A YEAR ago a scandal erupted at Olympus, a Japanese camera-maker, which sent shockwaves across corporate Japan. Its newly installed chief executive—Michael Woodford, a Briton—was sacked by a hostile board after he raised embarrassing questions about a whopping $1.7 billion in suspicious deals. After breathless denials, the chairman, Tsuyoshi Kikukawa, eventually stepped down. He has since admitted to fraud. Along with two other Olympus executives, he faces up to ten years in jail.

It would be nice to think that lawmakers were intent on preventing a repeat of this debacle. And indeed, busy bureaucrats at the justice ministry have been drafting a revised Companies Law to tighten corporate governance. At first they wanted to require firms to appoint at least one independent director. But old-guard businesses objected. Now the ruling Democratic Party of Japan has scotched even a watered down bill with no such requirement and no obligation for directors to understand their fiduciary duties (see article). To list shares in New York, a firm must have a majority of outside directors. Japan does pretty badly on most scorecards for corporate governance, ranking behind not only rich countries but also several of its poorer neighbours.

“So what?” responds Japan Inc. The big-business lobby, Keidanren, has long argued that it should play by its own rules. Olympus, the old guard points out, actually had three external directors; that didn’t stop its management from misbehaving. Look at Enron, the lobbyists add. Its roster of non-executives did nothing to stop modern America’s most egregious corporate scandal. As for shareholder returns, even the most diverse boards do not count for much. CLSA, a broker, notes that a third of the 15 Japanese companies with the highest proportion of independent directors—with Sony at the pinnacle—have had negative returns on equity for the past five years. Firms with no outside directors did best.

That misses some crucial points, however. Governance is not just about how many non-execs there are; it is about how well they are able to do their jobs (none of those at Olympus raised a hand to help Mr Woodford). In Japan, boardroom committees have no legal status, so shareholders have no one obliged to fight their corner when they are at loggerheads with managers. What is more, even if Japanese firms choose to stuff their boardrooms with insiders, cronies and other members of the “old-boy network”—and they are almost all men—they should at least be obliged to undergo training about how their job on the board differs from their job on the payroll. That task is not primarily about boosting returns. It is about preventing Olympus-sized blow-ups.

Insularity is a huge problem for Japanese companies. By gazing inwards, they have lost ground to Asian competitors in world markets. They are losing the battle for global talent: after watching what happened to Mr Woodford, how many bright young foreigners would want to work for a Japanese firm? Until recently, Japan Inc had even lost sight of the fact that its home market was ageing and set to shrink.