Renewing Management Structure and Overhauling the Compliance System
The Chuo Shinkansen Maglev Line Construction Project Bid-Rigging Incident
In December 2017, Obayashi Corporation was subjected to a compulsory investigation by the Special Investigation Department of the Tokyo District Public Prosecutor’s Office and the Japan Fair Trade Commission on suspicion of obstructing business by fraudulent means and violating the Antimonopoly Act in connection with competitive bidding on the Chuo Shinkansen maglev line construction project contracted by the Central Japan Railway Company (JR Central).
The Chuo Shinkansen maglev line is a planned Shinkansen (bullet train) route that will run from Tokyo to Osaka. Owned and operated by JR Central, it will be the first Shinkansen route to use superconducting maglev trains, which are estimated to operate with a maximum design speed of 505 kilometers per hour, connecting Shinagawa, the first station on the line, with Nagoya in as little as 40 minutes, and Shinagawa with the final station, Shin-Osaka, in as little as 67 minutes. Although the line is not scheduled to be fully operational until 2037 or later, the ground-breaking ceremony for the Tokyo–Nagoya section, for which operation is scheduled to begin ahead of the rest of the line in 2027, was held in December 2014, with construction works already underway.
One of the projects for the Tokyo–Nagoya section was the construction of new train stations in Shinagawa and Nagoya using the underground open-cut method. It was in relation to this project that four companies—Obayashi Corporation, Shimizu Corporation, Taisei Corporation, and Kajima Corporation—were suspected of violating the Antimonopoly Act (engaging in so-called “bid-rigging”), that is, effectively restricting competition by exchanging information in advance to determine which contractor would submit the winning bid, and then coordinating the quoted prices to allow that contractor to win.
On March 23, 2018, the Japan Fair Trade Commission filed criminal accusations against the above four companies including Obayashi Corporation (and one employee each from Taisei Corporation and Kajima Corporation) for violating the Antimonopoly Act in connection with competitive bidding for the Chuo Shinkansen maglev line construction project. On the same day, the Tokyo District Public Prosecutor’s Office instituted criminal prosecutions against the companies in the Tokyo District Court (no charges were filed for obstructing business by fraudulent means).
Immediately following the Public Prosecutor’s Office’s compulsory investigation in December 2017 into the case of alleged fraudulent obstruction of business, Obayashi Corporation began its own internal investigations. After learning from the investigations that there had indeed been a violation committed against the Antimonopoly Act, the company promptly filed an application with the Japan Fair Trade Commission for leniency (reduction of or immunity from surcharges) under the Antimonopoly Act and fully cooperated with the Tokyo District Public Prosecutor’s Office in the investigation. At the trial held on October 22, 2018, the Tokyo District Court ruled that the four companies including Obayashi Corporation had engaged in bid-rigging for the Chuo Shinkansen maglev line construction project, as they “not only chose the contract winners beforehand, but also communicated with each other about the breakdown of estimated amounts and unit prices to ensure that they would be able to obtain sufficient profits,” and thus, “free and fair competition was significantly obstructed.” Obayashi was ordered to pay a fine of 200 million yen as demanded by the prosecution. The guilty verdict was conclusive, and no appeal was made against the ruling. Accordingly, the company was ordered by the Ministry of Land, Infrastructure, Transport and Tourism to suspend business of all of its private civil engineering projects nationwide for 120 days from February 2 to June 1, 2019, as per Japan’s Construction Business Act.
The company additionally received a Cease and Desist Order and Surcharge Payment Order from the Japan Fair Trade Commission on December 22, 2020.
Announcement of a New Management Structure and Recurrence Prevention Measures
From 2006 to 2007, Obayashi Corporation had committed several legal and regulatory violations in connection with public works projects, including obstruction of competitive bidding and violation of the Antimonopoly Act. Projects involved included those related to works on U.S. military bases contracted by the Defense Facilities Administration Agency, as well as sewer line, tunnel, and subway construction projects contracted by local governments.
Reflecting on these incidents, the company established and announced the Corporate Ethics Program and Antimonopoly Act Compliance Program to prevent bid-rigging incidents from ever occurring again. Over the following decade, the entire company strove to implement rigorous compliance measures, making continuous efforts to prevent reoccurrence. However, in view of the fact that the 2018 bid-rigging incident occurred despite these efforts, on March 1, 2018, prior to prosecution by the Tokyo District Prosecutor’s Office, the company initiated a complete overhaul of its management structure, including replacing the company president. This judgment was based on the need to start steering the company’s management toward the future as soon as possible in order to investigate the cause of the incident and work to improve the compliance system.
