Scandal-muddied Toshiba Corporation recently announced it was terminating its long-time relationship with Ernst & Young ShinNihon, its rubber-stamping auditor and will hire PricewatherhouseCoopers Arata to replace it.
That’s a good if belated step to take if Toshiba is serious about stepping back onto the straight and narrow path that has served it so well for most of its 140-year history. Applause too for management’s attempts to implement a stronger governance scheme.
But these efforts alone are not going to bring about the necessary fundamental changes in management mind-set and corporate culture that enabled Toshiba and ShinNihon to conceal losses of $1.8 billion over a six-year period in the first place.
Financial scandals happen periodically overseas too, of course—Enron and Lehman Brothers jump to mind. Nevertheless, the Toshiba scandal has a peculiarly Japanese hue about it that leaves awkward questions unanswered and a dark cloud hanging over the company that won’t be easily dispelled.
How could such red-hot book-cooking have gone on for so long without someone seeing the smoke and flames and yelling fire?
How could the financial skullduggery be applied across a range of business units from semiconductors and notebook PCs to major infrastructure and construction projects—that must have required the knowledge of partner companies—be kept quiet for so long?
How was ShinNihon able to give Toshiba a clean bill of financial health year after year after year?
And while these questions go unanswered and their implications ignored, how can we accept new CEO Masashi Muromachi’s declaration that reforming the company’s governance structure will help prevent such fraudulent activities taking place again?
One factor that has played a role in all these issues is a relationship-driven business culture that by its nature can breed and facilitate collusion. The same culture also inculcates and demands staff obedience and loyalty to the company and to the kamisamma or “god” who sits at the top: He who must be obeyed.
In such an environment, work becomes a way of life, the organization a second family. And with the culture demanding harmony and conformity at all costs, it is no easy matter to shout foul when you see something shady taking place.
Given Toshiba’s accounting fraud was instigated and driven by its top leadership, it is hard to see how merely revising governance regulations is going to amend such deep-rooted elements of its corporate makeup. Compliance-based governance alone can all too easily create a culture that accepts what is legal as the standard, not what is the right thing to do.
To regain trust, Toshiba needs to draft an integrity-based code of ethics. Such a code would certainly include governance rules prohibiting illegal behavior, but go a step further and promote moral behavior. This can be done by establishing a set of corporate values that openly support honesty and integrity, while stressing that all staff, management and especially the kamisama at the top, are accountable for their actions and to each other.
This first appared on my Forbes blog site: http://www.forbes.com/sites/jboyd