Agency Theory and Misalignment of Interests
The corporate governance is the process, which aims to allocate the corporate resources in a proper manner so that the company can maximize the value for all the stakeholders of the company. It is a formal process, which determines the business policies and the growth strategy of the organization. The corporate governance controls the business corporation and assists the manner in which the business organizations operate their business. In this regard, the corporate scandal of Kobe Steel has been evaluated. The CEO (Chief Executive Officer) of Japan’s Kobe Steel will have to resign from his post after the scandal of the data falsification. The CEO announced that he has to step down from his position as the organization released a report about the malpractices in the corporate governance. This report highlights that the company has manipulated or changed the data regarding the quality of a few of the products before they were shipped to the international and domestic markets. The report also confirms that the Steel manufacturing organization has several underlying issues regarding the corporate culture and compliance of the organization. The report highlights that the organization has about 688 cases of corporate misconduct in the past few years.
The report indicates that the organization has a management style, which emphasize on the corporate profitability; therefore, it has issues with its corporate governance capabilities. There were two high management executives, who were aware of the data falsifying acts of the organization; however, they did not take any action to stop the act. These executives have been fired from the organization. Kobe Steel is the third largest steel maker in Japan and supplies steel for the manufacturing of the cars, planes and other transportation and industrial products in the world. Several automobile companies such as General Motors, Boeing and Toyota have made long-term contracts with these companies. However, currently these companies are conducting investigation, whether they are using sub-standard products (BBC, 2018). In this regard, in the present report, the corporate governance issues in the management of Kobe Steel have been examined. There were issues in the organization culture and the management style, which resulted in the corporate scandals in the organization. In the end, a conclusion is provided in which personal views regarding the scandal, its development and recommendations to curb the issue has been provided.
The revelation of the corporate practices in Kobe states that there is decline of the corporate governance practices in Japan, which was once famous for their manufacturing quality and high standards. Due to the corporate scandal, the company has fired a large number of senior executives, along with the CEO. The decision came in light of the fake reports created by the senior employees of the organization. These report contained falsified information, which stated that several products manufactured of copper, aluminum and steel products met the requirements of the customers, whereas, in fact, they did not comply by the standards. The products of the company are supplied to about 700 companies all across the globe, and have several world-class customers, including Toyota and Boeing. These customers are concerned about the quality of their product as they have purchased the raw steel and other metals from the company. The report highlights that the practice of falsifying the data dates back to 1970s. The report of the scandal has also plunged the share prices of the company (Shane, 2018).
Incentives in Aligning Goals
The report shows that every other product from the bullet trains to cars and airlines can be affected room the corporate scandal. The current scandal will create a lasting impact on the reputation of the Japan for high manufacturing quality products. This incidence shows that Kobe Steel along with other corporates need better governance. It is important that the companies work harder to attain these problems instead of apologizing when the issue gets bigger. However, this incidence shows that the companies have to work on their corporate governance practice. The investors and independent directors are the important people, who force the managers to shape the corporate governance practices (Baker & Anderson, 2010).
The current newspaper article highlights several different issues in the corporate practices and the organization culture of the organization. The company has a history of falsifying the data and the corporate report dated back to 1970s. It shows that the organization did not have the proper amount of transparency and authenticity. Another issue highlighted in the corporate scandal is the focus towards profitability. The business executives and the top leaders of the organization emphasize the profit making and net revenue of the organization. The current situation can be examined with the help of agency theory. This theory states that the individual actors of the organization are focused on self-interest and utility maximization. They perform actions, which are beneficial and profitable for them (Gomez & Korine, 2008).
The agency theory focuses on the issue that there is difference between the directors and the shareholders of the organizations. Therefore, there are chances that the directors do not act in the best interest of the organization and other shareholders. The agency theory highlights this problem and suggests different solutions to address the problem. The agency theory is developed to understand the relationship between the agents and the principals. An agent is a personnel, who represents the organization in the best interest and do not regard the self-interest of the organization. However, the monetary gains create a conflict between the interest of the agents and the stakeholders of the organization (Bournois, Roussillon & Scaringella, 2010). Several times, some agents may not work in the best interest of the organization.
