Accounting scandal forces mass resignations at Toshiba

Chief executive and senior board members step down over inflated profits

Nick Goodway,Ben Chu
Wednesday 22 July 2015 01:43
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The boss of the venerable Japanese technology giant Toshiba has resigned in disgrace in the wake of one of the country’s biggest ever accounting scandals.

Toshiba’s president and chief executive, Hisao Tanaka, made a 15-second-long bow of contrition at a news conference in Tokyo, before announcing his departure. His exit comes two months after the company – which makes everything from microwave ovens to laptops to nuclear reactors – revealed that it was investigating accounting irregularities. Deputy chairman Norio Sasaki and senior adviser Atsutoshi Nishida also stepped down, along with five other board members.

An independent investigatory panel said earlier this week that Toshiba’s management had inflated its reported profits by up to 152 billion yen (£780m) between 2008 and 2014.

Mr Tanaka said the company had suffered “what could be the biggest erosion of our brand image in our 140-year history”.

The scandal comes four years after similar revelations at the Japanese camera maker Olympus, and raises fresh questions over the state of corporate governance in the country. Some investors have voiced concerns that the Toshiba scandal could turn out to be “the tip of the iceberg” for misreporting by Japanese companies.

In 2011 the British chief executive of Olympus, Michael Woodford, blew the whistle on 118 billion yen of concealed losses at the company. That sent Olympus’s share price plunging by 80 per cent and led to thousands of job losses.

Although Mr Woodford was dismissed as he attempted to investigate the losses, he won some praise in the country for revealing outdated Japanese corporate practices.

Japan’s finance minister, Taro Aso, said the accounting irregularities at Toshiba were “very regrettable”, coming at a time when Japan was trying to regain global investors’ confidence with better corporate governance. “If [Japan] fails to implement appropriate corporate governance, it could lose the market’s trust,” he said.

Mr Aso declined to say whether Toshiba could be fined or if individuals faced prosecution. Despite the resignations, Toshiba shares rose 6 per cent on investor relief that the scale of losses was not even greater. However, they are still down almost a quarter since early April when the irregularities first came to light. It remains Japan’s 10th biggest company by market capitalisation.

“Within Toshiba, there was a corporate culture in which one could not go against the wishes of superiors,” the independent report said. “Therefore, when top management presented ‘challenges’, division presidents, line managers and employees below them continually carried out inappropriate accounting practices to meet targets in line with the wishes of their superiors.”

Toshiba said in a statement: “It has been revealed that there has been inappropriate accounting going on for a long time, and we deeply apologise for causing this serious trouble for shareholders and other stakeholders.”

Chris Rowley, professor of Human Resource Management at London’s Cass Business School, said “interlocking cultural and organisational” factors were responsible for “group think” within Japanese company boards.

He pointed out that Mr Tanaka and Mr Sasaki had joined Toshiba in the early 1970s, immediately after they graduated. “This leads to strong team work and consensus, with dislike of ‘outsiders’ versus ‘insiders’ mixed with patriarchal hierarchies,” he said. “This is seen to produce inward looking, consensual management, with a focus on the company, incremental change, the long term and a risk-adverse culture.”

Japanese boards are also often filled with former managers and other people with links to the company.

Toshiba’s chairman, Masashi Muromachi, will take over as interim chief executive. The company is also said to be considering appointing outside directors to half of its board seats.

Mr Sasaki served as Toshiba president between June 2009 and June 2013, covering much of the period of inflated profits. Mr Nishida was chief executive from 2006 to 2009.

The scandal broke when securities regulators uncovered problems with the company’s balance sheet earlier this year.

One line that the investigators looked into was that executives set unrealistic targets for new operations after the 2011 Fukushima disaster hit Toshiba’s nuclear division. The report said there was a culture of exerting pressure to meet short-term profit targets.

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