In March 2018, Hiroya Kawasaki, the CEO of Kobe Steel, resigned over a big scandal. One of the largest steelmakers in Japan and a major supplier of metal parts to corporate giants like Mitsubishi, Panasonic, Ford, and Boeing, Kobe Steel admitted to having falsified its product specifications, misrepresenting the strength and durability of the parts sold to many of its clients.64 The fake data affected more than 600 customers and sent shock waves through the supply-chain industry.

The news turned the company upside down, causing a series of resignations of many other key executives. A number of middle managers also faced pay cuts or similar measures. Kobe admitted that its executives and managers were aware of the fraud;

some board members were also aware of this issue but did not report the problems in the board meetings. In a recent statement, Kobe blamed the overemphasis on productivity and profitability as having pushed Kobe’s executives to act as they did.

Kobe Steel issued an apology statement on its website: as of December 20, 2018, users who visit the site are first greeted with a prominent statement saying, “We are extremely sorry for our misconduct.” It goes on to announce that Kobe’s employees are going back to the roots of “monozukuri,” an old Japanese philosophy based on ethics and professional work in manufacturing. Amidst this scandal, Kawasaki stressed the need for a new way of management at Kobe Steel that would be “a fundamental transformation.”65 Yet Kobe Steel already had a 16-page-long code of ethics that was formulated as early as 2000, comprising ethical principles that included transparency and data accuracy.66 Kawasaki also admitted that that data fraud at the company was not something new and that it had been going on since the 1970s. The scandal was brought to light in October 2017 after a four-month-long internal investigation led to the discovery of the data fraud in its steel and machinery divisions. Kobe Steel has admitted that the scandal is very likely to decrease its profits sharply. Indeed, Kobe Steel’s shares fell by more than 40 percent when the scandal first broke in late 2017. However, recent reports show that Kobe Steel is slowly recovering and has posted its first profit in three years despite the scandal, and it is predicting a profit of ¥45 billion in the year ending March 2019.67 However, the company is still subject to an ongoing investigation by the U.S. Department of State, which could eventually penalize it and deal another financial blow.

Discussion Questions 

1. Whom do you hold most responsible for the latest data fraud scandal at Kobe Steel?

2. How do you explain the statement by Kobe Steel that an overemphasis on productivity and profits led to the acts of fraud?

3. What kind of cultural transformation do you think is needed at Kobe Steel?

4. Do you believe that Kobe Steel will fully recover from the scandal? Can you think of any companies that recovered from similar scandals?

5. Kobe Steel’s code of ethics appeared to have had little effect on the managers of the company. Briefly list the actions that you would recommend to ensure that Kobe Steel’s employees actually abide by the ethical code.