The Toshiba Corporate Governance Scandal: How Can Japanese Corporate Governance be Fixed? Commentary
The Toshiba Corporate Governance Scandal: How Can Japanese Corporate Governance be Fixed?
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JURIST Guest Columnist Bruce Aronson of Hitotsubashi University’s Graduate School of International Corporate Strategy discusses the controversy surrounding Japanese corporate governance practices…

A third-party investigative report released on July 20, 2015, found that Toshiba Corporation had padded its profits by $1.2 billion (1.5 billion yen) over the past six years. The current and two past presidents and half of the board of directors have resigned from their positions. Once again we are faced with the questions of how good Japanese corporate governance practices are and how might they be improved.

The Toshiba case was shocking news, even compared to other recent Japanese corporate governance scandals, such as the Olympus case in 2011, for two reasons. First, Toshiba is very much a part of Japan’s business establishment. Two of the past four presidents have been Vice Chairmen of the main big business lobby (Keidanren), and a number of its top executives have served on cabinet-level committees charged with improving Japan’s economic growth. Second, Toshiba was noted for its efforts in the corporate governance area. It was one of the roughly two percent of listed Japanese companies that chose to replace traditional governance structures with an “American-style” system of executive officers and board committees with independent directors.

Additionally, Toshiba instituted a modified “hybrid” board committee system that it held out as a “best of both worlds” approach that was more practical and effective for Japanese companies (for my law review article analyzing Toshiba’s corporate governance model, see For over a decade half of the Toshiba board (currently totaling 16 directors) consisted of “insider” executive directors and half of non-executive directors. The latter were equally divided between former senior company officials and independent directors. There are currently four independent directors, and, unlike the Olympus case, they are reported to have been truly independent and to have participated actively in open board discussions.

How did things go so wrong despite this apparently sophisticated corporate governance structure? The former top management continues to insist that although it pressured operating divisions with aggressive profit targets it never intended, and was unaware of, any manipulation of accounting records. So far, the Japanese press has referred only to “inappropriate accounting” at Toshiba and has refrained from using more aggressive language such as “window dressing” of accounts that would indicate deliberate manipulation by top management.

The third-party investigative report criticized Toshiba’s “corporate culture” under which operational managers “couldn’t refuse” challenging profit targets demanded by top management. However, this is an incomplete explanation for bad practices that continued for six years during the terms of three company presidents.

While it is not a simple matter to pinpoint what exactly should be “fixed,” the Toshiba case serves as a reminder that the real issue is not board structure, but rather actual board functioning, including processes, people, true independence, and management respect for the same. As part of its “American-style” board committee system, Toshiba had an audit committee of the board with a majority of outside directors, an arrangement which experts generally regard as superior to Japan’s traditional internal corporate auditor system. However, as part of Toshiba’s modification of the committee structure, the head of the audit committee was an inside director and two of the independent directors on the committee were ex-diplomats with little business experience. It does not appear to have functioned effectively.

In addition, more general weaknesses in Japan’s corporate governance system that contributed to the Olympus scandal still remain today. These include relatively weak regulation and little risk of liability for external auditors who act as “gatekeepers” or financial intermediaries between companies and financial markets with respect to the accuracy of financial statements, a relatively ineffective whistleblower system, and a general lack of public and private enforcement to provide incentives for both disclosure and monitoring.

This is not to suggest that accounting problems at Toshiba condemn the entire system of Japanese corporate governance. Japan’s household electronics companies may be something of a special case; they all have faced tremendous problems for two decades as the rise of low-cost competitors in Asia has decimated their traditional lines of business such as the manufacture of television sets. Sony, an industry rival, has been a particularly popular lightning rod for Japanese criticism of the ineffectiveness of the “American-style” board committee system; however, more traditional Japanese rivals such as Panasonic and Sharp have performed no better.

It will be interesting to see what lessons are drawn from Toshiba’s failure. Problems with Toshiba’s seemingly well-considered “hybrid” approach to governance clearly illustrate the tension and difficult tradeoffs between insider and outsider perspectives. Director independence is important for monitoring management, however failures by American companies during the 2008 financial crisis have also exposed the limits of independence and resulted in a renewed call for director competence. Toshiba made an effort to utilize the knowledge and experience of former insiders, in combination with independent directors, to ensure effective monitoring of management.
However, in this case, what it assumed was a strength proved to be a two-edged sword, as the audit committee apparently failed to function with sufficient independence.

Japan’s corporate governance may be aided by a new corporate governance code for listed companies (which became effective June 1, 2015). Under this code Japanese companies must now report (“comply or explain”) with respect to a long list of governance issues. Although a clear principle recommending a minimum of two independent directors has claimed much of the attention, other new areas such as director training and board self-evaluation may have a greater impact on board functioning.

Bruce Aronson is Professor of Law at HItotsubashi University, Tokyo, and was formerly Professor at Creighton University School of Law and a practicing attorney who represented Japanese clients.

Suggested Citation: Bruce Aronson The Toshiba Corporate Governance Scandal: How Can Japanese Corporate Governance be Fixed?, JURIST – Academic Commentary, August 10, 2015,

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