Conversation: An Corporate Auditor's Perspective on Capcom's Governance
Capcom’s Vision of Corporate Governance and the Role of Corporate Auditors
- You were appointed as one of Capcom's external directors for a five-year period starting in 2002, so you don't fulfill the requirements of external auditor legally speaking, but you have been helping us to perform audits with the perspective of an external auditor. Today, I'd like to discuss Capcom's corporate governance from an external perspective.
- The corporate governance of Japanese companies has become a topic of debate due to scandals that plagued a number of leading companies last year. In light of the recent revisions made to both TSE regulations*1 and to guidelines on securities reports*2, particular focus is being placed on how to ensure external officers' independence. Capcom was among the first in Japan to appoint external auditors and external directors more than ten years ago. Why do you think having an external perspective is important?
- The objective of corporate activities is to continually increase profits and achieve growth. In order to do so, a company must tackle creative challenges like no other competitor can. In the case of Capcom, this holds all the more true because we are a company with a creativity focused corporate philosophy that has grown thanks to its original video game content and proprietary business model. Yet, focusing solely on challenges means a company may forget to check its actions from a societal standpoint. I want us to proactively engage in original projects that cannot be copied by other companies, but I don't want these projects to go against our responsibility to society. To uphold our corporate social responsibility, we were among the first to implement an external director system. Today, people with the highest level of sound judgment in each respective field have been delegated to help us make decisions.
- Corporate governance is a way for companies to oversee how they achieve their objectives, so its basic elements include, of course, not only the legality of management, but also increasing efficiencies -- neither of which inhibits the growth of a company. However, it's important for corporate governance to strike a sound balance between efficiencies and legality as well as corporate social responsibilities. Corporate officers focused on maximizing profits should not be placed in control of everything. This is why I believe the importance of external officers is growing because they serve as coordinators in this regard.
- Just as you point out, this balance is extremely vital. A company must not engage in actions contrary to its social responsibilities just for the sake of profits, but on the other hand, a company must not lose its creativity, or the source of its competitiveness, by getting too caught up in common practices. To strike a balance, each department must quickly identify any of its functions that are not working effectively and implement continual improvements after thoroughly addressing the problem.
- As for our internal control in terms of finances, we closely monitor management indicators using a company-wide information system, with top management constantly checking numbers worldwide and for every business division to immediately identify problems. In 2011, we instituted an Corporate Auditing officer system to develop a more detailed check system for each of our operations. Nevertheless, there is still the potential for top management to neglect its duty of legal compliance, so external officers are in place to point out issues. I believe this structure helps ensure Capcom’s steady profitability.
- In addition to rigorous accounting checks, we have also begun audits performed by officers well versed in the video game industry through the establishment of our own operational audit officer system. In this sense, I believe we have a well-balanced system in place. I am also aware that our role as corporate auditors to govern this system has become even more important.
Reinforcing the Company's Audit Functions Requires All Divisions to Change Their Mindset
- Japan's corporate auditor system has seen the role of corporate auditors independent from management strengthened over the last half century or so. Of course, mechanisms have been developed to this end, but in order to achieve the true function of this system it's just as important to cultivate the human resources needed to run the system and to ensure the entire company has a solid awareness of the importance of this system.
- The same can be said for Capcom's corporate auditor system.
- Similar to what I just mentioned, Capcom has a highly developed corporate auditor system and organizational system, and the company runs these systems very effectively. If I had one request it would be to step up support provided from each division, since it's almost impossible for the current number of corporate auditors to perform audits on all business divisions. In other words, I'd like all groups and divisions to be fully aware that thorough audits are very important for the company.
- I also believe this change in mindset is important. Unlike the time of our founding, we have grown into a large company, and have more shareholders with high expectations of us. In this regard, all employees must be keenly aware of safeguarding our profitability. The key to this will be developing a corporate culture where managers frankly report projects that are not making progress according to plan and then action is taken as an entire organization to make improvements. Hiding failures will cause the eventual downfall of the company. Senior management will also ensure that those in charge of our frontlines in the Accounting Department, Finance Department and General Affairs Department will act with shareholder returns in mind.
- This type of corporate culture will ensure that employees properly report problems when they are found so that the entire organization is aware. This will enable top management to take the most appropriate measure. This will also make our work as corporate auditors easier as well.
Preventing Improprieties before They Happen
and Reinforcing the Company's Overseas Auditing Set to Become Key Issues
- What are some of the things you place the most emphasis on as a corporate auditor?
- A corporate auditor's fundamental mission is to find management improprieties, but I believe working to prevent these improprieties from occurring in the first place is even more important. In recent years, the law world calls it "preventative legal work". Essentially, appropriate measures are taken well in advance to stave off potential future disputes. In this regard, we have also coined the phrase "preventative audit work". Although it may be quite difficult, I believe this "preventative work" will grow even more important going forward from the perspective of incorporating greater external perspectives.
- I feel the same way about preventing improprieties before they occur. In order to meet the expectations of stakeholders and shareholders, I'd like Capcom to strive to prevent improprieties using a rigorous system of checks. This is because even the smallest incident, if left unattended, can develop into a major scandal in the future.
- Another important topic for the future is audits outside of Japan. With the growth of our business around the world, we will need to further strengthen audits of our overseas subsidiaries. Capcom is focusing particularly on growth in Asia, so we will also need to raise the bar of our auditing functions globally.
- We have been performing rigorous checks of our overseas subsidiaries for some time now using the aforementioned management information system. The focus of these audits was subsidiaries in the United States and Europe, which made it quite easy to create an auditing system. As you point out, though, emerging countries in Asia have far different business practices and cultures, and legal revisions occur much more frequently. This means that we need to perform rigorous audits not only with internal resources, but also using external professionals as well. At present, our auditing company has created a special team for us in local markets, and I also hope that our corporate auditors will broaden their auditing focus as well. This will mean that you [Mr. Iechika] will be requested to do more, so I ask for your understanding and assistance in this manner going forward.
*1 In May 2012, the Tokyo Stock Exchange (TSE) made revisions to its listing regulations, which included an entry on expanding information disclosures pertaining to "independent directors".
*2 In March 2012, a Cabinet Office Order was promulgated and enacted to reinforce disclosures on "independent directors" in securities reports and other corporate filings.