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Kobe Steel data scandal

Is Japan rotten to the core? No

Corporate mismanagement is to blame for Kobe Steel scandal not national culture

Kobe Steel Chairman and CEO Hiroya Kawasaki apologizes for the company's data falsification.

When you hear of wrong doing in American companies like Equifax, with its data breach scandal, Wells Fargo, where client bank accounts were faked, or at groups involved in the subprime mortgage crisis, you don't necessarily assume that there is something rotten with the whole of U.S. corporate culture. Individual companies are subjected to intense public scrutiny. So, why should we act differently when it comes to alleged corporate wrongdoing in Japan?

Kobe Steel's recent scandal, in which we have learned of falsification of performance data of steel supplied to manufacturers in Japan and around the world, is yet another in a series of Japanese company scandals, which has caused many people to wonder whether Japanese corporate culture as a whole is to blame.

This is quite wrong. We should not be concerned about Japanese corporate culture as a whole because there is no such thing as a uniform Japanese corporate culture. There is however something like Kobe Steel corporate culture -- and there is likely something very wrong with that.

There are thousands of different Japanese corporate cultures. Fast Retailing (purveyors of the Uniqlo brand), Cyberdyne (robotics), Softbank (internet and telecoms), Ryohin Keikaku (suppliers of the Muji brand), and Japan Airlines are all companies just as Japanese as Kobe Steel. Yet all have corporate cultures vastly different from Kobe Steel's. As far as we know, none has committed malfeasance similar to that at Kobe Steel.

Ascribing blame to Japanese corporate culture for illicit and illegal activities is not just offensive to the vast majority of people in businesses in Japan who operate within the rules, it is dangerous because it ignores the root cause. Without understanding root causes, no problem can be remedied. Blaming Japanese corporate culture becomes a scapegoat and an excuse for doing nothing. After all, no one person can single-handedly change Japanese culture. For a business leader to ascribe the cause of malfeasance in his or her own company to Japanese corporate culture is the worst kind of abdication of responsibility.

Countries do not make corporate culture. Leaders do, by design or by neglect. If you want to understand the root cause of malfeasance at Kobe Steel or at any other company, look to the behavior of managers and staff from the top on down.

I was once asked to do just that for a different business. The CEO of an engineering company called me in to investigate the root cause of lapses in safety protocols that had led to numerous serious accidents. The CEO was confident I would find fault with frontline staff. Instead, I found that managers were subtly pressuring staff to skirt safety protocols to boost business results. The practice had gone on for decades and the majority of managers who had come up through the ranks had never known any other way, and many had even been complicit. It went all the way to the top.

After I called them out, the CEO and other senior executives protested, claiming this kind of questionable activity was "standard practice" in the industry in Japan and a necessary evil to be profitable. However, that reasoning simply didn't wash. A competitor company in Japan that my client company had recently acquired exhibited no such practices and was profitable.

Though often cited as an excuse, Japan is never the root cause of whatever may ail a business in Japan. It is always something else that is within the control of the business leader. No chief is ever at the whims of whatever he or she may see as the prevailing national culture. Business leaders should impose the corporate culture they want, no matter how unconventional. Rakuten CEO Hiroshi Mikitani imposed a culture of global business, requiring English capability of all staff as a prerequisite to remaining employed -- previously unthinkable in Japan with its tradition of lifetime employment and widespread aversion toward foreign languages. As Japan Airlines CEO, Kazuo Inamori also led a remarkable Japanese business turnaround. The founder of Kyocera, he imposed a Buddhism-based business philosophy on the company, including obligatory education sessions. He was adamant that staff must be happy, as opposed to following the self-sacrificing career of the stereotype Japanese company employee.

However, imposing a corporate culture to improve performance and reforming a culture to eradicate illicit behavior are not the same. In the former, a leader can lead the change. In the latter, a leader has lost the ability to lead reform. It is not possible to simply claim you have found religion and start afresh. To achieve real change in malfeasance cases, leaders must be replaced, and that includes mid-level managers who have been complicit.

For Kobe Steel, this will be a hard pill to swallow. We have so far learned that falsification of data goes back far more than 10 years, and was not isolated to one division. Like the engineering company I investigated, this implies that many managers who have come up through the ranks have at best been aware of the practice and at worst been complicit. Kobe Steel likely has multiple generations of mid-level managers whose experience in how to succeed is based on how to cheat.

Kobe Steel issued a statement that even though product was not up to spec, it was still safe and there had been no accidents. For the current leadership of Kobe Steel to believe that this is an acceptable response to the public indicates not just arrogance, but deliberate myopia.

The recent raft of Japanese corporate scandals that have come to light -- including at FujiFilm, Toshiba, Takata, Mitsubishi Motors, Nissan -- make it appear as if there is something wrong with Japan. But could it mean that there is something right with Japan? Are we seeing more of these scandals in the news because of increasing transparency, less tolerance for malfeasance, and greater public expectations from companies? While Japanese governance regulations may lag behind others, are we not seeing a convergence of expectations worldwide as to what constitutes the minimum norms of corporate behavior?

No tolerance

So what can be done to prevent or at least reduce corporate malfeasance in the future? Some have argued that the root cause of corporate malfeasance in Japan is lax governance regulations, and that the remedy is in strengthening those. I agree that governance in Japan ought to be improved. However, weak governance is not the root cause of malfeasance.

What is needed is strong corporate leadership -- the resolve to stick to one's principles even when there is an immediate penalty for doing so. For example, Michael Woodford, the former chief executive of Olympus, the camera maker, exposed $1.3 billion in concealed losses that he discovered even though he felt physically threatened.

The only people who can strengthen future business leaders are today's business leaders. Leaders are not quickly trained up. They are cultivated over time by their predecessors. Successful companies often treat failure as learning. People are rewarded for good ideas that don't work so that the right behavior is encouraged as much as good business results. Failure ceases to be seen as something to be avoided at all costs, for example, by fabricating performance data.

Also, there should be no tolerance for even minor illicit behavior. A top-selling salesperson who cheats on business expenses must be terminated. That not only roots out illicit behavior, it also develops the character of the manager to whom the salesperson reports.

And what of Kobe Steel? Kobe Steel's board has some tough decisions to make. I'll go long on Kobe Steel if leaders complicit in malfeasance are removed, all the way to the top, and the new chief imposes a culture that cultivates strength of character. I'll go short on Kobe Steel on anything less.

Steven Bleistein is CEO of Tokyo-based consulting firm Relansa. His most recent book is "Rapid Organizational Change" (Wiley & Sons, 2017).

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