Only a few weeks ago, embattled Olympus was roundly denying anything was wrong with its finances. That was after it fired CEO Michael Woodford for challenging chairman Tsuyoshi Kikukawa and the board about governance and strange M&A activity. Woodford suffered from a ‘conflict of interest,’ the company insisted.
Uh, then again, maybe he didn’t. A panel the company created to investigate $1.4 bn in write-downs on acquisitions, as well as record high advisory fees, turned up a complex plan to hide decades of losses. Three top executives – including Kikukawa, who was forced to resign last month – allegedly ran the whole mechanism.
Is that the whole story? Who knows? As Woodford pointed out last week, the independent directors responsible for assembling the panel ignored his concerns when he raised them. But even at current face value, this is really bad.
The scheme harkens back to the 1980s in Japan, when tobashi was king. The Japanese equivalent of the game Hot Potato, tobashi was how many companies in Japan hid terrible financial performance from investors. They would transfer portfolios of toxic assets for an inflated value back and forth between other firms and paper dummy corporations. A given company would sell a portfolio just before calculating a balance sheet that would be publicly available, and then swap the payment received for the portfolio shortly after.
Eventually, the entire game fell apart, but not before it left a scar on the psyche of investors and corporate governance in Japan. Now, 20 years later, something similar has appeared on the radar, and no one in the investment community is happy.
Olympus president Shuichi Takayama claims he was ‘absolutely unaware‘ of the scheme. Even if true, however, that’s likely to do little good. Not only is Olympus’ status on the Tokyo Stock Exchange now in question, but the story has brought up old questions about Japanese corporate governance that could well spook institutional investors about the imaging company, and virtually any other corporation in Japan.
Not only will Japanese IR officials have to answer difficult questions – like ‘How could this happen with most of top management not having a clue?’ – but the taint may also carry over to US divisions of Japanese companies.