Sorry, Wrong Number
Through In the News, I'll take what you care about from the headlines and break it down using my theories.
In 2022, Shigenobu Nagamori stood in front of reporters and said something most founders only think. "It was an illusion to think that there would be a good successor outside the company."
He'd just watched another one miss the mark. Jun Seki, a former Nissan executive, had been CEO of Nagamori's company, Nidec, for less than a year. Nagamori demoted him, and a few months later Seki resigned. He was at least the fourth person Nagamori had lined up to take over and then pushed aside. (The Japan Times counted three before Seki even arrived.)
So the next pick came from inside. Mitsuya Kishida, who ran Nidec's automotive motor business, took over in April 2024.
Today he resigned, too.
If you don't follow Japanese industrial companies (and I don’t), here's the short version. Nidec makes electric motors. A lot of them, for basically everything. Last year an outside committee started digging into its books and found more than a thousand accounting problems. Labor costs got recorded as assets. Inventory that wasn't worth anything stayed on the books as if it was. This week the estimated hit grew to roughly $6.3 billion, and the stock tanked about 18%.
Kishida's exit used an odd turn of phrase. The company said he "made statements or engaged in conduct" during the cleanup that "could not necessarily be regarded as appropriate." They haven't said what. His replacement is Michio Kaida, who's 70 and joined the company in 1979.
I have no insight into Nidec or its people. None. I didn’t know they existed two days ago. And yet - the theories I’ve developed highlight a repeating pattern. One that will likely continue to repeat.
Here's what I think is going on. Nidec keeps changing the person. But it hasn't changed the thing that keeps breaking them.
The investigators were pretty blunt about where the trouble started. Their report said, “Mr. Nagamori should bear the greatest responsibility." They found no evidence he told anyone to cook the books. What they found was pressure. He set performance goals for more than 350 subsidiaries, and a 10% margin was treated as the baseline. Miss it and you got blamed, shamed, and had even more pressure heaped on through multi-day meetings and “unreasonable demands.” So... managers who couldn't deliver results legitimately... found other ways to get there.
To be fair, it looks like intense pressure built that company. Nagamori started Nidec in 1973 with a few colleagues and grew it into one of the world's biggest motor makers. You don't do that with soft goals. And plenty of us have worked for a demanding boss and come out better for it. I certainly have.
But a stretch goal and a goal that can't be missed do different things to people. The first one makes them work harder. The second one makes them lie... eventually. [Pause for quick Google search.] Donald Campbell, a psychologist, noticed this back in the 1970s. The more weight you put on a single number, the more people bend it, and the more it bends the work it was supposed to measure. It's called Campbell's Law now, which is probably a good indicator that smart folks think it’s true.
Put yourself in the shoes of a manager at one of those 350 subsidiaries. Demand for your motors drops and materials cost more. You run the numbers and see you’re going to come in at 7% - missing the baseline entirely. You know what happens to people who report 7%, and it ain’t good. You also know there's an old batch of inventory you could leave on the books a little longer, and some labor costs that could maybe count as building an asset if you squint at them just right...
Nobody has to tell you to do it. The baseline number already did.
Linden’s Bridge, the framework this newsletter was built on, would put this in the Rules layer. Rules is where an organization decides what gets rewarded and what gets punished. Nidec's written rules said that everyone should report accurately. Its operating rules said never report less than 10%. When those two collide, people honor the one that prevents the punishment and humiliation. But “cooking the books” doesn't get rid of the load. It hides it, and it keeps growing.
If you've been reading my stuff for a while, you might spot the Linden’s Lens problem too. What the company said (“we hit our numbers”) didn’t match what it did (they moved costs and delayed write-downs until the numbers looked right). Books that don't match the business are about as literal as a say-do gap gets.
In situations where the underlying cause of the issue is structural, swapping in a new CEO doesn’t work. The new leader walks into the same failed (and invisible) Rules layer. The targets and the penalty for missing them haven't moved. The people who learned to smooth results are still there, and so is the founder's influence. (He's stepped off the board, but he's still the biggest shareholder.) So the new leader either keeps the pressure on and inherits the problem, or backs off and gets blamed for missed results. Either way, they're the one who leaves. The number stays.
I don't know what Kishida said or did. It isn’t clear if anyone outside the company does yet. But it certainly looks like the job he stepped into asked for the same results, under the same rules, that the report blamed for the mess.
Not many of us run a company with 350 subsidiaries. You might have an unmissable target that's outlived a couple of reorgs, though.
My take is that the problem is fixable. If you find yourself at an organization where people fudge the numbers to stay out of trouble, consider trying something like this:
Identify the mandatory target your team treats as untouchable, the one nobody admits they might miss.
Clearly spell out what happens to a person or team who acknowledges they’ve missed it. This helps identify what the operating rules of the organization are - which often boil down to “avoid [penalty] at all costs.”
List the things that people and teams have been doing to ensure that it looks like they’ve hit the numbers even when they miss. This helps you figure out where the hidden load has been going. The smoke and mirrors are hiding an unsound organizational structure. You can’t fix the broken structure if you don’t understand what’s being hidden.
If the answers to the second and third steps make you uncomfortable, that's where the fix is. Swapping people can’t reach it. Changing the operational rules will, and that can mean keeping the written goal but changing what missing it costs. Make a miss something a manager can report early and survive, and you’ll begin to hear about trouble while there's still time to fix it. Nagamori's managers had every reason to try and keep him in the dark.
Sidebar: He did find out. The report says special audits told him that "improper accounting that should have been corrected immediately was handled in a planned manner, and he accepted this." The internal audit team didn't push back because they feared "repercussions." So he knew, and he let the fixes wait.
A new person wearing the CEO name tag doesn’t fix that. The operating rule punished anyone who brought bad news, and it made fixing critical problems something that could wait. As long as that rule stays in place, no CEO succeeds.
I’m thinking that Nagamori was right... there was an illusion. But it was bigger than he thought. The illusion was the belief that any CEO, given the operational rules in place, could succeed.
If you’ve got an organization, team, or person who has a number that can’t be missed, it’s likely worth the time it’ll take to look behind it to see what’s being sacrificed to hit it. Or, keep playing musical chairs with your leadership team. That’s an option, too.
