¹ For example, see Friedman, M. Capitalism and Freedom, (Chicago, University of Chicago Press, 1962), or Financial Accounting Standards Board, Statement of Financial Accounting Concepts No. 1, Objectives of Financial Reporting by Business Enterprises, 1978. The latter contains the position of the U.S. accounting profession on the primary responsibilities of corporate managers.

² For examples of corporate models which embody stakeholder theory, see Carroll, A. B., “A Three-Dimensional Conceptual Model of Corporate Performance,” Academy of Management Review, vol. 4 (1979), pp. 497–505, and; Freeman, R. E., Strategic Management, A Stakeholder Approach (Boston: Pitman, 1984). The term “corporate organization” in this paper denotes the human, rather than legal, organization. For a focused discussion of the corporate entity and managerial responsibility, see Nesteruk, J. and D. T. Risser, “Conceptions of the Corporation and Ethical Decision Making in Business,” Business and Professional Ethics Journal, vol. 12, pp. 77–89.

³ The term “corporate-oriented ethic” is used here to denote a desire on the part of managers to enhance the interests of the corporate (Human) organization versus those of external stakeholders.

⁴ For examples of surveys which compare the objectives of Japanese and U.S. corporate managers, see Abegglen, J. C., and G. Stalk, Jr., Kaisha, The Japanese Corporation (New York: Basic Books, 1985), p. 177, or; Choi, F. D. S., and K. Hiramatsu, Accounting and Financial Reporting in Japan- Current Issues and Future Prospects in a World Economy (Berkshire, United Kingdom: Van Nostrand Reinhold, 1987), p. 121.

⁵ The belief that quarterly reporting hinders long-term planning is so strong that foreign companies wishing to have their shares traded on the U.S. stock exchanges have convinced the U.S. Securities and Exchange Commission to allow them to adhere to the reporting requirements in their home countries, even if the result is less frequent financial reporting. Also, former Senator Paul Tsongas, in a March 5, 1992 presidential debate televised from Dallas (ABC), strongly argued that the quarterly reporting requirement for U.S. corporations hinders their long-term competitiveness.

⁶ I am not suggesting here that adherence to various concepts of financial accounting, alone, is sufficient to warrant a more “human-oriented” ethic on the part of managers. As succinctly pointed out by Solomon in Ethics and Excellence (New York: Oxford University Press, 1992), both individuals’ and corporations’ identities and purposes are derived from the groups and communities to which they belong. As such, the corporate organization, both internally and externally, cannot thrive without a large degree of mutual cooperation on the part of (and between) its human members (internally) and external stakeholders, regardless of financial results. Additionally, sheer adherence to financial reporting is insufficient from a moral context: Doing “what is right” obviously requires more than merely attempting to maximize any definition of financial profit.

I am suggesting, however, that managerial responsibilities are influenced by financial reporting. In this regard, discussions on financial reporting and managerial responsibility frequently focus on the relationship between the time frame of the profit (i.e. “short-term” versus “long-term” profit) and managers’ decisions. Generally, there seems to be agreement that concentrating on objectives which enhance long-term profit, such as enhancing employee welfare, is more consistent with enhancing the well-being of the corporate entity.

A more salient aspect of the relationship between profit and managerial responsibility, however, concerns how a society’s dominant concept of the corporate entity affects the relative importance of stakeholders and the definition of profit itself. For example, Professor Kenneth E. Goodpaster, in “Business Ethics and Stakeholder Analysis,” Business Ethics Quarterly, (April, 1991) essentially argues that in the contemporary (presumably U.S.) corporate environment, management should concentrate on enhancing the profit available for distribution to shareholders, the primary stakeholder. Close attention should then be paid to any other stakeholders which affect the realization of maximizing shareholder profit. By contrast, Professor Thomas L. Carson, in “Comment on Stakeholder Theory,” Business Ethics Quarterly, vol. 2 (1993), p. 174, deemphasizes the importance of stockholders by stating that “…duties to some stakeholders are more important than duties to other stakeholders.” In exemplifying this notion, Professor Carson, p. 174 states that “Japanese corporations seem to operate on a stakeholder model which takes promoting the interests of employees to be the most important duty of business….”

