Toshiba accounting scandal in Japan could speed corporate reforms

Kirk Spitzer | USA TODAY

TOKYO — Toshiba Corp.'s embarrassing and costly scandal over false profits is likely to boost long-standing efforts to improve Japanese management practices and strengthen corporate governance, experts said this week.

“This is not something you can do in one or two years. But I’m optimistic that eventually we will have a good system because Japanese companies know they have to change to survive," said Shin Ushijima, a prominent Tokyo attorney and president of the Japan Corporate Governance Network. "Toshiba is one of the most reputable companies in Japan. If it happened to them, it could happen to anyone.”

Toshiba CEO Hisao Tanaka and seven other senior officials resigned this week after an independent panel found the company “systematically” overstated operating profits by $1.2 billion over the past five years. The panel blamed a lack of internal controls and a corporate culture driven to inflate profits.

The scandal surfaced less than two months after Japan adopted its first corporate governance code. Japan companies have long been criticized for weak internal financial controls and resistance to outside oversight.

In Japan, "most board members are senior managers of the company, they know the company intimately, they know the people intimately and their allegiances are to people inside the company,” said Bob Eberhart, a Stanford Technology Ventures Program Fellow at Stanford University and an adviser to the non-profit Board Director Training Institute of Japan, in Tokyo.

“American corporate governance takes a different tack. They come from outside, their allegiances are to the broad business community,” Eberhart said.

The new governance code requires roughly 2,400 publicly traded companies in Japan to appoint at least two independent outside directors and to curtail the practice of cross-holdings, in which companies buy and hold each other’s shares. Cross-holdings can strengthen relationships and stabilize share prices but can also discourage activist shareholders.

Corporate governance is a key target of Prime Minister Shinzo Abe’s effort to boost Japan’s long-flagging economy.

A 2010 survey by the GMI Ratings research firm ranked Japan 36th in quality of corporate governance out of 39 developed and emerging economies.

The performance of Japan’s publicly traded companies has taken on increased importance since Japan’s $1.1 trillion Government Pension Investment Fund (GPIF) announced in October that it would increase its holdings of domestic stocks from 12% to 25%. The move helped push Tokyo’s Nikkei Stock Average to a 15-year high earlier this year.

The GPIF is the worlds’ largest pension fund and manages Social Security assets for millions of Japanese workers and retirees.

Toshiba shares lost more than 30% in value from April through mid-July, as reports of the accounting scandal emerged.

Toshiba, a 140-year-old company that makes everything from cameras, laptops and home appliances to power plants, is just the latest in a string of recent corporate scandals in Japan.

Three former executives at Olympus Corp. received suspended prison sentences in 2013 for their role in a $1 billion accounting fraud. The company’s British-born CEO, Michael Woodford, exposed the scheme only six months after joining the company; he was subsequently forced out and later won damages for defamation and wrongful dismissal.

Ushijima said the Toshiba scandal has been particularly shocking because of Toshiba's reputation as a well-run company with a modern corporate structure. Toshiba already had four outside directors — double the requirement under the new governance codes.

Colin Jones, a professor at Doshisha University Law School in Kyoto, said the new corporate governance code may not be enough to solve Japan’s systemic problems.

“I would like to see a disclosure requirement that all listed companies have to disclose the number of ex-central government employees that they have on the payroll,” said Jones. “Amakudari (in which retired officials go to work for companies or industries they once regulated) is one factor in corporate governance that exists outside the formal company law, but is clearly a factor that everyone knows about.”

The key, said Eberhart, is for the Japanese to settle on a system that works for them.

“Japan is changing and I think the Toshiba scandal will accelerate that, because it shows a public desire for better governance. What is important is that Japan needs to develop a system that is best for it, and that requires a good, rigorous public discussion. And these scandals help.”