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TEACHING NOTE

Mitsui & Co.: The DPF Incident

In November of 2004, Mitsui & Co. faced its second major corporate scandal in two years, the DPF Incident. Unbeknownst to CEO Shoei Utsuda, employees within one of Mitsuis subsidiaries had been falsifying emissions data on diesel particulate filters (DPF). Utsuda had spent two years fighting corruption in his company after the 2002 Kunashiri Island bid rigging scandal, and now had to confront his, and his companys, failure to implement corporate responsible behavior. The Mitsui (A) case details the history of Mitsui & Co., its place within the Japanese and global economy, and describes the micro and macroeconomic factors that affected Japanese employee behavior and whistleblowing. The Mitsui (B) case details Shoei Utsudas immediate and long term response to his companys scandal. The two cases provide students with an opportunity to discuss and evaluate the role of a CEO in setting corporate culture, and also studies crisis management through one CEOs response to company fraud.

OBJECTIVES
a. Demonstrate impact of misaligned incentives on corporate strategy b. Highlight the role of culture in conforming to strategy c. Highlight communication needs during a crisis and the role of internal and external communication at different stages of a crisis (pre/during/post) d. Explore the role of a CEO as a leader and strategy-setter

COURSE RELEVANCE
The Mitsui cases have been taught in the first year core General Management course within the MBA curriculum at the Tuck School of Business at Dartmouth. While this case applies to broad general management and leadership courses, the Mitsui A case is also appropriate for a corporate responsibility class while cases A and Mitsui B together fit well into a crisis management or corporate communication class.

TEACHING GUIDELINES
The Mitsui case should be taught in advanced general management courses. Suggested layout for the class includes: 1. Pre-assigned reading of Mitsui A along with assigned discussion questions (see below)

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2. In class review of case facts & discussion questions 3. What would you do class discussion a. Role playing as CEO to class in mock press conference b. Role playing as CEO with chief officers c. Open discussion on various next steps 4. Wrap up summary along with assigned post class reading of Case B

KEY BUSINESS ISSUE

Case A: It is November 2004 and Shoei Utsuda, President and COO of Mitsui & Co. has just heard about fraud at one of the companys subsidiaries. He is in the middle of preparing for an impending speech at a symposium organized for the Nikkei, what should he do?

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PROBLEMS
a. Utsudas immediate problem is that employees at Mitsui subsidiary PUREarth have been falsifying emissions data on diesel particulate filters for two years, otherwise known as the DPF Incident. How should he communicate the news and manage the crisis? b. Utsuda is frustrated. Despite his efforts to change Mitsuis culture to one of transparency and honesty, the DPF incident proves that his message has not gotten through to his employees. Why not? c. Utsuda established a clear strategy that attempted to bring Mitsuis culture back to its foundation of innovation and integrity, but the DPF incident proves that he has not been successful in implementing it. Despite his good intentions and strong vision, how has Utsuda failed as a leader? d. Mitsuis structural complexity makes communication a challenge. There are 160 offices across 79 countries and 723 subsidiaries and associated companies. The management is matrix-oriented and split into three regions managed independently. 13 headquarters business units serve as cross-regional, vertically-integrated functions for management. What is the best way for a CEO to manage this complexity? e. Mitsui faces decreasing morale as the company focuses more on short-term, quantifiable results in performance evaluations. Performance reviews are based on quantitative criteria and various departments within Mitsui had been left to compete with each other based on quantitative values. What led to this problem and how should it be fixed? f. Mitsui has a reputation of fraud, and its slow and cautious response to the Kunashiri incident was heavily criticized. Shinjiro Shimizu, the companys CEO at the time, resigned in the aftermath. What is Utsudas personal responsibility in this situation? Should he resign? What are the cross-cultural implications of his decision?