Accordingly, Director and Senior Managing Executive Officer Kenji Hasuwa was appointed as the new president. Hasuwa joined the company in 1977, and after serving as a civil engineering project manager and heading back offices, he was appointed the Head of the Technology Business Development Division in 2014. It was there that he promoted the development of new businesses centered on the renewable energy business.
Along with the change of president, many other representative directors and executive officers were transferred to new roles, newly appointed, or retired. A drastic reshuffle was also made to the directors of the board at the Ordinary General Meeting of Shareholders in June 2018. In addition, following the indictment in March, all representative directors as of April 1 voluntarily gave up 30 percent of their monthly remuneration, while all directors (excluding independent directors) gave up 20 percent, for a period of three months.
Under the renewed management structure, the company decided to investigate all the facts related to the incident and rebuild its compliance system with a view to preventing recurrence. In June of the same year, the company revised its existing Antimonopoly Act Compliance Program and added new recurrence prevention measures, which included implementing stricter rules when contacting industry peers, ensuring a correct understanding of the Antimonopoly Act, eliminating psychological factors that cause individuals to commit or overlook acts of violation, and strengthening monitoring functions.
Efforts to Rebuild Trust
To prevent bid-rigging incidents from recurring, Obayashi Corporation judged it necessary to investigate the causes of the incident from an objective standpoint, and receive recommendations on effective recurrence prevention measures based on the results of the investigation. To this end, the company established a third-party committee composed solely of external experts who had no vested interest in the company. The committee conducted a thorough investigation involving interviews with a total of 30 individuals, including the chairman and the president. On January 31, 2019, the company received the committee’s investigative report, which contained recommendations for recurrence prevention. The report was released internally and publicly on the same day. The core recommendations were that management should proactively work to prevent recurrence and publicize the specific details concerning the bid-rigging incident to keep the incident from being forgotten. The report also recommended that top management from the Civil Engineering Construction Department be strictly dealt with and disciplined, that officers and persons with approval authority be encouraged to understand the Antimonopoly Act on a deeper level, and that a framework be created to put checks on persons with approval authority.
The company took these recommendations seriously, and from February of the same year, began rolling out new recurrence prevention measures in stages in line with the recommendations. Further efforts were made to implement rigorous compliance measures. In his capacity as the head of the company, the president has also taken every opportunity to state the company’s resolve to have “zero tolerance for getting orders and profits by misconduct and violations of the law for any reason whatsoever,” and to “never exchange information such as that indicating a desire to win certain orders with industry peers who might potentially compete against us” as a way of rebuilding trust with the public. Accordingly, the company has been firmly reinforcing its stance to place compliance as its highest priority in all aspects of business.
The Sentiment behind the Obayashi Three Pledges
Yoshigoro Obayashi, the founder of Obayashi Corporation, is said to have always advocated for the tenets of a meticulous approach to construction, fulfillment of responsibilities, honest dealing, strict adherence to deadlines, and provision of low prices. These principles were later made explicit in the opening to the Guidelines for On-Site Employees, a handbook published in 1935, as the Obayashi Three Pledges—“Quality, Value, and Efficiency.”
Quality: “Committed to providing excellent structures created by weaving together perfect facilities and outstanding techniques with our utmost efforts led by sincerity and kindness.”
Value: “Committed to providing structures full of intrinsic value at low prices by utilizing superior machinery and equipment, skillfully procuring materials, and working rationally in a controlled manner.”
Efficiency: “Committed to eliminating all forms of time-wasting and shortening delivery times by demonstrating the best of our abilities in combination with innovative construction methods, superior planning, and meticulously kept facilities.”
Posters of the Obayashi Three Pledges were hung up in construction site offices and elsewhere, and the spirit of the Pledges became firmly rooted within the company as staff put them into practice during their everyday work, passing them down in an unbroken line to the present day.
These words were reiterated in the Obayashi Basic Principles in 2015, both to recall the mindset of the company’s pioneers, and to pass on to the next generation the spirit of honest craftsmanship that has been with the company since its founding. The original Obayashi Three Pledges are compatible with the Obayashi Philosophy to be a leading sustainable company, the Obayashi Code of Conduct to fulfill the company’s social mission and ensure strict adherence to corporate ethics, ESG management, and the SDGs.
Regardless of the changing times and the myriad of ways in which the content and conditions of the business shift, the company will be able to build trusting relationships with clients, suppliers, and subcontractors as long as it possesses advanced technological capabilities and the spirit of the Obayashi Three Pledges. This will also lead to solving social challenges and the sustainable development of society. It is this sentiment that lies behind the Obayashi Three Pledges.