Update on Investigation into Improper Quality Control Practices and Implementation of Reform Roadmap (Third Report)

TOKYO, May 25, 2022 - Mitsubishi Electric Corporation (TOKYO: 6503) announced today it has received the third report of its Investigative Committee (Chaired by Hiroshi Kimeda, Partner (Attorney-at-law), Nishimura & Asahi, announced on July 2, 2021) regarding improper quality control practices that were carried out by the company. The company also issued today an update on reforms being carried out in three key areas-quality assurance, organizational culture, and governance-including measures designed to prevent any recurrence of the improper quality control practices, as first announced on October 1.

So far, the Investigative Committee has completed its investigations into 1,933 out of 2,303 reports extracted from those on quality related issues which were applied, or around 80% of the total. The Investigative Committee expressed the view that the root causes identified in its first and second reports are equally applicable to the improper quality control practices newly revealed in the third report. The Investigative Committee will continue its investigation on the remaining 14 sites, and the company will continue to cooperate fully with the Investigative Committee in an effort to bring the investigations at all works sites to completion as early as possible.

The committee also confirmed that the three areas of reforms, including measures to prevent recurrence, the company has been carrying out since October 2021 appear to be based on the committee's recommendations, and that the company's directions toward the reforms and initiatives to them have been positively noted. The committee also provided new recommendations to increase the effectiveness of the measures, including a recommendation to be mindful of any excessive burdens that the preventive measures may pose at the workplace level. As it carries out the three reforms, the company will continue to refine and enhance its efforts based on these recommendations.

Based on the committee's final investigation results, the Governance Review Committee (Chaired by Toshiaki Yamaguchi (Attorney-at-law), Yamaguchi Toshiaki Law Office, established on October 20, 2021) intends to tender its report on the accountability of the company's Executive Officers and Board of Directors and its assessment and recommendations on the company's internal control and governance systems. The company will issue an announcement as soon as this report is available.

Mitsubishi Electric also takes this opportunity to reiterate its sincere apologies to all customers, valued stakeholders, and broader society for the impact of these incidents, including the delay in completing the investigation.

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1. Status of Investigative Committee's investigation

The Investigative Committee, established on July 2, 2021 and chaired by an outside attorney, conducted a  survey of all employees in Japan. The committee has used objective data and other information to verify the consistency of the responses it received, and it has conducted forensic investigations into Executive Officers and other relevant parties as well as carried out interviews and inquiries with relevant parties at the affected sites.

As of the third report received today, the Investigative Committee had identified a total of 2,303 matters requiring investigation, of which it had completed its investigation into 1,933. The committee will continue to investigate the remaining matters.

The findings in the third report issued today describe occurrences that have come to light since the second report was received and disclosed on December 23, 2021. Tables 1 and 2 provide overviews. Table 3 summarizes the company's latest responses to improper quality control practices covered in the second report.

Table 1: Status of company-wide investigation (as of May 25, 2022)

- Temporary suspensions of ISO9001 certifications: 3 sites (Fukuyama Works, Kamakura Works, Transmission & Distribution Systems Center)

- Partial withdrawal of ISO9001 certifications: 2 sites (Nagasaki Works, Power Distribution Systems Center)

Table 2: Overview of newly reported incidents of improper quality control practices (as of May 25, 2022)

In cases where the improper quality control practices listed above constitute breaches of applicable laws/standards, this information has already been provided to the related organization units and corrections implemented. As for the company is working proactively with customers to arrive at a solution for cases in which misconduct impacted contractual requirements. Measures to prevent any recurrence are being implemented in all cases.

Table 3: Status of responses to previously reported cases (as of May 25, 2022)

2. Summary

As of the third report, the Investigative Committee has completed its investigations on 8 sites out of Mitsubishi Electric's 22 sites in total. As described in the report, investigations on the remaining 14 sites are progressing, and the company will continue to cooperate fully with the Investigative Committee's ongoing investigations.