CASE ANALYSIS
The complexity of this case is also indicative of its versatility. Instructors may take one or more of several approaches to case analysis, depending on the objectives of the course and intended function of this case in the curriculum. This section addresses the three broad objectives of the case and provides suggested frameworks for analysis and discussion within each.

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Organizational Structure Design & Implementation

Challenges students to consider varying approaches to organizational structure design and implementation. From the impact of Japans kintracts on the companys remuneration structure, to the decision-making process that came under scrutiny following the Kunashiri incident, the outstanding issues and gradual evolution of Mitsuis organizational structure provides a compelling case for analysis in the context of the impending DPF scandal. Analyze organizational structure for a discussion of the complex macroeconomic and crosscultural context that impact businesses. Broadly, Galbraiths STAR Modeli provides a useful framework for integrating and thinking about the critical elements of Mitsui as an organization. Based on the organizational design categories of Strategy, Structure, Processes, Rewards, and People, STAR visually describes the manifold relationships between how organizations manage and leverage incentives, decision-making authority, human resources, business processes, and management vision. As one component changes, all of the five elements must change, because a change in one element of the organization has implications for the rest. In Mitsuis case, the DPF incident and the steps that Utsuda has taken in the aftermath of the companys previous scandals are closely interrelated; the STAR model can assist students with elucidating these relationships through the lens of organizational design. Strategy How is Mitsuis direction defined, and what are the mission, values, and goals that contribute to that definition? Do Mitsuis employees and management have a pithy, memorable, and actionable strategic principle to connect members of the organization to the mission, values, and goals of the company?ii Discuss also the difference between short-term and long-term objectives at Mitsui in the context of the current and previous history of scandal. Structure What is the locus of decision-making power at Mitsui and how do policies structure that power? What are the moments of friction that impede Mitsuis maximization of resources (including people)? Discuss Mitsuis structural evolution under Utsuda.

Rewards What is the current incentive structure at Mitsui and how is this complicated by the cultural context in which Mitsui does business? What actions has Utsuda taken to address rewards and performance metrics and have his actions been successful? Discuss the impact of his changes on the DPF incident as a stress test in relation to the greater lateralization of processes at Mitsui.

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Processes How do business processes cut across the organizations structure and what are the pathways along which information flow? Separate analyses into vertical processes and lateral processes, and discuss the impact of cultural norms on decision/information pathways. The case discusses the whistleblower phenomenon; what processes are in place (or should be put in place) at Mitsui to address the need for accountability and transparency? How do the recent structural and strategic changes impact such processes? People A new leader must consider how existing characteristics of a company impact/conflict with new strategies, both in terms of the business direction and (interrelated) corporate culture and behavior. How has Utsuda tailored his communication strategy to both the internal and external stakeholders or has he? What are the extrinsic rewards of success and those internal and intangible forms of appreciation that impact how such information is received and how else might Utsuda consider building people capabilities at Mitsui?

Strategic Communication & Crisis Management

Exemplify one company's way of managing a crisis and challenge students to think about how to communicate this crisis. Highlight the differences between internal and external communication needs as well as the different stages of communication (pre/during/post). Demonstrate the importance of reputational risk. This case challenges students to think through how to best communicate strategy both before and during a crisis. Utsuda had the vision to create a compelling strategy for Mitsui, but struggled to effectively communicate it both internally to the organization and externally to the public, government, and media. Communication Strategyiii To effectively communicate Mitsuis strategy both before and during the crisis, Utsuda needs to look at the four elements of a corporate communications framework: corporation objective, message, constituencies (employees, shareholders, customers, suppliers), and constituents response. This allows the leadership to start by defining the corporations objective, then craft a clear message, ensure that they communicate that message clearly to each of the constituencies, listen for feedback from those constituencies and take that feedback into account. Then, Mitsui must make sure that the feedback loops back -informing the corporations objective, message, and so on. Reputational Risk Framework Crisis management begins long before a crisis hits. Through a corporations communication strategy, it also should be managing its reputational risk. A companys reputation is built up over time and is based on the perceptions of all of an organization's constituencies.iv Consequently, it is important for Mitsui to be focused on building positive relationships with all of the different constituents we described earlier. Doing so allows Mitsui to build up

