Japan Inc hit by two corporate governance scandals in as many months

Toshiba colluded with the Ministry of Economy, Trade and Industry in suppressing foreign investor interests, a probe found.
Toshiba colluded with the Ministry of Economy, Trade and Industry in suppressing foreign investor interests, a probe found.PHOTO: REUTERS

TOKYO - Japan Inc has been hit by two major corporate governance scandals in as many months, with experts pointing to organisational practices unique to the country as reasons behind the controversies.

Last month, a probe by independent lawyers found that tech giant Toshiba had colluded with the Ministry of Economy, Trade and Industry in suppressing foreign investor interests, a plan which Prime Minister Yoshihide Suga was aware of.

And this month, Mitsubishi Electric unearthed three decades of "organisational misconduct" after the conglomerate found that data on inspections for air conditioners and compressors for train use was faked.

The two scandals have caused boardroom turmoil in two of Japan's most well-known companies.

Yet there is a sense of deja vu - in 2017, several companies including Kobe Steel, Nissan, Subaru, Mitsubishi Materials and Toray Industries confessed to systematic data fraud.

Top corporate governance lawyer Shin Ushijima told The Straits Times that Japan's traditional lifetime employment and seniority-based hierarchy form the backdrop of the problems.

"These systems create strong incentives for executives and employees to systematically defend themselves, which resulted in the recent scandals," he said, adding that if effectively functioning, they would ordinarily be keys to success.

Dr Parissa Haghirian, an expert in international management at Tokyo's Sophia University, stressed that "not every scandal is rooted in immoral behaviour".

Issues like data tampering may stem from how procedures are handed down through generations of employees. But the traditional job rotation system of shuffling people into new areas means "people constantly do jobs they're not qualified for, or really know about".

The lack of diversity on corporate boards in Japan also adds to the problem, she said.

"The people on corporate boards have been together for decades and know each other like brothers and cousins. This creates a certain power dynamic which leads to a sense of entitlement that they must be doing things right."