NEW YORK: Last week, we were treated to a bout of speculation that Shigehisa Takada, chief executive officer of Takata Corp, would resign after the companies’ faulty and lethal airbags led to a wave of auto recalls. Takada kept his job for the time being. But the focus on the possible resignation exposes deep flaws in Japan’s corporate and political culture — an overemphasis on punishment instead of prevention, and on individuals instead of organisations.

As an example, take the wave of accounting fraud scandals that have swept Japan in the past several years. After Toshiba was found to have overstated profits by about $1.2 billion, CEO Hisao Tanaka resigned, along with eight board members. The same saga unfolded at camera manufacturer Olympus: a $1.7bn fraud scandal in 2011 led to the chairman’s resignation. The story is always the same.

A similar phenomenon reigns in Japanese politics. Politicians’ standard response to the all-too-frequent corruption scandals is to apologize in public and resign. Witness the recent case of Akira Amari, who left his post as economy minister after it was revealed that he had accepted cash from a construction company in exchange for favours.

It’s good for leaders to take personal responsibility, of course. There can be no doubt that the Japanese executives and directors who step down from their posts feel a deep sense of shame that will hound them for the rest of their lives. Politicians may not go to jail, but their career ambitions will be curtailed. The problem isn’t — as I sometimes hear people say — that Japanese leaders refuse to lead, or that they get off with only a slap on the wrist.

The reality is that individual punishment — whether public shaming or jail time — just isn’t an effective substitute for efforts to prevent these problems in the first place. Every Japanese executive and politician by now knows the consequences for shady dealings. And yet the steady stream of accounting and corruption scandals continues. The existing incentives are just not doing the job.

Some may suggest that the solution is harsher punishment. Politicians who resign for corruption are often simply appointed to different positions in the future, and executives rarely go to jail for fraud, so there is certainly a lot of room to increase the severity of penalties. Yet very severe penalties can create a different but unwelcome set of incentives — they make honest leaders more risk-averse.

Bloomberg-The Washington Post Service

Published in Dawn, February 7th, 2016