In Japan the phrase 'corporate governance' is very often an oxymoron. Too many corporations are not so much governed in any truly accountable way; they are instead the personal playground for a core of professional managers, coddled and encouraged by complacent board members and indifferent shareholders.
This is the case of 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 Barclays Bank in 1995? Perhaps, except, in this case, nobody has yet been able to put the finger on the 'rogue trader' behind the mess.
The scandal had been bubbling along since 2008, when Olympus made three questionable acquisitions of companies that had no relationship with the company’s core business interests, which involves 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 Gyros 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 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 the British chief executive Michael Woodford, 51, sought an independent audit from Price Waterhouse Cooper, which revealed the exorbitant figure. He was fired as president of Olympus on Oct. 14, breaking the story wide open.
Initially, Chairman Tsuyoshi Kikukawa admitted paying a fee of approximately $300 million, 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.
The Olympus debacle, plus several other corporate scandals this past summer, has 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, the use of foreign executives in top positions, the role of boards and the influence of gangsters.
Woodford was not the first foreigner to head a major Japanese company. Carlos Ghost, a Frenchman, has long had a successful run as chief executive at the Nissan Automobile Co., and an American, Howard Springer, has been the head of Sony for six years. They have survived despite hard economic times that have sent profits tumbling.
But Woodford was not the same as these two outside executives, who were both specifically brought in at the top for their experience as global executives. He was a career Olympus man who entered employment, like any other recent graduate, after leaving 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.)
Oddly enough, one of the few recent reforms of corporate governance in recent years was the enactment of a whistleblower protection law. In August, the high court ordered Olympus to pay Y2.2 million to a 50-year-old employee 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 wide open.
The possible Yakuza (Japanese gangster) connection comes mainly from the sudden and suspicious turn the company took in 2008 when it changed its business focus toward real estate, medical waste disposal and temporary staffing enterprises. 'What happened at Olympus has all of the hallmarks of anti-social forces [i.e. yakuza] gaining entry,' wrote Jake Adelstein, an expert on Japan’s underworld.
Nobody has yet connected the Gyrus takeover with white 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. 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 four to five 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 sake 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. Woodford turned the Price Waterhouse 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 exposés, and nobody knows what they will reveal.