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reputational capital that the corporation can leverage should a crisis occur. By having those relationships in place, it allows for Mitsui to react quickly, and credibly, to the crisis and ensure that the crisis response is effective. Crisis Management Having a well-planned and well-executed communication strategy in place and having built up positive reputational capital are two necessary keys to responding to a crisis. Reacting well during the crisis is the next challenge. At the end of Case A, Utsuda is faced with the decision of whether, when, and how to disclose the scandal. To do this successfully, he must understand the level of urgency and transparency dictated by the situation. Mitsuis quick and decisive response to the crisis is detailed in the B Case. Finally, by reacting well to this situation, Utsuda can use this crisis as an opportunity to change Mitsuis external image and internal culture. Utsuda can use this as a platform to showcase Mitsuis new culture of honesty, integrity, and long-term thinking by taking responsibility for the incident and fixing the problems.

Personal Leadership & Business Strategy

Explore the role of a CEO as both the face of the company as well as the strategic vision. Challenge students to think about how a leader can be successful across both. Case A does a good job of presenting a situation where strategy has been well-defined but has struggled with implementation. One of the hallmarks of a strong leader is getting employees to think and act like owners. Had Utsuda accomplished this, the employees in question would not have engaged in fraud since the long-term implications of their actions would negatively impact the company they had a stake in. Utsuda could have prevented this dissonance by focusing on the rewards criteria of the STAR Model and ensuring that company practices were aligned with strategic principles. Since Utsuda placed a premium on value and trust, he should have incorporated these qualities into employee reviews instead of relying solely on number metrics. This approach would be particularly salient given the Japanese philosophy of kintract that emphasizes more than just profit. The four cornerstone roles of a CEOv provide a useful index to assess leadership. Challenge students to consider the following questions as they contemplate Utsudas performance before and during the crisis. Vision & Values Utsuda is particularly vested in reforming corporate identity, e.g. mission, values, and vision. Does he have a vision for Mitsui? Does Mitsui have a clear strategic principle (i.e., how vision and values at Mitsui translate to action)?

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Team Development How has Utsuda recruited, cultivated, and retained talent at Mitsui and how can he focus on recruiting teams that balance qualitative with quantitative approaches to business expansion and improvement? Strategy As someone who entered the role of senior leadership within a company of entrenched expectations, how can Utsuda source, refine, and institute best practices around compensation and communication? What is the relationship between these two? How has he adhered to his mantra that, above all else, in business, being trusted is paramount? Consider the CSR committee and new policy and his revised mission-values-vision statement at the 2004 meeting. Energy Source How have Mitsuis previous crises impacted expectations around Utsuda and his relationship with Mitsuis employees? What do you make of these expectations in light of his efforts to be portrayed as a caring CEO? What has he done to change the culture of Mitsui? Consider a dedicated website for employees to communication with him, and his direct responses to internal email inquiries. The case also presents a unique opportunity to explore and analyze the issues facing leadership of a multinational company, as well as the cross-cultural aspects of managing non-U.S. based businesses. Several management frameworks are applicable for exploring Utsudas role as a CEO amidst change and crisis, as well as the strategic steps around managing organizations and growing Mitsui. Leaders such as Utsuda should be aware of the Four Drivers of Employee Motivation: the drives to acquire, bond, comprehend and defend.vi These four goals underlie the most basic of human interactions and can be leveraged by managers to create a more productive and successful work environment. Drive to Acquire Mitsuis 1999 switch to a results-based remuneration system triggered employees desire to acquire recognition and prestige in ways that undermined the companys long-term health. When changing policies, it is important for leaders to consider the unintended consequences that may arise from unaligned incentives. Drive to Bond Firms that encourage collaboration and care about employees on a more personal level can benefit from humans drive to bond. This drive to bond is particularly important in a country like Japan, where ones company is a significant component of an employees identity. By placing a renewed focus on company loyalty and employee retention, Utsuda was able revive the morale and culture of Mitsui employees. What steps did Utsuda take that facilitated employees drive to bond?

