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Toshiba's then-President Hisao Tanaka bows at a news conference in 2015 after the release of a third-party commission's report pointing to problems with internal controls. (Photo by Keiichiro Asahara)
Business trends

How Toshiba's closed culture bred systematic cover-ups

The failure of internal controls to function properly has cost the company dearly

TOKYO -- Toshiba has proved an inspiration for oversight at listed companies, just not in the way the conglomerate might have hoped.

In February 2016, the Japan Exchange Regulation, part of the Japan Exchange Group, laid out principles regarding how Japanese corporations should behave when faced with a corporate scandal. One of them states that: "Companies should avoid dressing up a shoddy and insufficient investigation to give it the appearance of objectivity and neutrality."

This particular principle, according to people familiar with the matter, was established after taking into consideration the problems at Toshiba.

Toshiba's accounting scandal came to light in April 2015. The following month, the company set up a third-party committee to look into the accounting practices of the group's personal computer and infrastructure divisions, among others. Toshiba's struggling U.S. nuclear unit Westinghouse Electric was excluded from the committee's investigation, although it seemed to be linked to the accounting irregularities at its parent.

After the committee released its full report on July 21, 2015, critics immediately asked why it had not examined Westinghouse. The committee responded that it had investigated the matters assigned to it by Toshiba.

The same day, then-Toshiba President Hisao Tanaka held a press conference to announce that he was stepping down to take responsibility for the accounting scandal. Bowing deeply, he said, "I apologize from my heart to all our stakeholders."

Three months before the report came out, Tanaka is believed to have instructed senior officials in Toshiba's finance division to pressure the committee to limit the scope of its investigation. Tanaka reportedly warned that if the committee members became aware of the company's overall financial situation, "it could develop into major problems regarding our organizational structure and corporate culture."

This pressure seems to have had an effect, as the committee only looked into accounting issues in the divisions that Toshiba had designated, such as PCs.

Toshiba had the chance to come clean then and there, but it opted to cover up massive losses that would eventually come to light anyway.

Westinghouse booked write-downs totaling more than 110 billion yen ($993 million) in the fiscal years through March 2013 and March 2014. But it was not until November 2015 that Toshiba admitted that it had failed to disclose losses incurred as a result of its subsidiary's devaluation of assets. While the Japanese parent argued that the write-downs would not affect its consolidated earnings, that did not change the fact that Toshiba was subject to the Tokyo Stock Exchange's rules regarding the timely disclosure of important corporate information.

Reflecting on the company's failed investments in overseas nuclear projects, which started with its purchase of Westinghouse in 2006, a former Toshiba executive said: "We used to cover up anything that smelled bad. I feel ashamed because, as this instance shows, we fell into the trap of procrastination."

Hopeless and helpless

Hiroyuki Itami, president of the International University of Japan, was serving as an outside director at Toshiba when the accounting scandal broke. In August 2015, shortly after the resignations of Tanaka and former Presidents Atsutoshi Nishida and Norio Sasaki, Itami wrote a message of encouragement in the company magazine: "Now that you are freed from having your boss asking you to do something inappropriate and no longer feel pressured to comply with his requests, I believe you all will have plenty of energy to create significant change in our organizational structure."

But the roots of Toshiba's nuclear problem ran deep, and even a reshuffling of top management failed to change things. At the end of 2015, Westinghouse acquired a U.S. nuclear construction company suffering substantial losses. This delivered the final blow to Toshiba's embattled nuclear business. Masashi Muromachi, who took the helm as president of Toshiba after Tanaka, could not prevent its nuclear business from deteriorating further.

An internal report released in October 2017 pointed failures in the company's internal audit system. According to the report, sufficient information was not available to outside directors and the audit committee lacked full independence.

A former outside director recalled that whenever asked about Toshiba's U.S. nuclear business at board meetings, executive officers always gave the same answer: The business is doing well because it can make money providing maintenance services for nuclear plants. In reality, Toshiba booked 260 billion yen in impairment losses tied to Westinghouse for the year ended in March 2016. The former external director said angrily that no one had told them the truth.

Employees themselves recognized the shortcoming of Toshiba's internal audit system but felt unable to do anything about it. One employee said he was reluctant to use the company's internal whistle-blower mechanism because the personnel department would be able to find out who had blown the whistle. As Toshiba continued putting off tough decisions and hiding inconvenient truths, a feeling of hopelessness and helplessness spread among employees. Even now, as Toshiba starts to rebuild itself, workers in their 20s and 30s continue to leave the company in droves.

Toshiba's deeply entrenched corporate culture prevents subordinates from contradicting their superiors. This state of affairs undoubtedly facilitated a cover-up culture that allowed the company to recklessly pad its profits for as long as it did. It is little wonder, then, that Toshiba's financial troubles quickly spiraled into disaster.

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