24 August 2015
There are universal truths to be learnt after the recent accounting scandal
It is easy to dismiss the Toshiba accounting scandal as simply another manifestation of Japan’s peculiar corporate culture. The revelation that the company overstated its profits by $780 million over many years comes some four years after the disclosure that Olympus had hidden $1.7 billion of losses over 13 years. Both scandals are widely considered evidence of Japan’s weak corporate governance and the lack of accountability in its leading companies.
Such allegations carry a large measure of truth. Japan has only just introduced a corporate governance code – more than 20 years after the UK’s Cadbury code and in stark contrast to the EU where codes are now an expected norm. A regional survey of Asia-Pacific corporate governance conducted last year by ACCA and KPMG Singapore, ranked Japan’s governance 21st out of 25 countries, behind the Philippines, China and Cambodia (although surprisingly Canada also scored low).
Yet there are also some universal truths underlying the Toshiba experience. They embody lessons even for those who pride themselves on their more sophisticated governance framework.
Analysts say that one of the driving forces behind the scandal was the company’s overpayment for the purchase of its Westinghouse nuclear subsidiary in 2006. The economics of this were then undermined by the Fukushima meltdown of 2011. An independent panel report into the accounting scandal did not mention Fukishima but noted that the accounting pressures on Toshiba were particularly strong in the two years following this incident.
The problem appears to have stemmed from the unwillingness of the company’s corporate leadership to own up to bad results which would reflect badly on the Westinghouse purchase. Although there may have been no formal instructions from on high to fiddle the accounts, the pressure on the company’s financial managers to report strong figures – or at the very least not to admit to weakness – was great. One is reminded of the famous remark attributed to Henry II with reference to Thomas Beckett: ‘who will rid me of this turbulent priest?’ The words were taken as an invitation to assassinate the unfortunate Archbishop of Canterbury, but without any direct instruction traceable to the King.
Moreover, once a deceit is underway, as it was in Toshiba, it becomes difficult to unravel and is easily compounded. When the results are overstated, the targets for the following year are set unrealistically high. When these targets are missed the pressure to repeat the deceit is irresistible. One might think this is a purely Japanese phenomenon, but there is a strange similarity with another company closer to home: Tesco. This is another case where staff overstated profits with very damaging consequences.
Openness and honesty are fundamental to a strong corporate culture, wherever a company is located. So is the need to avoid placing expectations on staff that are impossible for them to meet. Experience shows that this is one of the strongest impulses behind corporate misbehaviour. A survey by the American Management Association in 2006 showed that pressure to meet unrealistic objectives or deadlines is, by a wide margin, the strongest factor likely to compromise an organisation’s ethical standards. It is ranked in the top three by 70% of managers surveyed, with the next one down – desire to further one’s career – only chosen by 38.5%.
Japan’s corporate experience may be eye catching and extreme, but it is not quite as exceptional as it looks. Moreover, there is a possibility that Japan’s record on corporate governance could improve now that a governance code is in place and now that the country also has a stewardship code for investors. A key issue is that there needs to be accountability of the board and senior management to the shareholders that provide the capital, as well as a recognition that all companies depend on society for their licence to operate. When they go in for calculated deceit that licence is easily lost.
What makes Japan different is the length of time the scandal went undiscovered, but there is another difference too. In Japan, when malpractice is exposed, those responsible do not cling on and try to retain their position. They apologise and resign immediately. There is no apparent reward for failure.
For more on Japan’s new corporate governance code, see our feature ’A distinctive character’.
Peter Montagnon is Associate Director at the Institute of Business Ethics