Is scan­dal-hit Ja­pan fi­nally bow­ing to the in­evitable?

Rocked by a series of cor­po­rate dis­as­ters, the coun­try’s top busi­ness lead­ers will have to do more than say sorry in pub­lic, re­ports Alan Tovey

The Sunday Telegraph - Money & Business - - Business -

There are three main types of Ja­panese bow. Eshaku is lit­tle more that a nod of the head: keirei is a 30-de­gree tilt to sig­nify re­spect. Then there is saikeirei, a full 45 to 90-de­gree bow that shows deep ven­er­a­tion, hu­mil­ity or ab­ject con­tri­tion. The world has had am­ple op­por­tu­nity to watch Ja­panese ex­ec­u­tives demon­strat­ing the last of these in re­cent years.

While cor­po­rate scan­dals are by no means ex­clu­sive to Ja­pan, the coun­try’s com­pa­nies do ap­pear to be string­ing to­gether an im­pres­sive list of mis­deeds. Last month, Kobe Steel, one of the coun­try’s largest com­pa­nies, ad­mit­ted that it fal­si­fied data about the qual­ity of some of its prod­ucts over a pe­riod of three years, though many be­lieve it could be far longer.

More than 21,500 tons of cop­per, alu­minium and steel com­po­nents were sub­ject to “im­proper con­duct”, Kobe said, mean­ing they were not up to strength and their cer­ti­fi­ca­tion data was worth­less.

“Caus­ing this se­ri­ous mat­ter has brought over­whelm­ing shame to the com­pany,” Kobe said in a state­ment.

Lead­ing the first of what would be a series of press con­fer­ences as the scan­dal grew, Hiroya Kawasaki, chief ex­ec­u­tive of Kobe, said: “Trust in our com­pany has fallen to zero.”

Some of the af­fected prod­ucts are be­lieved to have been sold for use in safety-crit­i­cal ap­pli­ca­tions such as cars, air­lin­ers and Ja­pan’s famed bul­let trains. Kobe cus­tomers in­clude Toy­ota and Nis­san, and its in­ter­na­tional client list fea­tures Boe­ing, Gen­eral Mo­tors and Daim­ler.

Some prod­ucts were sup­plied for use in the nu­clear in­dus­try, a ter­ri­fy­ing prospect for Ja­pan, with the Fukushima dis­as­ter such a re­cent and painful me­mory.

Shares in Kobe plunged 40pc on the rev­e­la­tions, and last week the com­pany scrapped its fi­nan­cial fore­casts. Naoto Ume­hara, ex­ec­u­tive vice-pres­i­dent, warned the scan­dal could kill the com­pany.

“It’s very dif­fi­cult to es­ti­mate what may hap­pen as far as con­tracts pos­si­bly be­ing can­celled or re­placed by other firms,” he said dur­ing an­other apol­ogy and bow-filled press call. “We may in­cur ex­tra­or­di­nary losses.”

The Kobe scan­dal is by no means an iso­lated in­ci­dent. A few weeks be­fore the steel com­pany’s prob­lems emerged, Nis­san re­vealed it was fac­ing sim­i­lar trou­bles with un­cer­ti­fied staff in­spect­ing cars. In­cred­i­bly, a few weeks af­ter first an­nounc­ing the prob­lem, Nis­san said staff with­out the cor­rect cer­ti­fi­ca­tion were still check­ing cars. The prob­lems will al­most cer­tainly mean costly re­calls for more than a mil­lion af­fected cars.

Then there’s Takata, the com­pany which col­lapsed into bank­ruptcy in the sum­mer, fi­nally suc­cumb­ing to long-run­ning qual­ity prob­lems af­fect­ing mil­lions of its airbags, amid al­le­ga­tions it knew of the is­sues a decade be­fore.

And Mit­subishi, which last year ad­mit­ted fak­ing data to show its cars were more fuel ef­fi­cient than they re­ally were, a scan­dal which Suzuki was drawn into.

