TOKYO -- Toshiba on April 1 handed its reins to an outsider for the first time in over half a century. Nobuaki Kurumatani, a former banker, has his hands full cleaning up messes that reduced the electronics conglomerate to a shadow of its former self. But how, exactly, did the company careen so far off track in the first place?
Ostensibly, things started to fall apart in April 2015, with revelations that Toshiba had been cooking the books. A more than 300-page report by an independent panel, along with observations by former executives, have since shown the company was hurt by its unbridled pursuit of profit and a corporate culture that silenced employees.
Many insiders point to late 2003 as the time Toshiba began to go astray. That was when then-Chairman Taizo Nishimuro put his foot down.
One former executive remembers the moment vividly. "You'll become president after you've done your job," Nishimuro told Atsutoshi Nishida, then a corporate executive vice president. Both men died in late 2017.
The assumption had been that Nishida would replace Tadashi Okamura as president in spring 2004. The trouble was that Nishida was overseeing the PC business and other digital goods operations, and the PC segment was in a crisis.
Hewlett Packard had bought fellow U.S. player Compaq Computer and was gaining ground. For fiscal 2003, Toshiba's PC unit posted an operating loss of about 48 billion yen ($400 million at the time).
"We cannot appoint someone from a loss-making division," said a member of Toshiba's nominating committee, headed by Nishimuro.
Not only was Nishida's accession put on hold, he was in effect demoted. He remained an executive vice president but was left in charge of the PC business alone. The challenge was simple: Revive the computer operations and you will be promoted.
Nishida had been telling confidants that if he could not become president, he would quit. When Nishimuro threw down the gauntlet -- but presented a path to the top -- he promised to deliver results no matter what.
His plan was to make full use of overseas, low-cost contract manufacturers.
"In just a few years, the share of overseas contract manufacturing increased from less than 10% to over 80%," a former Toshiba official recalled. But Nishida did not simply outsource more work. He apparently used "buy-sell transactions" to inflate profit.
The transactions, which are not illegal, work like this: A company sources parts, such as liquid crystal display panels and semiconductors, from suppliers. This is the "buy" part of the equation. The company then sells the parts to contract manufacturers at a premium. Later, it buys them back as part of finished products.
This is a common practice among manufacturers. But because sellers determine the premiums and when they book the sales, it is prone to abuse. When fudging numbers becomes a habit, things can quickly spiral out of control.
"Buy-sell transactions were like drugs," a Toshiba executive said. To make profits look bigger than they were, Toshiba appears to have sold parts it did not yet need to contractors at premiums up to eight times the original cost. By doing this near the end of quarters, it would have been able to book gains that were supposed to be canceled out later.
This likely helped the PC business return to the black in the first nine months of fiscal 2004 -- three months ahead schedule. President Okamura recommended Nishida to the nominating committee as his successor, praising his "strong leadership" and "executive power." Nishida took over the presidency in June 2005.
"I became president and grabbed foreign investors' attention away from Hitachi," he boasted. Market players were drawn to his bold moves, like withdrawing from the race to set the standard for next-generation DVDs and investments in memory chips and nuclear power. Toshiba surpassed Hitachi's market capitalization in the summer of 2006; it also managed to beat Hitachi in operating profit.
Few would question that Nishida had a strong desire to win. His ambition carried him to the top even though he was not a Toshiba lifer -- he joined the group through its Iranian unit at age 31.
But as the world plunged into the financial crisis of 2008, his aggressive management style was reaching its limits.
At a monthly executive meeting in October 2008, a division head reported: "With the effect of buy-sell, operating profit stands at 17.3 billion yen. The real figure, without the effect, is 6.4 billion yen."
In Nishida's final year as president, which ended in March 2009, Toshiba reported its first operating loss in seven years, with a net loss of over 340 billion yen. Its capital ratio dropped to 8.2%.
The independent panel did not say the "miracle of 2004" -- the swift turnaround of the PC operations under Nishida's guidance -- was due to fraudulent accounting. It only said the abuse began in fiscal 2008, which ran through March 2009. Still, many insiders believe it all started with Nishimuro blocking Nishida's promotion in 2004.
