Rising Sun Construction is a California company that is anxious to expand its business by entering the Japanese market. Opportunities for overseas companies are tightly limited in Japan, however. When Jerry Blank, the company's business development officer, begins a successful networking effort in Japan, questions are raised about whether his efforts are ethically—and legally—sound.
Arthur Ono, chief operating officer, had dedicated his working years to Rising Sun Construction, a family-owned California corporation established by his father, Dale Ono, 45 years ago that specializes in heating and air conditioning. He is anticipating that in five years he will replace his father as the chief executive officer, and Jerry Blank, Vice President for Business Development, will be COO. Sitting in his office on the top of the 15-story building, Arthur was browsing through the reports on the top of his desk. He lifted his eyes and saw Jerry Blank entering his office.
"My travel plans to Japan have been finalized," Jerry said. "I will be leaving this evening for Tokyo."
Arthur looked hopeful. "I wish you success. You seem thrilled to revisit Japan. Keep in mind our need to capture a contract in Japan."
"Securing a contract is my goal."
Both shook hands, and Jerry hurriedly left the office to talk with his executive secretary before his departure to Japan.
Jerry Blank was a mechanical engineer who joined Rising Sun on graduation from a state university. During his years at Rising Sun he established a good professional and personal relationship with Arthur. He had, however, ultimately left Rising Sun to pursue a PhD in mechanical engineering. After completing his PhD, Jerry went to work for a multinational construction company headquartered in Chicago, with construction contracts in Indonesia, Thailand and the Philippines. During his years in graduate school and afterwards, he remained in touch with Arthur, and on a few occasions they met for dinner.
On a cold February day Jerry received a telephone call from Arthur offering him the newly created position of Vice President for Business Development. Jerry ultimately accepted the position. The warm weather of central California was one attraction, but the deciding factor was the chance to earn a bonus based on contracts received.
Arthur had an impressive understanding of the construction business and had assumed many business leadership positions nationally and in California. He had dedicated most of his time to developing opportunities for obtaining contracts. With Jerry's background in business development, he thought Jerry was the right person to succeed him as the business development officer. The accounting and finance area was under Kenneth Gaylord, Vice President of Finance. Arthur did not really enjoy looking at financial and accounting reports. Consequently, he relied heavily on the competence and integrity of Kenneth, a CPA. The financial reporting system used by the company had not been changed since the company was created.
Rising Sun was facing a decline in the dollar value of contracts received in the early 1990s. Arthur had been concerned about the effect of any restructuring on his talented and dedicated staff. Across the Pacific, the central, prefectural and local governments in Japan had been expanding their construction of public projects to assist in that country's economic recovery.
Arthur had discussed construction opportunities in Japan with Jerry, along with the organizational arrangements that must be established to handle business in Japan. Jerry thought that returning to Japan would be exciting. In college, he spent a year at a Japanese university in Tokyo as an exchange student.
The Construction Business in Japan and U.S. Construction Firms
Many public construction projects in Japan use limited general competitive bidding, which means only selected qualified bidders are allowed to bid. To be a qualified bidder, one has to have experience in construction in Japan. It is not unusual for contractors who have been invited to bid to participate in dango, literally meaning allowing one contractor to win (called bid-rigging by some). It is not unusual for the winning bid to be close to the cost estimates.
The U.S. government had pressured the Japanese government during the U.S.-Japan Structural Impediment Talks to make it possible for U.S. construction companies to participate in construction projects in Japan. A subsidiary of a U.S. company in Japan lacked the construction experience needed to bid for a contract. As a result of U.S. pressure, the required experience in construction would now be evaluated not only on the experience of the subsidiary but also on the experience of its parent company in the U.S.
The U.S. Commerce Department had been organizing trade missions to Japan to meet government officials and business leaders to establish personal contacts and to acquaint members of the mission with business opportunities. Arthur selected Jerry to join the latest mission to Japan. The Commerce Department briefed mission members on Japanese business and society and on trade conflicts. Jerry also got a list of readings. Jerry attended all the briefings. He asked his executive secretary to order a number of books on Japan and a subscription to the Nikkei Weekly for corporate use.
The mission members stayed four days in Tokyo, and three days each in Nagoya and Osaka. In all three major cities, the delegation met with government officials and discussed a long list of construction projects. Official receptions offered opportunities to establish contacts with government and business leaders.
