Monday, 19 December 2011

Governance on Olympus

Sorry for the dreadful pun of a title. Its poor quality gives some indication of the struggle I have had, and continue to have, with this important case study in appalling governance. The big question I have been thinking about is what lessons there are for corporate governance outside Japan where this company is based. Is it just too specific to the curious business environment of that one country to have wider significance?

I must start with a brief summary of the salient facts. In April 2011 an Englishman, Michael Woodford, was elevated to the position of president and chief operating officer of Olympus Corporation where he had worked for 30 years. The man he replaced, Kikukawa, was elevated to chairman. Woodford was appointed CEO in October but then removed after just two weeks. He claims this was because he queried transactions that had been brought to his attention by an article in Japanese financial magazine Facta in July.

This reported that Olympus had bought a series of small businesses that were peripheral to its main activities but apparently for very high prices. One of these, Welsh medical equipment maker Gyrus was acquired for $2.2bn, which included a $687m success fee to a middleman through a Cayman Islands registered company. A 31% fee is extraordinarily high and totally out of proportion to the size of the company acquired. Further acquisitions were queried in the days that followed and Woodford fled Japan, claiming his life was threatened. Japanese newspaper reports alleged that huge payments had been made to criminal underworld figures. After repeated denials of any wrongdoing by the company, a halving of its share price, and the opening of investigations by police forces and regulators around the world, it eventually admitted that these payments were actually an attempt to hide investment losses from the 1990's. Three board members resigned but the rest, who had all voted for the sacking of Woodford, remain. They have indicated there will be further resignations but not until after they have appointed new directors.

One of the many curious facts about this most curious scandal is that Japanese investors have been relatively subdued. Calls for resignations of all the board have mainly come from overseas investors which has led to a polarisation. Indeed the board of Olympus has spoken of issuing new shares, presumably to a 'friendly' party, which would have the effect of diluting the overseas shareholders who are vociferous in their criticism.

It would take too long to rehearse further facts of the case (for latest developments see here), I must turn to the issues;

  • How have internal and external auditors missed such huge losses (around $1.5bn) over so many years and what sanctions do they face?
  • Were they in collusion with management?
  • What are the Japanese regulators and police doing, since such a huge falsification of accounts is surely criminal?
  • Why are Japanese investors still so quiescent when they have lost over half their investment and they too have been seriously misled?
  • The board of Olympus comprised almost exclusively company 'insiders'. Will this be an impetus to corporate Japan to start appointing genuinely independent directors who will challenge management?
  • How on earth can the board that presided over this debacle still be in office and in charge of appointing their own successors?

The biggest question of all is why there seems a (possibly unspoken) conspiracy of collusion and closing of ranks between company executives, shareholders, regulators, police and government. Clearly Japan is a curious place where identity and loyalty are more important than cleaning the stables and punishing wrongdoers. The disgrace in this case does not just lie with Olympus but with corporate and government Japan.

Although a case like this occurring in the UK or USA would have resulted in arrests by now and a removal of the entire board I think there are still lessons on corporate governance for all of us outside Japan. The most important is that good corporate governance is not just about publishing codes of conduct: people may flout them. It demands that all stakeholders in the company live up to their responsibilities;

  • Auditors must do their job properly
  • Shareholders must not collude with the people who betray them
  • Lenders must not support disgraced management
  • Regulators must act swiftly and decisively to maintain trust
  • Directors must be willing to challenge their colleagues
And let us not be too compacent because we are not Japanese. I will write separately about the results of the investigation into the collapse of Royal Bank of Scotland, one of the biggest banks in the world. Despite having a board packed with big names from the world of business, we are told that nobody really ever effectively challenged a domineering chief executive in Fred Goodwin, neither fellow directors nor the regulator.