They say they just didn't know.

Photographer: Kazuhiro Nogi/AFP/Getty Images

Toshiba Exposes Japan's Weak Oversight

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Toshiba's CEO and two other top executives resigned after presiding over a $1.2 billion accounting scandal. Well and good, but when do we see some criminal indictments?

Could Hisao Tanaka really have been unaware that his underlings were fudging the books? Even an internal panel concluded it was management pressure that drove the iconic Japan Inc. manufacturer to overstate profits for at least six years. For Tanaka to suggest he didn't know is to imply he's the dimmest CEO ever.

Few are holding their breath waiting for arrests, though, and that should worry a Japan that claims to be in the midst of revolution in corporate governance. Over the past two years, Shinzo Abe's government has unveiled a raft of initiatives to internationalize business practices -- including new codes of conduct, increased transparency, outside board members and a new index for 400 solidly run companies.

Toshiba shows why all this is too little, too late for an insular corporate culture skilled at hoodwinking regulators. This company, remember, already had outside directors before it started fiddling numbers. And it has yet to be bounced from the JPX-Nikkei Index 400 of companies lauded for "efficient use of capital and investor-focused management perspectives."

Prime Minister Abe's efforts to make companies more accountable have always lacked imagination and teeth. Toshiba is only the latest example of corporate chieftains running amok with scant accountability. How is it that the CEO of deadly airbag maker Takata, Shigehisa Takada, still has a job? For the same reason no one went to jail for the $1.7 billion Olympus fraud case in 2011 or Tokyo Electric Power and the negligence that has radiation leaking from Fukushima: Japan Inc. answers to no one.

The absence of perp walks looks especially hypocritical after the Julie Hamp fiasco. Yes, the Toyota executive exhibited bad judgment in illegally importing the painkiller Oxycodone (considered a narcotic in Japan). But police arrested her, tipped off the media so TV cameras could document her humiliation, held her for 20 days -- during which she "resigned" -- and then decided not to charge her.

The cops said they pounced because Hamp knew she was breaking the law. By that logic, why did Olympus leader Tsuyoshi Kikukawa avoid prison? (He got only a suspended sentence.) Or Masataka Shimizu, on whose watch Tepco fudged safety reports at its nuclear reactors? And why isn't Toshiba's Tanaka in a holding cell for at least the next 20 days?

It's this chronic permissiveness that Abe says he wants to change. If so, his government needs to take off the gloves. It's astounding, for example, that Washington held hearings on Takata's faulty airbags and Tokyo still hasn't. Saying that's just not the Japanese way is unsatisfying. Abe ignored the will of his people to make an end run around their pacifist constitution so that he can send troops overseas. Love him or hate him, this prime minister knows how to get his way.

He should start by naming and shaming retrograde CEOs. His government should launch investigations that end in fines that hurt -- and in jail time. Next, Abe should set a timeline to end the practice of cross-shareholdings between friendly companies. With the yen down 35 percent, you'd think acquisitive multinational companies would be rushing Japan's way. Barely a nibble, thanks to intricate takeover defenses that Abe has yet to dismantle.

Then, kill off the corrupting practice of "amakudari" -- literally descent from heaven. When bureaucrats bank on one day getting plumb, lucrative gigs in industries they oversee, they tend to go easy on offending executives. Abe's push for more outside directors could actually accelerate the revolving door between public and private sectors. CEOs might see it as a means to reward obliging government officials.

By Abe's reasoning, the mere presence of outside voices will make Japan more competitive. But Sony has had outside directors for a decade, and it's spiraling toward irrelevance. Nor have outsiders halted the garish father-daughter brawl over control of furniture retailer Otsuka Kagu. What matters more is the people companies choose. If CEOs can load boards with retired public officials, golf buddies and pushovers, governance reforms are purely cosmetic. And Toshiba shows how one company's negligence affects others. If Tepco had acted more responsibly, Japan's nuclear industry wouldn't have been shut down in ways that eroded Toshiba's earnings. Toyota and Honda have been pulled into Takata's mess, too, announcing recall after recall.

Finally, Abe should take the bureaucracy down a peg and create a new corporate accountability board. It would be a drastic step for harmony-obsessed Japan, but one that's needed to shake up its change-averse corporate culture. Entrusting the process to ministries and regulators reduces the odds that Abe's corporate governance revolution will succeed. Japan needs to get bold -- and bring the handcuffs.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author on this story:
Willie Pesek at wpesek@bloomberg.net

To contact the editor on this story:
Mary Duenwald at mduenwald@bloomberg.net