The most enjoyable occasion was when Jerry met Masatoshi Kanemaru on his first day in Nagoya. Kanemaru, 54, was the section head of the planning office of Aichi ken ( Aichi Prefecture). Jerry and Kanemaru were both sumo fans. They were able to obtain tickets through close associates to watch the Nagoya sumo tournament.
Jerry was impressed with Kanemaru's knowledge of construction in Aichi ken, which confirmed the good reputation of civil servants. Jerry, who knew that civil servants had a great deal of influence on decision making by government units, was determined to establish a lasting friendship with Kanemaru and invited him to a lavish dinner.
Kanemaru thought of himself as technically superior to many of his contemporary section heads who had accepted positions with private enterprises that did business with the prefecture. Traditionally, civil servants who retired, usually around the age of 50-55, obtained a position with a company operating in an industry supervised by the civil servant's agency. This was called amakudari or "descent from heaven."
When Jerry returned to California he pronounced his trip a success and promised Arthur a written report in few days. Jerry organized the bills he had accumulated and sent them to Sidney Clapp, the chief accountant, with instructions to include them in miscellaneous expenses. Sidney meticulously examined the bills received and immediately included them in the miscellaneous expenses account, since no account number existed for bills written in Kanji (the Chinese characters used in written Japanese).
In a meeting the top officers—Arthur, Jerry and Kenneth—discussed the potential for expanding their business to Japan.
"We need Jerry, with his impressive background in Japan, to aggressively pursue contracts there," Arthur said. "I have assigned Jerry to plan for a new venture in Japan. I have decided to send Jerry back to Japan soon to pursue the possibility of being allowed to bid for contracts."
Kenneth seemed serious as he responded, "Operating in Japan would require the creation of appropriate financial reports and a management control system. We would also need to examine the applicability of the Foreign Corrupt Practices Act (FCPA). Maybe it is the time to draft a code of professional conduct for the company."
Although Arthur thought he might be hesitant to support Kenneth's proposals on a financial reporting and a management control system, he said, "I would like Kenneth to prepare a report on FCPA for the top officers." He dusted off a folder he pulled from his cabinet and began to read the three sentences his father had written as the code of professional conduct for the company he created: "We strive to maintain our good reputation; we abide by all the laws of the U.S.; and we refrain from any activity that might involve a conflict of interest."
Approximately three months later, Jerry returned to Nagoya for five days. Kanemaru picked him up at the airport. At his hotel, before he left the car, Jerry pulled out a small bag from his brief case and left it on the seat he occupied. Jerry's days in Nagoya were busy but enjoyable. At lunch, Kanemaru briefed him on the few contracts that the prefecture would allow American firms to bid on, mainly due to political pressure. Jerry handed Kanemaru his gift. Kanemaru, following the American tradition of opening gifts when they are received, asked for permission to open it. The box contained a pair of hand blown crystal vases with cherry blossoms imposed on them. In the next few days, while dining and watching a sumo tournament, they talked in greater detail about the contracts.
On his departure, Jerry felt that given the trade negotiations between the U.S. and Japan and the support of Kanemaru, there was a great probability that Rising Sun would be among the American firms invited to bid for construction projects.
Jerry once again sent all his bills to Sidney. However, a few days later Jerry received a call from Kenneth. "Jerry, I have concerns regarding the increased size of the miscellaneous expense since you began your trips to Japan," Kenneth said.
"My expenses in Japan were legitimate development expenses for a privately held company," Jerry insisted.
References and Sources for Information
Amaha, Eriko, "Building Hope." Far Eastern Economic Review, v. 162, Apr. 15, 1999,
Donaldson, Thomas and Thomas W. Dunfee, Ties That Bind. Boston, Massachusetts: Harvard Business School Press, 1999.
Geva, Aviva, "Moral Decision Making In Business: A Phase-Model." Business Ethics Quarterly. Oct. 2000, v. 10, no. 4, pp. 773-803.
Martin, Keith and Sheila Malkani Walsh, Beware the Foreign Corrupt Practices Act. International Commercial Litigation, no. 13, Oct. 1996, pp. 25-27.
Merchant, Kenneth A., Modern Management Control Systems. New Jersey: Prentice-Hall, 1998.