The Olympus Shokku

In Japan the phrase “corporate governance” is very often an oxymoron. Too many corporations are not so much governed in any truly accountable way as they are personal playgrounds for a core of professional managers, coddled and encouraged by complacent board members and indifferent shareholders.

This is the case with the burgeoning scandal surrounding the Olympus Corporation, maker of the famous digital camera. Is it possible that this venerable corporation, founded in 1919, will go the way of Barings Bank in 1995? Except in this case nobody has yet been able to put the finger on the “rogue trader” behind the mess.

Then, hardly a week later, Daio Paper, a major maker of tissue products, announced that it would file a criminal complaint against its former chairman, Mototaka Ikawa, for allegedly channeling US$140 million in company money into a Las Vegas casino company and other ventures. These two debacles, plus several other corporate scandals this past summer, have raised questions about corporate governance in Japan that many had thought had been answered in previous reforms. They include the role of the press in uncovering corruption in the business world, which it usually doesn’t, the use of foreign executives in top positions, the role of boards and, not least, the influence of the yakuza – the Japanese mafia.

The Olympus scandal has been bubbling along since 2008, when Olympus made three questionable acquisitions of companies that had no relationship with the company’s core business interests.Those involve not just cameras but a considerable range of medical optics. Its lock on the endoscope business is about the only profit center in the company, which of late has branched out into unrelated businesses.

Then the company acquired the British Gyrus Group, which if nothing else at least was a maker of medical equipment, making it a plausible purchase. What raised eyebrows was the $687 million fee that was paid out to two virtually unknown investment brokers headquartered in the Cayman Islands. That sum amounted to about a third of the total acquisition price, compared with the usual 1 percent to 2 percent. .

This astonishing figure, of course, was not revealed in any company documents. It came out only after the British chief executive Michael Woodford, 51, sought an independent audit from PriceWaterhouseCoopers, which revealed the exorbitant figure. Woodford was fired as president of Olympus on Oct 14, and seemingly minutes later met with a reporter from the Financial Times, which ran the story.

Initially Chairman Tsuyoshi Kikukawa admitted paying approximately a US$300 million fee, but later the company conceded that the figure provided by Woodford was accurate. The company still maintained that such a fee was “reasonable” and that Woodford had been terminated for being culturally insensitive.

Woodford was not the first foreigner to head a major Japanese company. Carlos Ghosn, a Frenchman, has had a successful run as chief executive at the Nissan Automobile Co, and Howard Stringer, a Welsh-born American, has been the head of Sony for six years. They have survived despite hard economic times that have sent profits tumbling.

It is only fairly recently that corporate boards were required to have at least one independent director or an independent auditor. Woodford himself wasn’t the same as the two outside executives at Nissan and Sony, who were specifically brought in at the top for their experience as global executives in similar industrues. He was a career Olympus man who joined the company after college (albeit mostly working in the company’s United Kingdom affiliates). It would appear that in Japan a foreigner is forever an “outsider” no matter how long he has worked for the company.

Probably his only “cultural insensitivity” was the effrontery to send a formal memo to his immediate boss, Kikukawa, suggesting that he and executive vice president Hisashi Mori resign. (Olympus denies that Woodford was fired for this memo; Kikukawa resigned on Oct. 26 but insisted that there was no corruption involved in the company’s recent business moves).

One of the ironies in this episode is that Olympus was already in hot water over the treatment of whistleblowers. One of the few reforms of corporate governance in recent years was enactment of a whistleblower protection law. In August the high court ordered Olympus to pay ¥2.2 million to a 50-year-old employee who was transferred three times for blowing the whistle on his boss. Woodford would seem to be the ultimate whistle blower.

Another issue is the role of Japan’s press as a watchdog. Some elements of the media, such as FACTA magazine, have been covering this story since the questionable acquisitions in 2008 (which Olympus eventually wrote off as bad investments to the tune of $728 million), but the mainstream media mostly ignored the story until the Woodford resignation in mid-October broke it open.

The possible yakuza connection comes mainly from the sudden and suspicious turn the company took in 2008 when it changed its business focus by turning turned more attention to real estate, medical waste disposal and temporary staffing enterprises.

“What happened at Olympus has all of the hallmarks of anti-social forces [ie yakuza] gaining entry,” wrote Jake Adelstein, a expert on Japan’s underworld, on his website, Japan Subculture.

Nobody has yet connected the Gyrus takeover with white-collar crime, but the alleged recipients are still mostly dark horses. So far the speculation centers on two obscure Japanese expatriates, Hajime Sagawa and Akio Nakagawa, and their Cayman Island-registered entities. The New York Times, which did most of the work on this story angle, admitted their investigation had many unanswered questions, including the whereabouts of Nakagawa.

The recent revelations sent Olympus stock prices tumbling by more than 50 percent although they have recovered somewhat as investors look for a bargain. Naturally that has got the many shareholders worried. Another peculiar Japanese corporate practice is “cross-holdings,” in which companies take small stakes of no more than about 4 to 5 percent in each others’ companies.

Normally, these shareholders don’t interfere in the company’s business decisions, but this may not be the case with Olympus. The largest stake holders are pillars of Japan Inc., including Nippon Life, Mitsubishi UFJ, Sumitomo and Tokai Marine Holdings. They have seen the value of their holdings cut in half and they are seeking answers.

So far, Japan’s securities watchdogs have not intervened. It is telling that the US Federal Bureau of Investigation has taken the lead in investigating the connections to American interests. Woodford turned the PriceWaterhouse report over to the UK Serious Fraud Office, but the Tokyo Stock Exchange has not yet placed Olympus on a watch list or taken any further steps, so far. Woodford remains on the board, one of three “outside” members out of 15 (the other are Oympus veterans). There will certainly be more investigations, more exposes, and nobody knows what they will reveal.

editors note: Several editing correctons were made to this story on Nov. 4. We apologize for the earlier mistakes.