December 19, 2017 / 5:22 AM / 3 months ago

Breakingviews - A deluge of scandals in Japan will drive change

TOKYO (Reuters Breakingviews) - Investors will keep the pressure on corporate Japan to change. On top of governance trouble, like the strategic and accounting errors that nearly killed Toshiba, have come revelations of dodgy quality-control at firms such as Mitsubishi Materials and Toray. The scandals are likely to continue into 2018.

Mitsubishi Shindoh Co. President Kazumasa Hori attends a news conference in Tokyo, Japan November 24, 2017. REUTERS/Toru Hanai

Recent episodes have turned out less serious than the lethal airbags which drove Takata into bankruptcy in June. Kobe Steel, for example, sold metals that were not up to specifications although as of Dec. 1 the company had verified with over 90 percent of customers that they were still safe. Meanwhile Nissan and Subaru had unqualified staff inspect cars. Exhaustive coverage of these gaffes also reflects Japan’s national obsession with quality.

Still, it is hard not to worry about corner cutting when products go into trains, planes and nuclear plants, as Kobe Steel’s do. The lapses undermine a hard-won reputation for manufacturing excellence. And they dovetail with anxiety, rekindled by the crisis at Toshiba, about poor corporate governance. That is despite years of pressure from reformers and activist shareholders to make firms better-run and more investor-friendly.

Likely factors include overworked staff, unrealistic promises to customers and, when it comes to whistleblowers, declining loyalty to employers as Japan’s “job for life” culture fades. In the coming year, the flood of publicity could encourage more leaked revelations, while some companies might find fresh flaws themselves.

The silver lining is that this ought to catalyse better behaviour. Thanks to governance reforms, many boards now have at least two independent directors. They should be asking tough questions about culture and processes, whether compliance teams have enough clout, and whether executives oversee things effectively.

Given the potential for value destruction, shareholders should also keep pushing. Even after recovering somewhat, Toshiba’s shares closed 36 percent lower on Dec. 7 than a year earlier. Takata’s nightmare wiped out well over $2 billion of shareholder value. Creditors, including carmakers, banks, and bondholders, are owed $33 billion.

Companies could bring in global experts to help with quality control, too. More testing could be outsourced to specialists like Bureau Veritas. Firms will also need truly independent lawyers, accountants, investigators and the like to review systems and controls, says Tadashi Kageyama of Kroll. They should wherever possible eliminate easily manipulated manual data collection, he adds. Japan Inc has work to do to earn back trust.


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