And then there’s the 2015 cases of Toyo Tire & Rub­ber, whose shock ab­sorbers are de­signed to pro­tect build­ings from earth­quakes, and Asahi Ka­sei, whose pil­ings form foun­da­tions. Both were found not to have met stan­dards, again fal­si­fy­ing per­for­mance data.

In 2014, Toy­ota agreed a $1.3bn (£995m) deal in the US to set­tle claims over safety is­sues with its cars. At least five deaths were linked to the prob­lem, with cars ac­cel­er­at­ing even as their drivers tried to brake.

Then there’s the fi­nan­cial im­pro­pri­ety. Two years ago Toshiba chief ex­ec­u­tive Hisao Tanaka re­signed over an ac­count­ing scan­dal in which the com­pany over­stated prof­its by £780m over a seven-year pe­riod that took in two of his pre­de­ces­sors. An in­ves­ti­ga­tion into the af­fair con­cluded that while bosses did not tell staff to fal­sify num­bers, they were put un­der im­mense pres­sure in the ex­pec­ta­tion that cor­po­rate cul­ture would re­sult in this hap­pen­ing.

Per­haps the case of Ja­panese cor­po­rate malfea­sance best known in the UK is that of Olym­pus. In 2012 its Bri­tish chief ex­ec­u­tive Michael Wood­ford, re­spond­ing to a whistle­blower’s tip, ex­posed a £1.1bn fraud at the com­pany just two weeks af­ter be­ing pro­moted to the top job. He was blocked by the board as he tried to dis­cover why the com­pany had paid hun­dreds of mil­lions for worth­less com­pa­nies. He was fired for his ef­forts. On his re­turn to Bri­tain, Wood­ford was ad­vised by po­lice not to go out on his Lon­don flat’s bal­cony for fear of as­sas­si­na­tion by the Ja­panese mafia.

A 30-year veteran with Olym­pus and the com­pany’s first for­eign boss, Wood­ford has an un­ri­valled per­spec­tive on how such scan­dals can oc­cur in Ja­panese busi­nesses.

“Ja­panese se­nior ex­ec­u­tives are pre­pared to com­pro­mise their own in­tegrity – and of­ten com­mit il­le­gal acts – in a per­verted view the pri­or­ity is to ‘pro­tect’ the com­pany at any cost, al­though many times such logic cloaks

the real mo­ti­va­tion of self-in­ter­est,” says Wood­ford, who now ad­vises on cor­po­rate gov­er­nance and busi­ness in Ja­pan and cam­paigns to pro­tect whis­tle-blow­ers.

Ja­pan is famed in the West for its “salary­man” con­cept. These longserv­ing staff within the coun­try’s cor­po­ra­tions slowly move up the lad­der, of­ten on se­nior­ity rather than abil­ity, giv­ing them lit­tle in­cen­tive to rock the boat. Long ser­vice is re­warded, and this is a fac­tor in the trou­bles within Ja­panese com­pa­nies, ac­cord­ing to Mar­cel Thieliant, se­nior Ja­pan econ­o­mist at Cap­i­tal Eco­nom­ics.

“The up­shot is work­ers may feel re­luc­tant to blow the whis­tle for fear of los­ing their job or be­ing de­moted,” says Thieliant.

Wood­ford says he has great re­spect for “the salary­man en­gi­neer work­ing in a fac­tory”. It’s when these loyal em­ploy­ees start reach­ing up­per man­age­ment that prob­lems can oc­cur.

“The Ja­panese say­ing – the nail which stands up gets knocked down – is true,” he adds.

