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The importance of culture in the implementation of good corporate governance

08 March 2018

Original content provided by BDO Belgium

Culture and corporate governance are inseparable. The first is an element that is inherent to any business and the second ensures effective risk management, particularly for risks of fraud.

Culture can be understood to mean both national and corporate culture, with the second being influenced by the first.

When implementing corporate governance rules, an understanding of the culture of a country must be, in our opinion, a prerequisite.

Toshiba’s accounting fraud scandal(1) is a perfect example of this.

Toshiba’s staff committed multiple accounting irregularities, in particular the anticipation and overstatement of revenues, under the CEO’s influence. The magnitude of the irregularities amounted to USD 1.22 billion.

The inquiry commission that followed noted: “There is a corporate culture within Toshiba that makes it impossible to disagree with your superior”.

Where Western culture applies the principle of “Honesty is the best policy”, Japanese culture is inspired by the Samurai code, the way of the warrior known as “Bushido”, and more specifically its “Makoto” aspect.

“Makoto” focuses on the principle that social harmony is achieved through compliance and obedience to authority. This principle creates a kind of military hierarchy in which the senior executives give the orders and all employees are inclined to follow these orders without thinking about them or questioning them.

The organisation look down upon employees who “talk” or who step out of line. This culture prevents individuals from questioning themselves or from challenging the decisions of their superiors and discourages them from highlighting any problems that might arise.

The Japanese proverb “The nail that sticks out gets hammered down” perfectly illustrates this culture.

In other words, within Japanese culture, it is preferable for an employee to turn a blind eye to the principles of corporate governance in order to avoid destabilising the social order. In this way, Toshiba employees had to choose between following the governance rules put in place and “social disgrace”. It’s now quite evident what they opted for.

This is certainly what led to one of Japan’s major financial scandals and highlights the importance of taking culture into account when implementing good corporate governance!

(1) In Toshiba’s scandal, blame samurai code - FRAUD MAGAZINE, a publication of the Association of Certified Examiners - Vol 32, No. 3, May/June 2017 - Steve C. Morang - President of the ACFE’s San Francisco Chapter