Norio Sasaki, who succeeded Nishida, repeatedly said that until he became president, he "did not even know how buy-sell transactions worked in the PC business." At a monthly meeting in October 2009, he issued a warning that "buy-sell must be reconsidered at some point."
As chairman, however, Nishida kept the pressure on Sasaki. He criticized the new president for not doing enough to stoke growth and ordered him to increase sales.
Some say it took less than a year for Sasaki to grow hostile toward Nishida. The tensions, many Toshiba executives believe, made Sasaki obsessive over earnings and demanding of employees on the front lines.
Stagnant group earnings probably contributed to Sasaki's grudging acceptance of buy-sell transactions. A onetime opponent of the practice began instructing executives to use it more to pad disappointing quarterly figures.
Employees were expected to look the other way. Over the seven years from fiscal 2008 to 2014 -- when the independent panel concluded that Toshiba cooked its books -- some executives felt uncomfortable with the practice of pushing back losses and inflating profits, but none felt they could speak out.
The experience of former Chief Financial Officer Makoto Kubo was instructive.
In December 2012, Kubo submitted to Sasaki an unofficial midterm business plan designed to cleanse the company of improper practices. It called for measures not included in the official business plan, such as drastic streamlining and recognition of nonexistent "profits" accumulated in the PC and TV operations as losses.
Sasaki rejected it after a glance. "Self-destructive," he was quoted as saying. "Something an academic would argue."
Kubo's hopes of normalizing the company were dashed. He stepped down in July 2015, taking responsibility for poor business results.
With management's blessing, window dressing "for the sake of the company" became rampant. Employees were paralyzed as Sasaki was constantly portrayed in a flattering light. A booklet handed out to workers featured choice quotes from the president, such as, "We must continue changing ourselves."
Most employees, a Toshiba official said, "praised the president and held him up."
Sasaki ordered the finance division to rank Toshiba's presidents by earnings, showing figures like sales and operating profit during each one's tenure. "It was supposed to show [employees] he was better than his predecessor," a former official said with thinly veiled contempt. "When some figures were worse than those under Nishida, he ordered them to be adjusted by using a different foreign exchange rate."
Sasaki's successor, Hisao Tanaka, also failed to change the company's ways. In the fall of 2013, he approved "Project Rubicon," a secret plan to scale down the buy-sell transactions. Not long afterward, however, he is said to have quietly asked a finance official for a "slight increase" in the transactions to cover TV losses.
The independent report said Tanaka repeatedly pressured the TV unit at monthly executive meetings after August 2013. Stressing a public statement he had made about turning a profit, he reportedly said: "This is an official pledge. Use whatever tools available to achieve a profit."
Over those seven years, Toshiba inflated its profit by as much as 224.8 billion yen. Yasushi Hamada, a commissioner of the Securities and Exchange Surveillance Commission, described the figure as "unusually large."
"Not just some executives but a large number of people must have been involved," he said.
Toshiba's dark side also exposed the limits of auditors.
The conglomerate was a key client of Ernst & Young ShinNihon -- one of Japan's four big players -- and paid over 1 billion yen in annual auditing fees. Toshiba had a tendency to push the accountants around: When they asked for information, for example, Toshiba employees would often demand to know why. The auditors struggled to piece together a clear picture of what was going on.
Last October, the Tokyo Stock Exchanged removed Toshiba from its watch list for "securities on alert." But this only meant that "Toshiba's internal control now meets the minimum standards for listed companies," warned Takafumi Sato, the president of Japan Exchange Regulation, a TSE unit.
Kurumatani, a former deputy president of Sumitomo Mitsui Banking Corp., in mid-February spoke of the challenge that awaited him as president. "I will breathe new life into the reforms," he said, "to change Toshiba's corporate culture."
The last outsider brought in to run Toshiba was Toshio Doko in 1965. Perhaps not much has changed since then: Doko was once quoted as saying that "Toshiba's plague is deeply rooted."