The salary­man con­cept is some­what ex­ag­ger­ated by for­eign­ers, ac­cord­ing to Sir David War­ren, Bri­tish am­bas­sador to Ja­pan from 2008 to 2012. “But if you join one of the big in­dus­trial groups or trad­ing houses, then there is a much stronger idea of hav­ing a life­long ca­reer there,” says Sir David, who now chairs the Ja­pan So­ci­ety, an in­de­pen­dent body ded­i­cated to en­hanc­ing re­la­tions be­tween the UK and Ja­pan. “These com­pa­nies pride them­selves on so­cial co­he­sive­ness and mak­ing a con­tri­bu­tion to so­ci­ety much more than be­ing a prof­it­mak­ing ma­chine.

“It helps cre­ate a sense of loy­alty but also a con­sen­sual re­luc­tance to turn over every stone,” adds Sir David, not­ing that a “cul­ture of quiet in­tim­i­da­tion” can ex­ist.

Un­like in the West, a new ex­ec­u­tive com­ing in and “kitchen sink­ing” a sit­u­a­tion – throw­ing the blame for every prob­lem at their pre­de­ces­sor’s feet – is rare. A new boss ad­mit­ting a prob­lem would mean a loss of face.

“At Olym­pus it was one gen­er­a­tion cov­er­ing up for an­other,” says Sir David, a prac­tice which al­lows smaller is­sues to spi­ral out of con­trol.

“I don’t be­lieve it was cyn­i­cal prof­i­teer­ing be­hind Kobe’s prob­lems but more likely hu­man er­ror that was cov­ered up be­cause some­one was em­bar­rassed at mak­ing a mis­take or hav­ing over­seen neg­li­gence.” Ac­cord­ing to Sir David: “It’s of­ten eas­ier to cover up than own up – peo­ple don’t want to talk about it un­til it even­tu­ally be­comes over­whelm­ing.”

Wood­ford is far more damn­ing in his as­sess­ment: “I love Ja­pan but it’s an Alice in Won­der­land world for busi­ness.” He says the coun­try which once led the world in pro­duc­tion engi­neer­ing has since been caught up by other na­tions, cre­at­ing a breed­ing ground for scan­dal. “Made in Ja­pan used to be some­thing spe­cial,” says Wood­ford. “But as times got tough they have cut cor­ners. I’m con­vinced what we have seen so far is just the tip of the ice­berg.”

Shinzo Abe’s elec­tion cam­paign pledg­ing to re­store Ja­pan to eco­nomic health might have earned him the Prime Min­is­ter’s job, but lift­ing cor­po­rate gov­er­nance isn’t a high pri­or­ity. Abe – a for­mer Kobe em­ployee – sees his legacy as a “sort­ing out the econ­omy,

dereg­u­la­tion and Ja­pan re­assert­ing it­self mil­i­tar­ily”, says Sir David.

Wood­ford says there’s a re­luc­tance to deal with what could be a mas­sive hid­den is­sue. “It’s a so­ci­etal prob­lem: 80pc of peo­ple in Ja­panese cor­po­rates saw what I did as bit­ing the hand that feeds you. They are just happy to bow deeply if they get caught.”

What’s needed is a “peace­ful French rev­o­lu­tion”, he says. “It’s not healthy that peo­ple au­to­mat­i­cally de­fer to those in of­fices.”

‘It’s of­ten eas­ier to cover up than own up – peo­ple don’t want to talk about it un­til it be­comes over­whelm­ing’

‘Ja­panese se­nior ex­ec­u­tives are happy to com­pro­mise their own in­tegrity – and of­ten com­mit il­le­gal acts – to pro­tect the com­pany’

Nis­san work­ers in­spect trucks, left. The firm ad­mit­ted that un­cer­ti­fied staff have been in­spect­ing cars. Hiroto Saikawa, Nis­san boss, op­po­site, bows at the end of a news con­fer­ence. Naoto Ume­hara, Kobe vice pres­i­dent, right, and Hiroya Kawasaki, chief ex­ec­u­tive, bot­tom right, also bow

Kobe steel­works, above, ad­mit­ted data had been fal­si­fied about the qual­ity of its prod­ucts over a three-year pe­riod

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