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Drive to Comprehend Employees are motivated by challenging and interesting work, but stagnate if they find their assigned tasks meaningless. How did Yoi-shigoto stimulate employees drive to comprehend? Drive to Defend The drive to defend can result in positive contributions to a company or it can negatively impact morale and work ethic. When employees feel individually threatened, they may act in ways that do not benefit the company as a whole. If they feel valued and trusted, they then take pride in their company and want to contribute to its success. Some of Utsudas initial decisions activated employees individualistic defense responses, while other programs united the company. Furthermore, SWOT analyses allow students to carefully assess various strategic changes that have been or should be implemented by Utsuda. Challenge students to think through analyses of Mitsuis international growth opportunities, operational transparency & accountability, and company culture.

SOLUTIONS
1. Utsudas immediate problem is that employees at Mitsui subsidiary PUREarth have been falsifying emissions data on diesel particulate filters for two years, otherwise known as the DPF Incident. How should he communicate the news and manage the crisis? In the short term, Utsuda should use the Problem Framing framework and focus on urgent strategic issues, specifically:

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Immediate Actions: Work with government customers / stakeholders to identify and implement a resolution to the DPF incident (e.g., costs to replace filters, damages) Determine internal implications: whos getting fired, who will be responsible for managing this specific business unit going forward, how will the company determine whether (and if so, where) similar incidents may have occurred / still be occurring Once the above plans are in place, Utsuda should make a public announcement about the DPF incident, explaining what went wrong, how Mitsui is fixing it, and how Mitsui will avoid future incidents (i.e., what does this incident mean for how the company needs to change?) If there is enough time to execute the above steps prior to the speech, Utsuda should change the focus of his speech to analyze what went wrong and how Mitsuis CSR strategy will change in the future

Long-term Actions In the longer term, he should leverage the following eight steps to change management to ensure that Mitsuis strategy aligns with its value and vision.
i. Create a burning platform (a sense of urgency) around the issue

Utsuda needed to realize that radical changes are usually difficult in a place with a strong culture and therefore creating a sense of urgency around the ending of any form of dishonesty within the company was important. He could have done this by postponing the Press Conference and instead addressing his employees in that time regarding the information that had come to light about the falsification of the DPF data.
ii. Form a Powerful Coalition

Slowly get the buy-in of respected individuals within the company instead of trying to single-handedly influence all the employees through one-on-ones with them. With the DPF issue, he could have established a task-force that was responsible for auditing other potential areas of corruption as well as implemented a policy of firing employees found to be going against the company policies.
iii. Create a vision for change

There is a need to articulate where Mitsui is going both in the short and the long-term. Although he said that he didnt want his employees to end up just painting pictures on the sand, it almost appears as if that is what he was doing himself. With the DPF issue, his immediate vision should have been to ensure compliance with all regulations within a certain timeframe.
iv. Communicate the vision

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This was well executed as he opened several channels of communication that did not exist before. With DPF in particular, this communication should have centered on managing the downside of reputation risk and have extended beyond employees to partners (e.g. CDT), customers (e.g. Tokyo Metropolitan Government); activists (e.g. those supporting whistleblowing); and the media.
v. Empower others to act on the vision

Given management the power to hire and fire accordingly as a way to establish transparency within the organization.
vi. Create short-term wins

Utsuda could do this by publicly tracking progress towards compliance and sharing this information with employees and other key stake-holders. Similar to Atchison, Utsuda should have tried to get small wins and consolidate them into bigger gains. Instead, he had worked flat out on this strategy for two years, only to have the DPF incident threaten to negate his efforts.
vii. Anchor the Changes in Corporate Culture

