University. He is currently appointed as an invited fellow at RAND Corporation.

Now, without further ado, please give a big round of applause for Dr. Ramanna and Mr. Tamura. [applause]

KOTARO TAMURA: Good evening. Thank you for joining us. Thanks, GLOBIS, for having this opportunity to turn this place into Cambridge, Massachusetts. As you may well know, Harvard Business School professors like him are not allowed to give lectures in competing educational institutions. But GLOBIS is already a threat to Harvard Business School, right? So we have got to be nice to enemies. Sorry.

Let me ask you a question. How many of you have a business background? Basically everybody, huh? Manufacturing business? Finance? Education? Japanese companies? Thank you. This means nothing, nothing but the practice of raising your hands. So, you can cut in at any place, at any time, to our discussion.

Today we’ll mainly focus on two things. One is corporate governance of Japanese companies, and the second is the globalization of Japanese companies. So we will divide this into three parts. For the first 30 minutes, we will mainly talk about corporate governance. And for the second 30 minutes, we will talk about the globalization of Japanese companies. And for the last 30 minutes, it’s open discussion. But, as I mentioned, I want to make it an open discussion from the beginning. So please cut in at any time.

So, let me ask you a hard question. You see we have consecutive corporate governance scandals in Japanese companies, such as Daio Seishi, the large paper producer. I don’t want to talk about this, because you know, not me, but many of my friends are involved in this case, governing in Macau. And Olympus: you know the Olympus case. So I don’t think it’s very constructive just accusing Japanese companies of having corporate governance problems, because, you know, every country, you know, we have corporate governance issues. Several years ago, Enron, WorldCom…recently European banks, and even in China, and India. So we have many cases.

My first question is: What is the distinctive, striking difference between Japanese corporate governance scandals and those of other countries’ companies? Can you tell us a bit about where the problem is coming from? And you can talk about every surrounding party: companies, regulators, laws, stock exchanges, and, you know, the incentive of those parties. Why are these accounting incentives created? For what reasons? Can you kick-start it?

KARTHIK RAMANNA: Sure. Thanks, Kotaro. Let me first say it’s a pleasure to be here. This is my first time in Japan, and I’m very much enjoying my visit so far. Kotaro has been a very gracious host. And Harvard Business School also has a research center here, with a permanent staff based here in Tokyo. And so they’ve also been extraordinarily generous in introducing me to Japan. I can only say that, so far, this has just been an extraordinary opportunity for learning. And I look forward to many more interactions.

You actually brought up a great question, and I’ll choose several ways in which to talk about the phenomenon of corporate governance, as well as what constitutes unique elements of corporate governance, whether it’s in Japan or any other country. And as Kotaro said, feel free to stop me at any point.

KOTARO TAMURA: One thing I have to tell you, though: it’s very hard to cut into an Indian speaker. It’s hard to keep his mouth shut.

KARTHIK RAMANNA: Yes. And we’re used to teaching in the Case Method; so we’re not used to talking for extended periods. So as interactive as you make this, the richer the experience will be for both of us.

When it comes to corporate governance, I think there are two broad ideas to keep in mind.

One is to understand what is the theory of value creation that corporations play in that society. By that, I mean that in different societies, in different countries, corporations have different responsibilities to society as vehicles of value creation. For example, in the United States, the dominant idea is that corporations create value for society by maximizing profits to shareholders. That may not be the idea, or the ideal, for corporations in other parts of the world. So understanding what the objectives of corporations are, in terms of their responsibility to create value for society, is very important. Because that gives you a starting point to think about corporate governance and corporate accountability. Because when you ask the question about corporate governance or corporate accountability, the question is: To whom?

Again, in the United States we tend to think of corporate governance as geared primarily towards shareholders. Because shareholders are the key. In Japan, that may not be the case. That is certainly not the case in France or Germany, where corporations are viewed as having a broader responsibility to many stakeholders in society, including labor unions, including local communities at large, including bondholders, and so on. Certainly in China, there’s a closer relationship between the corporation and the state. And so the responsibility of corporations to the state is much greater than you would see in the United States.

