Photo Credit Willie Holdman Trust in Japan my Bow is My Bond “The Economist”
Sunday, April 27th, 2008Our close friend and colleague Joseph Grenny co-author of the New York Times best seller Crucial Conversations sent us this interesting snapshot into international trust printed in the Economist this week. It highlights the foundational bedrock of Trust in business. Business, whether B2B or with consumers demands a propensity to trust each others intentions. IF that presumption of Trust is violated consistently and a propensity to be suspicious prevails it could grind our global economy to a halt. The articles points out an interesting fact. That there are actually less lawyers in the business sector in Japan, perhaps signaling a higher propensity to trust. The speed of growth that economies around the world are enjoying seems to be evidence that trust is again growing. This story is a cautionary tale however, if we violate trust with each other in business our global economy could quickly shift from speed to friction.
The article contrasts the propensity to trust in the Japan compared to the west. ”In the West, that culture is increasingly one of implicit mistrust. Deals require armies of lawyers and thick paper trails to give parties confidence, in spite of the time and money that such work entails. In Japan, by contrast, companies—some dating back centuries—regularly deal with long-standing partners; reputational concerns, rather than strictly legal ones, are paramount.”
Japanese finance
My bow is my bond
Apr 24th 2008 | TOKYO
From The Economist print edition
A wicked swindle exploits a soft spot in Japan’s business culture
TRUST is the bedrock of business everywhere, but the sources from which it springs are different. In Japan, where reputation and relationships are considered precious, the informal cues are as important as the legalistic ones. Parties take their time discussing deals. Managers meet to exchange meishi—their all-important business cards (usually presented with two hands)—and bow respectfully. It helps to establish confidence.
So it was that when a handful of bankers from Lehman Brothers met executives of Marubeni, one of Japan’s largest trading houses, at Marubeni’s headquarters across from the Imperial Palace last autumn, they never suspected that they were actually being drawn into a massive fraud. The teams had met numerous times to discuss a bridge loan. Reams of paperwork were supplied. In a convoluted agreement, Lehman provided more than $350m in financing to a small firm with ties to Marubeni (and founded by a cousin of the empress of Japan); the trading house guaranteed repayment.
Or did it? When Lehman contacted Marubeni after a payment was missed, Marubeni said that it had no idea what the bank was talking about. Marubeni has claimed that contracts signed and stamped by a Marubeni director were found to be forgeries and the manager whom Lehman’s bankers met in Marubeni’s offices was an impostor. Marubeni says the two employees who negotiated the deal were fired. Marubeni refuses to repay the money, claiming it is a victim of fraud itself. On March 31st Lehman sued Marubeni for $350m. Since the fraud was uncovered, more alleged victims have surfaced, such as Och-Ziff, an American private-equity firm, which is owed around $80m.
The case pits a company’s responsibility to supervise itself against the adequacy of the due diligence that investors must perform. The Japanese legal doctrine of “apparent authority” holds firms accountable for their employees’ actions, provided those actions are carried out within the scope of their normal work. Meanwhile, Lehman’s checks will come under scrutiny, not least by its own insurance company. Yet also on trial will be Japan’s business culture—and what constitutes trust in the world of finance.
In the West, that culture is increasingly one of implicit mistrust. Deals require armies of lawyers and thick paper trails to give parties confidence, in spite of the time and money that such work entails. In Japan, by contrast, companies—some dating back centuries—regularly deal with long-standing partners; reputational concerns, rather than strictly legal ones, are paramount. Business disputes rarely go to trial. The number of corporate lawyers is extremely low compared with other financial centres, and frauds by one party against another are exceedingly rare.
So when Lehman met Marubeni employees at the trading house’s offices, there was no reason to suspect anything was amiss. Many consider such a culture to be very beneficial to Japan. Yet the closer that Japan’s financial practices are to global standards, the more the informal ties of trust will be replaced with formal legal ones. Something will be gained, but something will be lost as well.
