Toshiba Scandal - Not Being So Judgmental of the Company or Japan - Case Study Example

Introduction

Globally, laws and guidelines are established by policy and decision makers to keep people safe, maintain organization and prevent conflicts from arising. However, no matter how many rules and regulations are formulated, there are still ‘grey areas’ that are not covered. A lot of organizations go a step further to create ethical guidelines for their employees. These guidelines stipulate what is right as well as what is wrong. Nevertheless, in an international situation, implementation of the set guidelines it is not as easy as it seems. The advent of multinational organizations has cumulatively brought great anxiety and concern especially on issues concerning ethics of businesses in a global environment.

Many international companies such as Apple Incorporated, Nestle, or Coca Cola, just to name a few, that have their branches in foreign countries have a hard time understanding and complying with the numerous national laws, management of their employees located in their foreign headquarters, as well as building and maintaining relationships with their suppliers, partners and customers in the multiple jurisdictions. This poses a great challenge to them because they find it hard to develop mutual business values as well as appreciating a comprehensive philosophy. In general, international firms are faced with three key challenges: the ability to adopt principles of a virtuous conduct in the different headquarters; the ability to appoint an all-inclusive labour force that is able to comprehend and espouse the international company’s business values; and the ability to meet the grid of multifaceted authorized and compliance commitments that are existent in the countries that their branches are located. This paper will delve to analyse the unethical practices that the management at Toshiba had undertaken which resulted to one of the biggest scandals that has dogged the company. Additionally, the paper will delve to analyse the principles of corporate governance that are necessary for any organisation and further will analyse how the management of Toshiba had done little to maintain quality corporate governance.

Case Study

Toshiba, a Japanese company that was started in 1875, is globally known for its state-of-the-art products such as home appliances, electronics, medical equipment and numerous infrastructures. It managed to develop during the period after the Japanese war in 1950, which experienced increase in the demand for technological products. Toshiba was also able to find new markets beyond the borders thereby expanding the market. Since the 1950’s Toshiba has been able to find new market and expand its market size (Jennings, 2015). It has expanded to become an internationally recognized organization, providing products to customers across the globe. By the year 2015, the organization was able to establish new markets, which involved serve diverse products with customers ranging from industries and individual consumers. In the year 2015, this company reported a 63 billion dollars in total not sales.

It has it’s headquarter in Tokyo and to date Toshiba has managed to employ over two hundred thousand globally. Toshiba was the ranked as the fifth-largest personal computer purveyor and the fourth-biggest global manufacturer of semiconductors in the year 2010, based on the profits it had made. The month of March, 2015 saw a rise in sales of Toshiba’s products. The company had made sales of over $63 billion universally. Four months down the line, the CEO Hisao Tanaka, together with eight other senior officials, announced their resignation that was brought about by an accounting scandal caused by overstating of profits by the various company units. The overstated profits were in the amount of $1.2 billion. Investigators discovered undeviating evidence of incongruous bookkeeping practices and exaggerated earnings in several of the Company’s business units comprising; visual merchandises unit, personal computer unit and semi –conductor’s sales unit. It is important to note that an overstatement of profits has a direct effect on the profits. Therefore, in this case the company’s profits were overstated.

Indecorous accounting is believed to have occurred over a period of seven years, embroiling previous Chief Executive Officers, Atsushi Nishida and Norio Sasaki together with Tanaka himself. The indecorous practices began in 2008 after the worldwide recession. Reports by investigators reveal that the company employees were never openly instructed by any of the Chief Executive Officers to cook the books. Instead, the incongruous bookkeeping practices were brought about by the immense pressure that came precisely before the termination of Toshiba’s quarter or financial year (Jennings, 2015). The management expected that the already developed corporate culture would bring about the expected results. The hard-pressed employees then saw it fit to adjourn the company’s losses or even accelerate sales. The handing down of such strict profit targets to the various business units of Toshiba came about with the insinuation that failure and disappointment would neither be accepted nor tolerated. To add insult to injury, the top management added quarterly challenges that similarly required to be achieved. It therefore became evident to the subordinates that the only way to realize the set targets was via the use of unscrupulous and unethical accounting practices. Therefore, the unethical bookkeeping practices that were related to playing down of costs applied in long-standing projects as well as inflation of profits was caused by the nonexistence of in-house controls and well established ethical culture.

The top management gave no explicit instructions to the underlings on how to achieve the expected profit targets. Instead, there seemed to be a belief that the Japanese business culture of compliance and allegiance that motivated people in the bottom hierarchy to do whatever it takes to achieve the set targets would be enough to drive Toshiba’s employees to achieve Toshiba’s set targets. These unrealistic and yet bellicose goals fashioned a nasty cycle in the various units of Toshiba’s company. These units tactfully doctored the accounts to meet the set profit targets due to them dreading cut backs. Manipulation of the books led the top management to believe that the targets sets were being ‘met’; therefore, tougher goals were set for the ensuing years

Doctoring of the accounts was very complex that external auditors could not discover them. The employees used intricate skills to treat the internal accounts creating a situation where investigators found it problematic to acquire corroborative evidence. Additionally, auditors were intentionally sent on a wild goose chase and deluded on requesting for facts and figures from Toshiba’s employees (Jennings, 2015). The information given portrayed a different picture from the actual occurrences. The erroneous bookkeeping management linked to extended projects used assessment methods, for instance the ‘percentage of completion method’, that consists of approximations founded on internal data manipulated by a professional with high-quality knowledge. These procedures created problems for outside auditors to self-reliantly assess the appropriateness of the approximations. Assessments were therefore, consequently premised on the actual running of interior controls intended to safeguard suitable approximations are used.

