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Caterina Bulgarella: How lofty values led to Kobe Aluminum’s failures

On October 8, 2017, Kobe Steel Group admitted to falsifying data about the strength and durability of aluminum and copper parts used by manufacturers of automobiles, bullet trains, and aircraft.

Initially presented as a breach occurring at four of its Japanese factories during 2017, the admission of wrongdoing would soon turn into a much more severe affair. 

As an independent investigation recently discovered, 21 of Kobe’s business units had engaged in misconduct. Sixty-two percent of these breaches had been committed continuously for more than five years, some even dating back to the ‘70s. Thirty-nine percent involved multiple departments, or divisions/plants where supervisors and managers had implicitly or explicitly instructed employees to falsify data. Moreover, of the 511 customers who had received parts that did not comply with statutory requirements, 416 (81 precent) had worked with those units where the unethical behavior had been continual and widespread.

Less than a month ago, Hiroya Kawasaki, then Kobe’s CEO, resigned, acknowledging that “the roots of the problem go deep.” A corporate culture that had prioritized profit, production volumes, and deadlines over quality was to blame. Confronted with a tough business environment, Kobe had evaluated each business based on its results. With management not wanting to hear “excuses,” underperforming divisions had won new orders by overpromising and cutting corners.

Kobe’s scandal was another wild spin in the carousel of corporate failures that have tormented Japan over the past few years. From Takata’s deadly airbags, to Asahi Kasei’s manipulation of piling data, to Toshiba’s profit padding, to Mitsubishi Motors’ overstated fuel efficiency claims, to Subaru’s faulty quality control practices, the Land of the Rising Sun has seen its reputation for high quality and integrity crumbling, piece by piece—each of these scandals uncannily sharing the manipulation of data to misrepresent the state of an outcome (e.g., quality, profit, efficiency, etc.).

With ambitious profit targets to meet, stringent delivery deadlines to honor, and high-quality standards to abide by, something had to give at Kobe. And that ended up being quality. Though on the surface this was one more example of greedy business straying from its values, the multiple layers of Kobe’s story caution against drawing conclusions too quickly. Taking in the larger trend of corporate failures afflicting Japan of late, it’s even less clear whether Kobe forgot its principles out of greed or held them too dear, for quality and trust (i.e., striving for perfection and the paramount importance of relationships) are two deep-seated values in Japanese culture.  

It turns out that some of the Kobe plants involved in the scandal had voluntarily made their quality requirements even more stringent. These criteria “…were introduced with the hope that the stricter internal standards would enable the plants to be aware of a deficiency in their process capability at an early stage…”

Indeed, Kobe’s ethical failure underscores the dangers of pitting exacting values against ambitious goals. To begin with, there is a dark side to setting challenging objectives. While these may increase performance, they also increase the likelihood of unethical conduct by depleting mental resources. For example, setting consecutive difficult goals — and, even more so, increasing the number of challenging goals — will make unethical behavior all the more likely over time. In the case of Kobe, not only did the organization assign ambitious goals in a systematic way, but it also expected businesses to meet a variety of difficult concurrent targets (e.g., high profit, high production volumes, short delivery time, etc.). And all the while Kobe may have put high stakes on quality and trust.

What’s remarkable about Kobe’s story is that ambitious goals were compounded by even more ambitious values. It turns out that the pressure of exacting principles in the face of challenging objectives may paradoxically give cheating moral cover. In a recent study, researchers found that people were more likely to manipulate the truth about an outcome (e.g., falsifying quality data, claiming higher profits, etc.) only if: 1. They were under the pressure of a specific goal; 2. And, to begin with, they had an inclination to engage in moral justification. Exactly what happened at Kobe and, possibly, across other Japanese companies.

Because moral justification entails explaining unethical conduct as acceptable in the name of a moral purpose, it’s easy to see why the combination of deeply internalized values and difficult goals can make cheating the only acceptable choice. In Kobe’s case, falsifying data may have seemed the only way in which demanding quality standards and high customer expectations could be met without endangering the “standing” of the company’s values.

As previously written, values and purpose create ethical debt because, on the one hand, they raise the ethical stakes for an organization, and, on the other, they trigger specific ethical weaknesses. For example, they can cause moral licensing (i.e., give people freedom to engage in unethical conduct), and/or become the source of moral justification. This is why companies who wish to strengthen their ethical orientation through values and purpose should skillfully architect and manage a host of other components.

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Caterina Bulgarella, Ph.D., pictured above, is a member of Ethical Systems’ core team and a collaborator of SAI Global. She’s a culture architect and ethics expert  who advises senior leaders on culture change and ethical challenges. She can be contacted here.

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5 Comments

  1. Excellent analysis — highlighting the complexity of culture failure in a case like this brings necessary nuance to the dynamics of culture (both organizational, and at the national level). As you point out, the behavioral impacts of aggressive goal setting combined with lofty values that can enable people to justify their bad behavior can be a dangerous combination. Really important risks for E&C practitioners to keep in mind.

  2. Very insightful article, with excellent analysis of underlying issues. I wonder what the managerial take-aways can be, though. What are the "host of other components" that should be "skillfully architected"? What can companies that create environments with ambitious goals and deeply rooted values do in order to anticipate and defuse this moral time bomb? Can we generalize, or is this really a case-by-case phenomenon?

  3. Say no more. We all admired and even put in practice over Japanese Management techniques and methods since late 70's to 90's. Does OLYMPUS's Olympian case mirror facts of KOBE's misconduct? The culture of "keiretsu" has many facets, if not faucets.

  4. In response to @Martha’s comment: The pattern of ethical failures observed across a number of Japanese companies and the non-profit sector (examined in a previous article) suggests that we should take these trends seriously. In considering what components an organization needs to architect as it relies on corporate values for its ethics, let me share some guiding questions: 1. What’s the role of values? How do they relate to what an organization values? Do values hold special qualities? If so, what are these qualities and how do they work? For example, how do values affect implicit reasoning? Are organizations ethical because they have values, or because they conduct themselves in a certain way? What do ethical companies that have values and ethical companies that don’t have values have in common? Is it gimmicky to suggest that values will make an organization ethical? I will be writing and talking about these issues more in depth in the coming months.

  5. Excellent. It clearly provided example of elements triggering the fraud; i.e. "situational pressure", "Opportunity to commit" and "Rationalization". To be added the Olympus case of 2011


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