"Trust" is the Foundation of Capitalism

Susumu YOSHIDA (Senior Coordinator, Sumitomo Chemical Co., Ltd.)

The fall of traditional authority, as the result of people's loss of trust in public and private institutions, is a marked, unfortunate social phenomenon that has been observed in Japan over the last decade, where great efforts must be made by private-sector's corporate managers.

In the late 1980's, when the price of land and stocks started soaring sharply in Japan, many corporate managers were strongly tempted to seek windfall profits. The primary Tokyo stock market index, the Nikkei Index of 225 leading issues, which was slightly above 16,000 yen in early 1986, reached its peak of 39,000 yen in December 1989. Many investors predicted that the Nikkei Index would eventually reach a prodigious level of 80,000 yen and above.

The whole atmosphere was maddening. People were intoxicated by short-lived returns from their investments and became arrogant. During the economic bubbles, bankers and other corporate managers, who used to make steady profits through their own risk taking and creative endeavors, suddenly turned around and began pursuing windfall profits. People respected them as the principal promoters of economic growth and the creators of wealth.

As it is well known, the stock market then plummeted to 14,300 yen shortly thereafter. After the economic bubbles collapsed, numerous cases of default were disclosed to the public. Consequently, those managers involved in such dubious transactions were viewed with scorn, indignation and distrust. In the eyes of the general public, they were perceived as windfall gain seekers who lacked the virtues of self-restraint and modesty, which their proud predecessors regarded as an essential ingredients required for business managers.

People have come to see injustice, illegal transactions and unethical behaviors with increasingly critical eyes. Naturally, they have serious concerns over the issues of corporate governance and moral, and demand corporate social responsibility more strongly than they did a few decades ago.

Illegal practices and unjust business transactions have not been confined to Japan. In recent years, a number of cases of illegal practices such as out-of-pocket transactions and insider transactions have taken in the United States. For example, Enron, a major energy company, Andersen, a consulting firm for Enron, WorldCom, and Xerox, were reportedly involved in these illegal activities.

As Max Weber wrote in the above-mentioned book, in a highly developed, modern capitalistic society, it would not be surprising to find a group of "specialists without spirit, sensualists without heart."

Considering that disclosure of information to the public and auditing by independent auditors, based on the authoritative International Accounting Standards, had been most rigorously practiced in the United States, it was surprising to find that this is where a series of illegal cases occurred. It was very impressive, however, that corrective actions were speedily taken by the U.S. government agencies, such as the Securities and Exchange Commission.

A recent case in Japan involves Mitsubishi Motors. Unfortunately, it is a problem of long-term malpractices covering over a decade, resulting from a fallible path of pathetically immature stewardship under poor corporate governance.

This series of alarming events, occurring in almost all market-oriented economies, indicates that capitalism, though it proved a more workable system than socialism to realize dynamic economic development, is far from perfect, and therefore needs an apparatus for constant institutional improvement.

What is absolutely necessary, but often missing today, is a general recognition of the importance of "trust" which provides modern capitalism with the spiritual foundation. It is precisely the recovery of trust, which political and business leaders must keep in mind, in order to bring about economic rehabilitation and full-fledged expansions.