So when thinking about the phenomenon of corporate governance, and when thinking about the notion of corporate governance scandals, it’s important to keep in mind who the principal is, or who the principals are, because that changes from country to country; it changes from society to society. So that’s point number one.

Point number two is that corporate governance in my view is not a set of, or a well-defined set of, institutions; but rather a mosaic of institutions. Sort of a compelling metaphor in my mind to think about corporate governance as a puzzle. The various institutions of corporate governance are pieces of a puzzle. You could have the pieces sitting distinctly, just as when you would pick a puzzle out of a box and dump all the pieces on the floor. And they’re all spread out, but they don’t connect, in which case you could have all of these individual institutions, and it may seem like on paper that you have very effective corporate governance because: auditing (I’ve got that); accounting (I’ve got that); independent boards (I’ve got that); and so on.

But the pieces don’t really fit together. The puzzle hasn’t been completed. And so unless those pieces fit together, unless that puzzle has been completed, the individual institutions may have very little impact in effecting corporate governance.

So these are two broad elements about the discussion that I’d like to sort of set out from the onset: understanding who the constituents are, who the principals are, in the context of a corporation’s role in creating value for society; and understanding that the institutions of corporate governance, apart from merely existing, have to connect with each other. Absent that connection it’s unlikely that those individual institutions will have an impact.

That being said – and I’ve spent a lot of time studying corporate governance institutions, and I studied them in a formal context through the role of accounting and auditing institutions, as well as cursorily through the role of supplementary institutions like boards and audit committees – my personal view is that the most important institution of corporate governance remains the individual, and the integrity of the individual. Because no institution, no formal institution of corporate governance, can ever manage the situation, or the agency problems, that generate the demand for corporate governance. No individual institutions or set of institutions, even collectively, can manage those problems to the point where they would eliminate the need for individual integrity in the process.

Absent individual integrity in the process, it’s very difficult to get effective corporate governance, regardless of who the principal is. So that would be sort of the third tenet that I would set out: which is that you cannot complete this picture if you don’t have a role for individual integrity. And that’s something that actually transcends cultures; it transcends societies; it transcends institutions; it transcends principles. If you don’t have a culture that promotes the integrity of individuals, it’s very unlikely you’re going to get effective corporate governance.

That said, I can sort of more directly answer Kotaro’s question, which is: What is unique about corporate governance failures in Japan, relative to the rest of the world? So, we can use these three points that we laid out as sort of a framework for thinking about corporate governance to think about Kotaro’s question.

Firstly, how does the role of the corporation, vis-à-vis the state, differ in Japan, relative to another country? I’m going to leverage my case method style of teaching to get you to answer this question. Because presumably you know the answer far better than I do.

How many of you have business experience outside of Japan? So if you were to compare your experience within Japan to that outside Japan, how would you differentiate the role of a corporation? How would you think about the role corporations play in society in Japan, relative to that experience that you’ve had outside of Japan? Sir, your hand was up.

MAN: Okay. The big difference is the management. I was in Los Angeles, and I worked as a rotation of people. My president is an American president, and really, really had the leadership. But on the other hand, in Japanese management, I think there is less leadership.

KARTHIK RAMANNA: Okay. Any others? Go ahead.

MAN: Hi. I think that I feel like there’s a difference in social aspect, in terms of how people view the company as an individual in society. I think in Japan a lot of people expect stable employment from companies; whereas American companies are, you know, don’t really hesitate to lay off a lot of people at the same time. It’s like catching a cold; if you’re not really well, if you feel sick, you just lay off a lot of people. It’s not as bad, the same thing, in Japan. So I think that employment responsibility is much bigger in Japan.

KARTHIK RAMANNA: Okay. That’s an excellent point. Sir, your hand was up, as well.

MAN: Yeah. I came to Japan the first time 12 years ago. And I had the task to reorganize a Japanese company. That was a company that was around for 100 years. So I kind of was confronted with that situation.

