Zero tolerance? Toshiba tries the opposite in accounting scandal

The Toshiba logo is seen at its headquarters in Tokyo, Japan on Oct 1, 2015.
The Toshiba logo is seen at its headquarters in Tokyo, Japan on Oct 1, 2015.PHOTO: REUTERS

TOKYO (BLOOMBERG) - Companies like General Electric are known for zero-tolerance policies: Any wrongdoing results in immediate dismissal. Now Toshiba, one of the icons of Japan Inc, is testing the other end of the scale.

President Masashi Muromachi said Thursday (Oct 1) the company had identified 30 more executives involved in an accounting scandal that spanned almost seven years and reduced reported profit by about US$1.3 billion. While Muromachi said the wrong-doers will be "punished," they won't be dismissed. He also disclosed that two of the directors who stepped down in a board reshuffle remain on the payroll as advisers.

Toshiba's action risks making a mockery of Prime Minister Shinzo Abe's efforts to improve corporate governance in a country that has long been known for paying scant attention to shareholder interests. Mr Abe, speaking in New York this week, urged Japanese companies to scale back the practice of holding each other's shares. He has also linked such improvements to the government's target for expanding the economy by 20 per cent.

"The rule at GE is one strike and you're out," said Nicholas Benes, representative director of the Board Director Training Institute of Japan. "What I'm seeing is something closer to 100 per cent tolerance at Toshiba."

Toshiba has lost about US$6 billion of market value since it withdrew its earnings forecast in May and announced an accounting probe that was later expanded. The internal investigation showed that company operations, including personal-computer manufacturing and power plants, overstated profits and delayed booking losses.

Former presidents Hisao Tanaka, Norio Sasaki and Atsutoshi Nishida have since quit and the company has revamped the board, increasing the number of outside directors. For the past six years, Mr Muromachi has overseen the chip business and served as its chairman. The 40-year company veteran said he will step down within three years.

Mr Muromachi told reporters on Thursday he could not comment on possible responsibility of board members because an internal panel set up to investigate hasn't completed its work. He cited the 30 executives that will be punished in response to a question about the roles of managers below the director level.

A third-party panel formed to investigate the irregularities reported in July that top managers at the company caused systematic overstating of profit by pressuring lower-level workers to meet unrealistic targets.

"The repercussions need to be much more severe," said Mitsushige Akino, an executive officer at Ichiyoshi Asset Management Co. in Tokyo. "If there isn't a fundamental change at the company, who's to say this will not happen again 10, 20 years later?"

Toshiba shares fell 1.4 per cent as of 10:18 am in Tokyo, while the Topix index declined 0.3 per cent. The stock has dropped 41 per cent this year.

Mr Muromachi on Wednesday won shareholder approval as Toshiba's president at an extraordinary meeting that included calls for his resignation. Share owners angered by the damage done to the 140-year-old brand interrupted the proceedings several times, shouting over him.

One investor drew applause when he said Mr Muromachi was unfit to lead regardless of whether he knew about the improprieties. "You were chairman when this happened," another shareholder said during a question-and-answer session. "What in the world were you doing?"