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Kobe Steel confronts a culture that put profit above quality

To clean house, Japanese steelmaker will tap an outsider to head the board

Kobe Steel Chairman and CEO Hiroya Kawasaki announces his resignation at a Tokyo press conference March 6.

TOKYO -- Kobe Steel is taking drastic steps to prevent a recurrence of product-data tampering, including an overhaul of its executive ranks, though reclaiming lost trust could prove a tall order after a scandal that has shattered its manufacturing reputation.

The Japanese steelmaker said Tuesday that Chairman and CEO Hiroya Kawasaki will step down April 1, as will the executive vice president overseeing the aluminum and copper division. Three managing executive officers will either be dismissed or have their pay docked.

Although Kawasaki's replacement has yet to be named, the position of executive chairman will be abolished. An outside director will serve as chairman of the board and at least a third of the board's seats will be occupied by people from outside the company. A new nominating and compensation committee will be established to ensure further transparency.

Five past or present executives were either involved in falsifying data on the quality of materials shipped to clients, or contributed to the cover-up, according to a report from an independent investigative committee released Tuesday. Over 40 company employees had a hand in the scandal.

Kobe Steel delivered material that did not meet specified standards to 605 companies, Kawasaki told reporters Tuesday, 80 more than the 525 companies previously disclosed. The company expects profit to shrink by about 10 billion yen ($94.3 million) this fiscal year due to expenses related to the misconduct, including the cost of replacing material.

The Kobe-based steelmaker has pledged to minimize the fallout from the scandal during the next fiscal year, although it is currently under investigation by the U.S. Justice Department.

Kobe Steel will try to fix a corporate culture that pursued production volume at the expense of quality.   © Reuters

The 80-page report pins the blame on governance lapses that led to a deep divide between management and front-line workers. Kobe Steel has seven business segments, the most among materials makers. 

Its corporate culture prioritized production volume over quality assurance, the report said. Segments were pressured to accept orders regardless of whether the capacity would allow it. Put out more product and reap bigger profits, went the thinking.

In 1999, Kobe Steel adopted an internal company structure that gave each unit a high degree of authority. The format was later converted to the segment structure in 2010, but even as segments the business arms continued to enjoy outsize independence.

Because of the rigid and divided structure that formed, there was hardly any lateral movement of personnel between segments, meaning no fresh blood that might be quicker to blow the whistle on misconduct.

Each business arm, highly empowered, felt they had to set lofty profit goals, the report said. The excesses of the aluminum and copper segment are a particularly sobering example. That operation had been a drag on group earnings until turning things around in the mid-2000s. The division, and others like it, focused on short-term profit gains.

One way they cut corners was by abusing the practice known as tokusai, in which the customer willingly accepts material that fails to meet specifications. In Kobe Steel's case, clients were never informed that they were receiving substandard orders.

Group company Kobelco & Materials Copper Tube even made a so-called "tokusai list." If quality testing yielded results that fell short of customer specifications, testers would simply refer to the list to ship out the material in question without consulting the quality assurance staff, the report said.

Kobe Steel had no actual manual laying out the process for this gross misapplication of tokusai, according to Makoto Mizuguchi, a senior managing executive officer at the company.

At Kobe Steel's head office, there were no mechanisms in place for overseeing product quality, the report stated. Top brass did not take a deeper look at the segments so long as their earnings were rising. In that environment, opinions on the ground were not delivered unfiltered to the C-suite.

The same went for factory floors, the report noted. Even if some voices did reach the top of the company, a stifling corporate culture prevented any corrective action, said the report.

"There were tall barriers between the head office and the operating segments," Kawasaki said.

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