Dangers of the culture of obedience

A company with more than 100 years of history behind it would easily come across as an outfit where governance and accountability would be deeply ingrained as part of its corporate culture.

But that is not the case for Toshiba of Japan that is hit by an accounting scandal. An independent investigation committee has found that the 140-year-old company had inflated profits up to 152 billion yen (US$1.2bil) since 2008.

That caught many by surprise because Toshiba is seen as one of the leaders that embraces enhanced Japanese-style corporate governance. For instance, it is one of the large companies that very early on in 2001 appointed three external director to the board.

This added more independence to the board of Japanese companies that are largely made up of retired senior management of the company who are deemed as “insiders”.

According to a report on a survey done by Japan Corporate Governance Network, a non-profit organisation, Toshiba is ranked ninth out of 120 listed companies with good corporate governance practice.

But investigations by a special committee revealed that what had led to the overstating of profit was the Japanese culture of obedience and not questioning the superiors over their moves or motives.

The corporate culture in Toshiba, like many other Japanese companies, is that it is not viewed well if employees question their superiors. It is a culture of obedience that has been passed on for generations and hard to get rid of.

The corporate shenanigans in Toshiba came to light in February this year after Japan’s Securities and Exchange Surveillance Commission started questioning the company for accounting irregularities following anonymous tips.

Where the tip-off came from is anybody’s guess.

A month earlier in January, an internal auditor in Toshiba, raised the red flag and told the head of the company’s auditing committee, who was the former chief financial officer, of problems in Toshiba’s lap-top manufacturing business.

Instead, he was told to focus on completing the accounts on time with a warning that re-opening that section of the books would cause Toshiba to miss its deadline to file the accounts.

Apart from a corporate culture of obedience, investigations revealed that there was intense pressure on employees to achieve good numbers. Profit targets were aggressive and failures to achieve numbers were frowned upon.

According to a report, employees were told to inflate the profit numbers when the actual situation was that the company incurred losses.

The third reason, according to experts, is the overwhelming presence of old guards in the company that created rivalries and factions. It also made it a challenging effort for the younger group of leaders in the management to make changes.

The reluctance to question superiors, blind loyalty and culture of obedience are very much part and parcel of the culture in other countries as well.

We have seen several examples in Malaysia.In the aftermath of the 1998 financial crisis many companies went under. The investigative audits on many of these companies revealed that there was collusion in the top management that caused the misreporting of profit numbers.

There is also the Transmile Bhd accounting scandal where several top executives were charged in court. The books apparently were “cooked” for several years until the external auditor found out and raised the red flag.

The culture of obedience and reluctance to raise the red flag is also prevalent in companies where the government holds the majority stake. If the statement by Public Accounts Committee (PAC) chairman Datuk Nur Jazlan Mohamed is anything to go by, 1Malaysia Development Bhd is an example.

Earlier this week, Nur Jazlan in an interview with Singapore Business Times said that the management, board and auditors of the government-owned fund should shoulder the major part of the blame for the fund’s poor state of financials.

He had also said that there were weaknesses in the governance and wished that the auditors had raised the flag for corrective action earlier.

Most corporate shenanigans cannot be hidden from scrutiny forever. No matter how corporations manage their books, continued losses or abuse from some business segments cannot be tucked away hoping that it will turn around the corner one fine day.

To minimise damage, it has to come to the attention of the stakeholders fast. An effective way is when the culture of obedience and reluctance to question superiors are frowned upon.

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