The table below shows the number of cases of improper quality control practices now identified, including cases identified in the investigative reports of October 1 and December 23, 2021.

Table 4: Number of improper quality control practices identified by the Investigative Committee

In the recent investigations, no improper practices were confirmed at the Communication Systems Center, Shizuoka Works, Gunma Works, Kyoto Works, Industrial Mechatronics Systems Works, or High Frequency & Optical Device Works. But given that several best practices issues related to quality of operations were identified at these sites as well, Mitsubishi Electric recognizes the need for efforts to improve quality levels across the entire company, and will proceed with the following initiatives.

(1)   The Investigative Committee's third report provides specific examples of issues at a number of sites relevant to what the committee's first report identified as the four direct causes of improper quality control practices (① Lack of emphasis on realizing quality assurance through adherence of protocols, ② Vulnerability of the Quality Division, ③ Exhaustion of middle management, ④ Distance between head office and the front line) and the three characteristics of organizational culture that led to these practices (⑤Closed organizational system due to independence of individual sites, ⑥ Highly independent Business Unit System, ⑦The resolve of management).

The report also gives some recognition to the direction and steps taken so far by the company on its reforms in three key areas-quality assurance, organizational culture, and governance.

In addition, the Investigative Committee provided seven specific recommendations for enhancing the effectiveness of these reforms. Mitsubishi Electric takes these recommendations seriously and will continue to carry out its reforms, adding new measures to these three areas if and as necessary.

(See Table 5, Table 6, and Table 7 for progress on the three reform areas, and Table 8 for the specific recommendations and the company's responses to them.)

(2)   As to the three items identified by the Investigation Committee as problems with organizational culture that led directly to the improper practices, Mitsubishi Electric will work to resolve these problems through its April 2022 management reforms as well. Further, the company will rethink its management policies to make them more socially conscious, instill an understanding of this in all managers, and work to raise awareness of the social responsibilities the company bears as a whole.

(See Section 4 for information on the management reforms and revision of management policies.)

(3)   Going forward, the company will also do a deep dive into its measures to prevent a recurrence, including its three areas of reform, through a detailed analysis that includes identifying the characteristics and systematically categorizing the details of improper practices that occurred at each of its business divisions, works sites, and other organizational units, and, on that basis, institute strategies tailored to each individual workplace.

3. Progress in carrying out three reforms, including measures to prevent any recurrence

Below is an update on the company's progress in reforming its quality assurance, organizational culture, and governance reform in accordance with the Investigative Committee's recommendations.

(1) Quality assurance reforms

The Corporate Quality Assurance Reengineering Group, which was established on October 1 and reports to the CEO, is executing the company-wide measures shown in Table 5. Its aims are to strengthen new company-wide functions for quality assurance led by the head office, and to share knowledge and to provide flexible support across business divisions.

It has become clear that many of the quality matters discovered during the Investigative Committee's investigations to this point have been test deficiencies and problems due to test results not meeting required values, and these are issues that should be resolved between the initial stages of product development and the point at which preparations to produce the product have been completed. The company believes that this points to a problem in the way quality control is carried out, in the sense that quality, and communications with customers as well, are built into products upstream (in the design and production technology phases) and visualized on that basis.

The quality assurance reform measures titled "Greater independence and separation of chain of command" and "Strengthen quality assurance functions" imply that the Corporate Quality Assurance Reengineering Group should coordinate with the Corporate Total Productivity Management & Environmental Programs Group and Corporate Research and Development Group to confirm whether designs are correct and production preparations are ready in all phases of manufacturing, and make improvements through the Plan-Do-Check-Act (PDCA) cycle. The company believes this will be an effective means of addressing the currently identified quality matters.

The company also reaffirms that enhancing quality through IT and digitalization will be crucial to running the PDCA cycle efficiently. To implement detailed responses tailored to its diverse products, differing customer specifications, and the rules and requirements in different countries, and accelerate its efforts to resolve the present problems, the company will pursue digital transformation (DX) initiatives across its quality processes and work to eliminate human error and enhance and streamline quality control.

