Corporate fraud is not a Japanese disease

Kobe Steel President Hiroya Kawasaki (left) bows to economy, trade and industry officials during a meeting at the ministry in Tokyo, on Oct 12. PHOTO: AFP

Just because a raft of high profile sexual harassment scandals are coming to light in the United States right now, as opposed to in Japan, does not mean sexual harassment is a particularly American problem and not a Japanese one.

Similarly, the recent raft of corporate malfeasance scandals in Japan involving Kobe Steel, Mitsubishi Materials and Toray does not indicate that corporate malfeasance is somehow a Japanese disease.

The root cause of corporate malfeasance is always a failure of leadership, no matter the country or the nationalities of those involved.

Think Wells Fargo whose managers pressured sales staff to fabricate millions of checking and savings accounts without client consent to boost business results, or Volkswagen, which created software for its diesel cars to spoof emissions tests, or Uber, which paid hackers to cover up a major breach of private customer data.

Neither Mitsubishi Materials nor Kobe Steel is a Japan problem.

It is a Mitsubishi problem and Kobe Steel problem respectively. Mitsubishi Motors falsified fuel performance data some years back and it is not clear that the company made any significant changes in its leadership and processes as a result.

Similarly, Kobe Steel had a history of malfeasance before the most recent data falsification scandal broke last month. Both companies are keeping to form in their respective scandals and neither appears to have attempted to address the root cause.

To argue that somehow Japanese corporate culture is to blame is to ignore the vast majority of Japanese firms which are well-run and are just as Japanese.

Take, for example, Fast Retailing with its worldwide success of its Uniqlo brand, Cyberdyne with its life-changing cybernetics, Softbank with its transformative use of technology, and Ryohin Keikaku with its now iconic Muji brand to name a few.

Ascribing blame to Japanese corporate culture for illicit and illegal activities is not just unfair but also dangerous because it ignores the root cause. Without understanding root cause, no problem can be remedied, and so Japanese corporate culture becomes a scapegoat and an excuse for doing nothing. After all, no one person can single-handedly change Japanese culture.

I have often heard that malfeasance is likely to go unchallenged in Japan because of a Japanese cultural tendency to conform and never to question superiors, as opposed to Americans who are less hierarchical, or because of a supposed Asian propensity to "save face" by not admitting errors, as if non-Asian people have somehow no issue with divulging serious mistakes or fraud.

These are delusory notions. The pressure to conform is hardly distinct to Asian culture and admitting error or wrongdoing is never comfortable for anyone, no matter the culture or country.

Thousands of Wells Fargo employees in the US were complicit in perpetrating fraud for years, despite hating the practice. Very few ever spoke up, and those who did, rather than being treated as American heroes, suffered severe retribution at the hands of their employers, destroying their reputations, careers and livelihoods.

In the case of Kobe Steel, its management came clean publicly not because they wanted to do the right thing but because of a whistle-blower.

In the Mitsubishi Materials case, we still do not know the exact genesis of the decision to go public. I suspect, however, that management was pressured to choose its least worst option.

The leaders at Mitsubishi Materials and its subsidiaries somehow believe they should remain at the helm as they navigate a storm of their making.

You cannot be complicit in fraud and then later claim that it is a new day after you have been found out. These leaders must go. However, the resignation of the top leaders, which is typical practice in Japan after scandals, is not enough.

Mid-level managers who were complicit in the fraud cannot remain in their roles leading staff without compromising the next generation of leadership bench.

Removing these managers may seem unfair to those who may have been "just following orders." However, think about what keeping them in management roles means from the perspective of their staff. If you were a cyclist, would you want to be coached by Lance Armstrong, no matter how good a cyclist he may be even without the doping? Employees do not quit companies. They quit people, and if a star employee sees no profit in hitching his or her star to his or her boss, he or she will leave without compunction. The best and brightest staff in any company are never afraid of not being able to find other work.

Improved governance, for which investors in Japanese companies are clamouring, is also not enough. No matter how regulatory bodies may strengthen governance, there will always be ways to circumvent the rules for those who are determined to do so.

In the cases of both Mitsubishi Materials and Toray, managers abused tokusai, or a special waiver on a non-compliant production lot. Tokusai is defined both in ISO and JIS Q standards as a means to provide customers the option to accept such products if they are deemed "good enough", or to accept them with conditions.

This is not to say that a manufacturer would not be sued for breach of contract, or that a customer cannot reject a non-compliant lot outright. It merely provides a mechanism for settlement between manufacturer and customer in cases where standards may be discretionary as opposed to regulatory.

However, using tokusai presumes transparency and discussion between customer and manufacturer; Mitsubishi Materials firms kept mum on the defects.

The only solution for preventing malfeasance in the future is choosing and cultivating better leaders in the present. It is incumbent upon current leaders of businesses to ensure that the character of future leaders is not susceptible to compromising the values and principles of the business merely for immediate profit or avoidance of immediate hardship.

If you happen to be so unfortunate as to be a mid-level manager or staff person with limited power who encounters malfeasance in your company, you have only three choices for how to deal with it.

You can call it out, as apparently some did at Mitsubishi Materials and Kobe Steel. You can quit the company and find a better employer. Or you live with the malfeasance and turn a blind eye. Only the first two solutions are viable. The third one is ultimately soul-destroying.

  • The writer is the CEO of Tokyo-based consulting firm Relansa. His most recent book is Rapid Organisational Change.

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A version of this article appeared in the print edition of The Straits Times on December 01, 2017, with the headline Corporate fraud is not a Japanese disease. Subscribe