My feeling was that the structure of the company, being an old Japanese structure, was actually given by the society as a whole, and not by the management. So the leadership role that that person had, who was very close to the emperor’s family, it was given to him by the society, not by his corporate government style. So he had no foundation.

When we restructured this, I came into the next problem: that this transferred to all employees. So the employees felt more responsible towards that person, actually, than towards the company. So there was no way to actually steer, other than American-style change, unfortunately.

KARTHIK RAMANNA: And where was your experience outside of Japan.

MAN: I own businesses in the States, Russia, and Switzerland.

KARTHIK RAMANNA: Okay, so, many other companies. Okay, fantastic. So I think these responses start to give us a sense of what the differences might be between the role that the corporation plays or the principles that the corporation responds to in Japan, versus other countries. Perhaps Japanese corporations have, or treat, their employees as principals, under some circumstances; Japanese corporations treat society as the principal in some circumstances. Whereas in a traditional American context, or in a traditional American definition of the role of a corporation, the primary fiduciary responsibility of the corporation and its agents, the board of directors, is to shareholders.

So, as you start to identify these differences, you understand that what constitutes a corporate governance scandal would be different in different countries. You could have a corporate governance scandal in Japan, vis-à-vis that failure of a fiduciary responsibility, maybe not defined in a legal sense, but certainly in a moral, or in an implicit societal sense, in terms of this responsibility to employees, or perhaps in terms of this responsibility to a local community. Whereas those sorts of circumstances would not qualify as corporate governance scandals, per se, in a traditional American definition of the phenomenon, or of the concept. So that gives us one way to think about it.

Another way to think about it is in the context of these various institutions that we laid out. Right? So, institutions like auditing; institutions like accounting; institutions like the board of directors themselves; ideas such as independent directors, or outside directors, and the like. So as we start thinking about these institutions, we need to ask ourselves: What are these institutions actually doing?

One fact that’s been mentioned to me several times in meetings that I’ve been having over the last few days is that there is only one outside director (or one independent director, rather) in Japanese corporations. The question is, Is that sufficient? Does that make sense?

Certainly, from a Western perspective, from an American perspective, the idea that one independent director would be sufficient to satisfy the sort of external check and balance that a board of directors needs to impose upon corporate management would seem deficient. That would seem, certainly, a substandard practice of corporate governance.

If you think about one independent director in a board that has 10, 15 people, it becomes very difficult to stand up to people who are arguing against your point of view. You’d have to be a really strong personality. And in some sense, you’d have to be constantly arguing to make your voice heard.

But that may not be the context in which the independent director is salient in Japan. Because, again, there may be other institutions that are connected to this concept of an independent director. There may be other institutions that provide for the checks and balances that are not otherwise present in, say, an American corporation.

Another term that I recently came across in the context of one of these interviews is that of kouki. “Public bowl” is what I was told it was. Somebody mentioned to me that managers think about themselves as having this sort of broader social responsibility. And absent that social responsibility, you would have to have a very different set of institutions in order to keep management actions aligned with shareholder interests.

So, when we think about corporate governance in Japan and we try to measure it with Western metrics, like independent directors, or the presence of independent auditing, the question is: How have we accounted for or measured these uniquely Japanese institutions that fill the void in uniquely Japanese ways? And it’s not clear that existing metrics do that.

In that sense, I think we need to be very careful when we evaluate corporate governance systems from one country to the next, because there are uniquely local circumstances that meet these various needs. Maybe that gives you a sense of how Japanese scandals could be different from scandals elsewhere.

KOTARO TAMURA: So, another way of saying, who do you blame in this case, the Olympus case, beside the company? Are you going to blame the Tokyo Stock Exchange? Are you going to blame the laws? Are you going to blame the stockholders? Who do you want to blame?

KARTHIK RAMANNA: Shall we take a poll of the audience?

KOTARO TAMURA: Who believes the idea that only Olympus companies should be blamed? Or, the shareholders have to be blamed? Tokyo Stock Exchange has to be blamed? FSA?Accounting firms? Accounting firms? What else? Analysts?

