Olympus, Libor, Enron: sometimes a financial scandal comes along that shakes the very foundations of a country’s corporate life. Toshiba, whose chief executive Hisao Tanaka is stepping down after a scathing independent report released yesterday found he was aware profits had been inflated since 2008, will no doubt join those less-than hallowed ranks.
The conglomerate, which makes everything from TVs to semiconductors and nuclear reactors, overstated its operating profit by 151.8bn yen ($1.2bn, £783m) over the last seven years, as executives pushed their underlings to hit unachievable targets.
‘There existed a corporate culture at Toshiba where it was impossible to go against the boss’ will,’ the report said, pointing to ‘systematic involvement by the top management’.
The company has been unable to close its books for the year ending in March. Meanwhile, its shares had fallen more than 28% since the scandal surfaced in May, although they rose more than 6% today as short-term investors took a punt on their recovery.
Tanaka, the CEO and president, isn’t the only executive to bow out. His immediate predecessors, vice chairman Norio Sasaki (stepped down in 2013) and adviser Atsutoshi Nishida (CEO until 2009), are also resigning over their role in Japan’s worst corporate scandal since Olympus was revealed to have hidden $1.7bn of losses in 2011.
The fact Sasaki and Nishida were still so closely involved at Toshiba points to an enduring problem for Japanese corporate governance: a relative lack of independent board directors. It’s also a blow to prime minister Shinzo Abe’s efforts to change that.
The Japanese government unveiled a new corporate governance code in June to great fanfare, including a requirement for companies to have two independent directors. But Toshiba already have four, who have been part of its 16-strong board since 2012. They hadn’t prevented the company’s internal audit committee being headed up by its current and former chief financial officers.
Japan’s corporate culture is still very insular. Only 274 of around 40,000 directors are foreign, The Economist reported in June. Meanwhile, juniors are still expected to defer to authority and promotion remains largely on the basis of time with a company rather than merit.
Of course, even countries with supposedly top notch corporate governance aren’t immune to scandals - just look at Tesco and Libor here in the UK. But the upheaval at Toshiba shows Abe’s work to free Japanese business of its less-helpful traditions will be far from easy.