Tuesday, 10 January 2012

Olympus: you really couldn't make it up

Readers may feel I go on too much about the scandal at Japanese camera and medical equipment firm Olympus but, although everything about it seems so extreme that it has become a parody of a corporate scandal, still it holds important lessons for corporate governance everywhere.

This story illustrates how good corporate governance demands that three key groups of stakeholders must act to preserve it; directors must live up to their responsibilities; investors must apply proper stewardship and regulators must act to protect the public interest. If directors fail in their duties then external directors must act, if they fail then investors or regulators must act. In contrast, the case of Olympus seems to illustrate  more of a national conspiracy amongst all parties to preserve the corrupt status quo.

The two latest acts in the comedy are; firstly that sacked CEO, Michael Woodford, has given up his attempt to be reinstated because the major Japanese investor groups refuse to act swiftly against the disgraced management; and secondly - you really couldn't make this up - that the firm is suing most of its own directors, who had a hand either in falsifying the company's accounts or in protecting colleagues who did, yet they remain in office until March and seem to have a hand in choosing their successors. Meanwhile the police, stock exchange and government regulators are 'investigating'. This has been going on for months - since October. All of which clearly suggests that it is unsafe for foreigners, who are outside the coterie of Japanese conspiracists, to invest in Japanese companies. Who knows what else is going on elsewhere? Regulation and the rule of law patently mean nothing in Japan. "Steady on," you say, "What about Russia, which is far worse, or China where you can also be dispossessed in an instant?" Well, the difference is that we thought Japan was 'one of us': a politically stable and reasonably honest country governed by law where investors are protected by the authorities.

There are also other stakeholders who should have acted and could have influenced events. The auditors are clearly culpable. How on earth is it possible for successive auditors to miss a hole in the accounts that was over $1bn? And what are the Japanese authorities, whether accountancy bodies or police, doing about this and why is it taking so long? The other guilty party comprises the company's banks, who have extended credit in this situation. You can argue that it is not the role of banks to change management, their role is to lend at profit. That, however, is a simplification. In Japan the banks seem to be part of the conspiracy of the business elite. They have continued to lend, without apparent conditions, to a company that has been teetering on the verge of collapse. They have provided critical support that has enabled a corrupt management to stay in place: in a western context, banks would have demanded both good security and immediate management changes to protect their investment.

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