WOMAN: Because I’m a junior analyst in a U.S. securities firm, I understand why analysts for Olympus couldn’t find any uncertainties for Olympus. I was a very young child when Olympus did anything wrong, in the past decades.


KARTHIK RAMANNA: Did you have management in that list?

KOTARO TAMURA: Oh, management.

KARTHIK RAMANNA: You can always blame that.

KOTARO TAMURA: Oh, of course. Yes. Employees? Directors? Corporate auditors?

KARTHIK RAMANNA: Okay. So I think we start to get the picture, right? There are lots of people we can blame. And so I don’t know if it’s healthy for us to identify, sort of put together a lynch mob, and then say, “Okay, who are we going to blame? And can we go after them?”

Certainly, mistakes have been made. And certainly, the legal process needs to work to punish those who have committed wrongdoings. And certainly, there are some very egregious practices involved in this case. But in contexts like this, and in a forum like this, I think the issue isn’t so much what is the legal position, or what legal actions need to be taken; but rather, as a society, as a business community, what can we learn from this scandal?

This gives us an opportunity. Something like Olympus gives us an opportunity to be introspective about the role of Japanese corporations in society. It allows us to be introspective about the culture within corporations in Japan. It allows us to be introspective about responsibilities of management. It allows us to be introspective about responsibilities of the board. So I think it will be more helpful if we take a perspective on how can we learn from something like Olympus to improve the value proposition that corporations in Japan have to Japanese society?

Because, ultimately, the moral legitimacy of corporations comes from the claim that they create value for society. And when we see an egregious abrogation of that responsibility, it’s an opportunity for us to step back and say: What are we doing as a system that facilitates this sort of behavior?

So rather than go after the individuals that are pursued in wrongdoing in this case (which we certainly should do, and we can use the legal system to do it) we can use this opportunity. As a business school, we can use this opportunity to think about that value proposition and if there are any elements within the Japanese corporate culture that facilitate events like Olympus from happening. If so, what actions can we do, or can we take? What actions can we undertake to mitigate that, or to change that?

So, perhaps again, we can use this to leverage your experience. What elements of Japanese corporate culture, in your view, facilitate a scandal like Olympus?

MAN: When I was a management consultant, joining a lot of meetings of different companies, the one thing I noticed is that employees wear ties to meet with their CEOs. They always care about the temperature, if the CEO is feeling happy or not. So the attention is centralized around the management team, especially the CEO. And it’s really hard to say, to raise any opinions to the CEO.

In this case, the person who was a whistleblower wasn’t Japanese. He raised his hand and made the case, and made this public. I think in Japan, it’s really hard to be a whistleblower. You will be fired. He was fired, actually. And you will be fired. In the Japanese community, it will affect your future, probably much more than it does in other countries.

KARTHIK RAMANNA: Okay. Sir, you had your hand up, as well.

MAN: I’m thinking about who is a whistleblower, and who could get the benefit? And who could profit from that role and from that corporate scandal? Generally speaking, Japanese companies tends to be based on that ethical view. I mean, to make things to benefit people as much as possible. To many people, if you could provide the benefit, they could even break a rule.

But as he suggested, someone entered that quite united society and tried to change the rules. He tried to think by himself, based it on his ethical core. And he tried to suggest that it is different.

I think that the difference of viewpoint, before and after, benefits as much as possible the responsibility of action. Now we are in the transition of that ethical core.

KARTHIK RAMANNA: Any others? Sir?

MAN: Actually I’m working for an American company, and also I earned a degree in the U.S. I’m kind of a U.S. early supporter. However, I still think the U.S. structure, in terms of corporate governance, is not perfect. If you look at the history of Enron and Tyco, it was the same thing. And probably the scale is much worse than those of Olympus or Daio.

However, if you learn from the U.S., the big difference between Daio and also Olympus versus U.S. companies is the process of choosing your CEO. Because if the top management has low morals, nobody can stop it — even in a U.S. company like Tyco. However, in U.S., if you look at U.S. companies, there are a lot of people; basically the board of directors, many board of directors, choose the next CEO carefully.