The company also sees the need to clarify issues (close calls, potential incidents) that tend to be overshadowed by the presently pressing quality issues, and to take steps to prevent them. 

To address this, the company will assess the health and soundness of each of its sites and production lines, quickly find problems, and implement efforts whereby all relevant employees provide support.

As a company, Mitsubishi Electric aims to achieve integrity through the PDCA cycle, using the clarification of problems to keep its activities in check and mobilizing its entire workforce to provide support in implementing solutions.

Table 5: Progress of quality assurance reforms

(2) Organizational culture reforms

In March 2022, the "Team Sousei (Creation)" company-wide transformation project, comprised of employees selected through internal recruitment, set out its Robust Policies for reforming corporate culture with the aim of creating a new Mitsubishi Electric. The team came up with the slogan "Changes for the Better start with ME", with "ME" signifying that everyone in the Mitsubishi Electric Group will act as driving forces for change. In other words, it signifies that both individuals and the Mitsubishi Electric Group as a whole must act to effect change.

This overarching plan was put into action from April 2022, with a total of 148 employees company-wide involved in a range of reform projects within each business division. Briefing and discussion sessions for emplpyees on the Robust Policies by Executive Officers, Business Group President and members of "Team Sousei (Creation)" have been implemented since the middle of April, with a total of 59 sessions having been completed. These activities will be continuously carried out in all the work sites and offices within the company.

With respect to initiatives that will be deployed on a company-wide basis such as personnel systems, the relevant divisions have already begun putting together appropriate measures and reviewing existing systems. FY2023 marks the company's first step toward change, with these efforts to continue toward the goal of establishing a new culture and building a connected, self-powered organization, which the company envisions achieving by around FY2026.

The company will steadily carry out its efforts to renew its human resources management system to meet the objectives of the overarching plan described in Table 6. Specifically, the company seeks to overcome its inward-looking organizational culture, and to drive change in the behavior of senior management and foster diversity to facilitate open communication. The company will also take steps to reform its organizational culture and ensure its new culture takes hold. These will include running training rotations designed to foster independent growth and cooperation across organizational boundaries, striving to improve the working environment of middle management by ensuring that managerial scope is appropriate and building systems for decentralized authority, and ensuring that senior management provides appropriate support. It will also entail fostering mindfulness of the fundamental role of managers and fleshing out the managerial education and training programs that enable managers to fulfill their role. The company will continuously monitor the progress of these measures in an effort to gauge and enhance their effectiveness.

Table 6: Progress of organizational culture reforms

(3) Governance reform

To strengthen the company's management oversight functions and realize sustainable medium- to long-term growth in its corporate value, Mitsubishi Electric has initiated a reform of its Board of Directors. On October 20, 2021, it established the Governance Review Committee comprising third-party lawyers to begin assessing the company's internal-control and governance systems in order to identify problems and provide recommendations for improvement. Going forward, the company plans to devise and implement further improvements to its internal-control and governance systems, with reference to the committee's recommendations.

On the issue of governance reform, the Board of Directors, including the three statutory committees, is working toward an appropriate vision of governance and oversight in a way that builds on the fundamental separation of execution and oversight by structuring the "Company with a Nomination Committee, etc." while also taking note of trends in governance across the world at large.

To institute the oversight functionality required of a Company with a Nomination Committee, etc., the company will work to create and enhance the environment necessary to facilitate proper oversight (Board of Directors function and composition, support for outside directors) while also enacting specific individual measures for strengthening oversight functions based on the Governance Review Committee's recommendations.

In addition, to strengthen risk management, in January 2022 the company set up a specialist panel reporting directly to the CEO and appointed a new Chief Risk Officer (CRO). The panel will monitor the company's internal risk management activities from a high level, examine the company's multilayered internal control measures, and assess whether management systems are effective and whether any procedures have become obsolete/unnecessary. It will thus work to catalog and improve the company's various internal control measures.

