Corporate governance becomes the buzzword whenever big companies are mired in scandal, wrongdoing or crisis of management. But the examples set by the scandal-hit firms indicate that installing corporate governance mechanism alone don't prevent those problems from happening. Management at businesses across Japan need to learn from these cases so as not to repeat the same mistakes.
The administration of Prime Minister Shinzo Abe has promoted corporate governance reforms as a key part of its growth strategy, hoping that improved governance would enhance companies' bottom lines and lure more foreign investors. The Tokyo Stock Exchange in 2015 introduced a corporate governance code that calls on listed firms to take a series of steps to enhance transparency and objectivity in management, such as by appointing at least two outside board directors and promoting information disclosure in English. According to the TSE, nearly 20 percent of listed companies now follow all 73 principles required in the code, while 65 percent have implemented 90 percent of them. More than 80 percent of firms on the TSE's first section are now said to have two or more independent outside directors. The result suggests that corporate governance reforms are making progress — at least in form.
This however does not guarantee that the reforms are indeed serving their intended functions. Toshiba Corp., the embattled electronics and machinery giant, is often cited as a case in point. Toshiba had long been deemed an excellent performer in terms of corporate governance, having actively introduced an in-house systems for checking its management — until its massive profit-padding scandal surfaced in 2015. The company had four outside directors on its board — with their number increased to seven to account for a majority of the 11-member board after the scandal came to light. But the presence of such directors, who were supposed to monitor the company's management from their positions independent of its inner workings, played no role in preventing the wrongful accounting, in which three successive Toshiba presidents resigned to take the blame for their involvement in padding the firm's profits by hundreds of billions of yen since the late 2000s.