A Rotten Heart

Shockwaves from the Toshiba accounting scandal were felt way beyond the company. The scandal dealt a blow not just to directors, employees and shareholders, but also to the Japanese president Shinzo Abe and his attempts to reform the country’s corporate governance practices. A recent study of corporate governance in 25 leading nations by KPMG and ACCA placed Japan 21 out of 25, the lowest of the developed countries and behind Indonesia, Russia, Brazil, Cambodia and China.

In an article for Governance & Compliance Magazine, Leo Martin examined Toshiba’s corporate governance practices and explored what went wrong.

Leading the field

The Toshiba story is particularly shocking because the company was once widely applauded for its corporate governance. Toshiba first appointed external directors back in 2001, long before the Olympus scandal and at a time when Japanese boardrooms were dominated by long-standing company insiders. In 2013, Toshiba was ranked ninth out of 120 publicly traded Japanese companies for good governance practices, in a list compiled by the not-for-profit Japan Corporate Governance Network. How could a company that appeared to be leading the field in good corporate governance find itself at the centre of one of the country’s biggest ever accounting scandals?

Universal dangers

Although much can be laid at the door of Japanese corporate culture, there are nonetheless universal dangers that any senior management team should heed.

• Four of the company’s 16-strong were outsiders. Although this was uncommon in Japan, it is short of best practice requirements elsewhere in the world
• Three of the four had little business training and appeared to offer more in the way of box-ticking than accountability
• Loyalty and hierarchy permeate Japanese corporate culture creating and overly dominant culture of obedience
• Auditing practices which allowed company executives on the audit committee would almost certainly raise a flag in most governance circles
• Low fees paid to auditors would suggest that insufficient time may be allocated to scrutinising accounts

The scandal is likely to lead to a radical management shake-up which hopefully encourages a speak-up culture that allows managers and employees to raise concerns more freely. This has been embraced in the country’s new corporate governance code which offers greater guidance on whistleblowing procedures.

Toshiba has stated it will appoint more outside directors, however the first real test will be how the new chairman is appointed which will determine how the business is led going forward.