In light of the 2015 Toshiba accounting scandal, Kevin Engelberg examines why Japanese companies frequently engage in massive accounting fraud. Engelberg uncovers that these accounting scandals are the result of deeply held Japanese cultural beliefs about harmony and a deep respect for authority. These cultural beliefs cause Japanese corporate employees to follow their company's CEO at all costs, even if it means fraudulently inflating company profits. Despite the passage of Japan's first ever comprehensive corporate governance code, Engelberg argues little has been done to incentivize good corporate practices. Engelberg suggests the most effective to clean up Japanese corporate culture is to align employee incentives with the financial success of their corporate employers. This can be done by effectively tying executive compensation to company performance; strengthening current whistleblower laws; and creating clear enforcement procedures for companies caught of wrong-doing.
Reining in a Culture of Fraud: Adopting Incentive-Based Regulations to Reform Corporate Governance in Japan,
Emory Corp. Governance & Accountability Rev.
Available at: https://scholarlycommons.law.emory.edu/ecgar/vol3/iss3/3