How Toshiba accounting scandal raises questions over Japan's "closed" management model
21 July 2015 -
Is the management style of Japan’s largest firms too insular? In the wake of Toshiba’s financial woes, experts think change is required
The “closed” model of senior management favoured in Japan’s largest companies has come under renewed scrutiny, following the resignation of Toshiba boss Hisao Tanaka in the wake of an accounting scandal. After leading the tech giant as CEO since 2013, on the heels of a four-year stint as president, Tanaka notched up more than 40 years’ service at Toshiba – but was forced to quit today in the wake of revelations that the firm had concealed a US$1.2 billion gap in its books. Vice chairman Norio Sasaki accompanied Tanaka out the door.
At a press conference, Tanaka said that Toshiba has a “serious responsibility” to build “a new structure” that would forestall any further incidents of this kind. In a statement focusing on the firm’s leadership styles, Toshiba confirmed that an independent probe into the irregularities is underway. “The company will thoroughly analyse and examine the investigation results,” it said, “and reflect them in our management practices, as well as examine measures to prevent recurrences.”
Initial thoughts on the factors behind the black hole have suggested that under-pressure executives had distorted performance figures since at least 2008, contributing to a widespread overstatement of profits. But with Toshiba “lifer” Tanaka at the centre of the fallout – a scandal that could blight Japan’s entire economy – experts have also queried the nation’s hermetically sealed approach to management and leadership, particularly in light of the parallels with a previous controversy.
In 2011, Michael Woodford – CEO of Japanese camera manufacturer Olympus – was forced out of his role after blowing the whistle on what the Wall Street Journal called “one of the biggest and longest-running loss-hiding arrangements in Japanese corporate history”. While Woodford had worked at the firm for 30 years, his promotion to CEO lasted for just six months, and subsequent legal action over the affair indicated that an ingrained management culture predicated on secrecy had undermined the integrity of the firm’s dealings.
Today, Loizos Heracleous – professor of strategy at Warwick Business School – said: “Over the past decade, corporate Japan has been making efforts to move towards globally accepted principles of corporate governance, such as transparency and board independence. However challenges remain – particularly with issues such as board composition.” In Japan, Heracleous pointed out, there are fewer outside directors than in other developed markets.
He added: “The Toshiba scandal will be seen in the context of the Olympus event, with investors wondering whether there is a pattern of account manipulation in corporate behaviour, and observing much more closely. Japanese regulatory authorities will need to reassure the markets that they are casting a watchful eye over Japanese corporations – and also [ensuring] that Japanese corporate culture is moving towards global expectations with respect to robustness of corporate governance.”
The Toshiba scandal is not the only recent event to draw attention to potential flaws in Japan’s “closed” management model. Last week, Nintendo announced the death of its president and CEO Satoru Iwata, immediately triggering speculation over who could take over from such a pivotal figure.
Hailed for boosting Nintendo’s fortunes with devices such as the Wii after the high-profile flop of the firm’s Gamecube, Iwata was handpicked for his job by former CEO Hiroshi Yamauchi – who had been at the helm for a staggering 53 years. Indeed, Nintendo is renowned for its dynastic power structure, and in the wake of Iwata’s death, industry analyst Colin Sebastian told online journal Gamasutra: “Given the tight and close-knit culture of Nintendo, my guess is that Iwata-san’s successor will come from inside the company.”
Earlier this month, a storm flared at leading Japanese motor company Toyota after its US-born chief communications officer Julie Hamp – the firm’s first-ever female executive – stepped down from her role after just 90 days. Hamp, who was appointed to help fulfil Toyota’s goal of a more diverse and internationalised C-suite, had reportedly suffered excessive ill treatment from Japanese media and police, after allegedly importing prescription painkillers into the country without the required permission.
Although Toyota president Akio Toyoda said he was confident that Hamp had not intentionally broken the law, Temple University Asian Studies specialist Jeff Kingston told The Japan Times: “Japan Inc. will suffer from this. [Hamp’s treatment] sends a chilling message to other foreign managers who might be considering a posting to Japan.”
For more on the value of whistleblowing in corporate culture change, go to page 23 of CMI’s recent report The MoralDNA of Performance.
Image courtesy of Anton Watman / Shutterstock.
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