Learning the lessons from Livedoor chief’s fall

By Chandran Nair

This column by Chandran Nair appears in the May 2007 issue of the Ethical Corporation magazine.

The conviction of Takafumi Horie holds important lessons for both entrepreneurs and investors about the importance of corporate governance and the consequences of its failure.

Takafumi Horie has taught us all a lesson, and it is not that brash business is bad and the tried-and-true traditional approach is best. It is certainly not that young entrepreneurs and their new ideas should be stifled.

Horie was convicted in Japan in a high-profile court case of securities fraud at Livedoor, the web consultancy he founded a decade ago and developed into a multi-billion-dollar Internet service provider and portal. He was jailed for two and a half years, harsh in a country where white-collar crimes rarely draw jail terms.

The cry from Horie’s supporters is that the court made an example of him, that the fallen high-flyer soared too far above the dour corporate suits, dared to be better and was punished for openly defying a corporate culture long dominated by big-name companies.

Good governance

But pushing aside the “us-and-them”circus, we should be looking for what Horie’s case means. What it has done is jolt us in to realising the crucial nature of good governance.

While it may not sell papers, good governance is a critical component of engaging in business that not only tries to keep us all honest, but also attempts to eliminate the possibility of misunderstanding and misinterpretation that may have unfortunate consequences.

The court found that Horie and three other former executives set up dummy funds to inflate Livedoor’s profits. Presiding Judge Toshiyuki Kosaka said their crime “shakes the foundation of the information disclosure rules set [by the Securities and Exchange Law]”.

Livedoor’s former chief financial officer, Ryoji Miyauchi, convicted with Horie and the other former executives, testified that his former boss had given a direct order to commit fraud, which was instrumental in Horie’s conviction.

The court’s ruling is not in question. Judge Kosaka placed ultimate responsibility for the fraud with Horie as top manager. While the others admitted the fraud, only Horie’s approval made it possible, Judge Kosaka said.

Indeed, he said: “Entrepreneurs must have strong ethics and a law-abiding spirit. It is unforgivable when one ignores the law in pursuit of corporate gain. … Criminal acts were committed to pursue corporate benefits by victimising ordinary investors, and should be harshly condemned.”

But the question of good governance goes much farther back than the events at the heart of the hearing. It starts with the beginning of Livedoor, with the exuberance surrounding its growth and similar frenzies. The seduction of the market, the dot-com hubris, investors’ greed and their demands and expectations are also in play.

Norms washed away

As investors took the dot-com ride, the nature of the market changed, and with it business norms. No one was asking the right questions – of the new kind of business environment that was bubbling up, and of themselves as investors.

And with this exuberance, governance and ethics went out of the corporate door.

Good governance is at its most simple a two-way relationship – between a company and its investors. It is framed by the laws of the land, and some social norms, with each side bearing responsibilities.

But good governance is not just a ritual of following rules in a book. It is also about unstated things. There is a certain behaviour that one should expect of others, and by extension of themselves. Horie seemed to have irritated his established business rivals by his brashness, but he also abandoned a crucial rule: keep corporate governance bullet-proof. In the event, it only made it easier for his detractors to add injury to his conviction.

Japan’s authorities have shown they are willing to mete out real punishment for corporate crime. But how does that fit in with other jurisdictions in Asia? In South Korea, lawmakers are considering easing restrictions on chaebol cross-investment, something that the new Fair Trade Commissioner is adamant he will fight.

Corporate governance is complex, but it can be made simple to understand by keeping the lesson of cases like Horie’s at the forefront of the minds of entrepreneurs and investors alike.