TOKYO -- Obayashi, a leading Japanese construction company, admitted breaching antitrust laws in bidding for contracts for a new high-speed train project, with the voluntary nature of its disclosure meaning it will likely escape any fine.
The company told the Japan Fair Trade Commission, the country's antitrust watchdog, that it was involved in obstructing the bidding along with three other top contractors -- Taisei, Kajima and Shimizu -- and was raided by public prosecutors in December.
But even though Obayashi has not officially disclosed the reasons for pleading for leniency, the construction company may have been pressured to admit to bid-rigging in fear of possible shareholder lawsuits and under scrutiny from investors motivated by environmental, social and governance concerns, or ESG.
The contracts relate to the new magnetic-levitation train line that will allow passengers to travel between Tokyo and Nagoya, which are 286km apart, in just 40 minutes. Total construction costs for the project commissioned by Central Japan Railway, also known as JR Tokai, are expected to reach about 5.5 trillion yen ($49.6 billion) by the time it opens in 2027.
The Tokyo District Public Prosecutors Office and the JFTC have increased the amount of investigators involved in the case since the start of the year in an effort to dig out the whole truth.
The Tokyo District Public Prosecutors Office raided Japanese construction company Obayashi's office in a building, second from left, in Tokyo's Minato Ward in December.
"I thought we had broken away from bid-rigging, and I never thought we would be raided again," an executive at one of the big four general contractors said under condition of anonymity, referring to past cases that have blighted Japan's corporate scene.
Leniency rules
Obayashi is expected to avoid penalties as it admitted to the antitrust violations. Under JFTC's leniency rules, the first company to report misconduct under anti-monopoly guidelines will be granted full immunity from fines and criminal prosecution.
Companies that violate antitrust laws are usually required to pay 10% of sales from related projects as fines. With Obayashi estimated to have won orders of around 60 billion yen for four maglev projects, including Nagoya Station Chuo West works, it is likely to avoid paying fines of around 6 billion yen.
A voluntary report of bid-rigging might result in a company being allowed to continue with public works for the government and municipalities. In 2007 the Ministry of Land, Infrastructure, Transport and Tourism barred Obayashi from bidding for up to nine months following the discovery of bid-rigging for Nagoya municipal subway works. Kajima and Shimizu were barred for seven months.
In the fiscal year to the end of March 2017, Obayashi's public works came to 226.3 billion yen, a little more than 10% of its total sales. Public works are an integral part of the company's earnings.
In the wake of demand for redevelopment in greater Tokyo and other factors, Obayashi's net profit is expected to rise 1% to 95 billion yen this fiscal year ending in March, marking its third consecutive year of record profit. Some market watchers say that penalties would have an insignificant effect on Obayashi's corporate earnings.
Shareholder scrutiny
However, the issue is an important one for investors. Obayashi shareholders brought the suit against the company over the 2007 Nagoya subway bid-rigging. Obayashi's former executives -- who failed to perform their duties to prevent bid-rigging -- settled the class action lawsuit by paying 200 million yen to the company to establish processes for preventing similar incidents in the future.
In recent years, shareholders have not looked kindly on offending companies, and Obayashi could face another shareholder lawsuit for not taking action sooner.
The spread of ESG investment among foreign investors is also adding to pressure. General contractors have long been seen as mainly domestic stocks. But as of the end of September 2017, Obayashi's foreign ownership ratio was 39%, up nearly 10 percentage points in a little more than three years.
With this increased foreign scrutiny, components of ESG indices could be reviewed on a quarterly basis, with the result that companies facing scandals could be removed from the indices. U.S. securities index provider MSCI, which complies ESG ratings, has ranked Obayashi's bid-rigging scandal as a "moderate" risk.
If Obayashi's rating is raised by one notch to "severe" depending on how the criminal investigation develops, Obayashi's AA rating on the index will be automatically reviewed.
Obayashi therefore had little choice but to seek leniency with the aim of showing that it had conducted proper corporate governance and thus attempting to avoid a harsher evaluation.
The construction company's stock price closed at 1,407 yen on Friday, having seesawed since it was raided by prosecutors on Dec. 11.
"It will be difficult for investors to buy Obayashi shares unless the whole truth of the incident is uncovered," said Kentaro Maekawa of Nomura Securities, expressing the widely-held view that while Obayashi may escape a fine, it will be difficult for it to regain market confidence.
