I continue my look at the Beatles classic album, Sgt. Pepper’s Lonely Hearts Club Band. Today I want to consider the song For the Benefit of Mr. Kite. Jordan Runtagh, writing in a Rolling Stone article entitled “Beatles’ ‘Sgt. Pepper’ at 50: How an Old Circus Poster Led to ‘… Mr. Kite!‘”, noted that John Lennon found all his material for this song on an old circus poster in an antique shop. While filming a promotional video for Strawberry Fields Forever near Kent, England, in early 1967, Lennon saw a “framed Victorian circus advertisement, breathlessly hawking the “Grandest Night of the Season” – February 14th, 1843, a Tuesday – more than a century after the applause had died away. “Pablo Fanque’s Circus Royal, Town Meadows, Rochdale, and Positively the Last Night but Three!” the verbose headline trumpeted. “Being for the Benefit of Mr. Kite, (Late of Wells’s Circus) and Mr. J. Henderson, the Celebrated Somerset Thrower! Wire Dancer, Vaulter, Rider, Etc.””
Lennon bought the poster for about one-half shilling, or $0.50. Later during the Sgt. Pepper’s recording sessions the “poster provided a welcomed dose of inspiration. “I had all the words staring me in the face one day when I was looking for a song,” he told biographer Hunter Davies. Keeping the archaic syntax intact, he borrowed a title: “Being for the Benefit of Mr. Kite!”” The song became one of his most personal songs and one of his favorite works. He said in a 1980 Rolling Stone interview “The song is pure, like a painting, a pure watercolor.”
I thought about how Lennon was able to use this simple poster to create an enduring, if whimsical, song as I read about the burgeoning scandal involving Kobe Steel, Ltd (Kobe). The basics were laid out by Peter Wells and Emiko Terazono in a Financial Times (FT) article entitled “Kobe Steel scandal hits Boeing, Toyota and Nissan”. The Japanese company admitted it had falsified “inspection data on an estimated 20,000 tons of metals shipped to about 200 customers in the year to August 2017. The steelmaker had sold metal with strength that did not match the quality standard it had promised its clients for use in products ranging from cars to aircraft.” Unfortunately, it may get much worse and Kobe announced over the weekend that the fraud may extend back 10 years.
This has the distinct possibility of being a truly international scandal involving companies as disparate as Boeing, Nissan, Toyota, Mitsubishi Heavy, the rail group that operates the bullet train JR Tokai and Mitsubishi Regional Jet. All of these companies must “check the safety of their products after it emerged they had been supplied with falsely certified metal.”
This is yet one more dent in the quality component of the Made in Japan brand as the scandal follows on the heels of the “string of scandals highlighting wider concerns about inspection and quality control in Japan from wobbly building pilings at the construction arm of Asahi Kasei to overstated fuel economy at Mitsubishi Motors.” The FT article noted Yasuji Komiyama, the Director of Metal Industries at Japan’s Ministry of Economy, Trade and Industry, “said the scandal was “threatening fair and proper trading” by other companies. He called on the firm to do extra safety checks, investigate the root cause of the certification failure and put forward proposals to prevent problems.”
Unfortunately, the Kobe scandal is not an isolated example of a company fudging the books, not on its financial statements but in the area of quality control. Francine McKenna, writing in the online Wall Street Journal (WSJ) site MarketWatch, in a piece entitled “Kobe Steel joins rogues gallery of companies that have falsified data”, noted this was one example in a line drawn from Lumber Liquidators to Volkswagen (VW) to Tata Steel. McKenna noted the 20% drop in stock value for Kobe. She also reported that the company admitted the fraud was ““systematic.” The practices go back up to 10 years for some items, according to executive vice president Naoto Umehara who apologized for the fabrications at a news conference on Sunday. He said workers were “feeling pressure” to meet delivery goals the products, but that senior management had ordered or was aware of the conduct.”
Yoshifumi Uesaka, writing in the Nikkei Asian Review article entitled “Kobe Steel’s falsified data undermines trust in ‘Made in Japan‘”, also noted that “Dozens of employees, including senior managers, were involved in the misconduct. Furthermore, a review of the past 10 years revealed other incidents of falsification, suggesting a widespread organizational effort to mold the data to align with customer specifications.” This appears to have been a case of fraud up and down the organization.
The Kobe scandal points to another way to think about the fraud triangle. The fraud triangle is well-known to most compliance practitioners. It is pressure, opportunity and rationalization. When these three factors converge, there is danger of an ethical lapse which could lead to violation of law. Here you add on the role of senior management identified by Kobe Executive Vice President (EVP) Umehara and you can see an entire systemic failure in both compliance and ethical values.
When your stock in trade is quality, a company must not only do everything it can to protect it; it must not actively seek to damage it. The cost to Kobe may well end up far greater than the loss of market cap. It could take years to repair its reputation, which going forward may be the company that actively misled its customers. For companies which purchased Kobe products, the potential cost is equally high if there are structural failures.
While John Lennon created an entire story around one 19th century circus poster. The Japanese steel industry may learn the lesson the German auto industry learned from the VW scandal the entire national Made in Japan brand for quality may be at risk. That is certainly a high price to pay for creating a fiction.
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