The printer company has worn sackcloth and ashes since being caught out inflating its New Zealand revenue by $350m. Now it’s in line for lucrative government work again, and boss Peter Thomas tells of lessons learned.
Staggering corporate blunders like Kodak failing to spot the rise of digital photography and the gazillion-dollar bailout of General Motors have become the stuff of academic studies on how not to do it.
New Zealand has its own homegrown cautionary tale. The $350 million financial scandal that engulfed printer and document management company Fuji Xerox in 2017 was the largest in this country’s history, and today managing director Peter Thomas finds himself in the role of tutoring MBA students and business groups on avoiding the same stupid mistakes.
A toxic sales culture and abuse of accounting techniques saw Fuji Xerox artificially inflate its revenue by tens of millions of dollars between 2010 and 2015. It culminated in the company announcing a loss of over $350 million in 2017 and being kicked off the government’s panel of official suppliers. Heads rolled, a Serious Fraud Office investigation still hovers, and Fuji Xerox is pursuing civil action against three of its former executives.
An independent investigation found the company operated a culture of “sales first at any cost”. Sales staff were rewarded with lavish bonuses and $25,000-a-head holidays. Fuji Xerox would sell contracts that billed customers on how much they used their photocopier machines. This would include a ‘target volume’ of future usage which the company booked as revenue upfront – whether or not it was achieved.
After hard-out rehabilitation and public relations efforts, including the release late last year of a 136-page Sustainability Report outlining its good deeds, Fuji Xerox has just been reinstated as a government supplier on a probationary basis.
Peter Thomas spoke to The Spinoff about what life is like at Fuji Xerox today.
You joined Fuji Xerox in 2015 two months after a whistleblower sent the first email to head office revealing the financial scandal. How much did you know about what was going on?
When I joined Fuji Xerox, from the outside looking in I thought it was a highly successful technology company striving for growth. Within a few weeks it became clear to me things were not well. For example, we had a number of bad debts that we were not managing appropriately and from what I could see these were going to hit the P&L (profit and loss or income statement) and needed to. In March 2016 the company recorded losses of over $50m, and when we released those results that’s when the news broke about the scandal.
Did you understand the extent of it at that point?
No, not the extent of the way the past contracts had been classified from an accounting perspective. The thing that changed for us was when we had a change of auditor in early 2017, KPMG are our auditors now. Their view was that we had been incorrectly recognising revenue on particular contracts from 2010 to 2015. They raised those issues with our shareholder (Fujifilm). They also raised the issue that potential fraud had occurred in New Zealand, and that’s what set off the independent investigation.
To give you some scale of that, there were over 260 auditors and accountants based here in New Zealand reviewing every sales transaction the company had done from 2010 to 2015. This resulted in the losses the company ended up having to record. It was unbelievable, a very surreal time.
You were on the board from 1 April 2016 – did you sign off on the 2016 accounts?
What we knew about at the time, in terms of some of the bad debts and some of the accounting issues, to the best of our knowledge those were all cleaned up. I didn’t personally sign the accounts, they would have been signed by the chairman and the chief financial officer. But yes I was a director.
Was it the Wild West?
I probably wouldn’t use that term, but there was no doubt that the governance and management controls that existed in Fuji Xerox were not close to sufficient for an organisation of our size and scale (600 staff across 17 New Zealand branches).
We’ve obviously worked hard, and our Sustainability Report released in November provided a reasonable amount of detail of the changes we’ve made. I think it was over 60 changes to the way we account for things, there’s a whole new governance framework in place with a board chair and a board that meets quarterly, there’s an audit risk committee. We have put 100 percent of our staff through ethics training and we continue to focus on it.
One of the things we’ve really tried to change in the culture is this feeling of inclusiveness, where if people see something going wrong they can put their hand up.
The whistleblower was ignored, there was an active campaign to try and cover it up. What assurance can you give New Zealand taxpayers that it wouldn’t happen again?
There’s no doubt the whistleblowing function failed in Fuji Xerox, but to me whistleblowing is the ambulance at the bottom of the cliff. You need to create a controlled environment and a culture where people feel they can speak to management and raise issues if they’re not happy. The reality is it’s what plays out in practice now that will characterise our future, and I’m confident we’re developing the right culture so that we can be seen as ethical and professional organisation.
How have things changed since the days of huge sales bonuses and flash holidays?
In the past sales people were almost on minimum wage but earned significant commissions of hundreds of thousands of dollars. What happens now is that there’s a far greater level of fixed remuneration as part of a sales person’s package, and there are caps over what commission can be earned. In the last financial year we moved our sales staff to gross profit paid plans, so they were rewarded based on the profit the company generates rather than off revenue. That’s helped change the culture. And certainly at my level the variable component of my remuneration is capped at 30 percent. So the significant over-achievement bonuses are a thing of the past.
You’ve been on a PR offensive, and the Sustainability Report alone can’t have been cheap. What have you spent on rehabilitating the company?
It’s hard to put a dollar figure on it. We want to be open and transparent about what happened at Fuji Xerox. It’s no good hiding behind it. One of the things I have been doing recently is I’m happy to talk to pretty much anyone who’s willing to listen about what happened and why, but more importantly what you can do to avoid the same things happening in your organisation. I’ve done a number of public speaking roles over the past six months or so. I see that as something Fuji Xerox can do to help the broader New Zealand business community. Learn from us, don’t make the same simple mistakes we made so that you don’t ever have to deal with this.