This gap in the interest of the agent and the stakeholders can create miscommunication, and disagreement with the organization. The miscommunication can result in various issues in the operations of the organization. This issue is also defined as principal-agent problem in which the interest of the principal and the agent are not inclined. The business organizations can reduce these issues, with the help of corporate policies. The agency problems can encourage the normal people to conduct moral hazards (Wright, Siegel, Keasey & Filatochev, 2013). The business organizations can use the method of incentives to redirect the behavior of the agents with the interest of the principal. Appropriate strategies in the corporate governance can be used to change the organization’s policies and restore the interest of the principal in the acts of the agent. The principal should employ agent so that they can represent the interest of the principal; however, they should try to fill the gap regarding the lack of information. The agent should be provided with attractive incentives so that they can work along with the interest of the principal.
Cross-Shareholding in Japan
The agency theory is used in designing the incentives and motivates them to act in the interest of the principal. The company should also make provision so that wrong behavior is rejected and the business rules are discouraged. The major insight of agency theory is that it is important to maintain division of labor among the shareholders, and managers. The managers have the benefits of information as they are regularly updated with the operations of the organization (Solomon, 2007). The agency can use this information to enhance the reputation of the organization. This theory clearly shows that there is misalignment between the needs of managers and the stakeholders.
The managers of Kobe ignored the misrepresentation of the information as they were concerned about their job tenure. They also manipulated the information as they were concerned about the profitability of the organization. It can be critiqued that there were issues related to misalignment between the interests of both the parties (Sison, 2010). The company should take some strong initiatives so that the corporate agents cannot breach the interest of the organization.
It can be perceived from the above analysis that in the absence of shareholder pressure, the business managers avoid taking big decisions and try to maintain stable business empires. It can be stated that when the competition in an industry is less, the managers can normally rule their empires instead of pushing for profitability (Obayashi, 2018). The lack of competition can be a result of various factors such as government regulations, network effect or brand loyalty.
The corporate governance structure in Japan is also unique, with a large number of firms involved in cross-shareholding in which the corporation holds the stock of each other companies. It creates an unofficial deal with the organization that they will work in each other’s combined interest. Moreover, Japanese companies also do not have a large number of independent directors on their board (Obayashi, 2018). Most of the decisions are taken by the business managers. It creates the monopoly of the business managers.
These Japanese companies are engaged in cross-shareholding and more focused on curbing the competition. As a result, they spend less in investment in the Research and development activities of the organization. These companies also spend less in the corporate restructuring. Here, it can be stated that the capital expenditure and research represent the motive of growth and expansion, whereas the restructuring efforts shows the effort towards attaining efficiency.
Implications of the Kobe Steel Scandal
If the business managers do not face the shareholder’s pressure, they do not pressurize themselves for growth or efficiency. Therefore, it is important that independent directors are present in the corporate board of the organization. The corporate governance guidelines should also have a stewardship code so that the investors can be guided to perform better. The companies should also try to expand their market, offer buyouts and early retirement to the senior managers, so that the young business leaders can manage the organization (Murai, 2018). The companies should also take effort to bring the industry experts and academy experts so that proper ethical practices are followed in the organization.
The issues highlighted in the report states that there are deep rooted concerns in the business ethics sand the corporate culture of the organization. The company promotes a culture of profitability and manipulation of the corporate data. They have sold steel and other metals at a low quality to the company’s customers. Subsequently, it can compromise the safety and security of the organization. Along with it, the company has also hurt the sentiments of customers, suppliers, shareholders and other stakeholders of the organization. The Kobe steel scandal is impacting the global plane, train and auto industry. The present scandal will create significant problems in the vehicle inspection of the major automobile manufacturers of the world. In the past, the Japanese firms were famous for their precision manufacturing and adherence to quality. However, in the past few years, several instances of the corporate scandals have emerged, which is a cause of worry for the government officials and the public (Negishi, 2018).
It has shaken the trusty of the public and the credibility of the Japan’s manufacturing industry, which was once popular for the high quality and the safety standards of the organization. The evaluation of the report states that the senior managers had poor insight over the operations of the organization. The current corporate scandals are starkly in contrast with the image of the country for qualitative products, which has been the primary result for driving the organization’s success. The corporate scandal has been the result of the lack of loyalty from the managers, who want to ride faster in corporate ladder of the business organizations. The long-term employees of the organization are rewarded with high pay and taxation benefits. Therefore, they are reluctant to blow whistle as they fear that they might lose their job. It can be perceived that the same situation occur at Kobe Steel, in which the employees fabricate the data regarding the strength and durability of its products.