Importantly, each of these concepts embodies a different substantive definition of “profit.” The view that stockholders are the predominant stakeholders essentially defines profit as the resources which remain to the corporation for the distribution of dividends to shareholders after payments to lesser stakeholders, such as creditors and employees. In a somewhat reverse manner, the notion that employees are the most important stakeholder defines profit as the resources left to the corporation for the enhancement of employee welfare after distribution to other stakeholders, such as shareholder dividends.

Since employees’ interests (i.e. livelihoods) are more frequently tied to the long-term interests of the corporate entity than those of stockholders, the latter view intrinsically coincides with longer-term view of “financial profit” which emphasizes the long-term well-being of the corporation. However, its more important aspect lies in the defining of workers (rather than shareholders) as the primary stakeholder group and enhancement of “organizational well-being” rather than “shareholder wealth” as the primary objective of managers.

Herein lies the argument I make in this paper. Different societies possess different concepts of the corporation which place greater emphasis on different stakeholder groups. As a result, the substantive concepts of the corporate entity and profit differ in a manner which affects the importance of “Western” style financial reporting in managerial decision-making.

⁷ See Thurow, L., Head to Head- The Coming Economic Battle Among Japan, Europe, and the United States (New York: Time-Warner Books, 1993), Ch. 9.

⁸ Japanese accounting principles incorporate two sets of reporting regulations (See, Corporate Disclosure in Japan- Reporting, and; Corporate Disclosure in Japan- Accounting, Japanese Institute of Certified Public Accountants, 1984). One set, contained in the Commercial Code, requires that financial statements be made available a few weeks prior to the annual shareholders meeting. The other set, contained in the Securities and Exchange Law, requires large corporations to file financial statements with the Securities Department of the Ministry of Finance on a semi-annual basis. For a more detailed discussion of the history and orientations of these dual requirements, see McKinnon, J. L. The Historical Development and Operational Form of Corporate Reporting Regulation in Japan (New York: Garland Publishing, 1986).

In the United States, the Securities and Exchange Commission requires that publicly traded corporations file form “10Q,” which includes income information, on a quarterly basis, see Pointer, L. G., and R. G. Schroeder, An Introduction to the Securities and Exchange Commission (Plano, TX: Business Publications Inc., 1986). Additionally, the U.S. accounting profession, in Accounting Principles Board Opinion no. 28, Interim Financial Reporting, requires that corporations release earnings data on a quarterly basis.

⁹ “Fiduciary responsibility” is used to denote management’s responsibility to parties who have entrusted it with their resources. “Independent shareholders” refers to shareholders whose financial return is not closely tied to the long-term well-being of the corporate entity, such as shareholders involved in short-term speculation. “Ethical/Unethical” behavior refers to management’s behavior relative to advancing the interests of parties to whom it owes a fiduciary responsibility.

¹⁰ A general description of early Japanese merchant houses is provided by Clark, R., The Japanese Company (New Haven, CT: Yale University Press, 1979), pp. 13–18. More detailed descriptions are provided in Benedict, R., The Chrysanthemum and the Sword, Patterns of Japanese Culture (Boston: Houghton Mifflin Co., 1946) and Nakane, C. Japanese Society, (London: Weindenfeld and Nicolson, 1973).

¹¹ Dore, R., British Factory-Japanese Factory, The Origins of National Diversity in Industrial Relations (London: George Allen and Unwin, Ltd., 1973), p. 377.

¹² Dore, supra note 11, at 391.

¹³ Reischauer, E. O., The Japanese (Cambridge, MA: The Belknap Press of the Harvard University Press, 1978). pp. 78–80.

¹⁴ Reischauer, supra note 13, at pp. 87–94.

¹⁵ Clark, supra note 10, at pp. 18–29.

¹⁶ Clark, supra note 10, at pp. 29–35.

¹⁷ Clark, supra note 10, at pp. 32–43.

¹⁸ Dore, supra note 11, at pp. 390–95.

¹⁹ Dore, supra note 11, at pp. 392.

²⁰ Dore, supra note 11, at p. 383.

