NEW YORK (The Street) -- The news that Japan's economy shrank in the second quarter was just one more blow to "Abenomics" -- the nickname for the stimulus plan that Prime Minister Shinzo Abe is using to try to turn around his country's economy. But a bigger issue may be getting foreign investors to trust Japanese companies, who've had a storied history of refusing change, even from within.

As Japan deals with the largest accounting scandal in its history at Toshiba (TOSBF , it's still being rocked by the sentiment that is calling into question the effectiveness of the fundamentals underlying everything during what has been called the make-or-break year for the "three arrows" plan set forth by Abe.

"Taking on entrenched vested interests reflected a seriousness of intention from Prime Minister Abe largely absent from prior administrations. Translating this into sustainable reform, though, will take more than one-off fixes," said Katrina Lamb, head of Investment Strategy and Research at MV Financial, a Washington D.C.-based asset management firm. "One tangible indicator of success in the 'third arrow' of structural reforms is an uptick of female participation in the labor force. There are still disincentives for women to join the labor force that could be remedied through programs including, among others, intelligent fiscal incentives."

The recent replacement of Toshiba's board and the inclusion of seven outsiders -- including respected leaders from other industries, and a former supreme court judge -- has led to renewed hope that the government's reforms might actually have some teeth. The news comes less than a month after government auditors discovered that Toshiba had overstated profits by as much as $1.22 billion since 2008.

"Two cheers for the board shake-up at Toshiba," said Lamb. "But Japan has in the past shown itself to be adept at stage-managed crisis responses. The jury is still out on whether this reflects a genuine sea change in the governance practices of corporate Japan."

Initially the reforms included in Abenomics were met with enthusiasm in 2013 and Japan saw a record level of new foreign investment. But these inflows dropped by 90% in 2014. As a result, Abenomics was very much under scrutiny this year, even as Japan's broader Topix index  (similar to the S&P 500) is expected by some analysts to close up as much as 18% for 2015.

There are many who fear that the country's tight-knit, slow-to-adapt corporate culture has yet to embrace these reforms. Yet it is also undeniable there is more of a call internally for greater transparency and oversight after 2011, when Michael Woodford, the newly appointed, British-born CEO of Olympus (OCPNY revealed the company had hidden $1.7 billion worth of losses over 13 years.

Does the executive shuffle at Toshiba finally signal a new direction for the company -- not to mention for the corporate culture in Japan?

According to Mike Smitka, a professor of economics at Washington and Lee University who specializes in Japan, the fast fall of top executives at Toshiba means "that the state of corporate governance in Japan is good, at least in formal terms." Especially in comparison with Olympus scandal, "action was prompt, both internal and external," said Smitka. "There may be other cases that will pop up, but I don't think this is the tip of the iceberg. A lot of heads have rolled, the fraud was much more fundamental."

No matter how fast the government -- if not the board of Toshiba -- has moved to address at least the most obvious image problems this time, investors are still leery of Japanese firms.

According to an ACCA Global Survey published last November, Japan's corporate governance culture has long contributed to a lack of transparency, especially for foreign investors. It listed the country close to the bottom -- 21 out of 25 - of those examined in terms of ideal investment environments.

Smitka was reluctant to describe these issues as a "typical" or even Japanese problem. "There are a vast array of corporate cultures in an economy that is, after all, larger than Germany's," he said. "I know the auto industry best -- Toyota (TM - Get Report) and Honda (HMC - Get Report)  and Nissan  (NSANY and Mitsubishi Motors are all very different companies, with different governance structures and traditions of what makes good management."

After all, issues of outside oversight and larger problems related to "corporate culture" are in the news far beyond Japan these days.

According to a just-released study by the University of South Carolina's Darla Moore School of Business, American for-profit companies are more likely to hire executives who show a willingness to cook the books. Its findings appear to show that people in positions of authority within the U.S. corporate landscape are predisposed by their personality and values to "manage" earnings, and further, are hired and promoted for that reason over more-qualified candidates who do not share such perspective.

In Smitka's view, there is no apparent correlation between governance structure -- including the presence of outside directors or even auditing -- and good governance. He also believes that "the U.S. is not a model: We've not seen financial firm executives going to prison the past five years, even though the schemes employed were slimy in the extreme and the social impact was and remains horrific." He points to the fact that in the 1980s, more than 2,000 executives were convicted of felonies related to the Savings & Loan crisis.

However, he does believe that structural reforms can make a big difference. "I personally would like to see tax laws changed to prevent share buy-backs and instead force firms to pay dividends," Smitka said. "It would generate fewer incentives to emphasize the stock price over the business itself. Even better would be to eliminate stock options, or at least prevent repricing them, and not allowing executives to cash out until some years have passed."

"Foreign investors will believe in the reform when they see more productive capital allocation strategies by Japanese companies -- be that enhanced dividend and buyback policies or the intelligent deployment of capex to opportunities in growth markets -- and less cash sitting idle in corporate coffers," concurred Lamb. "I have been observing the Japanese business environment for more than 25 years, and do believe the climate to be more conducive to meaningful change than has been the case for some time. Whether that change comes in time for deep-seated economic recovery, though, remains to be seen."

That said, for all the conversations right now about how to implement better accountability in a corporate culture which may still be resistant to it, more U.S. style reform is not necessarily the only approach -- or perhaps not even the optimal one in a country where cultural as well as business mores are clearly still evolving to the challenges of a more integrated global economy.

 

  This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.