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Corporate governance
10 August 2015
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TOSHIBA’S
TRUE
COLOURS
The US$1.2 billion profit padding discovered at Toshiba is an
embarrassing blow to the Japanese government’s reform
plans. Stakeholders tell George W. Russell that even though
many hallmarks of corporate governance are lacking, this
latest scandal will add momentum to changes already afoot
Illustrations by Takeo Chikatsu
I
t is a Japanese ritual that seems least US$2.4 billion in charges and The Toshiba scandal is also an
as familiar as a tea ceremony: writedowns over the scandal. Chair- embarrassment to Japan’s govern-
a top executive bows to an man Masashi Muromachi will lead ment, led by Prime Minister Shinzo
assembled media conference, ticks the company as interim CEO on 10 Abe, who had trumpeted better
off his company’s wrongdoings percent of his previous salary. corporate governance as part of his
and resigns or, more likely, fires That scandal should envelop economic revitalization platform.
a scapegoat. such a venerable corporation was Announcing a government probe
Recent years have seen several a further blow to corporate Japan’s of Toshiba on 22 July, Finance
large Japanese corporations – prestige. “Toshiba was considered Minister Taro Aso said that without
from cosmetics maker Kanebo one of the frontrunners of corpo- “appropriate” corporate gover-
to brokerage Nikko Cordial, and rate governance reform initiatives nance, Japanese companies would
machinery giant IHI to optical among listed companies in Japan,” “lose the market’s trust.”
equipment manufacturer Olympus says Ken Kiyohara, Partner at the Japan’s first formal Corpo-
– admit to fraudulent accounting or Jones Day international law firm rate Governance Code went into
profit manipulation. Last month, in Tokyo, whose practice includes effect on 1 June and while many
it was the turn of the biggest advising on corporate governance companies pre-empted the rules by
corporate name yet – Toshiba. and compliance. adding independent directors and
After months of speculation, Japan’s accounting profession is improving transparency, Toshiba
Toshiba in May appointed a third- also under scrutiny. The Japanese had fallen by the wayside in sev-
party committee to look at mount- Institute of CPAs, a Global Account- eral metrics, such as the composi-
ing allegations of fraud. The report, ing Alliance member, says it had tion of its audit committee (See
released on 21 July, found that begun an investigation into EY Audit committee under scrutiny on
Toshiba had engaged in improper ShinNihon’s auditing practices page 13).
accounting that resulted in US$1.2 for Toshiba. JICPA Chairman and In addition, the government last
billion of inflated profits and President Kimitaka Mori says the year introduced its Stewardship
extended to almost every business institute would review account- Code, in which about 200 institu-
unit of the sprawling conglomerate. ing standards and procedures. tional investor signatories engage
Chief Executive Officer Hisao “We may [also] look into issues in dialogue with companies and are
Tanaka and other executives quit pertaining to enhancing corporate encouraged to question governance
while Toshiba expects to take at governance,” he adds. and transparency.
August 2015 11
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Corporate governance
Blowing the whistle – for fear of negative conse- Board Director Training Institute
Aspects of the Toshiba case are quences,” says Kiyohara at Jones of Japan and a leading corporate
reminiscent of the Olympus scandal Day. “Without such reporting to the governance advocate. Its Japanese
in 2011. The fraudulent accounts SESC, this incident may not have equivalent provides no such ser-
were a legacy of previous manage- come to light.” vice, he adds.
ment teams – decades in the case of Furthermore, Japan’s whistle-
Olympus, several years for Toshi- blowing rules are complex: if an Institutional issues
ba’s – and both were brought to light employee reports wrongdoing to After news of the SESC complaint
by whistleblowers leaking data. the company and is ignored, then leaked out, Toshiba initially claimed Since 2009,
Since 2009, Toshiba had been goes to the authorities, legislation that any possible accounting irregu- Toshiba's top
setting unrealistic goals for busi- will offer protection against any larities were confined to its infra- executives set
ness units. Senior managers had retribution. That protection does structure business, and opened a unrealistic profit
to manipulate figures to appear to not apply if the employee goes third-party investigation, traditional targets that
meet their targets, investigators straight to the authorities. in Japan under such circumstances. led to improper
said in their report. “Whistleblowing in the West Unlike Olympus’s third-party accounting
Long-held suspicions about is seen as a positive force,” says investigation, which backed man- practices,
Toshiba padding profits were Michael Woodford, the former agement, the Toshiba probe found according to
strengthened when news emerged Olympus CEO who was sacked after evidence of manipulation across the a summary of
earlier this year that an anony- drawing attention to the company’s entire corporation. Announcing his a third-party
mous email pointing to accounting attempt to hide US$1.7 billion in resignation on 21 July, Tanaka, the investigation.
malpractices had been sent to the losses. “I believe most reasonable former CEO, claimed he did not tell
Securities Exchange and Surveil- people will accept that whistleblow- anyone to falsify accounts but he
lance Commission, Japan’s major ing is something to be nurtured. took responsibility for the com-
corporate watchdog. Immediate change is needed to pany’s shortcomings.
