News broke that Moody’s downgraded Nidec’s credit rating by three notches, from “Baa3” to “Ba3.” The reason cited was “governance deficiencies.” Many business leaders might view this news as “a big company issue” or “complicated rating agency talk,” finding it hard to relate to their own situation.
However, this incident contains crucial insights for considering governance in small and medium-sized enterprises (SMEs). A rating agency’s evaluation is not merely a “report card.” They analyze, from their unique perspective, the extent to which a company can control future business risks through its “design,” and “translate” that analysis into a credit rating.
In other words, a downgrade is not an assessment that “governance is bad,” but rather a forward-looking diagnostic result indicating that “there is a flaw in the governance design, which is increasing future business risks.” This time, we will consider how to inspect your own company’s governance design through the lens of this “external evaluation.”
The True Nature of the “Design Flaw” Seen by Moody’s
According to reports, Moody’s reportedly pointed to issues with Nidec, including inappropriate accounting practices at a subsidiary, insufficient internal controls over those practices, and the weakness of the board of directors’ supervisory function. What deserves attention here is not the pointing out of a single instance of “misconduct” or a “mistake,” but the focus on the “system itself” that generated a series of problems and failed to detect and correct them.
This aligns perfectly with the core philosophy of this media: “Governance = a higher-order management design concept.” Accounting errors are a “result,” and behind them lies the “design”—the organizational structure, decision-making processes, and risk management systems that allow them (or fail to notice them). Moody’s pointed out the flaws latent in that blueprint.
The structure is the same for SMEs. For example, entrusting all accounting tasks to a single person with no functioning check mechanism. Important contract decisions being made solely based on the president’s “gut feeling,” leaving no record. These situations are often dismissed as issues of individual employees’ competence or awareness, but the essence lies in the fact that “a mechanism to manage risk has not been designed.”
Three Perspectives for SMEs to Simulate an “External Evaluation”
It’s rare for a rating agency to visit your company. However, it is possible to borrow their perspective to inspect your own firm. This is also a perspective that all external stakeholders—such as business partners (especially large corporations), financial institutions, and potential future investors—potentially hold.
1. Are “Traces of Decision-Making” Being Left According to the Blueprint?
Analytical institutions like Moody’s scrutinize not only official announcements but also internal documents and meeting minutes. In SMEs, important decisions are often finalized verbally or via chat, and the process and rationale behind the choice—”why was this option selected?” and “what other options were available?”—frequently go unrecorded.
This is a lack of design. For instance, “designing” a rule that any expenditure over approximately $63,000 (¥10 million) must be accompanied by at least three options (Plan A, B, C) and a comparison table. This alone improves decision-making quality and creates a verifiable “trace” of that judgment. External eyes are looking at the presence and quality of this trace.
2. Is the System Designed to “Discover Problems” or to “Hinder Their Discovery”?
In the Nidec case, the failure to detect and correct the subsidiary’s issues early was highlighted. In SMEs as well, it’s not uncommon to have a structure where bad news does not reach the top, whether between headquarters and the front lines or between a parent company and its subsidiaries (or business units).
Before concluding this is due to “low awareness on the front lines,” question the design. Is the reporting route singular, creating a structure where information stops if that route is blocked? Is management unconsciously fostering an atmosphere of “not tolerating failure”? Truly strong governance lies in designing “mechanisms” that weaken the power to conceal problems and bring them to the surface early. Establishing an anonymous reporting hotline is one example, but prior to that, the question is whether psychological safety—where “things not going well” can be discussed casually in daily operational reports—has been “designed.”
3. Are Experts Acting as “Gatekeepers” or “Translators”?
In companies cited for governance deficiencies, legal or audit departments often function as “gatekeepers” who halt business initiatives by saying, “That’s not allowed.” The true role of experts is “translation” and “implementation support” to achieve business objectives.
When a manager says, “I want to do this,” do the experts in your company (or external advisors) immediately respond with, “That’s legally not allowed”? Or can they present options: “To achieve that objective, we can consider Method A, Method B, or Method C. Each carries a different risk level on a scale of 1 to 99. Which risk level would you choose?” The latter approach embodies the design philosophy of “governance for business.” External evaluators observe how experts are utilized—how specialized knowledge is integrated into the management design.
Concrete Actions for a “Design Inspection” Starting Tomorrow
So, what should you actually do to inspect your company’s governance design from an external evaluation perspective?
Action 1: Retroactively Verify One Important Decision
Select one recent important decision regarding investment, hiring, or a contract. Then, gather all related meeting minutes, emails, and comparison materials and review them from a third-party perspective. Can the reason “why this was chosen” be understood from the materials? Are the options presented? If insufficient, design a minimal rule for leaving the necessary “trace” next time (e.g., creating an option comparison table).
Action 2: Intentionally Increase the Pathways for “Bad News” to Reach the Top
In addition to the current formal reporting lines, create opportunities for management to hear directly from the front lines. For example, hold a monthly “anonymous lunch meeting” where a few randomly selected employees from each department have a frank discussion with management. Issues and concerns raised there are brought to management meetings in a non-identifiable form and used for system improvement. Designing such informal yet structured feedback channels significantly increases sensitivity to problem detection.
Action 3: Change How You Pose Questions to Experts
The next time you consult a legal or tax expert, try stopping yourself from asking, “Can we do this?” Instead, ask: “We want to achieve [specific business objective]. Could you please tell us the options for realizing it and the respective risk levels for each?” Observe how the expert’s reaction and the resulting answers differ from before. This is the first small design change to transform experts from “gatekeepers” into “design partners.”
A Downgrade is Not the Endpoint, But the Starting Point for Redesign
The Moody’s downgrade of Nidec must not end as merely an evaluation of one company. It is a question posed to all companies regarding their “philosophy of governance design.” We in SMEs, caught up in daily busyness, tend to neglect maintaining the underlying blueprint, thinking, “It’s working fine for now.”
However, true resilience cannot be built after a crisis hits. Continuously inspecting your own decision-making traces, problem-discovery mechanisms, and methods for leveraging expertise, while assuming the perspective of an external, objective observer in daily operations. This ongoing “act of design” is what preemptively mitigates significant future business risks and leads to the sustainable enhancement of corporate value. The rating is merely a result. What’s important is to start redrawing the “blueprint” that produces that result, beginning today.
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