However, if you look at Japanese companies, there is only one person who is currently in top management, like a president or a CEO, is appointed to just one person. If that person makes a mistake, then nobody can stop it. That is a case for Olympus. From some discussions for the Daio case, was that even with the existence of a member of directors, it’s very difficult. Because he is a descendent of the owner and also a descendant of the prior president. That’s almost impossible, to just replace the CEO.

KARTHIK RAMANNA: We’ll take one more.

WOMAN: I think he points out a good point. In my opinion, the current Olympus case is very similar to the Enron issue. Do you think so? How?

KARTHIK RAMANNA: We’ll get to what I think. I want to get there, but I still want to sort of solicit ideas on what you think is unique to this particular case that allows you to sort of reflect and say what needs to be fixed.

WOMAN: I think there is little that’s unique in the Olympus case because I knew, we saw, the Enron issue in America. So they are very similar, in the accounting issue.

KARTHIK RAMANNA: Yes. I mean, yes and no. I’d say it’s actually closer to WorldCom than to Enron, because the fraud in Enron was actually sophisticated. The fraud in WorldCom and the fraud here in Olympus are not sophisticated at all. It’s actually very simple.

But of course in all these circumstances, as many of you have pointed out, there was a failure of moral leadership at the top. And that has an enormous impact on the way people within the organization behave.

You raise several points: the first being, it’s hard to be a whistleblower. It’s very hard to be a whistleblower in America, as well. I teach a case around whistleblowing. And at the end of the case I have this statistic on what happens to whistleblowers. Most whistleblowers actually — and these are all American whistleblowers — most whistleblowers find it very difficult to find employment. They may be celebrated for a few weeks in the press. They may be lauded for their moral courage. But thereafter, they become pariahs. It’s very hard to find employment because they’re viewed subsequently as snitches, as rats. Why would you want someone who is not a team player in your team?

So it is very hard to be a whistleblower anywhere in the world. I think human beings have a strong desire to belong, to want to belong — to societies, to groups, to cultures, etc. And when you are a whistleblower you are violating that inherent desire to want to belong. And that makes you perhaps someone that’s doing the right thing in some circumstance; but thereafter, you may suffer the consequences of that.

That’s not a uniquely Japanese trait. That seems to be something that you see across the board. And maybe that says something about how we treat people who are different, how we treat people who are not like us. Maybe that says something about the fragility of human society and the way we interact with each other.

But these opportunities give us an occasion to reflect on who we are, and what we want to be. So this is an excellent point: again, an opportunity for us to reflect on that.

The second point that was raised was on differences in viewpoint. Is there enough opportunity within Japanese corporate culture to promote differences in viewpoint? Certainly, at least in traditional popular culture . . . you know, Silicon Valley is considered to be the place for sort of corporate democracies. You know, lots of ideas floating around; no bosses; open offices; no walls, etc. Is that the kind of corporate culture that works in every environment? Are there certain circumstances where you do need rigor? Certainly, in the context of operating a nuclear power plant, you don’t want corporate democracy all the time. Right? You want certain standards of governance and you want certain standards of safety. And you want to make damn sure that people follow them! You don’t want people getting creative with how safe they’re going to be in a nuclear power plant.

So there are circumstances in which that makes sense, and there are circumstances in which that doesn’t. Again, it gives us an opportunity to reflect on whether we have the right level of it; but the point being that no corner solution is every likely to be perfect in every circumstance.

But again, each of these instances gives us an opportunity to reflect on what it is we want to do differently as a society. Sorry. Your hand was up.

WOMAN: How about if Olympus had accepted the understanding of diversity, or the application of diversity, in their workplace? In Japan now diversity policy is going ahead among many companies, I hope. Because I studied gender studies at a university in the U.S. So I’d like to know how you understand this policy in the business sense of thinking.

KARTHIK RAMANNA: That’s an excellent question: How would policies around diversity have changed this? I think there are two ways in which we want to think about diversity. And certainly, there are a host of studies, academic studies that look at the impact of diversity on things like firm performance. Now it’s very hard in these studies to establish causality, simply because causality could run the other way. Well performing firms are the ones that exercise leadership on things like diversity, so it’s hard to establish without . . . or, establish with scientific certainty . . . that it’s diversity that’s causing better performance, or better accountability, rather than the other way around. So the jury is still out on that literature — at least from an academic perspective.

