Corporate Governance in Tokyo

Squash out of the board room

Photo by Bill Oxford on Unsplash

Three and a half decades ago, my job search started right here in Tokyo. It was a hot summer in July, 1985 when I return to my home from Ann Arbor, Michigan. No clear job opportunity existed for me except I found a promotional flyer on the bulletin board at International Student Center. A rare recruiting advertisement came to my attention from a half-way around the world. A 100-year-old tech titan, Toshiba, was looking for a job candidate to expand business abroad. Toshiba was on the rise.

I called them for the job and they invited me for the interview. It was a very quick face-to-face meeting with the personnel. The interview didn’t work out. A Japanese salaryman in the dark suit looked at my resume and immediately told me that there was no chance for a gradate without engineering background. I still remember that they served me a glass of orange juice in the waiting room. That was my last contact with Toshiba until today.

One June 25th, Toshiba held the shareholder meeting in the middle of scandals. In the annual meeting in 2020, Toshiba and the Japanese government officials pushed shareholders out of the room. The unsuccessful campaign resulted in a resignation of Nobuaki Kurumatani and several board members.

That is a beginning part of business story of the Economist, “What Toshiba’s travails say about Japanese capitalism”, published on June 24, 2021. Toshiba is the 145-year-old tech conglomerate in Tokyo, headquartered adjunct to Hamamatsu-cho Station. Being a symbol of high-tech success in flash-memory data storage, the home buildings stood very high with long corridor from the train station. That looks obsolete now.

In 2017, the fallout from accounting fraud ruined its reputation. It deepens with a loss from investment in an American nuclear-energy firm. What was lost in not just the reputation, but also trust in management. Effissimo Capital Management of Singapore, an activist investor, became a major shareholder. They don’t like the way the current management team runs Toshiba. They called for an independent investigation. The report claimed that Toshiba executives and government officials cooperated as “in unison” to prevent shareholders from exercising their rights. The affair raised three concerns over Japanese firms listed in the capital market of Tokyo.

For a start, in Japanese business, an activist investor is regarded as troublesome enemy. It is merely a disturbance to keep the firm off stable condition. Yet Toshiba reported a big accounting fraud, a misconduct in internal control. In the Western view, any public companies are subject to legal prosecution to stipulate an accounting standard and if they plead guilty, they should pay for the damage. Toshiba didn’t pay for a loss of investors until recently.

Secondarily, Japanese corporate governance is just rhetoric, keeping accounting manipulation confidential and hiding unethical behaviors within the corporation. Goodwill does not exist. Alicia Ogawa, a scholar of Japanese corporate governance, says in the interview with the Economist correspondent, that Japan is likely to exhaust a little goodwill left within the foreign investment community. Toshiba, along with other manufacturing operations, responded passively to the Stewardship Code of 2014, hiring independent outside directors to reflect the voice from outside. Yet the firm hires those directors for their own interests.

Thirdly, it is mostly disturbing to the Western public that corporate executives merely react to the external claim without saying anything first, and appear to the public media with a shallow bow. On the surface, they nod and indicate a subtle apology, “I am very sorry.” But subsequently, they disappear from the public with no fines, no dismissals, and no jail term. Toshiba pays the bonus and the retirement money in full. That is utterly incomprehensible in international community. If a corporate law is adequately executed, most Toshiba executives are guilty for risk assessment. The dismissal of executives in place is inevitable.

For nearly four decades apart, my reflection of Toshiba was a lot of good images in 1980’s and 1990’s. In late 90’s, the firm purchased latest supply chain management software from i2 Technologies from Irvin, Texas. I worked for the software house as pre-sales consultant. Toshiba was the first customer in Tokyo for the flexible production scheduling for the fab. Engineers worked around the clock. Toshiba is known as a scandal now. To wipe out the evils within the company, the first thing to do is to squash inadequate executive out of the board room. That is what shareholders have in mind. So do the public.



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Hiroshi Hatano

Taught marketing @ universities in Tokyo, ex-I-banker @ UBS & mgmt consultant @ Kurt Salmon (Accenture Strategy now), Utah, Michigan + Georgia Tech educated