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.

The profit-padding practices at Toshiba were overlooked for years as its in-house audit committee, put in place as part of the governance reforms and led by its vice president in charge of finance affairs, failed to function properly. The irregular accounting, in which the firm’s earnings in such divisions as semiconductors and infrastructure were padded and costs discounted under pressure from top executives to meet inflated profit targets, was kept from the outsiders’ view until it was exposed in a whistleblower report to the Securities and Exchange Surveillance Commission. Oftentimes, whether a corporate governance mechanism is properly functioning in a company is only known when some problems are exposed at the firm. It seems evident that corporate governance reforms at Toshiba lacked substance.

Toshiba’s latest crisis — the massive losses at Westinghouse Electric Co., its nuclear energy unit in the United States, that threw the group’s debts in excess of assets and its continued listing on the stock exchange in doubt — meanwhile points to what appear to be a common challenge in the Japanese firms’ global operations — the difficulty of understanding the management realities of their overseas units. Japan Post Holdings Co. incurred its first group net loss since it was privatized in 2007 in the business year to last March after it booked a ¥400 billion special loss over its troubled Australian subsidiary Toll Holdings Ltd., which it bought two years ago as part of its efforts to expand overseas. Last month, Fujifilm Holdings Corp. said it has found accounting irregularities, including inflated sales reports, at its Australian and New Zealand units, which forced the group to delay its fiscal 2016 earnings report through the end of this month. These cases highlight the tough challenge of Japanese companies properly assessing and managing the risks involved in the overseas operations of their increasingly globalized and complicated structures.

Installing corporate governance mechanisms only give companies the tools to check for wrongdoing and management lapses. For these tools to be effective, company management and workers need to learn from the examples of others before them that erred, including what went wrong and how.

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