In what’s being called the most damaging event in the company’s 140-year history, Toshiba admitted this week to overstating its operating profit by $1.22 billion during the past several years. This staggering figure and related misconduct, which a Toshiba-appointed investigative panel uncovered, led to the resignation of chief executive and president, Hisao Tanaka along with other top executives.
Similar to other high-profile corporate scandals, a lack of a speak-up culture is at least partly to blame in the Toshiba incident.
Culture at the Core (Again)
According to the BBC: "Within Toshiba, there was a corporate culture in which one could not go against the wishes of superiors…Therefore, when top management presented 'challenges', division presidents, line managers and employees below them continually carried out inappropriate accounting practices to meet targets in line with the wishes of their superiors."
We’ve written before about the need for organizations to foster a speak-up culture, but the lessons are worth repeating—especially with another well-known company like Toshiba at the center of a scandal. As noted above, the BBC article described a culture where “one could not go against the wishes of superiors.” It would be unwise to view this as a concern that is unique to Japanese culture or companies and therefore not worry that it could happen in other countries or organizations. In fact, some commentators warn that leaning too heavily on the cause of the scandal as a culture issue would be a mistake: “There’s a cultural issue, a legal issue and there’s this other issue which accompanies both—the idea of accountability,” said Lawrence Repeta, a law professor at Meiji University, in a Bloomberg article.
A "Chain of Command" Culture Can Stifle Internal Reporting of Misconduct
In our global culture assessment work, we often hear similar stories, told with different words but leading to the same outcome. Most often it is “we are expected to follow the chain of command.” This is particularly true in defense companies or organizations led by former military personnel. While there are various reasons why this approach is important in military operations, it is not conducive to raising issues in a corporate environment where multiple reporting channels are in place specifically to ensure that issues are raised internally, giving the company the opportunity to investigate and respond before the issue is taken externally by the employee.
Further, lower-level managers in any organization have been known to provide specific instructions contrary to the wishes of their leadership when it comes to raising issues. We have heard many times from front line employees that their manager has “made it clear” that all issues must go through him or her first, and not directly to reporting channels. Leadership teams need to be clear with managers that this is not acceptable behavior. In these situations, employees may feel that raising concerns or bad news through established company channels is insubordinate to their managers.
Fear of retaliation or a belief that speaking up won’t do any good are among the most common reasons employees don’t voice concerns. To avoid this Catch-22, companies should have clear strategies and tools in place to foster employee trust, and emphasize the importance of reporting misconduct.
Training at the Top is Critical: Senior Leaders and Boards of Directors Have Significant Impact on Organizational Culture
The conduct of Toshiba’s top-level executives is especially resonant this week, as we found in part of our second annual Ethics & Compliance Training Benchmark Report that senior executives and board members were receiving less ethics and compliance training.
Senior leaders, as well as boards of directors, are expected under all best practice models to receive role-relevant training. Our finding of less training stood out because the most common stated goal among the 677 ethics and compliance professionals surveyed was to create a culture of ethics and respect, just as it was in 2014.
Training at the senior levels should address their role in creating such a culture and, for many, this is not intuitive. Topics should include balancing performance pressures with ethical business conduct, and recognizing situations where employees may feel they have no choice but to compromise company standards. Mid and lower management levels need to be trained on how to appropriately respond to issues raised and how to recognize and prevent retaliation.
As we’ve previously discussed, companies must foster open-door reporting to management or appointed compliance officers to help create a culture of ethics and respect. Without learning these lessons and acting on them, companies are in danger of engendering the same kinds of problems that occurred within Toshiba.
By building a robust ethics and compliance program with strong leadership commitment, organizations can begin building an organizational culture that helps protect itself from the kinds of reputational and financial damage Toshiba (and many others before them) is experiencing.