But it behooves us to ask whether we went to take such a functional, or consequentialist, or utilitarian view to diversity. Perhaps we want to exercise more moral leadership on something like diversity, and say regardless of the consequences, what kind of society do we want to have? Do we want to have a society that’s exclusionary? Or do we want to have a society that’s willing to accept diversity, even if it comes at some costs?

We can ask a different question around diversity if we take that approach to it. Diversity is then, as a process, it’s something that make us better as human beings, that makes corporations better instruments of creating value in society, regardless of the outcomes on performance and value. And, again, the jury is still out on that. But that’s a different way, a different lens, to look at diversity.

KOTARO TAMURA: As a former policymaker, I have a question to you: the very basic reason we seek corporate governance and transparency. So do you think if we inject, implement, more corporate governance, or more transparency, to companies; do you think it’s going to create a better society? I mean, a better market and a higher stock price?

The other way around is that, you know, lack of transparency and lack of corporate governance is now creating stagnation of the economy, or stagnation of the stock price. How do you think about that? How important is this issue for Japanese economy, or Japanese stock price, or Japanese asset building?

MAN: I think transparency is very important for our regaining the trust for investors. For example, when we think about Mothers in the stock market: a lot of startup companies went public through Mothers. But many companies are creating accounting fraud. And, as a result . . . just like Livedoor. And after that the investors lost trust to Mothers. So I believe that transparency is very important for regaining the investors’ confidence into the companies’ financial statements.

MAN: Yeah. I think transparency is important, as long as we define towards whom we want to declare that transparency. And transparency comes with responsibility for the person that sees into an organization. And they have to understand what they’re seeing, I think.

So, just to open up and say, “Here are my books,” won’t change anything. Because a creative accountant can present a book that looks really good to the untrained person. So the transparency comes with training, also.

Also, I think that, for younger companies, talking startup, transparency is a very difficult thing. So the more mature, the more publicly traded they get; certain areas are easier to display transparent. For young companies, or companies in an aggressive change, it’s difficult to stay transparent.

MAN: I think one transparent mechanism should come together with the promotion of the integrity of the individual, which you mentioned earlier. Transparency in general requires additional rules . . . to actually submit the documents, go through the numbers. That doesn’t alone prevent this kind of scandal to happen.

I actually wanted to ask a question: What sort of mechanism would have been working — whether, ethics training or more, sort of, burdensome punishment, or whatever? But, in general, it should actually come as a combination. Just transparency doesn’t work; but eventually it comes back, then, to the issue.


MAN: Yeah. I think the question is: transparency of what? Because as Dr. Ramanna explained, in the U.S. a lot of shareholders and everybody understand what are the financial terms, financial barriers; then the corporation can just provide a financial transparency to everybody.

However, in Japan, as you guys explained; Japan, as a society, they require a different . . . probably a kind of intangibles, more softer things, like, corporate society or something. However, in Japan, they still try to — especially for a corporation, the transparency of finance terms, that kind of stuff; that is not enough to require of the society. So we have to change the terms on what kind of information should be transparent to the society.

KARTHIK RAMANNA: Right. So we’ll take one more response.

MAN: I agree with his idea and I’d like to add one more extension. The perception of the people needs to be changed. Because as strong as we set regulations much harder, harder and harder to get; but the more and more complicated, they could make a counter methods (?). And Chinese says that once we have a law, we can have counter methods.

Therefore I suppose that the most important thing, as he suggested: the terms need to be changed. And I think the term must be the perception of ourselves: what kind of information we need to have, and what else we needn’t. And what kind of information is important for us, and what is not? What is other, else? So those selections, both in education or the change of conception, must be needed.