²¹ The statement on Japanese worker relations is provided in Morita, A., Made in Japan (New York: Penguin Books, 1988), p. 169. The desire of the Zaibatsu to control the labor force is underscored by their strong resistance during the 1920s and 1930s to the enactment of any progressive labor legislation. For a discussion of this period see Garon, S., The State and Labour in Modern Japan, (Berkeley: The University of California Press, 1987), Ch. 2.

²² Reischauer, supra note 13, at pp. 95–99.

²³ Reischauer, supra note 13, at p. 99.

²⁴ Clark, supra note 10, at p. 43.

²⁵ Nakane, supra note 10, at p. 17.

²⁶ Nakane, supra note 10, at pp. 14–15.

²⁷ After World War II, the occupation authorities encouraged the revision of pre-war labor laws concerning the recognition of labor unions, workmans’ compensation, minimum wages, pensions, and other benefits. These were later weakened in attempts to counter communist influence in the unions. However, given the experiences of the pre-war Zaibatsu, neither the government nor businesses attempted to roll back basic workers’ rights. For a discussion of this period, see Garon, surpra note 21, at pp. 229–56.

²⁸ Morita, supra note 21, at p. 170.

²⁹ Discussions of managerial responsibility in Japan can be found in a multitude of sources. For examples, see Abegglen and Stalk, £upra note 4; Okimoto, D., Between MITI and the Market-Japanese Industrial Policy for High Technology (Stanford, CA: Stanford University Press, 1989). For an intriguing and recent discussion of Japanese managerial financial responsibility, see Gerlach, M. L., Alliance Capitalism-The Social Organization of Japanese Business (Berkeley: University of California Press, 1992).

³⁰ For a discussion of the “paternal” relationship between the Japanese enterprise and its employees, See Dore, supra note 11, at Ch. 8.

³¹ Komiya, R., The Japanese Economy: Trade, Industry, and Government (Tokyo: University of Tokyo Press, 1990), p. 170.

³² Komiya, supra note 31, at p. 164.

³³ For a discussion of enterprise unions and their role in the Japanese corporation, see Dore, R., Flexible Rigidities, (Stanford, CA: Stanford University Press, 1986), and; Hanami, T, “Conflict and its Resolution in Industrial Relations and Labour Law,” in E. S. Krauss, T. P. Rohlen and P. G. Steinhoff, eds., Conflict in Japan (Honolulu: University of Hawaii Press, 1984), pp. 108–35.

³⁴ Komiya, supra note 31, at p. 170.

³⁵ After the War, the occupying authorities attempted to break-up the old Zaibatsu holding companies and disperse the shares to individual shareholders. However, after the allies departed, corporate alliances based on the old Zaibatsu holding companies were formed. For a description of this period, see Dodwell Marketing Consultants, Industrial Groupings in Japan, 8th ed. (Tokyo: Dodwell Marketing Consultants, 1988/89), p. 7.

³⁶ For examples of Japanese current economic weaknesses, see Wood, C., The Bubble Economy (New York: The Atlantic Monthly Press, 1992) and Wood, C., “Japan’s Blowup,” The New York Times, Nov. 11, 1992, p. 25. Further anecdotal support for this assertion is provided by reports that Japanese corporations have started to lay-off permanent employees and that Japanese financial reporting is starting to play a more important role in providing information to investors.

³⁷ Gerlach, M. L., “The Japanese Corporate Network, A Blockmodel -Analysis,” Administrative Science Quarterly, March, 1992a, pp. 105–39.

³⁸ Quoted from Gerlach, M. L., “Twilight of the Keiretsul A Critical Assessment,” Journal of Japanese Studies, Winter, 1992b, p. 117.

³⁹ Dulles, F. R., Labour in America- a History, Second Revised Ed. (New York: Thomas YCrowellCo, 1960), p. 20.

⁴⁰ The U.S. corporate entity actually originated in the years following the American Revolution. These organizations, however, concentrated on forming banks and the infrastructure necessary for the development of a young country. For a description of the early U.S. corporate environment, see Dulles, supra note 39, at pp. 20–34.

⁴¹ Dulles, supra note 39, at p. 24.

