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Toshiba scandal stresses need for strong corporate governance

laptop-300x214The current CEO and one former CEO of Toshiba Corp. resigned this week in connection with the accounting scandal the company has been embroiled in since May. Senior executives are alleged to have pressured subordinates to meet unachievable financial targets, leading the company to overstate its earnings by more than USD $1.2-billion between 2008 and 2014. Toshiba employees are alleged to have postponed losses or pushed forward sales on accounting in order to meet these unrealistic targets. Eight of the 16 board members have now resigned. The fallout from Toshiba’s accounting issues comes amidst increased regulation in Japan into matters of corporate governance.

Toshiba, one of the world’s largest electronics manufacturers with over 400 overseas companies, more than 200,000 employees and net sales in excess of USD $63-billion, had long been considered a model of corporate governance. In addition to the reputational harm, the scandal caused the company’s share prices to drop 17% in May and over 25% leading up to this week’s announcements, following a USD $2.8 billion loss in market value after the company withdrew its earnings forecast in May pending an internal probe into the allegations. That probe led to Monday’s report detailing systematic involvement by upper management in improper accounting. The findings will likely lead to a restatement of earnings at a later date. The company has yet to release its earningsfor the 2014 fiscal year and will hold a shareholders meeting in September to approve a new board.

The Toshiba story broke shortly after the Japanese government’s recent introduction of a new set of guidelines targeted at enhancing the number of outside directors (Japan’s corporate culture had previously been one where independent directors were rare, with boards filled largely by corporate managers) and fostering greater concern for shareholders.

Toshiba’s current scandal is a particularly stark reminder of the importance of strong corporate governance policies and robust internal controls, and the need for recognition that the tone and culture set by management will often dictate the compliance practices of lower level employees.

By Kevin O’Brien and Malcolm Aboud, Osler, Hoskin & Harcourt LLP

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