The Governance Reality Now Facing SMEs
Recently, two news stories broke in quick succession. One was the simultaneous resignation of three outside directors at the investment fund “Frontier Management.” The other was a suspected financial fraud case at Sony Life.
The chairman of Frontier Management denied it, saying, “This is not a governance crisis.” However, I believe this very statement is the biggest sign of a crisis.
At Sony Life, excessive performance-based evaluation was left unchecked, and internal management systems are now under review. Japan’s Financial Services Agency has also stepped in.
These stories are not just problems for large corporations. For SME owners, they are warnings that cannot be dismissed as someone else’s issue.
The Danger of the Phrase “It’s Not a Governance Crisis”
The chairman of Frontier Management stated that the simultaneous resignation of three outside directors “is not a governance crisis.”
However, the resignation of outside directors is a clear signal that some problem exists within the organization’s governance. Especially when multiple outside directors resign at the same time, the background almost always involves board dysfunction or serious disagreements with management.
Dear SME owners, if your company’s outside directors or advisors suddenly resigned, how would you respond? Dismissing it as “just a personal matter” or “unrelated to us” is dangerous.
Sincerely analyzing the reasons for resignation and identifying organizational issues is the first step toward strengthening governance.
Three Root Causes Behind Resignations
Outside director resignations often hide the following root causes:
- Lack of communication between management and outside directors
- A system where outside directors’ opinions are not reflected in management
- Information concealment by management or insufficient sharing of unfavorable information
These are problems that can easily occur even in SMEs. It’s not uncommon for owners to believe they are listening to outside opinions when, in reality, they are not.
The “Performance-Based Trap” Shown by the Sony Life Case
The Sony Life case vividly demonstrates how excessive performance-based evaluation can collapse an organization’s governance.
Performance-based evaluation is an effective tool for boosting employee motivation and performance. However, when evaluation metrics are distorted or only short-term results are pursued, it invites misconduct and ethical violations.
In this case, reports indicate that the financial fraud occurred under the pressure of excessive performance-based evaluation. Employees stopped caring about the means to achieve numbers, and as a result, the entire organization’s ethical sense became numb.
The “Performance-Based Trap” SMEs Are Especially Prone To
In SMEs, a culture of “anything goes as long as sales go up” is more likely to emerge than in large corporations. This is because owners themselves often prioritize sales above all else and tend to impose the same values on employees.
However, this mindset severely damages organizational governance. Employees learn that breaking rules is acceptable if results are achieved, leading to a decline in compliance awareness.
Specifically, the following behaviors can occur:
- Excessive sales pressure or misleading explanations to customers
- Inflated expense claims
- Inappropriate relationships with business partners
- Ignoring internal rules
These actions eventually lead to major legal risks and loss of trust.
Three Governance Measures SMEs Can Implement Right Now
So, how should SME owners address these issues? Here are three measures you can put into practice immediately.
Measure 1: Make Outside Perspectives a “System,” Not a “Decoration”
Many companies have outside directors, advisors, or auditors, but it’s meaningless without a system to incorporate their opinions into management.
Consider the following specific actions:
- Schedule regular one-on-one meetings with outside directors
- Create an environment where outside directors can freely access information
- Always include outside directors’ opinions as agenda items in management meetings
- Document the reasons for any outside director resignation in writing
Outside perspectives are a valuable resource for pointing out blind spots in management. A willingness to listen to their voices is the first step toward strengthening governance.
Measure 2: Revise Performance-Based Evaluation Metrics
When introducing performance-based evaluation, metrics should include not only “numbers” but also “process” and “ethical awareness.”
Consider the following specific actions:
- Add “compliance adherence” as an evaluation item
- Evaluate not just sales targets but also customer satisfaction and team contribution
- Clearly define penalties for misconduct or rule violations
- Conduct regular employee surveys to check ethical awareness
Revising the evaluation system is the most effective way to change a “sales-at-all-costs” culture.
Measure 3: Don’t Let Your Whistleblowing System Be Just a Formality
A whistleblowing system is the cornerstone of governance. However, in many SMEs, the system exists on paper but is poorly implemented, or whistleblowers may face retaliation.
Consider the following specific actions:
- Introduce a mechanism that allows anonymous reporting
- Appoint an independent person to investigate reports
- Establish rules prohibiting retaliation against whistleblowers
- Regularly report the content of reports and their outcomes to management
A whistleblowing system is a crucial tool for draining an organization’s pus. A system that is only a formality will allow problems to remain hidden, and the organization will rot.
Conclusion: Governance Is Not “Defense” but “Offensive Design”
The chairman of Frontier Management denied that the situation was a governance crisis, but I believe we should interpret this statement as “the beginning of a governance crisis.”
The Sony Life case is also a typical example of governance failure caused by distorted performance-based evaluation.
Dear SME owners, do not treat these news stories as someone else’s problem. Recognizing the risks lurking in your own company’s governance and taking action now is the path to sustainable growth.
Governance is by no means “defensive management.” It is an “offensive design” to strengthen your organization and achieve sustainable growth.
Starting today, take the first step to inspect and improve your company’s governance.
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