The now very public overstatement of profits at Toshiba (approximately US$1.22bn over six years) has led to the downfall of the chief executive, Mr Hisao Tanaka (below), and seven other senior managers, all of whom were also board directors. The share price has taken a 25 per cent hit and the company's reputation is in tatters. What a mess. At least there is a modicum of accountability and remorse, something sadly lacking in many other cases including HSBC and Lombard Finance.
Thankfully, people have begun thinking about what needs to change. So far, the response has followed a predictable course: The possibility of appointing independent directors to replace the disgraced directors has been mooted. Will this structural response be enough to fix the problem? Maybe, but I'm not convinced. Compliance responses rarely lead to sustainable change. (The compelling case is Sarbanes–Oxley: created post-Enron, it did little to prevent the GFC.)
The problem seems to be more fundamental. The contemporary conception of corporate governance seems to be flawed. Consider these statements, which highlight the problem:
The Japanese finance minister, Taro Aso, said: “If [Japan] fails to implement appropriate corporate governance, it could lose the market’s trust. It’s very regrettable.” (Guardian)
The Toshiba scandal has raised questions about efforts by the Japanese government to improve corporate governance and culture. (NY Times)
These seemingly innocuous statements are telling: Fix the compliance and the problem will be fixed. Yet history (Olympus, HSBC, FIFA, amongst many others) shows otherwise. Neither the 'monitor and comply' conception of corporate governance, nor the 'advise and monitor' variant espoused by many corporate governance codes and directors' institutes have achieved the desired outcomes. Yet, many boards dogmatically pursue such conceptions.
How many more failures will it take to realise that additional layers of regulation and compliance-oriented boards that operate as policemen don't actually add value? How many more failures will it take to acknowledge that a new understanding of corporate governance and appropriate board practice might be appropriate? Emerging research seems to suggest that when boards adopt a strategic orientation, and corporate governance is re-conceived as a value-creating mechanism, increased performance is not only possible—it is potentially sustainable. Please get in touch if you'd like to know more.
Thoughts on corporate governance, strategy and effective board practice; our place in the world; and, other things that catch my attention.