What Sanrio’s Improper Compensation Issue Reveals
In April 2025, Sanrio disclosed improper compensation paid to executives, with its president apologizing and acknowledging “governance challenges” (Hokkaido Shimbun Digital, April 2025). As a global character business and a listed company with outside directors and auditors, Sanrio’s case is a stark reminder that even robust structures can fail.
Yet, despite these safeguards, improper payments still occurred. This news is not just a concern for large corporations—SME owners should pay close attention. Before thinking “this doesn’t apply to us,” it’s essential to understand why this happened and the underlying dynamics at play.
Misconduct Is a Matter of Judgment, Not Just Systems
The key takeaway from Sanrio’s case isn’t the misconduct itself, but why it wasn’t stopped. Despite having accounting departments and auditors, improper compensation was still paid.
This shows that governance structures are only effective if the actual decision-making process is sound. Many SMEs face a similar situation: rules exist on paper but aren’t enforced, or checks are in place but have become mere formalities.
The Blind Spot in “Compensation Governance” for SMEs
In most SMEs, the owner decides executive compensation. Often, the process is unclear, and decisions are left entirely to tax accountants or advisors.
Three Pitfalls in Compensation Decisions
The first is a lack of verification that the owner’s own pay is appropriate. Some set fixed, high salaries regardless of revenue or profit.
The second is compensation for family members. Many SMEs are owner-operated, creating a risk of excessively high pay for spouses or children.
The third is the link between pay and performance. When compensation doesn’t decrease despite declining performance, it can lower morale and create a breeding ground for misconduct.
Designing a System That Helps Owners Self-Detect Issues
A critical point in Sanrio’s case is that the president himself admitted to “governance challenges.” Recognizing the problem is the first step toward improvement.
What SME owners need is a system where someone else can check their own compensation. Here are some concrete measures.
Actionable Steps You Can Take Today
Visualize the Compensation Decision Process
First, clarify the criteria for executive pay. Document rules that determine compensation based on objective metrics like revenue, operating profit, or cash flow.
Make it a habit to record the rationale for any annual pay adjustments. This documentation helps prevent future disputes and supports tax audits.
Introduce Third-Party Verification
While appointing outside directors is often difficult for SMEs, you can ask your tax accountant or lawyer to review the fairness of compensation. Schedule an annual check on pay appropriateness.
For family-run businesses, seeking input from a third party outside the family—such as a bank branch manager or a business partner—can also be effective.
Balance Compensation with Risk
Compensation should be considered not only as a share of profits but also as a responsibility in times of loss. SME owners must always be aware of how their pay affects the company’s cash flow.
For example, split monthly compensation into a fixed portion and a variable portion tied to performance. This creates a system where pay automatically decreases when performance declines.
Governance Is Not Something “Someone Else Does”
Sanrio’s improper compensation issue shows that even large companies can experience governance failures. For SMEs, it’s even more critical for owners to proactively design systems—otherwise, they remain superficial.
The key is not a defensive mindset of “preventing misconduct,” but viewing governance as a design tool for “sustaining business growth.” Compensation governance is one of the most accessible starting points.
Three Steps Owners Can Start Today
1. Write down your company’s current compensation decision process.
2. Add at least one point where a “third-party perspective” is included.
3. Define rules linking compensation to performance and share them within the company.
These steps require minimal cost or time. Yet, this small first step can prevent significant future risks.
Just as Sanrio’s president acknowledged “governance challenges,” start by honestly assessing your company’s current state. Misconduct often goes unnoticed until it’s too late. That’s why building a “system that helps you notice before it happens” is the responsibility of every business owner.
(Reference: Hokkaido Shimbun Digital, “Sanrio Apologizes for Improper Compensation; President Says ‘Governance Challenges,'” April 2025)
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