Toshiba debacle restates case for tone at the top

Jul 27, 2015
<p>Companies are reducing ethics and compliance training for senior executives and board members at their own risk</p>

Toshiba's tragic fall from grace is a cautionary tale of which all public companies should take note. It also serves as the latest warning about corporate cultures that set aggressive performance targets without also stressing the obligation for ethical conduct.



The overstatement of earnings by $1.2 billion, playing out over six years, culminated in an unprecedented accounting scandal for the 140-year-old conglomerate. A committee of independent experts hired by Toshiba to look into its accounting practices, citing implicit pressure that induced managers to misreport earnings from their divisions, ‘accused Toshiba of breeding a corporate culture where it is impossible to go against one's bosses' wishes’ , as reported by the New York Times earlier this week. The committee also reported finding ‘systematic involvement, including by top management’, aimed at intentionally inflating profits.

The Toshiba case also attests to the need for senior executives and board members to take ethics and compliance training as seriously as anybody else. The results of a recent survey by NAVEX Global show a 25 percent decline (from nearly 5.9 to 4.4 hours) from last year in ethics and compliance training time provided by companies to their senior leaders and a one- to two-hour decline in training offered to board members.This occurred even as training for non-management employees rose by more than 16 percent from last year.



‘Senior leaders and members of the board are difficult training targets. They're often very busy. They're often very vocal about not wanting to do training or not believing they need training,’ says Ingrid Fredeen, vice president of online learning content at NAVEX. ‘But like rank-and-file employees, they absolutely need that context. They need to understand what the risks are and they need that refresher training to ensure they’re staying on top of things.’



She sees the drop in training hours as ‘very concerning’ and notes that it undermines the ability of senior managers to set the best example for the staff as a whole. ‘It's a real big problem if your senior leaders aren't taking the training or don't think it's worthwhile. If you're looking for tone at the top, the rules apply to everyone. Everyone needs to be trained on the risks and have a good understanding of them, so leaving those audiences without does damage on multiple fronts to your ethics and compliance program.’



Toshiba's scandal has prompted the resignations of CEO Hisao Tanaka and seven of his fellow directors – half of the board’s 16 members, including two former CEOs. That's one thing to be said for Japan's legendary culture of shame and honor, which in former times typically spurred the far worse spectacle of ritual suicide for loss of honor. A stark contrast with the US, where directors have little shame and, in many cases, not enough respect for investors and other stakeholders to step down after losing their confidence in a proxy vote.

The notion that inflated earnings of the magnitude seen at Toshiba could endure for so long without being discovered also underlines the need for independent board members who know enough and aren’t afraid to ask tough questions. Two of Toshiba's four outside directors had ‘little to no experience overseeing commercial enterprises,’ according to the Times. That's something that boards at US firms still need more prodding to improve.

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