What the Olympus saga says about corporate governance in Japan
Oct 22nd 2011 | TOKYO | from the print edition
“THIS is a referendum on modern-day corporate Japan,” fumes Michael Woodford, a Brit cast down from the heights of Olympus, a Japanese camera maker. Mr Woodford was ousted as the company’s president on October 14th, after barely six months in the job. Tsuyoshi Kikukawa, the 71-year-old chairman, blasted him for failing to hew to Japanese cultural practices. The board voted unanimously at a ten-minute meeting where Mr Woodford was not allowed to speak. Take a bus to the airport, he was told.
Mr Woodford says his sacking may have more to do with some very large and unusual transactions that he challenged Mr Kikukawa and other executives to explain. They stonewalled him, according to internal company correspondence reviewed by The Economist.
Mr Woodford alerted Olympus’s auditors, commissioned a review by an outside forensic-accounting group and asked for the resignations of Mr Kikukawa and an associate. He has since handed a dossier on the matter to Britain’s Serious Fraud Office—much of the money flowed from Olympus’s accounts in Britain.
Olympus paid $687m in advisory fees relating to the purchase in 2008 of Gyrus, a British firm that makes medical instruments. The money went to AXAM, a firm incorporated in the Cayman Islands, and AXES, a firm in New York. The owners of AXAM/AXES are unknown. Neither firm can now be traced. Olympus paid a generous $2.2 billion for Gyrus, 100 times its annual pre-tax earnings. The advisory fee was even more generous: more than 30% of the purchase price, rather than the usual 1%. Olympus also paid $773m for three small, private companies in fields not obviously connected to cameras—cosmetics, plastic containers and waste-disposal. It wrote off 76% of the value of the deals a few months later. Olympus vigorously denies wrongdoing, but several banks lowered their ratings on its stock and Goldman Sachs on October 19th suspended its ratings entirely.
Founded as a microscope maker in 1919, Olympus is known for cameras but it is also a powerhouse in medical-imaging technology, such as endoscopes, where it has a 70% share of the global market. Net sales have declined for the past four years and the camera division is unprofitable. Mr Woodford was promoted to president after he cut costs and turned around Olympus’s European business.
Mr Woodford says that at the time he had “no idea” the firm had been so profligate. Its debt-to-equity ratio of nearly 500% made it the seventh-most-indebted company in Japan. He also says he was unaware of oddities in the Gyrus deal, even though he was the top European executive at the time. The write-offs took place during the global financial crisis, when gloomy announcements were so common that they ceased to startle anyone.
Corporate governance is a problem in Japan (see table). The country ranks 33rd among 38 countries for corporate governance, according to GMI, a firm that measures such things, making it worse than Russia, Brazil and China. CLSA, a broker, complains that Japanese firms “express hostility to reforms”. Regulators are mediocre. There is no requirement for independent directors. Few foreigners serve on Japanese boards and the proportion of women, at 1%, is less than in Kuwait.
Japanese chief executives are often figureheads, while real (but informal) power resides elsewhere, perhaps with the chairman. Mr Woodford challenged this convention. A traditional Japanese manager might have tackled the problem discreetly instead of embarrassing his peers.
KPMG was Olympus’s auditor in 2008; Ernst & Young in 2009. Both firms’ British offices placed a formal qualification on Gyrus’s accounts because the firm failed to show that it had no relationship to AXAM/AXES. However their Japan offices, though not required to follow the British decision, approved the Olympus group accounts without knowing the answer to this rather glaring conundrum.
Olympus’s odd transactions were first reported this summer by a small investigative magazine called Facta, but ignored by the mainstream Japanese press. Local media have made surprisingly little of the story, even as Olympus’s market value has roughly halved. Japanese regulators, too, have not made much fuss. Olympus suggests it may sue Mr Woodford for disclosing confidential information to the media. Mr Woodford says he would welcome that day in court.