Olympus's Traitor or Hero?

Is former Olympus president Michael Woodford, 51, a traitor to his company or a hero to those in Japan who seriously want to reform the country’s corporate culture?

There is no doubt that the British executive is regarded as a traitor to Olympus’s close cadre of senior executives, some of whom have already resigned in the wake of the revelations of corporate malfeasance that Woodford set in motion. The fact is that despite Japan’s standing as the world’s third-largest economy, behind that status lurks a different reality. Corporate governance, even in some of the most respected Japanese companies, is a lot less stringent than most of the world realizes, depending to a larger extent on the kind of family and interpersonal relations that apply to the rest of Asia than it does to the industrialized west.

Last Friday, Yukio Edano, minister for economy. Trade and industry, told a Foreign Correspondents Club lunch that every economy has companies that don’t comply with generally perceived rules of corporate government. But, he said, most countries, including Japan, are working to minimize such problems. The US, for instance, has had its Enron and AIG scandals. He called the Olympus scandal “disappointing,” and said the government is working to get at its roots.

However, there remains a widespread social compact in many Japanese corporations that one does not air the company’s dirty laundry, especially in such a brutally public way. The fact that Woodford is himself literally a gaijin (outsider), being British, certainly didn’t help him with his superiors, who had claimed lack of “cultural sensitivity” as the main reason for his Oct. 14 sacking.

But Woodford sees himself now as an agent change in the way Japan Inc. does business. Rather than going quietly into the night, he stormed back into Japan last weekend, met by hordes of Japanese journalists. In a busy week, he met with investigators, the public prosecutors’ office and the Olympus board of directors, of which he was then still a member. “I wanted to look them in the eye,” he said.

On Dec. 1, shortly before departing Japan, Woodford turned in his resignation as a board member and declared that he planned to fight to retain his job as the company’s chief executive by mobilizing shareholders behind an alternate team of directors, who would replace the current crew. He sees it as a classic proxy vote. “Olympus can become a model of governance.”

Whether they fall in with Woodford, the shareholders have good reason to be dissatisfied. The value of their stock holdings has shrunk from approximately ¥2,500 a share on Oct. 14, the day Woodford was fired, to about ¥500 a share now with the real prospect that the stock could be delisted, thus writing off the total value of any holdings.

The Tokyo Stock Exchange has placed the shares on a watch list which is a warning to investors that they might be delisted. Woodford himself has urged restraint, saying “If I have any involvement, Olympus will stay as a listed company.” the company has until Dec. 14 to provide updated and more complete financial information.

Yet it may not be as easy for Woodford persuade the large corporate investors to join his crusade. Nippon Life, one of the largest shareholders, for example, has said it will stand by the present management. Typically, Nippon Life and the other corporate shareholders hold relatively small stakes in Olympus, no more than 4 to 5 percent of the shares.

This is a peculiarity of Japanese corporate governance, known as cross-holding in which companies own small – usually about 4 percent – stakes in each other’s companies. The stakes are held in order to smooth relationships not necessarily for their intrinsic value. Normally, these shareholders don’t interfere in the company’s business decisions.

There has been no polling on the Olympus imbroglio, so it is difficult to determine whether the Japanese public at large supports Woodford in his efforts, whether he is a corporate “traitor” or a hero. He does claim that hundreds of Olympus employees have signed petitions urging that he be reinstated as president.

The roots of the Olympus scandal go back to a period of time rapidly fading from memory known as the Bubble Economy era. It was a frenzied time of exploding real estate prices and stock values, even record-setting purchases of Western art. During that time many Japanese companies made more money from buying and selling stock or real estate than they did in making and selling things.

Olympus was no different in latching onto what was then called zaitech, and when the various bubbles burst in the 1990s it was saddled with large debts. Over the years Olympus managers disguised their company losses by pushing them off on clients or subsidiary companies. This practice, is known has tobashi, has been illegal or several years, though riddled with loopholes.

Besides the famous camera, Olympus has a major and very profitable niche in medical optics. Its lock on the endoscope business represents about the only real profit center in the company, which of late has branched out into unrelated businesses that had no clear relationship with the company’s core business interests.

Then the company acquired the British Gyrus Group, which if nothing else at least was a maker of medical equipment. That made it a plausible purchase. What raised eyebrows was the $687 million fee that was paid out to two virtually unknown investment brokers headquartered on the Cayman Islands. It amounted to about a third of the total acquisition price.

This astonishing figure, of course, was not revealed in any company documents. It came out only after Woodford as president sought an independent audit from PricewaterhouseCoopers, which revealed the exorbitant figure. Hi subsequent firing broke the story wide open.

Already investigations into Olympus are continuing on three continents. The company itself has set up an investigative panel headed by a former Supreme Court justice. The stock exchange is evaluating the company’s financial status, and police are looking into any connections with organized crime (denied by Olympus). The story has yet to be fully told. It remains to be seen if Woodward will get other corporate leaders behind him for wider reforms of Japan, Inc. It looks unlikely.