Toshiba vows to change corporate culture and governance in the wake of scandal

FOLLOWING the massive resignation of its top management Following the revelation that Toshiba had inflated profits by 152 billion yen (£ 785 million) in the past six years, the company has promised sweeping changes in its accounting management.

On July 29, he announced a series of corporate changes. Significantly, he intends to “establish a new corporate culture under new management and governance structures”, according to a press release.

After the scale and scope of the accounting manipulations were publicly revealed on July 21 in an independent committee report, it became evident that the weaknesses of institutional corporate governance and the negative aspects of corporate culture Japanese company had combined to produce a veritable storm of accounting errors.

Toshiba chairman Hisao Tanaka and his two predecessors, Vice Chairman Norio Sasaki and corporate adviser Atsutoshi Nishida, publicly apologized for the financial fiasco on the same day and resigned. Four other senior executives and directors of the board also resigned, while an eighth resigned from his managerial and director positions. The resignations represent half of Toshiba’s 16-member board of directors.

Undisputed, uncontrolled and not responsible

Undisputed, unchecked and seemingly without accountability, Toshiba’s senior management had urged business unit leaders to prepare the books, the committee concluded. Therefore, over the past six years, subordinates have used a host of cheap accounting tricks to boost operating profits.

The investigation team found that the Toshiba group companies overestimated sales and profits, underestimated losses, delayed the recording of operating expenses, and caused related companies to hold excessive inventories of Toshiba components. (“Channel jam”).

In their summary, the investigators noted: “The inappropriate accounting treatment that was carried out or continued in a certain number of [Toshiba] enterprises simultaneously and institutionally with the participation of top management at enterprise level… should be seen as a management decision… ”

Seemingly unable to cope with the shame of presiding over what they saw as an embarrassing performance from Toshiba, the former presidents set incredibly high profit targets – euphemistically called “challenges” – and made sure their leaders Toshiba company understood what to do.

To ensure the desired results, the committee concluded that the chairmen had made “… the strong suggestion that these goals had to be met, and sometimes implied that underperforming companies would have to go out of business if they did not improve their profits. “.

Such deception could hardly have been carried out across a number of business units for such a long time without the strong adherence of employees to company values, such as obedience, loyalty to the organization and the desire to maintain harmonious compliance – values ​​reinforced by lifelong employment, which remains the carrot-and-stick standard at large Japanese companies like Toshiba.

“I have no doubt that the employees working at Toshiba are psychologically and emotionally attached to the company,” said Masazumi Wakatabe, professor of economics at Waseda University in Tokyo. “Japanese corporate culture therefore played a role in the scandal.”

However, given that major accounting frauds have taken place in most countries, Wakatabe believes the Toshiba case has more to do with “the institutional weakness of Japanese corporate governance.” Especially in situations where those at the top are not closely watched by outside directors or government authorities as the equivalent of the [US] Security and Trade Commission. “

The scandal first emerged in February when Japan’s Securities and Exchange Surveillance Commission began investigating Toshiba’s accounting policies for infrastructure projects. On April 3, the company went on to issue a statement indicating that accounting irregularities had been brought to its attention and thus “decided to immediately create a special investigative committee (whose members include experts from outside the group). Toshiba)… to conduct an internal investigation into this matter ”.

When the committee discovered widespread accounting distortions in various Toshiba group companies, Toshiba had no choice but to create an independent committee of inquiry on May 8. This team of outside lawyers and accountants reported their staggering 152 billion yen result on July 20.

It is no exaggeration to say that the news shocked not only the business community in Japan, but the entire nation as well. Founded in 1875, Toshiba has long been viewed as a venerable blue chip company, a proud global Fortune 500 company, and the embodiment of Japanese business strength at its best. Its multinational operations employ 200,000 people and manufacture a variety of items, including consumer electronics and household items, memories and semiconductor components, medical equipment, and power supply systems such as power plants. nuclear.

Commenting separately to the press after hearing the news, Japanese Finance Minister Taro Aso and Chief Cabinet Secretary Yoshihide Suga called the announcement “very regrettable”. Meanwhile, Taizo Nishimuro, a highly respected former president of Toshiba (1996-2000) and member of an advisory committee assisting Prime Minister Shinz? Abe, told Japanese media the day after the resignations, the news had been “a very big shock.”

Executive cups

Toshiba responded to the crisis by appointing its current chairman of the board, Masashi Muromachi, as interim chief executive officer, and ordered pay cuts for 16 executives, including Muromachi. To appoint a new management team and implement changes in governance structures and corporate culture, the company has established a Management Revitalization Committee, made up of the current four outside directors of the Board of Directors. , as well as an external accountant, a lawyer and a former Japan Supreme. Court.

“Changing the corporate culture is, of course, a very difficult undertaking,” said Michael Smitka, professor of economics at the University of Washington and Lee in Virginia, United States. Smitka, who has studied and researched the Japanese economy for the past 35 years, added, “The up-or-out system that prevails in many companies is putting tremendous pressure to play along. organizations experience this kind of pressure to some extent. “

Among other measures, Toshiba has appointed one of its outside directors (Hiroyuki Itami) to chair its audit committee. It also intends to reform its accounting conventions and improve its control and balance method, strengthen its financial controls through the supervision of the board of directors and increase the number of external directors so that they are in the majority on the board.

“These reforms are a step in the right direction in terms of strengthening the external directors – although the details of the exact measures to be taken are not yet known,” said Wakatabe of Waseda University. “Nevertheless, a formal investigation by the authorities is needed to speed up the entire restructuring process. “

One thing is certain. “Toshiba understands that the ramifications of trying to whitewash bad news can be quite costly in terms of the number of people whose careers have come to an abrupt end, the financial loss for the company and the time spent on [the scandal]”Smitka said. Therefore, he hopes the fallout” will generally lead to a hardening of accounting standards and practices and cause companies to check that they are not doing what they should not be doing. “

Meanwhile, the first order of business for Toshiba will be to quickly announce its new management team, and then submit the company’s delayed annual report for fiscal 2014 by the end of August – after being granted an extension. two months due to the scandal. The company will also face a class action lawsuit brought against it by a shareholder in the United States over the accounting manipulations.

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