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

by | Jul 22, 2021

By Richard Aston, Portfolio Manager of the CC Japan Income & Growth Trust

Efforts to improve corporate governance in Japan have ramped up significantly in recent years.

Things kicked off in earnest under former Prime Minister Shinzo Abe back in 2014, when he made the issue a key tenet of his “Abenomics” economic revival programme.

Specifically, he introduced the nation’s first stewardship code, which evolved throughout his tenure to address a wide variety of issues surrounding the way in which its companies are managed.

From tightening rules around cross-shareholding and increasing transparency and improving press freedom. To adding diversity and outside influence to boards and overhauling out-of-date corporate culture…

Abe’s work set the stage for a new era of corporate responsibility in Japan that distances it from the lacklustre standards for which it has long been notorious.

The improvements have only continued since Abe stepped down in August last year, too.

For one thing, new Prime Minister Yoshihide Suga has pledged to pick up the drive to rehaul corporate Japan where his predecessor left off, with another revision to the country’s stewardship code incoming intended to increase attention to sustainability and ESG matters and promote diversity among Japan’s listed companies.

Alongside this, the Tokyo Stock Exchange is also finalising its biggest ever reorganisation, with tighter listing criteria, which hopefully ensures firms boost their transparency, profitability, and liquidity.

Yet, questions still remain around the long-term direction of corporate governance in Japan for many, whose vision of the nation remains tinted by its past failures.

The concerns are not unjustified.

After all, companies from “old Japan” continue to resist change, and the nation was recently voted fifth in a survey ranking Asian countries by their corporate standards.

Yet, the reality is, this was never going to be an overnight fix—transforming a corporate culture ingrained throughout history is very much a marathon rather than a sprint.

For us, the critical point is that a positive direction of travel has now been established in this area.

We believe there is no better example of this than the way in which Japan has reacted to the recent accounting scandal that hit its electronics conglomerate, Toshiba.

Holding Toshiba to account

For a company that was once one of the 20 most valuable in the world, Toshiba’s recent history has been chequered.

Historical accounting scandals and the collapse of its US nuclear business led to the firm’s demotion from the main Tokyo Stock Exchange in 2017.

It was then forced to raise $5.4 billion in an attempt to prop itself up, marking the entrance of a stream of new overseas activist investors looking to increase accountability and profitability.

This is what ultimately set the scene for its latest problems.

Toshiba appeared to comply with the desires of these new investors—and, by proxy, the government—and matters looked to be in hand.

However, an investigation demanded by shareholders last year—much resisted by Toshiba itself—recently revealed that a layer of corporate misconduct continued to exist.

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