In 2016 you had contracts with 730 government agencies worth $55m – how much have you got now, and how much do you hope to gain now you’re back in the good books?
The government is 30 percent of the marketplace we operate in, and we have lost some customers over that period of time obviously, as customer contracts have come up for expiry and we’ve been unable to bid for that business. That has affected us financially.
As we go forward, I respect there are three other members of the panel as well as us (Ricoh, Canon, CSG) and government entities will have a choice, and we’ll put our best foot forward.
What did you have to do to get back on the government supply panel?
Our role over the period from when the suspension started was to give the government confidence that we’d made the appropriate changes in our company, so that we could be seen to be acting appropriately as a supplier, and ultimately to regain its trust and confidence to allow us to enter into new business. Through that period we continued to provide services to government on contracts that were already in place. The suspension meant we couldn’t enter into new business with the government sector.
More importantly it’s what we’ve had to do as a company. What happened here is something that the company is incredibly embarrassed about. It rocked our company to its foundations, not just here but around the world, particularly in Japan. None of us can change what happened, but what we can make sure we do is learn, and put the appropriate steps into the company to make sure it can’t happen again.
I fully endorse the government’s upcoming formal code of conduct that they ask suppliers to sign up to. If I turn that around a bit, Fuji Xerox also has a range of suppliers who provide services to us, and going forward we also expect our suppliers to operate in an appropriate manner.
We’ve done a lot of work on compliance and ethics and behaviours over the past couple of years, and I think our people understand the importance of operating in a professional and ethical manner at all times.
How do you get reinstated as a government supplier when you’re under investigation by the Serious Fraud Office (SFO)?
I’m not sure if the SFO is investigating us or not. If you have a look at their website, their official word says that they are ‘investigating matters relating to Fuji Xerox’. I assume they will be looking into whether any criminal behaviour occurred and decide whether or not to lay charges. Through the last couple of years as their investigation has progressed they’ve requested a large amount of information from us, and we continue to co-operate with them as best we can.
The talk around town is that you’ve been reinstated as a government supplier because you’re undercutting your rivals. Given your past practices, are you operating fairly in the market?
The independent investigation committee report released in 2017 talked about ‘a culture of sales at any cost’. There’s no doubt when you look at our restated financial accounts we lost a lot of money through that period from 2010 to 2015. It’s also fair to say at the time the company was very focused on revenue growth and getting equipment into the market. One thing I can say now for certain is our shareholder is very clear what they expect to see from our operation here in New Zealand. Number one is compliance and ethical behaviour, and it’s very much reinforced every time I meet with them. The second most important metric is profitability. This business in New Zealand must stand on its own two feet and deliver a return to shareholders. That seems pretty obvious, doesn’t it?
Over the past 18 months or so we’ve been running a focused and detailed turnaround programme to get this company back to profitability. We recorded losses in 2016-17 in excess of $350m. In the year ending March 2018 we recorded losses of $12-13m. Later this year we’re publishing our results for the year ending March 2019 and at this stage we’re very close to being in the black. It’s been a significant turnaround. As we take our products and services to market, if we can’t do that on a profitable basis we won’t offer contracts to customers.
Tell us about your own background.
I’m a banker at heart. I worked for Westpac for 22 years, joined from school.
When I left I applied for a job in the newspaper. I didn’t know what the organisation was. It happened to be with the New Zealand Defence Force, and through the interview process I met with Jerry Mateparae, and I just wanted to work for him, he was quite an inspirational leader and after working in the cut and thrust of the private sector for many years it was just something totally different.
Then I became the first deputy chief executive of corporate services at the Ministry of Business, Innovation and Employment (MBIE). I went there to do the merger of the four ministries into one and help set up MBIE as we know it today. Then I guess I wanted to return to the private sector, and I joined Fuji Xerox. I originally came in as general manager, then six months after that became chief operating officer. Then in October 2017 I became the managing director.
Did being the former deputy chief executive of MBIE help you in your dealings with government?
Not at all. It was a very difficult period back in late 2016, there were a lot of allegations levelled at me that Fuji Xerox must only have won these contracts because Peter Thomas used to work for MBIE. It’s now on the public record that I had nothing to do with any of those contracts. As we’ve gone through the last couple of years I’m acutely aware of the role I did play within the government previously, and as a result a lot of the day-to-day interactions with government have been held by other members of the team. If anything the fact I used to work for MBIE has perhaps made it more difficult.
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One of your sustainability goals is gender equality, and yet your New Zealand board is a hundred percent male. How does that work?
We have two local directors, myself and Graham Cook our CFO, and then we have a range of our Japanese colleagues. The board membership is directed by the Japanese. I’d like to think over time we’d see some gender change in that board. What I will say is in our senior leadership team we have a range of six different ethnic backgrounds and a 60/40 split between men and women.
You can’t necessarily change everything at once. We’ve made significant change and improvement in governance, you don’t draw a line under that and say it’s done. One of the things I’m advocating for at the moment is that our board considers an independent member.
The scandal that engulfed our company was felt well up the chain and there’s been a number of changes in where I report into in Singapore and in our head office in Japan, and over time I think you’ll see those changes flow into areas like gender balance on the board.
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