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Business

Toshiba pins woes on lax governance, risk management

Postmortem report blasts bosses for fixating on growth

TOKYO -- A lack of effective checks on unreasonable executive demands, along with a focus on results at the expense of risk management, led to the accounting fraud and massive losses that laid Toshiba low, the company found in a report released Friday.

The assessment, the Japanese conglomerate's first such report to investors and other stakeholders since August 2016, follows its removal this month from a Tokyo Stock Exchange watch list. The bourse had designated Toshiba a "security on alert" after the 2015 accounting scandal, citing serious concerns about internal controls.

The report acknowledged distortions affecting past management decisions. The past presidents under which the fraud took place did not take seriously the need for rigorous financial accounting and pursued policies with an excessive emphasis on short-term profits, it explained.

Governance structures meant to rein in such behavior -- the board, the nomination and audit committees, and the internal audit division -- were found to have failed to do their job. The assessment cited the appointment of outside directors as a step in the right direction in this area. Also noted was progress toward changing a corporate culture in which meeting management's demands was seen as the top priority.

Regarding the losses on U.S. nuclear operations that are forcing Toshiba to sell its prized flash memory unit, the report pointed to problems with decision-making processes and subsidiary management.

Toshiba acquired American nuclear company Westinghouse Electric in 2006 for about $5.4 billion. Even though the business environment took a sharp turn for the worse after the 2011 Fukushima Daiichi disaster, management still plowed ahead with an expansionary strategy. The 2015 acquisition of an American nuclear construction company saddled Westinghouse with the losses that left Toshiba in such dire straits.

The report concluded that an excessive focus on ensuring the success of completed acquisitions -- like the Westinghouse deal -- may have introduced unconscious bias into decisions on recognizing and tolerating risk. It cited as problematic a risk management process that put too high a priority on growth and acquisitions.

The nuclear debacle may not be the last of Toshiba's troubles. The conglomerate could lose as much as 1 trillion yen ($8.81 billion) on a 2013 contract to procure liquefied natural gas from the U.S. for resale. Top management at the time was too eager to push ahead with the project and failed to properly assess the risks, the report said.

The document detailed steps Toshiba has taken to improve governance, including incorporating risk evaluation groups with outside experts into decision-making and more closely supervising group companies deemed risky.

The work is far from over. Toshiba has only improved its controls to "the lowest acceptable level for a listed company," said Takafumi Sato, president of Japan Exchange Regulation, the Japan Exchange Group watchdog that handled the watch list review. Toshiba has promised periodic reports on its progress.

(Nikkei)

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