The Financial Services Agency has ordered the Mizuho Financial Group, whose computer system crashed spectacularly on the occasion of its integration last April, to improve its internal management setup so as to prevent any recurrence of the bungle. Mizuho itself has decided to cut the pay of all of its 107 directors as a punishment. This has confirmed our suspicion that although there were certainly technical reasons for the glitch, it was in fact a man-made disaster. Human misjudgments and poor understanding exacerbated the problem and resulted in huge inconvenience to customers.

The causes of the error can be summarized as (1) a delay in management’s decision-making relating to the computer system; (2) inadequate preparations, such as preliminary tests that should have been considered the minimum necessary; (3) a failure to relay important negative information to the top; and (4) a lack of recognition of the risks involved in system integration.

Among these causes, the third factor is the most important. Even though people understood at the test stage that the system was not functioning properly, the negative information remained in the development section and was not transmitted to the top management. Why on earth did the people on the floor not report such important information to the top? Mr. Terunobu Maeda, president of Mizuho Holdings Inc. and chief executive officer of the Mizuho Financial Group, recognized that there was an “atmosphere” in the group that made people hesitant to report negative information to the top. The point that should be severely criticized here is that this atmosphere and ethos in the group, which made it so difficult for employees to directly relay awkward information to their bosses, was ignored by management.

There are two starting points in the management of an organization that lead to completely different atmospheres and results. In the first, you begin with the understanding that people invariably make mistakes, whatever the circumstances. In the second, you start with the battle cry that there must be no errors, whatever the circumstances. The former accepts that mistakes and errors are inevitable and at all times thinks in terms of keeping botches to a minimum. This galvanizes the organization because it encourages individuals to boldly tackle new challenges and issues once thought impossible, even at the expense making of a few mistakes. It is a method based on merit, evaluating results and positive attitudes.

The latter, on the contrary, is a method based on demerit, assuming that things can be done and knocking off points for mistakes and errors. Under this approach, people do only what they are told and grow smaller and smaller as they try as hard as possible not to make any mistakes. Inevitably they become dispirited and view challenges negatively. People conceal any untoward information and put a lid on the truth. As a result, the organization becomes infested with recriminations and a shirking of responsibility. This atmosphere was especially pernicious in Mizuho, a merger of three banks, because employees apparently still felt a strong sense of loyalty to their former banks.

Unfortunately, it is this latter ethos that is the mainstream in Japanese companies. As a stream of recent examples shows, this ethos putrefies and destroys companies: the large banks that went bankrupt after getting carried away in the bubble period; the food-product company that was forced to disband after a scandal involving the mislabeling of beef; the automaker that has plunged into the red after being shunned by consumers following its attempt to conceal defective cars; and so on.

The fundamental cause of Mizuho’s problem this time, and also of the problem of nonperforming loans held by banks, boils down to the structure and ethos of Japan’s corporate society. So, however much the pay of directors is cut or managers are replaced by new faces, the stream of blunders and scandals that rock the foundations of Japanese companies will only continue unless there is also a change of attitude and a reform of organizational management, from top to bottom.

The problem is not limited to Japan’s corporate world, either. It also holds true for the bureaucracy and the political circles of Nagata-cho. That is why this country writhes in agony today. And remember how, not so many decades ago, the Imperial Army and Navy kept the covers on negative information and, riding on a wave of temporary fanaticism, embarked on arbitrary action that led the whole Japanese nation into the fires of war? We have not fully learned the lessons of that huge blunder, either.

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