Why do you think this scandal occurred? Answer this question by referring to direct and indirect causes as many as possible. What do you think they should do to avoid this type of scandal from happening again? (story below)

Daio Paper Corporation

Isekichi IGAWA established “Shikoku Paper Co., Ltd. in 1941. Two years later the company merged 13 small businesses, changing the name into Daio Paper Corporation. The Igawas owns more than a half of the stock of not only Daio but also all the other subsidiaries.

The company was engaged in the production of Japanese paper or Washi for a few years after establishment. In 1947 it started producing western paper.

In 1962, its profits went down and the cash management deteriorated because of its excessive investment in addition to the structural recession of the paper industry and the increased costs of raw materials. Daio finally dishonored a bill for ¥170 million and filed a petition for protection with the court under the Corporate Rehabilitation Law. In 1964 the company made a fresh start and finished their rehabilitation procedures in 1965.

In 1979, Daio introduced a tissue paper, brand-named “Elleair” into the market. It was not an easy job as a late comer in the market of home paper, since other famous brands such as “Scottie”, “Kleenex”, “Nepia” and so forth had already been accepted by customers. In 1986, 7 years later “Elleair” became the top brand. The brand “Elleair” was extended to toilet paper, paper diaper, sanitary napkins and paper towel gradually. In 2007, the company acquired all the business rights about “Atent” an adult diaper from P&G, which made Daio the 2nd largest company of the adult diapers market.

Mototaka IGAWA, the then president, who was from the founding family, withdrew ¥10.5 billion from a few of the subsidiaries from April 2010 to September 2011, and nearly ¥5.0 billion was left as an outstanding balance. Those loans were implemented without any approvals of the board meetings of the subsidiaries and unaccounted for expenditures as well. This scandal was uncovered on September 16, 2011. Mototaka resigned from the presidency position and became an advisor.

Daio Paper Corporation formed a special investigation committee within the company, which would conduct a survey. The committee released their survey report on October 28. The report pointed out behind the scandal there was a corporate culture that Mototaka was absolutely obedient to his father, Takao. The board of directors decided to remove Mototaka and his younger brother, Takahiro from their positions, which at last relieved all family members from management.

Media also exposed the truth that Mototaka wasted all the money on gambling in Macau, Singapore and Las Vegas. He confessed that he got pathological gambling gradually after he made a fortune at first at a casino he happened to visit when he suffered a big loss in financial transactions.

The Tokyo District Prosecutors Office arrested Mototaka for special crime of trust in November 2011. He was sentenced to 4 years’ imprisonment on October 10, 2012.

We should not focus exclusively on the abnormal aspect that the president lost as huge as more than ¥10 billion for gambling in casinos. We should not take this as something unusual that one extreme person did individually. The board of directors did have outside auditors, and the company had the compliance committee and a whistle-blowing system. They tried to make themselves transparent and was equipped with a system to watch management. The reality was however that the information did not reach the outside auditors or the whistle-blowing system. The compliance committee did not function at all. Whistle-brown information was supposed to go to the president and nobody tried to do that.

Daio Paper Corporation was a family business where family members had immense power on management, but we should not give them every responsibility, but we should think about why the organizational governance system didn’t work. We need to learn a lesson from this.

The investigation report strictly pointed out as the causes of the incident that the family members had strong control on the entire group of companies, and that employees thought it was a matter of course to obey the family members.

Their corporate culture was that employees gave priority to family members than customers, suppliers, buyers and other stakeholders. The whole company thought it was safe to follow the family blindly. This kind of thought was the real reason for the problem.

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