Introduction
The experience where "something wrong occurred within a company but no one stopped it" is an issue that many corporations face in their management. This accounting scandal at Nidec was not merely a financial problem, but had profound implications for the corporate governance structure itself. We explain what functions outside directors should fulfill based on the third-party committee investigation report.
＊This article is based on content from a third-party committee investigation report analyzed by attorneys.
What "Didn't Know" vs. "Did Not Seek to Know" Means: The True Role of Outside Directors
The most attention-grabbing aspect of Nidec's accounting scandal concerned the allocation of responsibility between Koji Nagamori, founder and honorary chairman, and outside directors. The third-party committee investigation report made several critical observations:
Key Findings from the Third-Party Committee:
- Possibility that "intense pressure on executives to increase performance" by Mr. Nagamori was a contributing factor behind accounting irregularities;
- Even if explanations were provided for individual cases of accounting misconduct, root causes were not adequately shared;
- Recommendation that "[the company needs to] shed its identity as 'Mr. Nagamori's Company';" and
- Proposal to strengthen coordination among the audit committee, internal audit department, and external auditors
Most importantly is this observation: "It wasn't [they simply]"didn't know," but rather "did not seek to know."
What Outside Directors Should Specifically Do – Five Lessons Learned from the Incident
Based on the third-party committee report and attorney analysis, here's how we can organize what roles outside directors should play in future corporate governance:
Point 1: Proactive Disclosure of Risk Information
The question arose about how to advance corporate governance even when no information concerning accounting irregularities or their background was being received from within the company. Rather than a passive stance, a proactive approach is needed to "elicit risk information (signs of problems) from inside the organization."
Point 2: Strengthening Collaboration Among Outside Directors
Beyond strengthening coordination with the audit committee, internal audit department, and external auditors in shedding the identity as "[Nagamori's Company]," it was pointed out that "especially important is strengthening collaboration among outside directors themselves." Regular mini-meetings should be held so if problematic cases arise there exists a dynamic where everyone acts together saying things like: "This is a problem. Let us all investigate it together."
Point 3: Recognizing the True Role of Outside Directors
There was an observation that while providing advice on management matters such as improving performance in terms of "attack" and defense, they were not fulfilling their function at the core of governance—the restraint or check-and-balance role toward top leadership.
Point 4: Attitude of Taking Initiative
Even when a company does not provide information from its side regarding problematic internal cases that outside directors think seem irregular—there should be things becoming visible if they dig into such matters in depth themselves.
Point 5: Importance of Outside Directors with Specialized Expertise
There was an observation stating, "Given this kind of movement especially requires legal expertise—we should center on attorneys as outside directors." It's important for specialized knowledge-holding outside directors to take the lead.
Supplemental Information and Precautions – Lessons Derived from the Incident
Legal Liability: High Hurdles But Not Impossible
While the report stated "[the fact that Mr. Nagamori directed or led accounting irregularities was not discovered]," it also noted that "it's inescapable to evaluate that [he approved some accounting irregularities]." Additionally, there was an opinion stating "[one must say] he is ultimately most accountable."
Important: Challenging outside directors for legal liability is generally a high hurdle, but shareholder derivative litigation could be initiated on grounds of violation of the duty of good faith care. While claims that "they were not informed about specific situations" regarding individual irregularities might offer exoneration—if they are pointed out as "[having] did not seek to know," responsibility may still arise.
Why Relying Solely on Information from Within Is Problematic
The report clearly indicates: Rather than maintaining a stance of waiting passively because information is not coming from the company—outside directors should elicit risk information (signs of problems) internally, then independently investigate until satisfied using employees and external experts as needed.
Precautions for Single-Owner Type Companies
There was an observation that while they might provide advice on management issues such as improving performance in terms of "attack" and defense—there remains doubt about whether the check-and-balance role against top leadership was being fulfilled.
Attorney Analysis
While the report states "[the fact that Mr. Nagamori directed or led accounting irregularities was not discovered]," analysis suggests they are attempting legal fact-finding. However, those who actually performed the accounting processing could face "further possibility of being legally questioned." This raises additional questions: "In such cases, is it acceptable to absolve Mr. Nagamori of his own legal liability?"
Summary
Nidec's accounting scandal revealed the importance of governance in corporate management. Through analysis from third-party committee investigation reports and attorneys, key core insights became clear:
Dual Role Toward Corporate Organization:
Outside directors should not only provide advice on operations (attack) but also bear responsibility for "defense"—the check-and-balance role against organizational leadership. While respecting top authority is necessary to improve performance—adequate checking functions must be fulfilled from perspectives of organizational ethics and compliance.
Responsibility Stemming From Not Seeking Knowledge:
Perspective that it was not "[they simply] didn't know," but rather "[had not sought to know]"is critical. Instead of idly waiting even when information does not arrive, an attitude is required of independently gathering and verifying information oneself.
Importance of Collaboration Among Outside Directors:
Through regular discussions or mini-meetings, outside directors must act in unity. An attitude where "nothing could be done due to insufficient information" should not be permitted.
Expertise Should Be Centralized:
Particularly lawyers with legal expertise among outside directors ought to lead corporate governance debates—with specialized knowledge they can identify more fundamental problems effectively.
Shedding the Identity as "[Nagamori's Company]"
The Nidec incident demonstrated necessity of transitioning from founder-centered organizational culture toward healthier governance structures. In future corporate governance, systems based on "multiple perspectives and mutual checks" are indispensable rather than dependence relationships around a single leader.
Utilizing lessons gained for ongoing organization operations or governance construction is crucial for maintaining company soundness and sustainability. The Nidec incident clearly demonstrated that passive attitudes in corporate governance will not suffice.
Lessons Applicable to Every Organization
Not just individual business owners, but every organizational member should understand "passive behavior prevents things from moving forward." Maintaining an attitude of courageously asking appropriate questions without shrinking back before the organization—conducting checks where needed—is essential for long-term enhancement of corporate value.
What Governance's Essence Really Means
The essence of governance is NOT about restricting top authority. Rather, it lies in "sharing perspectives on organizational ethics and compliance across the entire organization and establishing adequate checking functions." All stakeholders including outside directors must act based upon this understanding—essential sound operation for maintaining a healthy company.
