Saturday, January 30, 2016

Toshiba Could Compound Cultural Dysfunction with PEU Sale

Toshiba Corporation, lured by the siren song of executive rewards, falsified profits from 2009-2014.  WSJ reported;

Three consecutive Toshiba chief executives fueled the accounting irregularities by setting unrealistic profit targets and demanding that subordinates meet them, an independent panel hired by the company said Monday.
Now the company wants to rectify longstanding accounting fraud by partnering with a private equity underwriter (PEU) on its medical imaging business.  Apparently Toshiba executives haven't learned how PEUs pressure affiliates to perform financially such that executives commit bribes or fudge profit numbers.

Toshiba knows its internal failings:  Japan Times reported in July 2015.

It emerged this year that from fiscal 2009 to 2014 the firm manipulated its accounting to produce a ¥152 billion net profit.

Toshiba Corp. will forgo bonuses to all 33 executive officers for the current business year as managers take responsibility for an accounting scandal, company officials said Thursday.

The move is aimed at restoring trust in the company as soon as possible, the officials said.

The performance-linked payment (is) usually paid in July
The falsified profit numbers produced performance payments from July 2010 to July 2014.  Japan once widely embraced the leadership teachings of Dr. W. Edwards Deming, who encouraged management to drive out practices that encouraged the falsification of numbers.  Fear is one cause and greed is another.

He also spoke about constancy of purpose, which is greatly harmed by the buying and selling of companies and PEU profit maximization machinations.  Having made one great sin by driving in fear and greed, Toshiba looks to compound it by partnering with a PEU on Toshiba Medical Systems.

Toshiba need only look at The Carlyle Group's decimation of Johnson & Johnson's Ortho-Clinical Diagnostics Inc.

Ortho-Clinical missed a deadline last year for reporting its third-quarter 2014 earnings and disclosed them late, citing accounting complexities
Carlyle loaded Ortho up with debt.  Bloomberg reported:

Carlyle acquired the unit, which provides medical tests and equipment for disease screening, from J&J with more than 80 percent of the deal financed using credit.
Profits for the third quarter declined in each of the last two years under Carlyle's ownership.

The company’s $1.3 billion of 6.625 percent bonds sunk to 68.1 cents
Leveraged buyouts can kill a company's culture.  I'd love to hear from Ortho-Clinical employees on their culture with The Carlyle Group as their "sponsor."

Toshiba's case of cultural sickness will go from bad to worse with a majority PEU owner.  They can't see it.