The New Normal of Corporate Governance: Increasing Weight of Accountability
Significant changes are underway in Japanese corporate governance. In 2024, the Corporate Governance Code was revised, placing greater emphasis than ever on accountability in growth strategies. According to a report by the Nikkan Kogyo Shimbun, the revision was driven by the issue that “companies cannot concretely explain their own growth strategies.”
Traditionally, for SMEs, “accountability” mainly meant reporting at financial results briefings or shareholder meetings. However, this revision demands a more specific explanation of “growth strategies.” This is not just a matter for listed companies; it is becoming a crucial factor in relationships with business partners and financial institutions as well.
What We See from the Front Lines of Data Governance Implementation
In an ITmedia article, Mr. Nawa clearly states that “companies that cannot explain will lose in business dealings.” He introduces a specific method for implementing data governance in 90 days, the core of which lies in “taking inventory of data” and “maintaining an explainable state.”
For SME owners, the term “data governance” might sound unfamiliar. However, this is an extremely simple concept. It means being able to explain “where your company’s data is, how it is managed, and how it is used.” If you cannot do this, business partners may deem you “risky,” increasing the likelihood of contracts being terminated.
In fact, a manufacturing client I worked with was asked by a major business partner to “submit explanatory materials on your data management system.” This company had previously relied on paper-based management and simple Excel data management. Unable to meet the partner’s request, they faced significant obstacles in winning new projects.
Specific Risks of Being Unable to Explain Data
If a state of being unable to explain data persists, the following risks become apparent.
- Contract termination due to loss of trust from business partners
- Lower evaluations in loan screenings by financial institutions
- Decline in the quality of the company’s own management decisions
- Risk of penalties due to delayed discovery of legal violations
Especially for SMEs, data management systems are often more fragile than those of large corporations, and many fail to meet the demands of their business partners. This indicates that an era has arrived where a “governance gap” can determine whether business deals are possible.
The Black Box Effect in the AI Era and Governance Blind Spots
A report by the Nikkei newspaper revealed that in the AI-driven advertising market, a “black box effect” is progressing, creating a breeding ground for fraud. The mechanism where AI automatically optimizes ad delivery carries the risk of fraud occurring in ways that are difficult for human eyes to see.
This problem is not limited to the advertising industry. As more SMEs introduce AI into their operations, a “black box” state where the AI’s decision-making process cannot be explained is becoming widespread. For example, a company might introduce an AI-powered customer analysis or inventory management system but be unable to explain why certain decisions were made. This is precisely a major blind spot in governance.
The “accountability” demanded by the revised Corporate Governance Code also extends to AI decision-making processes. If your company uses AI, establishing a system that can explain the basis for its decisions will become a mandatory requirement in the future.
Shareholder Governance Challenges Highlighted by Wolf Pack Tactics
The issue surrounding SAAF (prevention of abuse of shareholder proposal rights) reported by Nikkei Business online has highlighted new challenges in shareholder governance. Cases where multiple investors collaborate to make shareholder proposals using “wolf pack tactics” are increasingly shaking the management of SMEs.
Particularly noteworthy are cases where a former president colludes with investors to buy up shares. This is collusion between an insider with internal information and external investors, a serious governance issue. Even in SMEs, there is a risk that a similar structure could emerge between founding families and external shareholders.
The essence of this problem lies in the fact that “inability to explain” creates conflict with shareholders. If you cannot clearly explain your management strategy or data utilization policy, shareholders will suspect that “something is being hidden.” As a result, your company becomes an easier target for aggressive shareholder proposals like wolf pack tactics.
Specific Actions SMEs Should Take Now
So, what should SME owners do? I propose the following three steps.
Step 1: Complete Data Inventory in 90 Days
Referring to Mr. Nawa’s method, first, take inventory of your company’s data. The targets are the following four categories.
- Customer data (names, contact information, purchase history, etc.)
- Transaction data (orders, deliveries, invoices, payments)
- Employee data (salaries, attendance, evaluations)
- Management data (sales, profits, cash flow)
For each category, create a list of “where it is,” “in what format,” and “who manages it.” This task alone will advance the visualization of your company’s data management system.
Step 2: Set Accountability Standards
Based on the revised Corporate Governance Code, set your company’s accountability standards. Specifically, create a state where you can answer the following questions.
- “Why are we collecting this data?”
- “How is the data protected?”
- “What is the scope of data usage?”
- “If we use AI, can we explain the basis for its decisions?”
If you cannot answer these questions, it is a governance risk. Prioritize improvements and address them.
Step 3: Design an Information Sharing Process with Business Partners
Before being asked by business partners to explain your data management system, it is important to proactively disclose information. For example, create an annual “Data Governance Report” and share it with key business partners. This will help you gain their trust.
In fact, there is a case of an information services company where this report strengthened relationships with business partners and led to winning new projects. Accountability can be used not just as a “defensive” tool but as an “offensive” management tool.
Conclusion: Companies That Cannot Explain Will Be Weeded Out
The revision of the Corporate Governance Code, the increasing importance of data governance, the black box effect of AI, and the complexity of shareholder governance. All these trends converge on a single point: “accountability.”
For SME owners, this is by no means a distant issue. Business partners choose “companies that can explain,” financial institutions lend to “companies that can explain,” and top talent gathers at “companies that can explain.” An era has arrived where the ability to fulfill accountability determines a company’s survival.
Start today by taking inventory of your company’s data. In 90 days, you should find new business doors opening as a company that can fulfill its accountability.
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