Table 7: Progress of governance reforms

(4) Investigative Committee's specific recommendations and the company's responses

The committee's third report contains the following seven new specific recommendations. The company takes these recommendations and will implement tangible responses, as described below, as part of its three key areas of reform.

Table 8: Investigative Committee's specific recommendations and the company's responses

4. Management structure・Management policy

The company also seeks to resolve the three organizational culture problems identified by the Investigative Committee as direct underlying causes of the improper practices (⑤ Closed organizational system due to independence of individual sites, ⑥ Highly independent business unit system, ⑦ The focus of management) through a reform of management structure and a reform of management policies/guidelines.

(1) Revision of management structure

As of April this year, the company has classified nine business groups into four business areas (BAs): Infrastructure, Industry and Mobility, Life, and Business Platforms. It has also appointed four BA Owners tasked with implementing initiatives to maximize corporate value over the medium/long term based on a high-level overview of the entire company's business with a view to addressing social issues. They will work to enhance the competitiveness of the business groups' individual businesses while also helping to reform the inward-looking organizational culture-i.e., insular at the site and business group level-through BA-driven efforts to strengthen cross-organizational functions.

In corporate divisions, the company will expand the chief officer structure to drive company-wide management from a high-level perspective, strengthen the entire company's shared capabilities, develop infrastructure, implement effective risk management and control, and support flexible business management.

(2) Revision of management policies

From May 2022, the company's management policies will clearly state that the tasks of resolving social issues through the company's business and achieving sustainability are fundamental to its operations. Through internal newsletters and executive town hall meetings, this policy will be clearly communicated across the company to ensure that all executives and employees recognize that they are part of this effort, fostering an awareness of social responsibility and norms.

5. Executive accountability and disciplinary action

As disclosed in the October 20, 2021 press release "Mitsubishi Electric Announces Establishment of Governance Review Committee," the company set up a Governance Review Committee comprising external experts who do not have any business relationship with Mitsubishi Electric. The committee's objectives include assessing the company's internal control and governance systems and clarifying the accountability of Executive Officers and Directors regarding improper quality control practices.

The committee intends to assess the accountability of Executive Officers and Directors based on the results of the Investigative Committee's investigation, and based on the committee's Reports, the company will also consider what executive disciplinary action should be taken to address the improper quality control practices identified in the Investigative Committee's second report which was released and received on December 23, 2021, and thereafter.

6. Looking ahead

So far, investigations have been completed across 14 of the total of 22 sites, and the company will continue to provide its full support to the Investigative Committee with a view to arrive at a full picture of the improper quality control practices and root them out as the company's top priority.

The company will conduct detailed analyses of the improper quality control practices identified to this point, and implement extensive recurrence prevention measures tailored to each of its sites.

Under its new management structure, the company will steadily implement its three key areas of reform, which will include carrying out its responses to the Investigative Committee's specific recommendations, as it strives to regain the trust of all stakeholders, including society at large, its customers, business partners, and employees.

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About Mitsubishi Electric Corporation

With more than 100 years of experience in providing reliable, high-quality products, Mitsubishi Electric Corporation (TOKYO: 6503) is a recognized world leader in the manufacture, marketing and sales of electrical and electronic equipment used in information processing and communications, space development and satellite communications, consumer electronics, industrial technology, energy, transportation and building equipment. Mitsubishi Electric enriches society with technology in the spirit of its "Changes for the Better." The company recorded a revenue of 4,476.7 billion yen (U.S.$ 36.7 billion*) in the fiscal year ended March 31, 2022. For more information, please visit www.MitsubishiElectric.com

*U.S. dollar amounts are translated from yen at the rate of ¥122=U.S.$1, the approximate rate on the Tokyo Foreign Exchange Market on March 31, 2022