Lessons Learned: Bad Things Can Happen When Even the Best CEO’s and Boards Start to Relax and Assume What is on the Surface is also Underneath

Fujifilm Says Losses From Accounting Scandal Bigger Than First Thought

Six members of Fuji Xerox board resign

By Megumi Fujikawa, The Wall Street Journal, June 12, 2017
“…The Japanese camera and copier maker said six board members at its mainstay subsidiary Fuji Xerox would resign to take responsibility for losses that ballooned to ¥37.5 billion ($340 million) between fiscal 2010 and 2015, from ¥22 billion.” [See below for other article excerpts and a link to the entire article.]

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Lessons Learned: Bad Things Can Happen When Even the Best CEO’s and Boards Start to Relax and Assume What is on the Surface is also Underneath

By Fred Leeb, Leeb Partners, LLC

In business after business, whether large or small, I’ve seen CEO’s and boards make assumptions that everything is running fine because the top line and the bottom line are better than they had been before.  But, running without prudent checks and balances is the best way to run amok.  The top five reasons as to why this is so common are as follows:

  1. The old expression that “when the height of the river is high all the rocks are covered” is very true.  It is much easier and more comfortable to assume that all is well when revenue is high and everyone is happy.  But, this is a sure way to build an undisciplined culture.  Once everyone sees that the leaders at the top don’t seem to care, everyone else will be quick to follow suit and emulate them.  In this atmosphere, many months or even years may go by until the level of the “river” falls again and the “rocks” become exposed.  If this happens, it will be too late to recover the huge losses that could have been avoided by asking tough questions much earlier.  “We didn’t nag at Fuji Xerox very much, and that is something we now regret,” stated Kenji Sukeno, Fujifilm’s president and chief operating officer.
  • Key managers and board members are often relatives and long-term friends.  When there are potential conflicts that could occur that could also affect social relationships and even extended family relationships, people will think twice before bringing up a sensitive or potentially embarrassing subject.  For example, they realize that what they say in the office may come up again when they are with their spouses at Thanksgiving dinner.  This means that they may stay as far away as possible from a potential confrontation, causing problems to fester under the surface, have a much greater negative impact, and eventually cause a huge blowup in the future that will be both irreparable and very costly.  On top of large financial losses, the best people in the organization may leave due to the toxic environment that was allowed to develop.
  • Once people recognize that they are in a position where they are able to operate under the radar (particularly when the radar is barely operating anyway), they may become adept at playing the game to build systems and excuses to protect their lack of effort, their uncooperative personalities, their lack of teamwork, and, eventually, they may siphon cash out of the system.  This can be done merely by maintaining a low standard for revenue generation or a higher than necessary cost structure.  It can be much more difficult to know what is correct based on an absolute level of revenue or expense as compared to a relative level.  For example, once months or years have gone by developing a standard of low sales results or expensive travel costs, it will be very difficult to know what should have been generated by a high-performing employee.  Unfortunately, once one person creates their own favored position, others may think they should play the game too and mimic the bad apple, causing the problem to be much worse. Paradoxically, these same people will be very creative and work hard to protect their favored positions.  Another disastrous byproduct of this negative behavior is, once again, the loss of the best employees who will not want to be associated with these bad apples—they know the truth even if top management is happily in the dark.
  • Managers may use high-performance results in one business unit to offset or mask other problems that may be occurring at the same time in other business units.  When one business unit may be experiencing difficulties, managers may do anything to buy time, thinking that the problems will be temporary and will be gone before anyone knows the truth or there will just be a miracle.  They may think it is all under control even though the problems actually could be getting worse.  Without proper oversight and onsite analysis, it can be very easy to produce “sanitized” information that will be plausible and uncontroversial to the leaders at the top.  If the problems are not actually corrected, they could be mushrooming under the surface, causing the necessity for even more obfuscation and increasing problems ever more difficult to resolve.   This may have been one of the problems at Fujifilm because they let the subsidiary, Fuji Xerox, operate with too much leeway (regarding personnel, strategy and capital expenditures) to offset the negative results of Fujifilm, the parent company, while it was going through a difficult transformation.
  • What is “out of sight is often out of mind”.  For example, the problems at Fuji Xerox developed at its New Zealand unit and an Australian sales subsidiary also had inappropriate accounting practices.  It may be that management was too far away and didn’t make the necessary effort to find out, first hand, what was going on because the business units were too far away.  This can happen whether the business unit or individual problem area is 1,000 miles away or just 20 feet away. 

All of the problems listed above can be much easier to resolve by an experienced, unbiased outside expert who knows what to look for, how to find it and how to fix it.  Call Fred Leeb at Leeb Partners, LLC now at 248-514-3262 for a free initial meeting to begin to discuss how to begin to identify these issues and to implement the necessary changes in your organization to maintain your competitive edge.  The meeting will be completely confidential and without further obligation.

 

Other Excerpts from:

Fujifilm Says Losses From Accounting Scandal Bigger Than First Thought

Six members of Fuji Xerox board resign

By Megumi Fujikawa, The Wall Street Journal, June 12, 2017

“The Japanese camera and copier maker said six board members at its mainstay subsidiary Fuji Xerox would resign to take responsibility for losses that ballooned to ¥37.5 billion ($340 million) between fiscal 2010 and 2015, from ¥22 billion. It also docked pay from all the board members at Fuji Xerox and two senior group executives. Only one of the resigning board members will stay with the company.”

“The latest example of Japanese accounting irregularities is likely to add to investors’ concerns over corporate governance at Japan’s companies, after a long-running accounting scandal at Toshiba Corp. and last year’s admission by Mitsubishi Motors Corp. that it falsified fuel-efficiency data for some of its cars….  Too much leeway had been given to Fuji Xerox to follow different practices from its parent company because the unit had helped support Fujifilm’s bottom line as the company tried to reinvent itself in response to the digital revolution, said Kenji Sukeno, Fujifilm’s president and chief operating officer….  “We showed too much respect for Fuji Xerox because it contributed to profits when Fujifilm was reforming itself after its film business peaked in 2000. We didn’t nag at Fuji Xerox very much, and that is something we now regret,” Mr. Sukeno said at a news conference after the release of the company’s delayed earnings for the business year ended March 31.

Fujifilm didn’t apply internal rules for managing its subsidiaries to Fuji Xerox, the company said. Those rules covered areas such as business strategy, personnel changes and capital expenditure.”  [see entire WSJ article]