Another Toshiba debacle awaits in Japan?
The Japanese corporate tradition has been to pay lip service to shareholders.
A few days after Toshiba Corp.’s latest business woes surfaced in late January, the head of Japan’s regulator asked his audience of financial professionals to look beyond that one company’s misfortune and consider the broader picture.
“It should be noted that the trend is toward improvement” of corporate governance in Japan, said Toshihide Endo, Director-General of the Supervisory Bureau of the Financial Services Agency (FSA).
That trend is clear at the FAS, which in the last three years has shepherded introduction of two codes of conduct.
One requests companies to adopt international accounting standards and appoint independent directors. The other suggests domestic investors be more active on governance matters.
Mr. Endo then went on to make a prediction: “So, we shouldn’t see a second Toshiba.”
Well, within three months of that bold statement, the Tokyo Stock Exchange (TSE) had to publicly demand that Funai Electric provide more details after the iconic VCR-maker announced improper accounting across several units and revised five years of financial results.
Then, advertising giant Dentsu said its 2016 financial control “was not effective” as it underestimated liabilities of an overseas business.
And Fujifilm Holdings delayed its earnings report after noticing accounting irregularities worth more than $200 million at a New Zealand unit.
The above is just a sampling, not an exhaustive list, of governance issues at top-tier TSE firms this year. In 2016, a record 58 cases of improper accounting by listed Japanese companies were reported, according to Tokyo Shoko Research.
These cases may not be on a Toshiba scale — the company has said it may report losses of more than US$9 billion — yet the idea that Japan won’t see a “second Toshiba” seems at best overly optimistic.
And, of course, before Toshiba there was the US$1.7 billion accounting fraud at Olympus Corp. uncovered in 2011.
It’s not that Japanese firms are at root dishonest and new corporate governance measures are starting to expose that.
What the measures reveal is how the traditional behaviour of Japanese companies has a major disconnect with corporate governance principles of promoting a balance of all stakeholder interests and the accountability of management.
Most Japanese companies pay lip service to shareholder demands, and instead see themselves as working for the benefit of their employees and business partners.
Managers at Japanese companies may not own their employer’s stock, but they feel more invested in the business than any investor and act accordingly. Salaries depend on length of employment and age rather than performance, making mid-career moves unattractive.
Hence, employees look for ways to hide problems and follow orders to cover up irregularities, believing their career and prosperity is embedded within the fortunes of the employer.
The corporate organs that are supposed to act as check and balances, such as the board of directors and board committees, are equally complicit.
These are often filled with semi-retired managers of the same firm and loyalists, who may lack the qualifications for the job.
Many are not even aware of the liabilities they face should legal cases be filed against them for negligence or malpractice, said Nicholas Benes, the representative director of The Board Director Training Institute of Japan.
The head of Toshiba’s five-man audit committee, for example, was its former chief financial officer who had managed many of the deals the body was supposed to monitor.
Two more members of the committee were diplomats without an obvious background in auditing, said Benes.
“The commonalities of Japanese corporate governance problems are extremely widespread,” Benes said at a briefing in Tokyo. “It’s not just Toshiba.”
Most large corporates staff their boards with ex-managers, who later move on to the even less clear position of advisor.
This structure guarantees ex-managers an income for as much as a decade after their career ends and inevitably subverts oversight bodies into extensions of management, with little concern for shareholders.
Take the case of Hong Kong-based fund Oasis Management when it questioned the need of electronics giant Kyocera to hold a sizeable stake in Japan Airlines, which Oasis termed as a waste of corporate capital.
Kyocera’s 85-year-old founder Kazuo Inamori responded in a media interview in which he said shareholders were “selfish.” Firms should primarily look after their staff, he said.
Inamori currently holds the rank of “honorary chairman” at Kyocera, which also has a CEO and a chairman. He helped restructure Japan Airlines at one point, which is how an electronics maker ended up with shares of a commercial carrier.
The current laws also undermine the motivation for those who wish to report irregularities within the corporate family where they work. For a whistleblower to gain protection from the authorities they first need to report the problem to their superiors, according to Benes.
When cases do come to the prosecutors, there is little desire to pursue white-collar crime because regulators lack the skills and resources needed, Nobuo Gohara, a former prosecutor who worked on corporate scandals, said at the briefing with Benes.
The typical soft punishments handed down also discourage, he said.
This creates an echo chamber in which Japanese companies live: Lack of pressure on management to improve corporate governance and lack of motivation for staff to report irregularities.
Meantime, the corporate governance code introduced by the government is voluntary and few investors, domestic or foreign, are demanding companies improve.
So when the regulators assure there won’t be a “second Toshiba,” perhaps that’s exactly what is coming.
(Yuriy Humber is a Tokyo-based researcher and award-winning journalist who has covered Japan’s Fukushima disaster, Vladimir Putin’s Russia, the rise of Mongolia, and the global commodity boom and bust. This is the first of a three-part series on corporate governance in Japan.)