⁴² Davis, J. S., Essays in the Earlier History of American Corporations, Number IV (Cambridge, MA: Harvard University Press, 1917), p. 256.

⁴³ Dulles, supra note 39, at pp. 73–95.

⁴⁴ Warshow, R. I., The Story of Wall Street (New York: Greenberg Publisher, Inc., 1929), pp. 56–62.

⁴⁵ Dulles, supra note 39, at p. 118.

⁴⁶ Chandler, A. D., “The Beginnings of ‘Big Business’ in American Industry,” in Baughman, J. P., ed., The History of American Management, (Englewood Cliffs, NJ: Prentice-Hall, 1969), p. 14.

⁴⁷ Nelson, R. L., Merger Movement in American History, 1895–1956, (Princeton, NJ: Princeton University Press, 1959).

⁴⁸ Dulles, supra note 39, at Ch. 11 through 14.

⁴⁹ Espeland, W. N. and Paul M. Hirsch, “Ownership Changes, Accounting Practice and the Redefinition of the Corporation,” Accounting Organisations and Society, vol. 15 (1990), pp. 77–96.

⁵⁰ The most prevalent examples of such behavior are the liquidation of corporations in mergers to enhance shareholders wealth and the layoffs of employees to enhance short-term profits.

⁵¹ For discussions of the “contractual entity,” see Coase, R. H., “The Nature of the Firm,” Economica (1937), pp. 386–405; Jensen, M. C., and W. H. Meckling, “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,” Journal of Financial Economics, vol. 3 (1976), pp. 305–60; and, FitzRoy, F. R., and D. C. Mueller, “Cooperation and Conflict in Contractual Organisations,” in D. C. Mueller, ed., The Modern Corporation-Profits, Power, Growth and Performance, (Lincoln, NE: University of Nebraska Press, 1986).

⁵² Numerous examples of such actions are provided by A. Michel and I. Shaked, Takeover Madness, Corporate America Fights Back, (New York: John Wiley and Sons, 1986).

⁵³ Examples of the greater stockholder pressure are provided by recent shareholder uprisings such as those at General Motors, Westinghouse, and IBM. The question of whether the pressure will result in greater demands for short-term profitability or greater long-term productivity is unknown and is the essential issue in the next section of the paper.

⁵⁴ The concept of corporate “ownership,” itself, is ambiguous. For example, it can connote legal title to specific assets, title to “shares” ownership in the corporation, or control of organizational resources. Herein, the latter definition is emphasized. Discussions of how the concept of ownership impacts the financial organization of business entities may be found in Anthony, R. N., Tell it Like it Was- A Conceptual Framework for Financial Accounting (Homewood, IL: Richard D. Irwin, 1983) and Patón, W. A., Accounting Theory (Houston: Scholars Book Company, 1962).

⁵⁵ Komiya, R., supra note 31, at p. 164.

⁵⁶ Komiya, supra note 31, at pp. 169–70.

⁵⁷ Abegglen and Stalk, supra note 4, at p. 6.

⁵⁸ Jinnai, Y, “The Function of Accounting: A Japanese Perspective,” Accounting Auditing and Accountability Journal, vol. 3 (1990), pp. 13–14.

⁵⁹ Nakatini, I., “The Economic Role of Financial Corporate Grouping,” in M. Aoki, ed., The Economic Analysis of the Japanese Firm (Amsterdam: North Holland, 1984), p. 231; and Okimoto, D., supra note 29, at pp. 137–38.

⁶⁰ See Gerlach, 1992a, supra note 37, and Hudack, L. R., and L. L. Orsini, “A Note of Caution to Users of Japanese Financial Reports- A Demonstration of an Enlarged Exogenist Approach,” International Journal of Accounting, vol. 27 (1992), pp. 15–26.

⁶¹ Quoted from Abegglen and Stalk, supra note 4, at p. 185. As used here, the term “external shareholders” refers to shareholders whose enrichment may not be tied to the well-being of the corporate entity.

