The saying attributed to management guru Dr. Peter Drucker, “Culture eats strategy for lunch,” has proven true over and over again. We’ve seen culture rock the foundations of some of the most well-respected companies:

When Daimler was found to have engaged in rampant bribery around the world, investigators learned that the company had a corporate culture that not only tolerated but encouraged bribery. “Cash desks,” foreign bank accounts of shell companies, and other techniques were used to pay hundreds of bribes totaling tens of millions of dollars to officials in no less than 22 countries across a 10-year period, with the scheme reportedly involving high-level executives.

Siemens bribed government officials around the world, using a network of “business consulting arrangements,” transferring money to foreign bank accounts, and establishing front companies to further hide the trail of payments. Corruption at the company was far reaching, driven by a culture where employees believed bribes were not only acceptable, but necessary and encouraged, with the bribery system being “systematic, widespread, carefully orchestrated, and institutionalized.”

General Motors found itself caught up in the ignition switch fiasco that caused multiple deaths and injuries. GM later acknowledged it knew about switch problems for more than 10 years, with plaintiffs and critics accusing the company of failing to take timely action to recall cars and fix the problems. Cultural causes include a “pattern of incompetence and neglect” embodied in the “GM nod” and “GM salute.”

Many more companies have suffered from a culture driving harmful behavior, across industries and continents. Among the most recently revealed cultural failures were at the Japanese-headquartered industrial and electronics company Toshiba.

What happened? Well, you’ve likely seen the media reports highlighting that the company overstated profits by more than $1.2 billion over seven years. Did the company’s culture play a role? You bet it did.

An investigative panel concluded that the fraudulent reporting stemmed from the financial crisis in 2008, when demand for the company’s products fell. Did management expect the accounting and reporting to reflect the economic reality? Clearly not.

Instead, according to the panel, senior managers insisted that subordinates meet rigid profit goals. The company’s culture, formulated and nourished by top executives, required managers to meet targets in line with their superiors’ expectations—where division presidents, line managers, and employees found it “impossible to go against one’s bosses’ wishes.” The result was overstatements and early booking of profits, and postponing recording charges or losses—including under-reporting the cost of raw materials and components, reporting uncertain future income, and delaying write-offs related to canceled contracts and other business setbacks.

The investigatory panel pointed to intense pressure put on the company’s business units to achieve desired profit targets, often just before the end of a fiscal reporting period, thereby “encouraging division heads to cook the books.” It said Toshiba engaged in a “systematic cover-up” under a program called “Challenge,” where “the improper accounting procedures were continuously carried out as a de facto policy of the management,” where “it was impossible for anyone to go against the intention amid Toshiba’s corporate culture.”

The reputation of Toshiba—which held a position of extreme respectability in Japan—now is badly tarnished, echoed by the sad commentary of the now former CEO: “This is the greatest damage to our brand in our 140-year history.”

Was this going on under only one CEO? The panel said no, pointing out that the three most recent chief executives played active roles in the profit inflation. And did this occur in isolated pockets at Toshiba? No again, with the panel saying it occurred in the company’s major divisions and extending it to virtually all corners of the business.

How Could It Happen?

One wonders how such widespread collusion could possibly occur in a major company. Well, there are multiple reasons. Some stem from the nature of Japanese society, which is conformist in nature, values team work, and looks down on whistleblowers who have relatively few legal protections. Further, large Japanese companies generally have strict hierarchical structures that make it extremely difficult for employees to challenge directives from the top.

These societal norms form a perfect environment for what happened at this previously highly respected company, setting the stage for the fraud. Experience shows that financial reporting fraud often begins when a company goes up to the line of acceptability, and then crosses it—in relatively small numbers. Company personnel believe that circumstances will “turn around” in the next quarter, and the improper accounting will never be uncovered.

Practitioners in this field call this the “slippery slope,” and I’ve personally seen it first-hand. The reality is that things seldom (if ever) get better in the next quarter, and the misreported numbers grow ever larger. The bad-doers have begun to slide down the steep, icy slope, and soon find there’s no turning back.

According to the investigatory panel, this is exactly what took place at Toshiba. The overstatements of revenue and delay in booking losses led to directives for larger misstatements in succeeding periods. And then things went from bad to worse, when, for example, it became clear that the company paid too much in 2006 in acquiring Westinghouse’s nuclear subsidiary, which problem was compounded in 2011 when the Fukushima meltdown largely halted demand for the company’s nuclear products.

Financial Reporting Fraud 101, if there were such a course, would highlight the danger in a directive to subordinates to “make the numbers”—along with the unspoken add-on that it doesn’t matter how. If you have to manufacture revenue, or make expenses disappear, so be it.

The aforementioned Japanese societal factors set the foundation for the culture at Toshiba, where such directives were expected to be followed, in an environment where employees believed it was not only acceptable to carry out the orders, but was the right thing to do for Toshiba.

How is it possible that so many people in so many diverse parts of the company participated? It’s all about culture. The concept of corporate culture, including the much-mentioned “tone at the top,” is intangible and amorphous. It is hard to grasp and more difficult to articulate. Nonetheless, experience shows that there are three absolute, inviolate axioms regarding corporate culture: First, a company's culture, although intangible, is very real. Second, culture is the top factor in influencing people’s perceptions, decision making, and behavior. Third, a company’s chief executive is the main driver of culture.

Certainly culture can vary by business line, unit, and geographic location, and it usually evolves over time. But in many companies the culture is uniform across the organization. Perceptive seasoned executives and consultants usually can go into a company’s offices, plants, and other facilities and, after observing activities and speaking to personnel, can quickly get a sense of key elements of the company’s culture. One can guess what the culture smelled like at Toshiba.

The Damage Done

The fallout from the $1.2 billion overstatement—which some observers say might rise to as much as $3.2 billion—is not surprising: The stock price has been hammered, its dividend cancelled, and the CEO and other executives are gone, as are half of the board of directors, leaving with heads bowed in traditional Japanese style depicting deep shame and contrition. The company is said to be planning to draw down bank credit lines and sell off assets, and the Securities and Exchange Surveillance Commission (one of the major regulators in Japan) is expected to impose financial penalties. The reputation of Toshiba—which held a position of extreme respectability in Japan—now is badly tarnished, echoed by the sad commentary of the now former CEO: “This is the greatest damage to our brand in our 140-year history.”

Strategic direction is among the most important drivers of a company’s success or failure. It’s also accurate to say, at least in many circumstances, that culture eats strategy for lunch. I had the privilege of doing graduate work under Professor Drucker, and I believe he might actually have used the term “breakfast” rather than “lunch.” In any event, I recognize that he was making one of his many insightful points: in this case that strategy may be well constructed and clearly articulated and communicated, and supported with organization, resources, and business processes—but the right culture also is needed for effective execution. Unfortunately, in Toshiba, the right culture was sadly lacking.