In summation, Toshiba’s business culture, which necessitated that subordinates comply with the demands of the superiors, was a major factor in facilitating the emergence and successful growth of accounts manipulation. The business culture was employed on the different levels of management therefore it had to be skilfully hidden. Additionally, the frail corporate governance and ailing operating structure of in-house controls in the various units of Toshiba Corporation, also aided the complex and hard to discover account doctoring. The in-house controls of the various departments and branches failed to function correctly and therefore could not pinpoint and discontinue the incongruous conduct. It is important to point out that this case provides a representation of the many fraudulent and unethical cases that occur in many organisations that cause them to collapse. The actions of the management also present a representation of the many top managers that act in their own selfish ways by corrupting and doctoring the financial statements.

Analysis of the case study in relation to cooperate governance

Corporate governance is an essential element in all organisations. It determines the success of any organisation. It is important to note that most successful organisation have proper corporate governance cultures which is as a result of having very competent managers and leaders. Some of this organisations includes Apple which over the past three decades has managed to come through the ranks to become one of the most successful technological companies in the world. There are various principles which are usually set forth to ensure that a company maintains a good corporate governance culture. Some of these principles are usually meant and intended to help the policy makers to improve and additionally evaluate the regulatory, legal and subsequently the institutional framework for corporate governance. Based on the case study is certainly important to point out that Toshiba had failed over the seven years of the scandal to maintain a good corporate governance as those that were required to uphold the principles were the same ones that were involved in the scandal. The culture of fraud in the company was so prevalent that it was passed from one CEO to another. The top management certainly not only failed the company but it also resulted to the company loosing substantially to its competitors. The adoption of the principles of corporate governance assists in ensuring financial stability which was not achieved based on the Toshiba case study, assists in ensuring economic efficiency and finally assist in ensuring there is sustainable growth. This can only be achieved through the provision of the necessary stakeholders, executives and board members with the required incentives to conduct their roles through the various frameworks of checks and balances that exist.

Despite the fact at the time Toshiba was in the process of trying to improve its corporate governance strategies, the measures instituted certainly lacked the teeth and were they just to show the shareholders that they were practice (Jennings, 2015). They were there for the show and no effect. The shareholders plight in this case was not in consideration. Managers are required always to conduct the operations of the company in regard to the shareholders wants and not in line with their desires. However, in Toshiba’s case this was vice versa as the managers of the company run the company with the desire to maximise their wants. At the end of it all it eroded the company’ s good reputation which had been gained over the past 140 years. Their actions certainly impacted the shareholder’s wealth as the company subsequently incurred huge loses. The subordinate staff in this case didn’t have any other option but to comply to the precedence set by the management. The subordinate became unethical due to the lack of an option as by them coming out and revealing the dealings of the company would have impacted negatively on their jobs. It is important to highlight that governance in any form or shape is subsequently ineffective if those at the helm of the company fail to be committed to implement the rules that have been set forth. Therefore, if employees and directors are subservient to the top management or those that make the final decision then there exists nothing that can check or audit corporate malfeasance.

The principles of corporate governance have a huge impact in securing investor confidence, capital allocation and formation. Additionally, the quality of corporate governance affects the extent to which a company can be able to access capital for growth of the company. Investors are usually attracted to those companies that generate profits and those companies that have good leadership. If a company is dogged with allegations and scandals such as the one that affected Toshiba, then there is limited likelihood that the company will get to attract investors. By the company being involved in the scandal it painted a bad image for the company to other stakeholders and therefore based on this many companies and partners distant themselves from themselves from the company. It is important to highlight that it takes a lot for a company to try to gain back the investor confidence. In the case of Toshiba, the company by restructuring its management was a way of trying to assure the investors of a turn around. This assures the investors that their investments in the company are secure therefore they would yield a profit for their investments. The principles of corporate governance are supposed to be accurate easy to interpret to be accessed by the communities on a global platform. The principles suggest that the government, and private sector determine the quality of the strategies employed by the governing body. This is in order to come up with suggestions, which can be employed based on different countries legal, cultural or economic factors.

It is important to note that the shareholder’s participation in the management of the company influences the corporate governance quality. Their involvement is through the exercise of their voting rights. The management influences their decisions by appointing board directors that they feel would address their issues. By the company increasing the number of shareholders it was a step in the right direction as it ensured there was an increase in the oversight of the management that would take up the management of the organisation. However, this are some reactive measures which should have been implemented before. Most successful organisations have oversight committees which are independent to guarantee that the activities of the management are continuously monitored to ensure that such scandals are detected in advance. However, it is important to point out that it is up to the management team to ensure that there is complete revival of the corporate governance. The outside directors will only play an oversight authority but the real work lies with the company employees and officers who need to take up a personal stake in the drive back to recovery.

Conclusion

The above findings highlighted that the management of Toshiba were unethical in their operations as they altered the books of accounts to cover up the real activities that they were undertaking. Their actions resulted in the company losing a lot to the extent that it dented the company image. The figures presented by the financial records altered the various stakeholder’s judgement that the company was actually performing well which altered the decisions they took. Toshiba decades of good company image had been dented and therefore the company needed to come up with ways of gaining their image. It is important to note that it takes a lot for a company to restore an image when compared to building an image. The company lost investors subsequently. The company had to revamp its management and additionally had to increase the number of directors who were to undertake the oversight authority to ensure that such scandals never occurred in the future. Based on the case study it is clear that the management had failed in their corporate governance due to the scandals they undertook. The paper highlighted that the quality of cooperate governance determines the success of an organisation. In this case Toshiba’s corporate governance had not only failed the shareholders but also all the stakeholders. As based on the scandal, the company’s share prices fell tremendously in which the shareholder’s wealth wasn’t maximised.