Japan’s crisis of quality and trust

17.11.17 Publication:

We all make mistakes. That simple statement is as true of companies as it is of human beings, and should be kept in mind when we try to assess the impact of the latest falsification scandal to hit Japanese business, the one at Kobe Steel.

The important question in all these cases is not the most obvious one of “what happened?” The really important question is what a company confronted by a scandal such as this one will do now that the issue has come to light: what compensation it will offer to pay, how open an investigation it will hold, what evidence emerges about whether or not top management knew about what was going on and whether they made any attempt at concealment.

For the first headline that greeted the Kobe Steel revelations, especially in the international media, was a misleading one, in my view. The first headlines asserted that this scandal would represent another blow to Japanese industry’s reputation for quality control.

Such a concern was understandable, especially given the huge scandal surrounding Takata airbags for cars and the eventual demise of that company. And the immediate question surrounding the false certification of metals was indeed the question of whether the quality of products that had used those metals might now be compromised.

But to focus just on that issue is to focus on the past rather than on the future. In Kobe Steel as at most other companies with scandals of this nature the true issue is not a matter of the quality of its products but rather one of whether and how the company can in future be considered to be trustworthy, by its customers and by the public.

Can a company’s promises be believed? That is a very basic issue, especially for any manufacturer of products used in equipment such as trains, aeroplanes or cars in which safety is paramount. This is therefore an even more profound issue than what arises from accounting scandals such as those at Olympus or Toshiba. Most of all, while accounting frauds or errors can be corrected and dealt with, without making customers doubt the firm’s products, trust in those products themselves is much harder to repair.

Financial accounts are important but most people realise that they contain a lot of mysteries and obscurities. Accounting fraud, even on a massive scale, can feel like a somewhat technical matter. The question of whether a firm’s basic products can be trusted goes much more to the heart of what a company exists to do.

Japanese companies are not the only firms facing questions over their trustworthiness. The same is true of the German car company Volkswagen, after it was shown to have systematically deceived inspectors over pollution tests for its diesel engines. Its cars proved to be a lot more polluting than the company had promised. Its declarations on that topic therefore could no longer be trusted.

Experience with scandals such as Volkswagen show that two principles need to be followed once a scandal has come to light.

The first principle is one of complete openness. “Dieselgate”, as the VW scandal became known, exposed deception, just like the false certification of Kobe Steel metals. So any sign that the company was trying to be any less than honest about what had happened, risks reinforcing the loss of trust, perhaps making it permanent.

That is why top management resignations are not sufficient, even if they are necessary. In Japanese companies in particular resignations and apologies are perceived as being rituals that provide little information about how things are going to change and how fresh scandals will be prevented in the future.

The second principle is that change needs to be demonstrated, in an also very open and transparent way, rather than simply promised. A good way to do this is to invite customers into the company to advise on and verify changes in practices and procedures: if convinced, they can then become the best ambassadors for the company in the future.

Such a severe loss of trust is truly a tragedy, especially when it takes place at big companies with a great history, fine engineering and technology, and superb reputations, like Volkswagen and Kobe Steel. So the responsibility both of management and of major shareholders is to make sure that trust is rebuilt as openly and as quickly as possible.