When scandal strikes a firm

by Tomoko Otake

Japanese culture and its scapegoat-seeking media often make bad times far worse for companies compromised by events. But for foreign firms less familiar with the country’s societal norms, such problems can easily spiral completely out of control.

On the evening of June 3, 2006, Hirosuke Ichikawa, a 16-year-old high-school student, was maneuvering his bicycle and backing out of an elevator on the 12th floor of a public apartment building in Tokyo’s Minato Ward. Then the elevator suddenly started ascending with both its outer and inner doors open, and the boy was jammed between the floor of the elevator and the top of the entrance frame. Although he was rushed to hospital, he was pronounced dead shortly afterward.

At that time, top executives of Schindler Group — the Swiss company whose Japanese subsidiary made the elevator — could not have imagined how much it would affect their business in this country.

They had no clue that their products would soon be referred to as “murdering elevators” on the streets, online and in the Japanese media. And they could perhaps never have expected that — despite being the world’s No. 2 elevator maker — their sales in Japan would come to a sudden halt.

Sad to say, dreadful things occur every day — whether involving trucks or trains or planes or mundane appliances like room heaters. But in this case, what went so terribly wrong with Schindler’s “crisis management” in the days and weeks after the tragedy to devastate its business in Japan?

A closer look at the company’s handling of the event provides a cautionary tale for businesses operating in Japan, where a swift public apology after being linked to a scandal — regardless of who’s chiefly to blame — is generally expected and taken for granted.

In the Schindler case, the avalanche of negative media coverage that followed the tragedy, and the “bashing” the company took for months, is a poignant reminder that a company’s responsibility to the wider society in Japan can often exceed its exposure to laws and regulations.

To be fair, Schindler itself wasn’t entirely to blame for the backlash that followed the accident.

For one thing, the cause of the accident is believed to have been the malfunctioning of a brake pad on the elevator. Schindler was not in a position to satisfy the public’s demands for an explanation because it was not allowed immediate access to reports on the cause of the accident. That was because Tokyo-based SEC Elevator, a rival of Schindler, had won the contract to provide maintenance work for the building.

In addition, at the time of the accident Schindler’s top management in Switzerland was off duty, as it was a public holiday there. The time difference and the language barrier contributed to a further delay in communication between the company’s Swiss headquarters and its Japanese subsidiary.

Meanwhile, along with the public’s desire to know why the tragedy occurred at all, another key question was whether Schindler’s elevators might be inherently dangerous.

This issue was addressed in a November 2006 report by the Land, Infrastructure, Transport and Tourism Ministry. The findings — reported by Kyodo News — were based on examinations of 6,273 elevators made by Schindler’s Japan subsidiary, which identified 102 as having problems in need of repair. The monthly failure rate of 1.7 percent was not particularly high compared with that of equipment made by the five largest elevator companies in Japan, which stood at 1.2 percent.

But despite such mitigating factors, experts say the company’s initial reaction to the accident could not have been more dangerous from a crisis-management point of view.

That view was to some extent echoed by Alfred N. Schindler, the elevator company’s chairman, when he addressed a recent Hong Kong symposium on crisis management. There, he acknowledged that the firm’s inadequate efforts to meet public expectations — by refusing to communicate with the media, provide Minato Ward with information or attend an explanatory meeting for apartment residents — significantly ignited public outrage.

“I would say that our reaction was typically Western, especially an Anglo-Saxon type of reaction,” said Schindler, who earned his MBA at the prestigious Wharton School of Finance at the University of Pennsylvania. He also explained that it took him and his executives months to learn that, in Japan, you must apologize “from the social-responsibility point of view.”

“When you are educated in, let’s say, a multicultural environment as I was, and mainly in the United States, apologizing is always the admission of guilt. So not only by training as a lawyer, but genetically we are preprogrammed never to apologize until it is clear you are guilty.”

Indeed, in Japan, every time bad news breaks executives wearing uniformly dark-colored business suits meet the media, bow deeply and apologize profusely “for causing a clamor” — though they are not always forthcoming about the details of the problem.

Some even go as far as openly crying in front of television cameras to express remorse — as former Yamaichi Securities President Shohei Nozawa famously did after the huge brokerage company collapsed in November 1997. At a news conference called to announce the debacle, Nozawa shouted: “It is management’s fault, and not the rank-and-file’s fault!”

Not that Japanese companies across the board are genuinely remorseful or have perfected the art of apology, either. Tatsumi Tanaka, in his 2004 book “Sonna Shazai de wa Kaisha ga Abunai (Such Apologies Would Ruin Your Company),” offers a long list of scandal-management flops by Japanese executives, who, despite apologizing, reinforced through their manner or response to subsequent questions their image as unrepentant, evasive or even antisocial.

