One of the largest corporate governance scandals in Japan’s history has seen Toshiba become engulfed in a quagmire of internal and external investigations into accounting irregularities. A report released last week found that the company had overstated profits to the tune of $1.5 billion since 2008. Toshiba’s shares have dropped by almost 20% since the scandal surfaced – a misplaced pass that certainly caught shareholders unaware.
The company was a prominent member of the JPX Nikkei 400 Index having satisfied stringent listing requirements. The equity index was created last year to showcase Japan’s most profitable companies with better-than-average governance structures and is part of Prime Minister Abe’s third arrow of ‘Abenomics’ – a series of structural reforms which includes enhancing the long-term appeal of stocks as investments.
A company heralded for its treatment of shareholders and admitted to the new index as a model for the rest of Japan, in particular having had four independent directors on its board (three of them since 2001), is alleged to have been committing fraud for years. So do we believe the scandal will affect the Japan recovery story?
Certainly not. A key point is that this scandal was uncovered by a whistle-blower as opposed to an external auditor, which in Japanese culture is almost unheard of. One could argue that Abenomics is encouraging a change in culture and exposing those who pay lip service to its ideals while remaining entrenched behind closed doors.
Reformed corporate governance is a key element of Japan’s growth strategy and it wouldn’t surprise us to see a few more headlines of a similar nature. While we shall remain alert to them, we do not immediately see cause to change our positive view on what we believe to be a broad opportunity for Japanese equities to convert the opportunity provided by Abenomics.