“There have been activities ensure that whistleblowers are given Tanaka’s predecessors as CEO,
amounting to incorrect accounting the confidence to speak out without Norio Sasaki, who served as vice-
in Toshiba’s infrastructure-related fear of adverse repercussions.” chairman, and Atsutoshi Nishida, a
business,” the email read, accord- Corporate governance experts board adviser, also quit. Two former
ing to a translation by Nikkei. counter that no country has an overt CEOs holding on to such influential
Media speculation initially focused whistleblowing culture. Even the positions is unique to Japan, and
on the identity of the whistleblower, United States, considered the van- created a situation in which the two
concluding it was likely to be a guard of whistleblower protection, men passed on their manipulation to
woman within Toshiba, acting on had to include financial rewards the next regime. A similar situa-
her own and who was not a trained for informants into its Dodd–Frank tion emerged with Olympus, where
accountant or lawyer. legislation of 2009. decisions taken in the 1980s caused
“Culturally, it is not easy for an “The U.S. Securities and enough ripples through the decades
employee of a Japanese company Exchange Commission has 10 to nearly sink the company.
to blow the whistle – even though people to man a whistleblower The Toshiba case has put the
it might be considered to be a right hotline,” points out Nicholas Benes, need for more independent directors
thing to do under the circumstances Representative Director of the in the spotlight. “If Abe really wants
12 August 2015
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Audit committee manager of the legal affairs division. director who was most recently dean
under scrutiny While the other three members were of the Graduate School of Innovation
Toshiba was considered a reform external directors, only one, Kiyomi Studies at Tokyo University of Science,
pioneer, first appointing independent Saito, was reasonably well versed was appointed as the new chairman.
directors in 2001. But the company's in financial matters. Saito, who had “While the accounting errors
five-person audit committee – of which previously worked for Morgan Stanley probably would have been hard for any
two members were former Toshiba in Tokyo, was a kansayaku, or “corporate audit committee to spot if managers
executives and two others lacked any auditor,” a uniquely Japanese position wanted to keep them hidden, this
business experience whatsoever – was referring to someone with a supervisory committee composition could not
a classic study of Japan’s corporate role over governance matters who does possibly have helped,” says Nicholas
insider culture that can often create not necessarily hold any qualifications in Benes, Representative Director of the
compliant committees under the thumb auditing or accounting. Board Director Training Institute
of management. The other two audit committee of Japan.
Audit committee chairman Makoto members were retired diplomats. Ken “Director skill sets matter,” says
Kubo rose to president and chief execu- Shimanouchi was a former ambassador Benes, a leading transparency advo-
tive officer of Toshiba Mobile Display Co. to China, while Sakutaro Tanino had cate who first proposed the Corporate
and senior executive vice president of served as consul-general in Miami and Governance Code to the Japanese
Toshiba Corporation in a 40-year career. ambassador to Brazil. government. “Just because you were the
Lawyer Seiya Shimaoka worked for Kubo resigned from the committee ambassador to Brazil does not mean you
Toshiba for 36 years, rising to general last month. Hiroyuki Itami, an external are fit for the audit committee.”
August 2015 13
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Corporate governance
14 August 2015
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Certified Public Accountants and it did after the Olympus scandal.” the overall corporate governance
Auditing Oversight Board, Japan’s Benes at the director-training landscape may help promote a
independent audit watchdog. institute, who first proposed the culture in Japanese companies that
“Depending upon the finding Corporate Governance Code, is also misconduct, if suspected, is sup-
of any deficiencies by the JICPA upbeat. “I suspect that the Toshiba posed to be addressed and discour-
and the CPAAOB,” says Kiyohara, affair will go down in history as a aged or stopped sooner rather than
“the Financial Services Agency bump in the road of general upwards later,” says Kiyohara. “This may
[which serves as a secretariat to progression towards better corporate be achieved if Japanese companies
the Business Accounting Council] governance in Japan,” he says. have more non-Japanese employees
might consider initiating discus- Some conclude that a mas- and a diversity of employ-
sions about revising the auditing sive cultural shift might first be ees can help facilitate such
standards to address such issues as required in Japan. “A change in cultural change.”
August 2015 15