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Whistleblowers: our best weapon against corporate fraud

More people are speaking out, but the authorities must make it easier to sound the alarm

Two companies grabbed the media spotlight more than all others during Japan's just-ended peak season for annual shareholders meetings, both for ignominious reasons.

The spotlight shone brightest on Toshiba, and it is not hard to understand why: One of the country's most famous companies has been brought to the brink of collapse by accounting misdeeds and massive losses at its nuclear business in the U.S.

A close second was Fujifilm Holdings. While its American rival, Eastman Kodak, collapsed in 2012 due to plunging demand for traditional photographic film, Fujifilm has stayed on its feet by diversifying. But long-simmering problems rose to the surface recently, with revelations of accounting fraud at the New Zealand and Australian units of its subsidiary Fuji Xerox, forcing Fujifilm's president to apologize to shareholders at this year's meeting.

FROM THE INSIDE The woes at these two powerhouses share key similarities. First, both had accounting irregularities and huge losses at foreign units whose operations were harder to oversee. This made the resulting auditing work slow going, causing the companies to be late in filing mandatory financial reports to the authorities. Second, their misdeeds came out into the open because of internal whistleblowers.

Toshiba's bigger problems are said to have begun when an employee tipped off the country's financial watchdog, about the systematic practice -- involving executives -- of padding group profits.

The scandal later took on wider dimensions partly because Nikkei Business magazine published a report about a Toshiba in-house e-mail it had obtained that appeared to be ordering window-dressing. The company's troubles became even worse with the revelations of colossal losses at U.S. nuclear reactor maker Westinghouse Electric -- a Toshiba unit at the time whose finances were a conundrum for the parent company.

Similarly, the accounting shenanigans at Fuji Xerox were exposed by an e-mail sent by an internal whistleblower. The company's top executives tried to cover up the irregularities, claiming "there has been no fraud." But after the New Zealand media got wind of the matter, auditors began probing the company's accounts, forcing it to revise its financial results not just for the business year through March 2017 but for preceding years as well.

These two high-profile cases show just how much impact a whistleblower can have. Yoshihiko Miyauchi, senior chairman at leasing and financial services company Orix, said Japan still has room to improve when it comes to corporate governance. "Though governance systems have made progress in Japan, such as the practice of installing more outside directors, that alone is not enough to stave off corporate misconduct."

Miyauchi warned that "if the top executives at any company intentionally violate the rules and hide their actions, it is almost impossible for people outside the company to know the truth."

How, then, can we fight and change systemic unethical corporate behavior? At the moment, our most powerful proven tool is whistleblowing.

CHANGING MINDSET Tadashi Kunihiro, a lawyer and expert on corporate risk management, said that while business scandals are making the news more in Japan and abroad, "I don't think corrupt practices are growing in number"; it is just that "a greater percentage of those cases have come to light."

He said that years of anemic business conditions, among other factors, have eroded the long-standing mentality among Japanese employees that "all people working for the company share the same fate and must carry any disgraceful secrets to their graves," a mindset that had been reinforced by lifelong employment and rampant intragroup dealings.

Japanese companies find it even more difficult to expect local employees at overseas operations to maintain the tight relationship among "insiders who share the same secrets," Kunihiro said, making those units a prime source for leaks.

Although whistleblowers and informants tend to be regarded in a negative light, these changes in the employee mindset should be seen as a good thing. If their existence makes it harder for an organization to cover up its misdeeds, the greater the chances that the fraud will be exposed and rectified. This in itself is a powerful deterrent.

In 2006, Japan introduced a "leniency program" under which companies that voluntarily approach the Fair Trade Commission about being involved in cartels, bid-rigging or other antitrust activity have their penalties waived or reduced under certain conditions. The same leniency applies if a company's auditing division comes forth with evidence of such misconduct found during checks on in-house emails.

In recent years, the program has yielded tips on more than 100 antitrust violations a year, with informants coming from such heavyweights as Fujitsu, Kuraray, Iseki and Mitsui O.S.K. Lines. As a senior FTC official put it, "The leniency program has led to the exposure of many antitrust violations, and its existence itself has provided an effective deterrent against cartel conduct or bid-rigging."

Of course, corporate malfeasance comes in many forms, not just accounting foolery and cartels. Mitsubishi Motors fabricated fuel-efficiency data, for example, and U.S. ride-sharing giant Uber Technologies has been rocked by revelations of a corporate culture of sexual harassment.

What can the authorities do to make it easier for people to blow that whistle so that such problems are snuffed out early or averted altogether? This is a matter that requires earnest discussion not just in individual boardrooms but among all Japanese.

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