Japan Inc's efforts to improve the international image of its boardrooms have been dealt a blow with the resignation of top business leaders in a $1.2-billion accounting scandal.

Hisao Tanaka, the chief executive and president of Toshiba, stepped down with other senior managers after admitting the company had inflated its operating profits by 151 billion yen over the past six years

The resignations follow the release of a damning report this week blaming the executives for operating a culture of intimidation that left employees afraid to speak out about unrealistic profit claims.

In a press conference yesterday, Tanaka said he was “deeply sorry” for the scandal and the damage inflicted on the reputation of the 140-year-old conglomerate, which builds everything from microchips to nuclear reactors.

Vice chairman Norio Sasaki, Toshiba's president from 2009 to 2013, said he would also quit. Toshiba's chairman, Masashi Muromachi, will replace Tanaka as interim CEO today.

Shares in the company have fallen about 25 per cent since news of the irregularities broke in April. Global investors are worried that Toshiba may be "the tip of the iceberg" in Japan, said the Nikkei business newspaper.

Taro Aso, Japan’s finance minister, sounded a warning to the nation’s boardrooms on Tuesday. “If [Japan] fails to implement appropriate corporate governance, it could lose the market’s trust. It’s very regrettable.”

Financial crash

Monday’s report by a panel of lawyers and accountants found that Tanaka and his predecessors ran a “systematic” attempt to inflate profits and pressured employees to meet short-term targets, particularly after the financial crash of 2008. The

Fukushima

nuclear disaster of 2011 led to a further deterioration of the company’s bottom line and more window dressing of accounts.

The findings have rekindled memories of the 2011 Olympus debacle when Englishman Michael Woodford, the optical-maker's then president and CEO, found that his predecessors had concealed about 117 billion yen in losses.

Tsuyoshi Kikukawa, Olympus's chairman, effectively ran the company behind the scenes and orchestrated Woodford's sacking when he persisted in probing the accounting irregularities. Kikukawa and two other executives were convicted of fraud in 2013. At one point the company lost 80 per cent of its value.

Analysts say Japan still falls short of global standards of corporate oversight, and its clubby, all-male boards have been slow to expand their in-house gene pools. Most managers are promoted through the ranks. Strict hierarchies discourage questioning of their authority.

Under pressure from the government, the country’s first governance code came into force last month, requiring firms to appoint at least two outside directors. There is, however, some way to go: Just 274 out of about 40,000 directorships in Japan are held by non-Japanese.

Many directors are still reluctant to embrace the Anglo-American brand of shareholder-led capitalism, with its stricter focus on quarterly profit and the bottom line.

Japan needs to urgently appoint more outsiders, including women and foreigners, to encourage openness and transparency, said Takashi Mitachi, co-chairman of the Boston Consulting Group in Japan. "There must be a culture of debate and discussion, not referral upwards to the old men in charge."

More than 2,000 publicly traded companies have already adopted the governance code, sparking hopes that a corner has been turned. Several of the country's biggest companies, including Hitachi and robotics giant Fanuc have recently introduced reforms aimed at increasing the power of shareholders. Frosty relations "I suspect that the Toshiba affair will go down in history as a bump in the road of general progress towards better corporate governance in Japan, one that clarified in the public mind the reasons why the new corporate governance code and its focus on director qualifications are necessary," believes Nicholas Benes, head of the non-profit Board Director Training Institute of Japan (and the proposer of Japan's governance code).

Toshiba’s unwieldy 16-member board had frosty relations at the top. Its five-person audit committee includes two former lifetime diplomats and two former Toshiba executives, one of whom is a legal not a financial expert, he said.

“Only one of the three external directors is well-versed in financial matters, in a company that we now see had succumbed to the Japanese tendency to not question orders from above,” claims Benes.

While the accounting errors probably would have been hard for any audit committee to spot if managers wanted to keep them hidden, the committee composition could not possibly have helped, he said.

" I do not think such hidden icebergs are rife among Japanese companies, but this will serve a stern warning bell to other companies that 'it can happen to anyone', and that director skill sets matter. Just because you were the Ambassador to Brazil, does not mean you are fit for the Audit Committee, " said Benes.

The Toshiba scandal damages Prime Minister Shinzo Abe’s attempt to boost confidence in Japan’s boards and win more foreign investment. Japan’s stock market has more than doubled since Abe came to power in late 2012. But his approval ratings have fallen this month amid protests against unpopular security legislation and doubts about his economic policies.