Published: 28 Nov 2017

Estelle Clark, executive director for policy at CQI, comments on the Japanese metal company’s fake quality checks’ data scandal and its repercussions.

At the time of writing, in the developing Kobe Steel crisis, it is impossible to accurately assess; to paraphrase one of the most famous lines from Watergate, “what the board knew and when the board knew it.”

What is clear is that there has been chronic institutional failure that has left one of Japan’s largest companies on its knees, with enormous damage to its corporate reputation, a collapsed share price and the potential for decades of costly litigation.

The issue, if not currently the blame, at Kobe is clear. Falsified quality inspection data for aluminium, copper and steel parts has been supplied to a range of industries across the world, including aircraft manufacturers, carmakers and the construction industry. Estimates suggest that the falsification of inspection data has been ongoing for around 10 years.

The board will take ultimate responsibility, and clearly has questions to answer about what is going on in its own organisation, but I suspect that something much deeper is afoot here.

It is one of the ironies of the governance debate that, at times of crisis, questions around corporate governance at board level are quickly aired. Too often however the key issue is operational, with a key factor being company culture. At Kobe Steel the falsification of data appears to have become the norm, an accepted practice that has been neither questioned nor reported. That is a cultural issue, which falls under operational governance.

The crisis highlights an abundance of questions that the boards of all companies need to ask themselves about their own cultures.

What measures can the board introduce to ensure that communication is two-way and not just a top-down approach?

Is the board only getting information from official channels and what risk does that pose?

What unofficial channels can non-executive directors, in particular, tap into to get a more rounded view of the company’s operations?

Are whistle-blowing employees treated as nuisance troublemakers or, as they should be, an early warning system and valuable part of the feedback loop?

Crucially, can whistle-blowers bring matters to senior managers and the board without fear of losing their job or being denied promotion?

These questions can only be answered if the board of directors is willing to widen its own remit, outside of the normal confines, and take a more holistic view of their companies and their own responsibilities. The bridge between the people who set strategy and those who turn it into reality should be prioritised. The board sits at the apex of an organisation, all-too-often removed from day-to-day operations, but the answers to these questions will be found in the body of the organisation not in the audit and remuneration committee.

A message to Japan

We must also ask ourselves, as a nation, some difficult questions. What is it about our business culture that has allowed a series of corporate crises at Takata, Nissan, Toshiba, Mitsubishi, and now Kobe to sully the reputation of most high-profile companies? We must ask ourselves whether our employees are willing to tell the truth to power or whether instead we have developed a corporate culture of cover-up and mendacity. This process will be painful, but only if we ask these questions can we come out with a restored sense of pride in our business culture and begin the process of rebuilding our reputation.