Publicize an upward trend in compliance and publish reports that reveal how the internal control environment helped the company move closer to compliance goals. Through repeated behaviors, adopt certain actions as norms at Mitsui, such as whistleblowing, proactively tracking compliance and taking actions against employees that do not adhere to company policy. 2. Utsudas is frustrated. Despite his efforts to change Mitsuis culture to one of transparency and honesty, the DPF incident proves that his message has not gotten through to his employees. Why not? One of the main reasons this message of transparency and honesty seems to have not permeated throughout Mitsui is because of the misalignment of rewards and the strategic objectives that Utsuda has for the company. Utsudas efforts were targeted towards restoring the high ideals and strong morality of the employees, which would in turn cultivate a culture of transparency. However, the focus on short-term quantitative measures appears to have done the complete opposite i.e. it bred an infatuation with short-term gains and incented employees to focus on measures that would yield short-term results that could be easily reflected in the numbers. The end result was that there was an undervaluation of contributions that could be expected to provide long-term benefits but were difficult to quantify numerically. 3. Utsuda establishes a clear strategy that attempts to bring Mitsuis culture back to is foundation of innovation and integrity, but the DPF incident proves that he has not been successful in implementing it. Despite his good intentions and strong vision, how has Utsuda failed as a leader?

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Utsuda had a great vision for the company and clearly articulated the four key values by which employees had to abide when making decisions (2002). While Utsuda worked very diligently to create a more open relationship with employees, it appears that he did not sufficiently prioritize team development ideally, more junior managers would have taken ownership of the strategy and proactively surfaced issues like the DPF incident soon after Utsuda became CEO. 4. Mitsuis structural complexity makes communication a challenge. There are 160 offices across 79 countries and 723 subsidiaries and associated companies. The management is matrix-oriented and split into three regions managed independently. 13 headquarters business units serve as cross-regional, vertically-integrated functions for management. What is the best way for a CEO to manage this complexity? While Utsuda worked to create a more open relationship with employees, it appears that he did not sufficiently prioritize team development. As a General Manager/CEO, Utsuda has to provide resources where they are needed. While he has been working hard to foster an open door policy by having one-on-one communications with employees, he also has to recognize that he is constrained in how many employees he can single-handedly reach. Therefore, he has to delegate some key duties to the appropriate individuals within the company. This not only gives the employees a sense of autonomy but also personal accountability thus leaders must build and sustain strong teams. One of the Four Cornerstone Roles of a CEO is Team Development. Utsuda needs to develop a team to help him to implement his new management philosophy. This team should be drawn from individuals from each of the 13 business units and across geographies as well that are closer to the ground than he is. Utsuda should personally empower each of these individuals to execute his strategy and vision and hold them personally accountable for the results in each of their areas of responsibility. 5. Mitsui faces decreasing morale as the company focuses more on short-term, quantifiable results in performance evaluations. Performance reviews are based on quantitative criteria and various departments within Mitsui have been left to compete with each other based on quantitative values. What led to this and how should it be fixed? The shift to compensation based on short-term results and quantifiable targets has incented the wrong behaviors within the company. It has created a culture that is contrary to the one that Utsuda is trying to build at Mitsui. Utsuda needs to recognize that to change the culture he needs to change the incentives and rewards structure that supports these kinds of dishonest activities. He needs a plan to reformulate the business model so that employees are incentivized by appropriate, long-term, intangibles, and not simply on near-term metrics.