Furthermore, it can be analyzed that in the competition in the domestic market of Japan is intense. Therefore, a large number of companies have become ready to make compromises with the quality and pricing standards to increase their profits. The Japanese companies are facing aggressive competition from China, South Korea and Taiwan. These countries have become new leaders in exporting high-end technology products including electronics and automobiles.
The current issues in the organization behavior of Kobe Steel highlights that it is top management of the multinational companies should understand that it is necessary to adopt a shareholder friendly behavior. Further, the corporate governance issue also highlights that the measures lay down by Kobe such as independent board members and design of a specific development and nomination committee were not sufficient to address the corporate governance concerns of the government.
Conclusion
It can be concluded from the above discussion that the corporate governance practices are important in establishing socially and environmentally responsible business organizations. The issue of Kobe Steel highlights that the corporate governance issue can have a severe and globalized impact on the society. The steel and other metals supplied by the company are used by various large automobile and heavy industry companies. Therefore, it is effective to design and establish corporate governance policies, which can create a positive organization behavior and transparent culture in the organization. Kobe Steel stated that the excessive obsession for profitability resulted in such an operations in the business organization. The senior managers of the organization were aware of the unethical practices of the organization; however, they were concerned about their employment; therefore, they did not raise a question. The current issues can be explained by the agency theory. The organization has to face the corporate governance challenges, as there was misalignment between the needs of managers and the directors. The organization failed to implement appropriate incentives, which can align the interest of both parties. Although the company had an independent board of directors, they were unable to correct the behavior of the organization until its tool late. Kobe Steel conducted misrepresentation of data, and misguided the customers regarding the quality of the metal. The corporate governance issues highlighted in the newspaper article are of importance for the general public as they will be directly influenced by the metal items. It also breached the trust of the public, which will be difficult to regain back. The analysis highlights that the uncontrollable pursuit of profitability has been the result of the intensive competition in the market. Recently, a large number of companies have emerged from the neighboring countries of China, Taiwan and South Korea, which has reduced the monopoly and the market share of the Japanese companies.
References
Baker, H.K., & Anderson, R. (2010). Corporate Governance: A Synthesis of Theory, Research, and Practice. John Wiley & Sons.
BBC. (2018). Kobe Steel chief Hiroya Kawasaki quits after data scandal. BBC News. [Online]. Available at: https://www.bbc.com/news/business-43298647 [Accessed on: 2 April 2018].
Bournois, F., Roussillon, D.S., & Scaringella, R.J. (2010). Handbook of Top Management Teams. Springer.
Gomez, P., & Korine, H. (2008). Entrepreneurs and Democracy: A Political Theory of Corporate Governance. Cambridge University Press.
Murai, S. (2018). Kobe Steel CEO steps down over data fabrication scandal . [Online]. Available at: https://www.japantimes.co.jp/news/2018/03/06/business/corporate-business/kobe-steel-ceo-steps-data-fabrication-scandal/#.WsMhyIhubIU [Accessed on: 3 April 2018].
Negishi, M. (2018). Kobe Steel CEO to resign over reputation-shaking data scandal. [Online]. Available at: https://www.marketwatch.com/story/kobe-steel-ceo-to-resign-over-reputation-shaking-data-scandal-2018-03-06 [Accessed on: 3 April 2018].
Obayashi, Y. (2018). Kobe Steel admits data fraud went on nearly 5 decades, CEO to quit. Reuters. [Online]. Available at: https://in.reuters.com/article/kobe-steel-scandal-ceo/kobe-steel-admits-data-fraud-went-on-nearly-5-decades-ceo-to-quit-idINKBN1GH2RQ [Accessed on: 3 April 2018].
Shane, D. (2018). Kobe Steel chief is resigning over fake data scandal. CNN Money. [Online]. Available at: https://money.cnn.com/2018/03/06/news/companies/kobe-steel-ceo-resigns-japan/index.html [Accessed on: 2 April 2018].
Sison, A.G. (2010). Corporate Governance and Ethics: An Aristotelian Perspective. Edward Elgar Publishing.
Solomon, J. (2007). Corporate Governance and Accountability. John Wiley & Sons.
Wright, m., Siegel, D.S., Keasey, K., & Filatochev, I. (2013). The Oxford Handbook of Corporate Governance. OUP Oxford.
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