Series of corporate scandals rock Japan

By Chris Cooper, Bloomberg News

TOKYO (Oct. 26, 2015) — Japan, a country that prides itself on propriety and order, suddenly has hit a season of corporate scandals.

Three companies disclosed internal malfeasance in the space of 24 hours last week, including one that says one of its units tried to cover up the faulty construction of an apartment building that started to tilt and another that says one of its units falsified reports on the quality of rubber used in trains and ships.

These admissions come after Toshiba Corp. admitted to artificially inflating profits for almost seven years while Takata Corp. said it supplied faulty airbags that have led to the recall of more than 40 million vehicles worldwide.

The outbreak of admissions raises questions about what is happening in Japan and whether more scandals are on the way. Prime Minister Shinzo Abe has said Japan needs more support from global investors and has pressed companies to improve corporate governance with more transparency and independent board members.

“It's like whack-a-mole,” said Jeff Kingston, director of Asian studies at Temple University Japan. “It's hard to keep track of them.”

The latest scandals erupted in a flurry last week. First, Toyo Tire & Rubber Co. said an internal probe found one unit manipulated quality testing data for rubber products supplied to 18 customers over a decade. Asahi Kasei Corp. then said one of its units had falsified data for foundation piles in condominiums, after one building had sagged sideways. Finally, Matsumotokiyoshi Holdings Co., a Japanese drugstore chain, said it found likely accounting irregularities and is investigating the president of one unit it suspects inflated inventories to hide past losses.

Positive sign or bad behavior?

Toyo Tire said it has asked a third party to investigate its rubber products, with testing to begin this month. Asahi Kasei said it will appoint outside attorneys to a panel investigating the cause of the tilting condominium, while an internal committee will collect and examine and 10 years worth of data on similar issues. Matsumotokiyoshi said it has set up a committee to investigate and will report its results next month.

Japan ordered Asahi Kasei to compile data on 3,000 buildings by Oct. 22, Keiichi Ishii, the nation's land minister, told reporters in Tokyo on Oct. 20.

The admissions of wrongdoing have set off debate within Japan about what it all means. Optimists see it as a positive sign that companies are publicly admitting to problems; pessimists say companies are simply engaging in more bad behavior without consequence.

Nicholas Benes, representative director of the Board Director Training Institute of Japan, was critical of Toshiba this month when the company said it had identified 30 executives who had been involved in the accounting scandal — and none would lose their jobs. He said the company was showing “100 percent tolerance” for employee wrongdoing in contrast to the zero-tolerance policies at the world's best-managed companies.

“We seriously consider people's opinions and will make efforts to restore their trust soon,” Midori Hara, a spokeswoman for Toshiba, said by phone. Toshiba did say the executives would be punished without disclosing any specifics. President Hisao Tanaka, Vice Chairman Norio Sasaki and adviser Atsutoshi Nishida stepped down in July to take responsibility for Japan's biggest accounting scandal since 2011.

Another example for the pessimists is Toyo Tire, which said for the second time this year it had uncovered fake data. The company's previous chairman and president announced their resignations in June, months after the company said it sold substandard earthquake-resistant components for buildings.

In addition, Toyo Tire in 2007 admitted to falsifying data for fire-resistance. The company set up a quality assurance center that year to ensure such problems weren't repeated.

“I can imagine investors are feeling rather disappointed, and investment managers are asking why this happened,” said Temple University's Mr. Kingston. “We've discovered the brand Japan, based on exceptionally high-quality products, may not be quite what it seems.”

Japan is ranked first in the world for supplier quality, according to a 2014-15 report from the World Economic Forum.

Progress seen

Optimists argue that Mr. Abe's effort to improve corporate governance is taking hold and the surge in corporate disclosures reflects progress. The new code took effect in June, and companies are supposed to meet the new government standards or explain why they failed.

“The fact that now these issues are coming out and being discussed in the open is actually a healthy sign of cleansing,” said Jesper Koll, chief executive officer of WisdomTree Japan. “It's actually showing that these changes in corporate governance are for real, that transparency and accountability is being taken very, very seriously.”

The pressure for disclosing problems may grow as Mr. Abe and groups such as The American Chamber of Commerce in Japan press for tighter compliance.

“Once something starts here, it really has a life of its own, and then it becomes stricter than other countries,” said Edwin Merner, president of Atlantis Investment Research Corp. in Tokyo.

Some people point to the cultural problems Japan still faces in encouraging employees to come forward about cover-ups.

“The biggest problem in Japanese corporate governance is companies' rigid respect for hierarchy and that one should never go over his boss's head or he will suffer retaliation,” Mr. Benes said. “This keeps bad news from rising.”

Contributing to this Bloomberg News report were Kiyotaka Matsuda and Katsuyo Kuwako in Tokyo.