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Overall, Utsuda should align the rewards scheme so that it emphasizes honesty, loyalty to the company and long-term consequences of actions over short term, numerical results. 6. Mitsui has a reputation of fraud and its slow and cautious response to the Kunashiri incident was heavily criticized. Shinjiro Shimizu, the companys CEO, resigned in the aftermath of Kunashiri. What is Utsudas personal responsibility in the DPF incident? As the CEO of Mitsui, he has a fiduciary duty to employees, shareholders, customers and the community. Given previous incidents the company does not have goodwill to fall back on at this point. Utsuda therefore has to make it his personal responsibility to lead the organization through this crisis. To this end, he needs to openly and honestly communicate with all the key stakeholders involved i.e. the public and investors. Utsuda should restate the new corporate mission-vision and values so that they know where the company is headed in dealing with incidents such as the DPF incident. As he continues to try to foster a culture that sets high standards for the company, he must hold himself to these same standards in all of his dealings, particularly in a time of crisis. If he wants to create a culture of building trust with fairness and humility he will have to embody these values in his dealings with the DPF incident. Lastly, as corporate reputation is the sum of the perception of corporate, community investor and employee image and taking strong action against the responsible parties would be the right step at this time. If this is not done, Utsuda would be sending the message that they have a tolerance for dishonest behavior, which is inconsistent with their stated values.

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QUESTIONS FOR DISCUSSION

What should Utsuda do immediately? o Case A: Should Utsuda go ahead with the speech?

In the longer-run, how should he ensure that the companys core values are understood and internalized by employees? How could he change the companys culture in depth? Evaluate the strategy Utsuda put in place for Mitsui. Did it work? How would you assess Utsuda as a leader? How can you explain and understand Mitsuis company culture in the broader context of the changes in Japanese culture? Who is responsible for this crisis (Utsuda, employees, company, etc.)?

KEY TAKEAWAYS
A clear strategy is important but cannot lead to success without thoughtful implementation. As we see in the B case, Yoi-shigoto is a much more effective way to change the culture of Mitsui. Yoi-Shigoto (good quality work) was much more integrated than Utsudas initial attempts to remind employees of their roots by recirculating the Mission-Vision-Values statement and making himself more available to employees. Yoi-shigoto put more responsibility on employees and created channels for them to interact with each other, not just with Utsuda, through Active Talk Wednesdays and Reunion Room. A leader must adhere to the message he/she is promoting. Utsuda is preaching honesty and transparency and so it was critical for him to quickly and publicly announce the DPF incident, despite all of the criticism he and the company received and negative financial consequences. A company can best hedge against future risks by setting a clear strategy and communicating that strategy effectively to all parties involved. In the event of a crisis, a company must recognize a need to react immediately and appropriately. An appropriate response balances urgency, accountability, and transparency. Culture is a key ingredient that cannot be ignored when creating a companys strategic direction or in change management.

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ADDITIONAL READINGS
Supplementary readings about crisis communication, crisis management, and corporate communications can enhance class discussion and students understanding of the key issues in the case. Some suggested readings are: Argenti, Paul A. Crisis Communication: Lessons from 9/11 Harvard Business Review. December 2002. Argenti, Paul A. Corporate Communication. Boston: McGraw-Hill Irwin. 2009. Augustine, Norman R. Managing the Crisis You Tried to Prevent. Harvard Business Review. November 1995. Bonini, Sheila M., Kerrin McKillop, and Lenny T. Mendonca. What Consumers Expect from Companies. McKinsey Quarterly. May 2007.

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Edward E. Lawler III, From the Ground Up: Six Principles for Building the New Logic Corporation, Jossey-Bass, 1996. Gadiesh and Gilbert, Transforming Corner-Office Strategy into Frontline Action, 2001. Paul A. Argenti, Corporate Communication, Boston: McGraw-Hill Irwin, 2009, Chapter 2

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Paul A. Argenti, Corporate Communication, Boston: McGraw-Hill Irwin, 2009, p.83. P. Lawrence and N. Nohria, Driven: How Human Nature Shapes Our Choices, 2002.

Paul A. Argenti, Corporate Communication, Boston: McGraw-Hill Irwin, 2009, Chapter 2

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