Take Tetsuro Ishikawa, then president of Snow Brand Milk Products Co., which was the focus of a massive food-poisoning case in 2000. Ishikawa was told publicly by one of his company’s factory managers in the middle of his news conference following the outbreak that he had seen chunks of solidified milk going through the production process — meaning the manager had detected a likely sign of bacterial contamination.

“Is that really true?” Ishikawa exclaimed in shock, inadvertently revealing on national TV that the top management had not been informed of such damaging information beforehand.

Later, the exasperated Ishikawa blurted out his second gaffe, exclaiming in self-pity while trying to run away from reporters: “I haven’t slept at all!”

“I didn’t know” is likewise a disastrous excuse for a company president facing scandal to make, Tanaka writes in his book. In this respect he cites the August 2000 revelation that Mitsubishi Motors Corp. had concealed numerous customer complaints about defects in its vehicles. Katsuhiko Kawasoe, then the company’s president, who voiced just that in a news conference, ended up resigning and was later convicted of professional negligence resulting in death.

Tanaka’s advice to presidents who were not in the know was to use expressions such as: “We were unable to grasp the facts,” or “Our mechanism and efforts to learn such facts were not enough.” Put in such ways, he writes, their ignorance is at least tinged with feelings of remorse.

Had the Schindler executives followed the right ritual, behaving like other scandal-hit Japanese companies, would their company have escaped the prolonged flak? Or would the reaction have been just as sensational — because the company was non-Japanese?

Schindler himself denied that the company was treated badly because it was a foreign firm, saying it received conflicting advice from its Japanese lawyers.

“Even some Japanese counselors told us, ‘Don’t say anything for the time being,’ ” he said.

Schindler, whose group gained a foothold in the Japanese market by buying an existing elevator-maker, is well aware that even if a society’s expectations far exceed what a foreign company is ready to offer, it falls to the company — not its host society — to bridge that gap. However, he has made it clear he wished Japanese society was a little more lenient, given that the company did not “have the same (societal) knowhow” as Japanese companies.

“When you climb a new mountain, you are responsible for knowing the way; the mountain is not responsible for you,” Schindler said. “And in this case, of course, the mountain is Japan and it has ears and eyes, and in a globalized environment one could expect that it would be slightly less . . . demanding, or maybe a little bit more tolerant, as people from far away . . . do not necessarily have the same knowhow as they should have.”

Such musings are supported by Mark D. West, a professor of law at University of Michigan Law School, whose book, titled “Secrets, Sex and Spectacle,” was published in 2006. He said in an e-mail interview that scandals involving consumer goods get “far greater attention in Japan than in the U.S., regardless of whether the scandalized firm is foreign or domestic.”

“Japan is said to have wonderful quality-control — but as we have seen time and time again, the system fails,” he maintains. “Japan’s famed quality- control is a myth, but like any good myth, many people believe it. When the myth is shattered, scandal results.”

He also attributes the relentless prominence of corporate scandal coverage in Japan to its media structure, in which news is largely national. Additionally, he cites the fact that, “because the mainstream news is so controlled, scandalous stories are exploited in the tabloids and the wide shows.”

Nobuo Gohara, a former public prosecutor who is now a professor of law at Toin University of Yokohama, served on an independent advisory board convened by Schindler from December 2006 to June 2007.

He told the Hong Kong symposium that, technically speaking, the Schindler company broke no laws, but he believes police investigators have not actually closed the case out of concern for the bereaved family’s feelings. Investigations against Schindler Elevator K.K. and SEC Elevator are ongoing — 2 1/2 years after the tragedy.

Meanwhile, further compounding the pressure on scandal-tainted companies in Japan, Gohara explained, is the media’s tendency to blindly follow prosecutors’ scenarios. He noted that the media coverage of Schindler suddenly turned negative the moment investigators raided the company’s office.

In addition, Gohara pointed to Japan’s unique elevator standards, which stipulate that only one brake needs to be attached to elevators going up.

“A number of factors became intertwined with each other and led to the calamity. But because Japanese society has no system of objectifying the accident, all the blame fell on Schindler’s shoulders,” he maintained.

So what lessons can firms learn from this and the countless other scandals?

Obviously, mastering the apology ritual alone is not enough, Gohara said, noting that companies need to watch out for the diverse, ever-changing set of values that society expects from corporations.

University of Michigan’s Professor West, on the other hand, puts it more bluntly: “Do not fall prey to the myth that an apology and a deep bow will end the scandal,” he said.

“Most Japanese firms do not end scandals with an apology and a bow. This is part of the ritual — but the ritual also often includes out-of-court settlements with injured parties. We see fewer lawsuits in Japan than in many other countries, but that might simply be because settlement amounts are closely aligned with the damages that a court would award.”