KARTHIK RAMANNA: These are excellent points. And I think they reflect some of the nuances associated with thinking about instruments of accountability, particularly something as powerful as transparency. Because transparency is a means to an end; it is not an end in itself. Transparency wouldn’t work if it didn’t have, again, complementary institutions that interpret that transparency and put that transparency in the context of a broader accountability. So, in that sense, we want to distinguish transparency from accountability.

When we think about something like transparency we also have to worry about too much transparency . . . or, in legal speak, in U.S. litigation during discovery, which is the process in which the opposing side is provided with information by the defendant, the defendant usually employs a tactic where they dump everything possibly upon the plaintiff. And it becomes very costly for the plaintiff, then, to actually sort through that process, to sort through that wealth of material. In that process a lot of information may be lost.

So there is certainly an optimal amount of transparency. And, again, as I said earlier, usually corner solutions, extreme solutions, are unlikely to function in any circumstance.

The other point about transparency is obfuscation. If you think about, for example, Citibank’s disclosures on its sub-prime mortgage obligations in its 2007 financial report: according to Citibank, it is possible to interpret the footnote disclosure that discusses the sub-prime mortgage obligations associated with certain collateralized debt securities from the 2007 financials. It’s very hard to do so, and it’s not clear to me that any one individual, or any group of individuals, with a finite amount of time will be able to decipher that information, because the footnote is so complex.

So does that constitute transparency? Is that the objective of transparency, insofar as it’s meeting this broader objective of accountability? And I would argue that it’s unlikely to be doing that.

Accountability: if your question is about accountability, that’s a different issue. The question is: To what extent does accountability create value? And I think that’s an excellent question. Certainly, we can very easily make the — or we can easily understand the logic between accountability and aligning incentives. One of the reasons why we delegate tasks: there are generally two reasons why we delegate tasks to someone else; one being that the person that you’re delegating to has better expertise at whatever it is you want them to do, better expertise than you.

So, for example, you want to earn a return on your capital, but you don’t have the expertise associated with running a manufacturing plant. So you delegate the capital to a manager and you entrust the manager in the management or the operation of that plant.

Another reason you may delegate is because you have a better use for your time. Maybe you are the best at everything in the world. But, still, there’s only 24 hours in your day; and so you are going to use your time most fruitfully.

In both these circumstances you’re delegating tasks to somebody else. And as soon as you delegate the task to somebody else, you have to worry about this misalignment of incentives. Because that person that you’ve delegated to now has her or his own incentives to look out for. In that context, you do want to have some accountability for delegation, for that delegation. And in that sense, it’s hard to imagine a circumstance where, in the absence of accountability, you’re going to get more value than with accountability itself. So I think that becomes a very, an easier question to tackle.

Now, of course, there are bound to be variations; there are bound to be variations in the amount of accountability that you can impose, or you would like to impose, in practice. And there is such a thing as too much accountability. You can delegate a task to somebody and burden them with so much accountability that they spend all their time reporting to you, as opposed to undertaking the task. And so in terms of designing regulation around accountability, it’s important to be sensible about it. But that is the distinction I would make.

MAN: . . . An accountable institution is quite important. But in the case of Enron and WorldCom, and Tyco, the accountants helped that fraud, and financial failure. So who was the watchdog? I’d like to ask you about that.

KARTHIK RAMANNA: Yes. That’s an excellent question. There are conditions. I mean, you know . . . Okay. Let me take a step back. After Enron and WorldCom, we said, “Oh, well. The accountants were in bed with the companies. We had created this institution of accounting and independent auditing precisely for this task, which is to monitor the managers to whom we’ve delegated capital. But now we’re worried that the accountants are in bed with the people that they’re supposed to monitor. So we’re going to create an agency to monitor the accountants.”

So we did that. In the United States, we created something called the Public Company Accounting Oversight Board — which is an unwieldy term; but it’s an agency associated with, it’s an agency charged with monitoring the auditors. Except that members of the PCAOB are drawn from the auditing profession, or from corporate management, more generally. And so then you can argue: Oh, well, there’s this revolving door between the people who are monitoring the accountants, and the accountants themselves. So who’s going to monitor the monitoring agency?

(Continued in Part 2)

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