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Japan materials makers' season of disgrace stretching into 2018

Distance between top management and culpable units remains a challenge

TOKYO -- The product quality scandals that dogged top materials makers in 2017 look to drag into the new year as they struggle to ascertain exactly how deep the data-doctoring went, making a governance overhaul imperative when the calendar turns.

At Mitsubishi Materials, the problem is deep-rooted and widespread, according to President Akira Takeuchi. A panel convened to investigate the tampering with product data at subsidiaries has found that quite a number of employees were involved over a long period, he explained at a press conference Thursday, citing an interim report from the body.

Mitsubishi Shindoh, an implicated subsidiary making copper products, has wrapped up its internal investigation, determining that faking quality data had been a regular practice since at least 2001. And officials including the head of quality assurance took the lead in shipping out improperly certified items. Mitsubishi Materials is said to have been unaware of the systematic falsification until Oct. 19. The parent went public with the issues Nov. 23.

Mitsubishi Cable Industries, however, is expected to take until the end of February to report on its own data falsification problem. The cable maker continued shipping affected products through Oct. 23, even after then-President Hiroaki Murata learned of the data problems in March. It neglected to explain the issue to customers, hoping to rectify the situation quietly. As a result, only 8% of the company's numerous clients have had their purchases certified as safe so far.

Mitsubishi Materials investigators have called for exhaustive measures to prevent a recurrence, calling MCI's misconduct extremely serious. The panel's final report is expected in February or later.

Kobe Steel's announcement of similar improprieties Oct. 8 set off a rash of revelations in the final months of 2017, including those at Mitsubishi Materials. The two companies' situations are much the same. Fairly distant ties between the parent and subsidiaries and noncore operations allowed pervasive falsification to go undetected for a long time.

Structural concerns

Because the companies are among Japan's largest materials producers, units close to customers were granted extraordinary power, walling off management from the units responsible for the wrongdoing -- a factor now making it difficult to gauge just how deep the problems run. Kobe Steel expects a final report on the improprieties to take until the end of February.

Perhaps these two companies can learn from Toray Industries, which went public with its own product quality scandal Nov. 28. An independent panel has already wrapped up its investigation of improprieties at the textiles maker, concluding that just two successive quality assurance heads were responsible. Results of a broader group investigation are expected in March.

All three of these materials makers are going after those closely linked to the improprieties. The heads of MCI and Toray Hybrid Cord have been forced out. Kobe Steel has effectively demoted three senior executives responsible for the incident. However, none of the three companies made any move toward ousting top executives. As Kobe Steel President Hiroya Kawasaki put it, "neither headquarters nor top management knew of the improprieties."

Investors have responded very differently to the fallout from each company's scandal. Kobe Steel's share price plunged 43% in the days after the scandal broke and remains down more than 20%. Mitsubishi Materials experienced a comparatively mild 11% tumble, and Toray fell only 9%. Both of these companies are now just 3% below pre-scandal levels, though they could still get hit with customer lawsuits or other unanticipated consequences later.

History suggests that the fallout could prove substantial. When a unit of Toyo Tire & Rubber was found in 2015 to have sold seismic isolation rubber products that were untested or had falsified quality data, five board directors, including the parent's president and chairman, resigned. The company ended up booking an extraordinary loss of more than 110 billion yen ($973 million at current rates) -- far more than the 700 million yen in annual sales at the far-flung subsidiary responsible.

Japanese materials makers are still assessing the full impact of their scandals. Once this task is finished, they could begin overhauling governance to bring closer scrutiny to distant subsidiaries.

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