A few years ago, I was allowed to enter the inner sanctum of Japan Steel Works: a closely guarded operation on the northern island of Hokkaido that forges some of the largest metal ingots on Earth.
As you’d expect from a company founded over a century ago by buccaneering British arms manufacturers, which uses a gargantuan tower and produces both swords and reactor cores, there was enough to remain speechless. Including, it turns out, a 600-ton lie, a grimy glimpse into an institutionalized lie, and a key moment for ESG investing.
The leviathan in front of me was a massive steel turbine shaft used in both thermal and nuclear power plants – a single component weighing about the same as 46 double-decker buses and now, years later, among many suspected after JSW surprisingly admitted earlier this month to nearly a quarter century of tampering with inspection data for these and other products.
The admission naturally hurt JSW’s stock. But the pain has been blunted by a crop of similar droppers from Japanese companies since last year. It’s both horrifying and, in some ways, encouraging. Toyota, textile giant Toray and major auto parts subsidiary Hitachi are among those who have recently admitted to years of data tampering in a sectarian gall game. In most cases, the admitted deception dates back at least two decades, flooding once strong reputations in light of calculated fraud, bloodying a new generation of CEOs in bloody crisis management and raising the usual questions about how much bad news that might be out there.
And these scandals are just one-liners for the current malfeasance megastar, Mitsubishi Electric. At the end of April, and after several months of rumors of false inspection reports on other products (elevators, auto parts, robots, road toll machines) hitting the market, the industrial icon said that it had indulged to false tests on industrial transformers for four decades. .
Last week, Mitsubishi informed investors of its still incomplete investigation and revealed that cheating had taken place at more than half of its Japanese factories. Basically, noted the attorney in charge of the investigation, many staff members had absolutely no problem with it.
Inevitably, when large numbers of people in different companies and across generations seem to have been institutionally convinced that bad is good, the search for common factors intensifies. Many – especially the companies involved – cling most to a cultural explanation in the hope that this is fixable.
Often these are plausible. A consistent feature of Japan’s data tampering scandals, Moody’s credit analysts note, is that none have yet been linked to serious security or performance issues. That, in itself, is telling: in many cases, it seems, companies cheat on product tests where customers have demanded standards that are, in fact, incredibly high.
Another favorite excuse of the moment, cited by several companies to justify years of data manipulation, is to blame insufficient staff in quality testing departments. He has a weasel ring: the more closely the personnel problems of Japanese companies are associated with the national demographic crisis, the easier the exoneration.
Curiously, however, it is quite difficult to cite many uniquely Japanese causes of these scandals. The competitive environment that creates the pressure to cheat also applies strongly elsewhere and, according to analysts, has produced both proven and anecdotal the same effects in Europe, the United States and elsewhere.
A key difference, however, concerns timing. The current series of data tampering scandals in Japan (there was another in 2017-2018) emerged from a distinct new phase in the evolution of the country’s shareholder capitalism. Companies are under increasing pressure to associate such symptoms with the broader pathology of corporate governance and are less able to ignore the voices of investors demanding they do so. These scandals are uncovered by whistleblowers whose stories, once possibly stifling, are now relayed by companies’ ESG commitments.
It is fashionable – not to say extremely tempting – to declare that Japan’s progress in governance reform has stalled. Many see a backsliding jungle quickly reclaiming a barely cleared path. Admittedly, the buzz has waned. But things would always reach a point where the runaway victories of stock buybacks and independent board appointments gave way to a slower territorial claim on corporate behavior. Scandals, especially those that have erupted in decades past, suggest this is happening now.