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Tim Green

Will Toshiba’s Scandal Affect Japan’s Transparency Push?

by Tim Green | Dun & Bradstreet Editor

July 21, 2015 | No Comments »

Toshiba-building_3219834408_e7319196c0_o_1100pxThe scandal of widespread accounting irregularities at Toshiba comes at a crucial time for Japan’s corporations.

An independent committee reported this week that the conglomerate overstated $1.2 billion in profit over seven years, just a month after a new corporate governance code went into effect in Japan designed to promote greater transparency in financial reporting.

One of Japan’s oldest companies, Toshiba ranks #145 on the Fortune Global 500 with $64 billion in revenue. The company’s wide range of products include industrial equipment, medical instruments, TVs and stereos, and semiconductors.

The investigative committee accused Toshiba managers throughout its six main divisions of cutting accounting corners to meet profit goals set by company executives.

It also cited problems such as underreporting the cost of raw materials and components, reporting uncertain future income — some of which would never materialize — as though it were cash in the bank, and delaying write-offs related to canceled contracts and other setbacks.

In response, not only did the current CEO, Hisao Tanaka, resign, but two of his predecessors — Norio Sasaki and Atsutoshi Nishida — also resigned as directors of the company. Tanaka said at a press conference that wrongdoing was unintentional.

The investigators placed much of the blame on the top-down, no-questions-asked culture at Toshiba, and such insular management is part of what the new governance code is designed to overcome.

Japanese companies have been accused of not paying attention to minority and foreign shareholders and of having weak boards of directors. The new code, part of Prime Minister Shinzo Abe’s efforts to revitalize Japan’s stagnant economy, directs companies to release market information in a timely manner, protect whistleblowers, and make better use of cash through reinvestment or stock buybacks.

The thinking is that investors — domestic and foreign — will feel more likely to buy stock in Japanese companies if they have a better idea of what the books look like.

Transparency is, of course, good, especially if it leads to the infusion of more investment in Japanese companies.

But there will be additional consequences: The consequences of pesky investors seeking even more information and second-guessing management decisions. The consequences of greater scrutiny from reporters looking for a scoop. And ultimately, hopefully, the consequences of rising stock prices and happy investors — IF all the numbers are in order.

Tim Green has covered business, technology and science at newspapers and in higher education. At Hoover’s he covers computers and telecommunications.

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Photo by Flickr user worldchaos, used here under a Creative Commons license.

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