Toshiba – yet another Japanese giant falls from grace

And so now it’s Toshiba Corp. Another giant brought to its knees from the ranks of Japan’s corporate behemoths that once ruled the world.

Toshiba’s shares have lost about half their value since the company said last month it may face a writedown at its US nuclear power business, a piece of bad news that came on top of a recent accounting scandal at the company.

The scale of the writedown has now ballooned to around US$6 billion, forcing Toshiba – which makes a smorgasbord of products from semiconductors and laptops to washing machines and power plants – to ask banks for aid and look at selling stakes in its chip business.

Stop me if you’ve heard this before. Sharp Corp., once the global standard for liquid crystal displays, ran into financing problems and was sold off to Taiwan’s Foxconn last year for about US$3.6 billion, becoming the first of Japan’s major electronics makers to fall under foreign ownership.

Japanese camera maker Olympus Corp. faced a lawsuit by banks seeking several hundred million dollars in damages after its share price collapsed amid, yes, accounting fraud. The list goes on, but you get the idea.

Like most unravelings of these global conglomerates, the rot sets in and then it’s a slow, agonizing process of bringing it to light as the subject writhes in different stages of denial about the true state of its corporate affairs.

The rude awakening for Toshiba was in February 2015 when the policemen, so to speak, came knocking on the boardroom door in the form of Japan’s securities regulator, which was decidedly unhappy with Toshiba’s accounting practises on infrastructure projects going back several years.

In response Toshiba – regarded by some as the producer of the world’s first mass-market laptop computer – set up a special investigation unit, though notably the six-member team included four from Toshiba and it was headed by the company’s chairman Musashi Muromachi. The latter perhaps to indicate the company was taking the probe seriously, though not achieving what could be called an independent review of the books.

This points to a thread running through the woes at many of these once bluest of Japanese blue chips: robust, independent corporate governance, or rather the lack of it.

Japanese authorities tried to tackle this issue more than 10 years ago by making outside directors compulsory as part of corporate governance reforms aimed at bringing some other types of thinking into the boardrooms of Japan Inc, along with some checks and balances.

Japan’s heavyweight business lobby group Keidanren turned its guns against that idea so it didn’t go anywhere. Then it caught the attention of the current government and in particular those steering Prime Minister Shinzo Abe’s drive to reform the country’s economy through so-called Abenomics.

Improving corporate governance at Japanese companies (the cynics say “introducing” rather than improving) is one of the policy planks in Abenomics that deal with what is called structural reform of the economy.

For example, installing more outside directors onto the boards of Japan’s companies to hopefully bring less bias into how the institutions conduct their business, as well as the voices of individuals whose careers do not hinge on saying “yes, sir” to the CEO.

In the case of the Olympus accounting fraud, in fact, it was the CEO himself, Englishman Michael Woodford, who blew the whistle in 2011. That’s not to say non-Japanese have any monopoly on good corporate governance practices.  Criminal behavior in the boardroom at the likes of WorldCom and Enron Corp. in the US, or Volkswagen in Germany, show that white-collar crime isn’t restricted by race, color or creed.

Like most unravelings of these global conglomerates, the rot sets in and then it’s a slow, agonizing process of bringing it to light

Perhaps the good news for corporate Japan, and by extension shareholders, is that after much resistance to the presence of independent, outside directors serving on boards the practise is gaining a following, not least because the Financial Services Agency has been actively selling the idea that good corporate governance is also good for business.

This seems to be having an effect.  According to the Tokyo Shoko Research institute, the number of Japanese firms disclosing accounting problems has almost doubled in the last five years, meaning discrepancies are being outed rather than kept in the closet.  In the same period, the number of outside directors at companies listed on the first section of the Tokyo Stock Exchange has also doubled.

However, all this will be judged by how companies behave, greater transparency in showing that behavior, and the generation of profit. The government is expected to further revise and expand corporate governance rules this year.

Meantime, Toshiba on its website apologized for its accounting behavior, adding: “With the new management team and governance structure, Toshiba as a whole will unite to make every effort to regain the trust of shareholders, investors, all other stakeholders and members of the public, and asks for your understanding and ongoing support.”