TOKYO -- Toshiba's debilitating accounting scandal could not have come at a more awkward time for the Japanese industrial conglomerate.
This year marks the 140th anniversary of Toshiba's foundation. But the time-honored company is in anything but a festive mood now that its social credibility is in tatters.
Toshiba has been found to have overstated its operating profits by more than 150 billion yen ($1.2 billion). Toshiba President Hisao Tanaka and his two predecessors were forced to resign to take responsibility.
The company did not seem destined for such a mess. It won customer confidence through its technological prowess and no-nonsense approach to business, and its group sales have grown to 6 trillion yen a year.
What went wrong?
There had, in fact, been signs of trouble before. The possibility of inappropriate accounting practices emerged in September 2013, when Toshiba won a contract to supply a smart meter communication system to Tokyo Electric Power Co.
News of the deal drew significant attention within the industry, not because of the technology involved but because of the unexpectedly low price. Toshiba acknowledged that it "had been aware of a possible loss" when it received the order.
One former senior official at a Toshiba subsidiary blamed the group's current woes on a monthly meeting headed by the Toshiba president.
"During the Sasaki era, [the meetings] became a place for the top management to give orders to achieve budget targets. I did not want to attend such gatherings," he said. By "top management," he meant Norio Sasaki, who served as president between 2009 and 2013.
While it is natural for top executives to pursue profits and encourage their subordinates to work harder, Toshiba went too far, resulting in the manipulation of accounts.
As it turns out, the uneasiness that the former official at the Toshiba unit felt about the monthly meetings was not unfounded.
The system was created around 2001, when Tadashi Okamura was president. He is now an adviser to the board. The monthly meetings have been an important regular event for the company, as they are where monthly results and other key information is reported by the various business units and major subsidiaries.
Initially, the gatherings were used for setting budget targets for individual subsidiaries through discussions based on figures proposed by the parent. The arrangement was designed to encourage constructive dialogue between the parent and its subsidiaries -- a place where the units could have their voices heard.
The meetings began to attract vice presidents, and transform into a place where the parent would present subsidiaries with unrealistic profit-improvement targets, referred to within the group as "challenges."
This new style emerged under Atsutoshi Nishida, who served as president between 2005 and 2009, and was taken to new levels under Nishida's successor, Sasaki. It was Sasaki and the man who took the reins from him, Tanaka, who put excessive pressure on their subordinates to achieve profit targets, resulting in accounting irregularities across the company.
In one episode exemplifying how strong the pressure was, Sasaki demanded at a meeting on Sept. 27, 2012, that the PC business "improve operating profit by 12 billion yen within three days." His order came only three days before the company closed its books for the first half of fiscal 2012.
Toshiba's image was long that of a company in touch with the average person and with an easygoing corporate culture. "In the past, there was no excessive competition to get ahead within the company," said a former Toshiba official. But changes in the company's business structure and leadership in recent years have drastically altered the atmosphere there.
Toshiba once focused on generating steady profits through its heavy electric machinery business. But it later began emphasizing the PC and semiconductor businesses, which destabilized earnings. In addition to that, fierce competition among the various business units to post the best results created a culture of placing profits above all else.
Things were not helped by Toshiba's 2006 acquisition of U.S. nuclear power company Westinghouse, which ended up backfiring. The Japanese company hoped the takeover would make it the leading player in the global market for nuclear facilities. But those ambitions were all but snuffed out by the 2011 Fukushima nuclear disaster.
Toshiba's capital ratio tumbled to less than 9% at one point amid the global financial crisis triggered by the collapse of Lehman Brothers in autumn 2008. It was around that time that the company plunged into a vicious cycle of low bid prices and profit padding.
During the same period, Toshiba also saw its product competitiveness erode, said one senior company official.
Tough road ahead
Toshiba is known for pioneering many products, not least of all the notebook PC and NAND-type flash memory. But the company's knack for technological innovation has faded in recent years. It increased its capital through public share offerings as a quick-fix solution to its weakened financial base, while pushing forward with window-dressing activities.
At a July 21 conference to formally announce his resignation as Toshiba's president, Tanaka acknowledged his responsibility and said the scandal has dealt the Toshiba brand its worst blow in the company's 140-year history.
Toshiba won over consumers with its trailblazing technologies and products, and a no-nonsense corporate culture. But its social credibility has crumbled. Rebuilding its battered image is going to be a tough job.