Loyalty - Virtue and Risk

Cultural differences around the world represent substantial organisational risks with severe reputational risk implications.   The Toshiba accounting scandal provides yet another example of just how badly things can go wrong even in an advanced economy.  These risks can only be addressed by leaders of multinationals if their scale and significance are first understood.

In his introduction to the Official Report to the National Diet of Japan into the Fukashima nuclear accident,  Kiyoshi Kurokawa, a former President of the Science Council of Japan sorrowfully wrote:

"How could such an accident occur in Japan, a nation that takes such great pride in its global reputation for excellence in engineering and technology? This Commission believes the Japanese people – and the global community – deserve a full, honest and transparent answer to this question.

Our report catalogues a multitude of errors and wilful negligence that left the Fukushima plant unprepared for the events of March 11. And it examines serious deficiencies in the response to the accident by TEPCO, regulators and the government.

For all the extensive detail it provides, what this report cannot fully convey – especially to a global audience – is the mindset that supported the negligence behind this disaster.

What must be admitted – very painfully – is that this was a disaster “Made in Japan.” Its fundamental causes are to be found in the ingrained conventions of Japanese culture: our reflexive obedience; our reluctance to question authority; our devotion to ‘sticking with the program’; our groupism (sic); and our insularity."

Accounting scandals are found worldwide, but Toshiba provides the latest in a series of Japanese financial scandals that seem to stem from Japanese culture.  About $1billion of losses have been hidden by overstating profits over many years.  The report of the Investigation Commission is not yet available in English but Toshiba website states that nine directors, including the Chief Executive have resigned, and newspapers carry pictures of those resigning bowing long and deeply in shame. The report apparently spells out “systematic” and “deliberate” attempts to hide losses by inflating profit figures.

As to why, it describes a culture that made employees afraid to contradict their leaders when they demanded unrealistic earnings targets.  Within Toshiba, there was apparently a corporate culture in which one could not go against the wishes of superiors.  Loyalty can be a virtue but not if it becomes blind to reality.  In this case loyalty meant cooking the books. The report apparently states that both Mr Tanaka and Norio Sasaki,  knew that profits were being over-stated but took no action to end the improper accounting.  This is despite the Toshiba Standards of Conduct which states: 

"Directors and Employees shall:

1. maintain proper and timely accounts in accordance with generally accepted accounting principles;
2. promote the prompt release of accurate accounts; and
3. endeavour to maintain and improve the accounting management system, and establish and implement internal control procedures for financial reporting."

The problem of speaking truth to power is widespread and driven by a mixture of incentives and culture, but the cultural dimension seems particularly deeply rooted in Japan. Why?  I am no specialist in Japanese culture but in reading the Analects of Confucius recently I came across the following, written in about 500 to 400 BC:

"The Master said, in serving his father and mother a man may gently remonstrate with them. But if he sees that he has failed to change their opinion, he should resume his attitude of deference and not thwart them; may feel discouraged but not resentful." (IV.20)

"The Master took four subjects for his teacing: culture, conduct of affairs, loyalty to superiors and the keeping of promises." (VII.24)

 "The Master said, first and foremost be faithful to your superiors..." (XI.24)

A Japanese travel guide says:

"According to early Japanese writings, [Confucianism] was introduced to Japan via Korea in the year 285 AD. Some of the most important Confucian principles are humanity, loyalty, morality and consideration on an individual and political level.

This may explain why loyalty is given special emphasis in Japanese society.

But as Andrew Hill points out in a post subsequent to the original publication of this post, it is important that boards everywhere do not think 'it couldn't happen here'.  A long string of European and US corporate scandals demonstrate that Confucianist loyalty is not the only route to board-led failure.  Complacency is deadly everywhere.


Anthony Fitzsimmons
Reputability LLP
London

Anthony Fitzsimmons is Chairman of Reputability LLP and, with the late Derek Atkins, author of “Rethinking Reputational Risk: How to Manage the Risks that can Ruin Your Business, Your Reputation and You”