The Toshiba accounting scandal – A major milestone in Japan’s corporate governance journey

Indeed, the report found that Toshiba’s management had colluded with Japan’s trade ministry to block foreign shareholders from gaining influence at last year’s annual general meeting.

Likewise, it also emerged that a huge quantity of results in the AGM had not been counted.

At first glance, the revelation of a major voting irregularity implicating a division of the government hardly points to a renovated culture of squeaky-clean corporate governance in Japan.

However, what we do see as a major signal of progress is the country’s reaction to the scandal and the resultant consequences that have played out in recent weeks.

First, the story—as expected—has attracted major attention from the Western press, with regular coverage in high-profile media.

But what is most encouraging is that the story has also been covered, and the actions of Toshiba’s executives, widely criticized in the domestic press.

Likewise, in the wake of the report’s release, we have not only seen four senior executives be forced out of the Toshiba but the company’s chairman, Osamu Nagayama, voted out in a shareholder revolt amid the launch of a major strategic review.

The significance here becomes particularly clear when you compare the reaction to the major Olympus accounting scandal of 2011.

Despite being labelled as “one of the biggest and longest-running loss-hiding arrangements in Japanese corporate history”, the issue was largely swept under the rug by Japan’s press.

Likewise, although most eventually resigned, a lack of reaction by Olympus’ Japanese investors meant top management in Japan were able to hold onto their jobs long after the controversy broke.

Japan’s coverage and wide condemnation of the Toshiba scandal coupled with the fact that its senior board members are being held to account so quickly and so significantly sends out a clear message today: many foreign and domestic investors in Japanese companies alike will no longer tolerate shareholder oppression and practices that fall short of the highest possible standards.

A bright future

In this sense, then, the Toshiba scandal could be viewed as a major milestone in Japan’s corporate governance journey.

Indeed, now a precedent has been set for the repercussions of malfeasance, the risk of emboldened activist shareholders—both domestic and foreign—could force more and more of the country’s biggest companies to move away from the ways of “old Japan” and into those of the new economy.

This is highly encouraging for investors in Japan as a whole.

After all, with dividends and share buybacks in the country already improving at a record rate (in fact, Japan enjoyed its fifth consecutive year of world-beating dividend growth in 2019).

The added prospect of a widespread clean-up of bad corporate behaviour in reaction to increased accountability paints a very attractive picture for the future.

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