The goings-on at Olympus were baffling three weeks ago. Michael Woodford, the Japanese company’s British president, was fired and then disclosed details of some very odd deals. Something was badly awry but it was hard to fathom why Olympus had wasted $1.4bn on three tiny acquisitions and a ludicrously inflated advisory fee.
Things became clearer, but even more disturbing, this week. Shuichi Takayama, Mr Woodford’s successor, bowed twice as a formal apology in Tokyo as he revealed a two decade-long effort inside the boardroom to conceal investment losses dating back to the 1990s. These had been written off against acquisitions.
It is still possible to believe that the accused trio of directors, headed by Tsuyoshi Kikukawa, the former chairman of the camera and medical equipment company, thought they were behaving honourably. They may have seen it as a duty to hide failure discreetly and not to make their predecessors lose face.
If so (and we still don’t know exactly what happened) they were wrong. Honesty would have been far better, not only for the company’s investors but for its employees, its auditors and for Japanese business. As it is, they left their company in a dangerously fragile condition and discredited the other directors, who either knew what was going on or failed in their duties.
The obvious parallel is with financial institutions such as Long-Term Credit Bank and Yamaichi Securities, which concealed post-bubble losses at the end of the 1990s with tobashi transactions. They hid blunders on securities and loans by transferring impaired assets to dummy subsidiaries at book value – Olympus simply managed to string out its own deception for another decade and a half.
It is also reminiscent of banks’ rogue traders who make losses and conceal them with fake transactions and hidden accounts. Nick Leeson, Barings’ rogue trader, lost about the same amount on the Nikkei 225 share index and Japanese government bonds in the mid-1990s as Olympus has paid on its dubious deals. One difference is the alleged culprits sat on Olympus’s board.
Olympus shared the rogue trader’s instinct that covering up losses rather than coming clean was the only way to save itself. Perhaps the pronounced Japanese sense of honour had the perverse effect of preventing the company’s directors from admitting error promptly, and instead making it worse.
Even on the evidence so far, it is an extraordinary scandal and it fully vindicates Mr Woodford’s decision to go public rather than to keep quiet – and keep his job. Such complicity at the top is usually the stuff of John Grisham novels or Hollywood films about nasty corporations, not daily life in the boardroom.
This misbehaviour has put at risk a company with a world-renowned endoscopy business and a distinguished camera brand. A 75 per cent fall in Olympus’s share price since mid-October has reduced its market capitalisation to little more than its equity of $3.5bn and its bonds have been downgraded. Mr Kikukawa has accused Mr Woodford of “trying to destroy society’s trust” in Olympus, but he did that himself.
Accounting scandals are far from uniquely Japanese, as Enron’s collapse and Lehman Brothers’ use of “Repo 105” window-dressing showed. Still, the size and audacity of what Olympus admits to doing is breathtaking. It was a nice piece of corporate satire to conceal losses by exploiting the widespread habit of paying too much for acquisitions and writing them down – the “advisory fee” was especially creative.
But weak standards of corporate governance in Japan made it disturbingly easy for the company to do so. Twelve of the 15 company’s directors were either executives or former executives and the safeguard of having a separate audit board was overridden by the fact that Hideo Yamada, one of the accused trio, headed that body.
Meanwhile, the company’s external auditors – KPMG until 2009 and now Ernst & Young – face some tricky questions to answer about why this deception lingered, and why the true purpose of the Cayman Islands-registered vehicles, through which losses were allegedly laundered, was not discovered.
There is a broader lesson for Japan – that engineering a “soft landing” when things go wrong rather than recognising the full depth of the problem, breeds mistrust. When the truth finally emerges, as we are seeing, investors run scared and a crisis of confidence erupts.
My FT colleague, Gillian Tett, recounts in Saving the Sun, her book on the fall of LTCB, that its officials had a habit of hiding embarrassing files in a concrete manhole in the basement when the Bank of Japan carried out its inspections. That progressed to setting up subsidiaries that were used to warehouse its non-performing loans.
Many Japanese were unhappy with the outcome – that LTCB was turned into a western-style institution called Shinsei Bank by an investment group let by Ripplewood Holdings, a US private equity fund. Yet its deception made it vulnerable, just as Olympus’s international investors are now pressing for change.
Japan’s companies have something to teach the west about harmonious working practices. But their boards of directors are supposed to keep an eye on executives and ensure that disciplines apply, no matter whom it embarrasses. Olympus’s directors instead protected their own.
A thorough clean-out is needed, and a new leadership that can deal credibly with threats such as the company being delisted by the Tokyo Stock Exchange. Mr Kikukawa may have had good intentions, but dishonesty is dishonourable.
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