The Changing Landscape of Governance
The world of governance is on the cusp of a quiet but significant transformation. Japan’s Financial Services Agency (FSA) has announced plans to halve the items in its Corporate Governance Code. Simultaneously, new risks are emerging, such as AI-powered document management and brand damage from overseas counterfeits. These developments may seem unrelated at first glance. However, for SME leaders, they share a crucial common thread: the balance between “effectiveness” and “practical burden” is becoming the core theme of governance. This article uses recent news to explain what SMEs should be thinking about and how they should act now.
The Essence Behind the FSA’s “Halving of Items”
According to a Nikkei report, the FSA plans to reduce the items in its Corporate Governance Code for listed companies by about half. This is seen as a measure to ease corporate burdens. While this move may appear to be deregulation at first glance, its true essence is a shift “from form to substance.”
From a “To-Do List” to a “Thinking Framework”
Traditional governance guidelines featured an overwhelming number of items to check. As a result, for many companies, “filling out the items” became an end in itself. Resources were allocated to formalities like establishing audit committees and board compositions, often pushing aside the fundamental questions: “What are our company’s risks?” and “Is our decision-making quality improving?” This simplification aims to correct this distortion. Fewer items do not mean governance is no longer needed. On the contrary, it means the ability to build a “unique governance model” suited to one’s own business scale and growth stage—without relying on a given checklist—will be even more critical.
Concrete Actions for SMEs to Take
First, visualize your company’s “governance map.” Try drawing a single diagram showing board meeting frequency, decision-making processes, and risk reporting pathways. Then, identify the most time-consuming processes and the meetings that are becoming decision-making bottlenecks. Boldly eliminate meetings that are merely formalities, and instead, create opportunities for management to directly discuss important strategic issues. The purpose of governance is not “to hold meetings” but “to make better decisions.” This is an excellent opportunity to return to this fundamental principle.
“Excess Cash” and Deposits: The New Perspective of Capital Efficiency
An article on coki.jp reports on the FSA’s message urging companies to “release their cash and deposits.” This encourages companies to redirect excess internal reserves toward capital investment, human resource investment, shareholder returns, and more. Some SME leaders still believe “the more cash on hand, the safer.” Liquidity is indeed important. However, excessive cash reserves represent “idle capital” and can be seen as an abandonment of the management’s capital allocation judgment.
Governance as a Design for “Offense,” Not Just “Defense”
Excellent governance is not merely a “defensive” mechanism for managing risk. It is a “offensive” blueprint for allocating management resources (people, goods, capital, information) to their most productive uses. How to use internally retained cash and deposits is one of the most critical governance challenges for management. Is the investment decision-making process transparent? Are the evaluation criteria for investment projects clear and shared among the management team? The mechanisms that can properly answer these questions are what constitute governance that enhances capital efficiency.
Starting Capital Allocation Governance In-House
No large-scale system is required. First, add “Review of Capital Allocation” to the agenda of your monthly or quarterly management meetings. The items can be simple: (1) Trends in cash and deposit balances (including current accounts), (2) Progress and results of recent major investment projects, (3) Future investment candidates to consider (e.g., technology development, talent development, DX investment). Simply making it a habit to regularly discuss these points will naturally shift the management’s focus from “the amount of cash” to “how to use the cash.”
The New Dimension of Technology and Compliance
Nikkei CrossTech reports on the “Acrobat AI Assistant,” an AI tool specialized in document analysis with a focus on governance. Meanwhile, an HRzine survey revealed that nearly half of employees are unaware of their company’s compliance policies. These two news items reflect two sides of the same coin. On one hand, we are entering an era where AI can assist with compliance management. On the other, a fundamental issue remains: the basic policies themselves are not permeating the organization.
AI as an “Excellent Assistant,” Not a “Universal Monitor”
AI tools that automatically check contract clauses for risks or point out inconsistencies in internal regulations are indeed powerful. However, for SMEs, the priority is to first clearly define “what needs to be protected”—the basic principles—in the words of top management. AI should be utilized as an “assistant” to verify that these principles are being followed in daily operations. Introducing AI without established policies makes it impossible to determine what to monitor.
Practical Steps for Compliance Penetration
First, have the management themselves write down “The Three Most Important Principles of Our Company’s Compliance.” Think about “what we value beyond mere legal compliance.” For example, concrete action principles like “Always keep promises with customers,” “Do not unfairly disadvantage business partners,” or “Report internal issues promptly and without concealment” work well. Communicate this via a company-wide email and explain it briefly in morning meetings. This simple act alone can significantly change the employee perception highlighted in the survey—that “management’s awareness is low.” Tool introduction is the next step.
Global Risks and Brand Defense
The case of Icom reported by Nikkei Business is not irrelevant to SMEs either. An explosion accident involving counterfeit products in Lebanon poses a serious risk of damaging the brand of genuine products. With expanding sales channels through global supply chains and e-commerce sites, understanding how your company’s products and brands are distributed and used overseas has become an essential governance issue.
Strengthening Intellectual Property Governance
Many SMEs obtain patents or trademarks but lack the capacity for subsequent monitoring and enforcement. However, a brand is one of the most important intangible assets. We recommend starting with regular (e.g., quarterly) simple checks in key export markets or on online platforms to see if your trademarks are being used without permission. Beyond hiring experts, management or administrative staff can take actions themselves, such as setting up Google Alerts or searching for products on major e-commerce sites. Also, pre-establish a response flow (e.g., sending warning letters, reporting to platform operators) for when issues are discovered.
Inspecting Supply Chain Governance
Are clauses regarding quality control and brand use clearly included in contracts with overseas agents or distributors? If contracts are only in Japanese, it’s unclear how they are interpreted locally. For critical contracts, simply creating a minimal English version and establishing a process for mutual confirmation can reduce risks. Governance is no longer confined within a company’s own walls; we have entered an era where the entire network, including business partners, must be considered.
Conclusion: Redefining Practical Governance for SMEs
The latest trends discussed here all point in one direction: a shift from “uniform compliance” to “effective management optimized for your own company.” The FSA’s guideline simplification encourages independent thinking. AI tools are emerging to support human judgment. The compliance survey results show that the words and actions of management are more important than formal documents.
The strength of SMEs lies in their speed and flexibility in decision-making. The time has come to reframe governance not as a “brake” that kills this strength, but as the “chassis design technology” that supports sustainable growth. Start by visualizing your company’s decision-making flow and eliminating one key bottleneck. Have management communicate the basic principles of compliance in their own words. These small steps will form the foundation of a robust and resilient governance system that others cannot imitate. Seize the trends of change as opportunities and begin building your own unique governance model.
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