⁶² Ballon, R. J. and I. Tornita, The Financial Behavior of Japanese Corporations (Tokyo: Kondansha International, 1988), pp. 222–24; Gerlach, 1992, supra note 37 at p. 107; Jinnai, supra note 58, at pp. 15–16; Nakatini, supra note 59, at p. 231.

⁶³ Jinnai, Supra note 58, at p. 16.

⁶⁴ Choi and Hiramatsu, supra note 4, at pp. 31–33.

⁶⁵ Harrison, G. L. and J. L. McKinnon, “Culture and Accounting Change: A New Perspective on Corporate Reporting Regulation and Accounting Policy Formulation,” Accounting, Organisations, and Society, vol. 11 (1986), pp. 233–52.

⁶⁶ McKinnon, J. L. and G. L. Harrison, “Cultural Influence on Corporate and Governmental Involvement in Accounting Policy Determination in Japan,” Journal of Accounting and Public Policy, vol. 4 (1985), pp. 201–23 and Jinnai, supra note 58.

⁶⁷ McKinnon, J. L. The Historical Development and Operational Form of Corporate Reporting Regulation in Japan, (New York: Garland Publishing, 1986) and Jinnai, supra note 58 at pp. 13–14.

⁶⁸ For a brief description of the early history of modern U.S. accounting, see Hawkins, D. F., “The Development of Modern Financial Reporting Practices among American Manufacturing Companies in American Industry,” in Baughman, J. P., ed., The History of American Management (Englewood Cliffs, NJ: Prentice-Hall, 1969).

⁶⁹ Yonezawa, Y, “The Dividend Policy of Japanese Corporations,” in Y. Monden and M. Sakurai, eds., Japanese Management Accounting- A World Class Approach to Profit Management (Cambridge MA: Productivity Press, 1989), pp. 505–15.

⁷⁰ An explanation of “permanent earnings” is provided by Beaver, W. H., Financial Reporting: An Accounting Revolution (Englewood Cliffs, NJ: Prentice-Hall, 1989).

⁷¹ That Japanese corporations disregard fluctuations in short-term earnings is provided by Yonezawa, supra note 69. Furthermore, they manipulate accounting information in a manner which reduces earnings. See McKinnon, supra note 67; Ballon and Tornita, supra note 62; and, Jinnai, supra note 58.

⁷² When short-term earnings increase, the price of a firm’s stock may temporarily increase. As such, if managers are holding a large number of stock options, they can receive stock with a value above the option price. Thus, there exists an incentive to engage in actions which may increase short-term income, even possibly to the detriment of long-term corporate interests. A vivid example of this phenomenon is provided by Holtzman, E., “When Management Falls Down on the Job,” The Washington Post, May 26, 1992, p. A17.

⁷³ Yonezawa, supra note 69.

⁷⁴ A reviewer to this paper commented that the concept of managerial responsibility could not be materially changed without changing the concept of the corporate entity. I do not doubt this point. However, given the strength of countries’ cultures and their impact on the corporate entity, I believe that concepts of the corporate entity should be allowed to evolve rather than abruptly altered to meet the conditions of another country’s history and traditions.

⁷⁵ A common example is provided in Choi, F. D. S., Hino H., Min S. K., Nam S. O., Ujiie, J., and Stonehill A. I., “Analyzing Foreign Financial Statements: The Use and Misuse of Ratio Analysis,” Journal of International Business Studies (1983), pp. 113–30. In Japan, corporations borrow from banks who may own corporate stock and place bank officials on the corporate board. In the United States, however, banks generally do not own stock. Thus, even though a loan from a bank may be classified (on a balance sheet) as a liability, the substantive difference of the relationship makes this information misleading. The Japanese loan is actually more a contribution of equity capital.

⁷⁶ Financial Accounting Standards Board, Statement of Financial Accounting Concepts No. 1, Objectives of Financial Reporting by Business Enterprises, 1978, para. 32.

⁷⁷ For example, requiring that assets be valued at their current replacement cost rather than historical cost would encourage both shareholders and management to more closely consider the service potential of assets. Also, requiring that research and development expenditures (like plant and equipment) be expensed over the time which they provide benefits to the firm (rather than totally in the year incurred) would encourage shareholders and managers to view research and development as an investment rather than expense.