Olympus scandal
Encyclopedia
The Olympus scandal was precipitated on 14 October 2011 when British-born Michael Woodford
was suddenly ousted as chief executive of international optical equipment manufacturer, Olympus Corporation
. He had been only two weeks into the job when he exposed "one of the biggest and longest-running loss-hiding arrangements in Japanese corporate history", according to the Wall Street Journal
. The incident raised concern about the endurance of tobashi schemes, and the strength of corporate governance
in Japan.
Woodford alleged that his removal was related to several prior acquisitions he had been seeking answers to, particularly the US$2.2 billion deal in 2008 to acquire British medical equipment maker Gyrus Group. Eyebrows were raised about the US$687 million paid to a middle-man as a success fee – a sum equal to 31 percent of the purchase price, and which ranks as the highest ever M&A fee. The company initially responded, on 19 October, that "major differences had arisen between Mr. Woodford and other management regarding the direction and conduct of the company’s business".
Sums Olympus paid out relating to other acquisitions were also mentioned in the press. Reports also said the company acquired three other Japanese companies outside its core business, and recognised that the assets were worth US$721 million less than their acquisition value 12 months previously. The facts concerning the apparently irregular payments exposed in article in Japanese financial magazine FACTA had come to Woodford's attention. Japanese press speculated on a connection to organised crime. Olympus defended itself against allegations of impropriety, citing its Audit Board's view that "no dishonesty or illegality is found in the transaction itself, nor any breach of obligation to good management or any systematic errors by the directors recognised."
On 26 October, Tsuyoshi Kikukawa resigned as president; he was replaced by Shuichi Takayama. On 8 November 2011, the company admitted that the company's accounting practice was "inappropriate" and that money had been used to cover losses on investments dating to the 1990s. The company blamed the inappropriate accounting on former president Tsuyoshi Kikukawa, auditor Hideo Yamada and executive vice president Hisashi Mori.
had, according to its accounts as at 31 March 2011, consolidated net sales of ¥847,105 million (US$10,589 million) in the year, and total shareholders' equity of ¥262,462 million (US$3,281 million). The group employs close to 40,000 people around the world. Its assets of ¥1,063,593 million (US$13,295 million) as at 31 March 2011 included ¥175,472 million (US$2,193.4 million) of goodwill. Under the leadership of Tsuyoshi Kikukawa, who became president in 2001, the company's revenues increased from ¥467 thousand million (billion) to ¥847 billion while the profits were a relatively constant ¥35 billion.
During the 1980s, many Japanese corporations relied on investments to bolster dwindling profits, particularly in its exports which had been eroded by a strong yen. Toshiro Shimoyama, Olympus president from 1984 to 1993, admitted to the Nikkei industrial daily
newspaper in 1986: "When the main business is struggling, we need to earn through zaitech". Olympus invested in derivatives and other risky investments to boost profits. However, Shimoyama said he "does not remember" any attempt to conceal loses during his tenure as president: “As president it wasn’t the case where all financial reports would come to me, so I have no memory. During that time (former Olympus president) Masatoshi Kishimoto was the treasurer ... I wouldn’t have heard financial details.”
The first sign that all was not well came in 1991, when Olympus had to take losses of ¥2.1 billion on the value of its investments after the investment bonanza ended in 1990. In June 1998, Olympus was subject of market rumours that it had suffered sizeable trading losses on derivatives which caused its shares to plunge by 11 percent. The rumours were emphatically denied by Olympus, which subsequently announced record profits. In September 2011, Olympus announced that it had written off part of a ¥45 billion investment in emerging market bonds. The company further disclosed during its interim results in October 1999, that it had lost nearly ¥17 billion from interest rate
and currency
swaps. The company also reported that it had lost ¥2.9 billion in the Princeton Economics International Ponzi scheme
. According to Bloomberg
, the annual report of Olympus Corporation for the year ended 31 March 2010 showed a ¥15.5 billion ($201 million) prior period adjustment for "loss related to the purchase of preference shares from [an unnamed] third party"; goodwill on its balance sheet also increased by ¥13.5 billion yen to account for the purchase. BusinessWeek
noted that ratio of a company's debt relative to its equity ranks Olympus among the top 2 percent most highly geared of Japan's largest companies, while The Financial Times commented that its capital base – an equity ratio
in 2011 of below 14 percent – is the weakest among its peer group. Olympus is the only Nikkei 225
constituent whose reported goodwill
(¥168 billion) exceeds net assets (¥151 billion).
. In the same year, Olympus also paid out ¥73.5 billion ($965 million) when it acquired three "small venture firms" – Altis, Humalabo, and NewsChef. By contrast, in 2009 Olympus sold its profitable diagnostics unit it had built up over 40 years to Beckman Coulter
for $1 billion – approximately two times turnover – to free up capital.
, an Olympus veteran of 30 years, was promoted to the post of president and chief operating officer. Woodford, previously executive managing director of Olympus Medical Systems Europa, replaced Tsuyoshi Kikukawa and became the first ever non-Japanese chairman of Olympus. Six months later (on 1 October), Olympus elevated him to its chief executive officer. At the time of Woodford's appointment, he was regarded as an unlikely choice. Reuters
reports there were rumours that he only got the job because he would be "easy to control"; some Japanese observers saw Woodford, who speaks no Japanese, as the chairman Kikukawa's new pet. An article in FACTA underlined the sceptics' views, saying "The fact that the company picked a bottom-ranking foreign executive director with virtually no significant responsibilities from amongst a total pool of 25 potential candidates, including the vice-president who was responsible for medical instruments ... set tongues a-wagging." Woodford's promotion was announced through a press statement without calling a news conference. The press release, which was full of praise for Woodford, mentioned his success in cutting costs and presented him as the "new global face of Olympus". According to Woodford, Kikukawa had reminded him privately upon appointing him president: “I am the one who has the authority to hire and fire, and to decide remuneration for board members and the next tier down of management," thus signalling Woodford was "little more than his puppet". Woodford recalls that there appeared to be "strange goings-on at the company" in 2008 – for example, the Gyrus acquisition ought to have been within his scope but was instead handled from Tokyo. So Woodford set off on a trip to Tokyo to resign, but decided to stay after Kikukawa promoted him to oversee all of Olympus’ European businesses and appointed him to the main Olympus board.
The company removed him two weeks into the job, due apparently to "differences in managing style". Woodford, however, alleged that his forced departure was linked to several prior acquisitions he questioned, particularly the US$2.2 billion deal in 2008 to acquire British medical equipment maker Gyrus Group. On 30 July Woodford's attention was drawn to a negative article in FACTA that alleged Olympus had made undisclosed payments for a series of acquisitions some of which outside its "core" camera and endoscope business, most notably a sum of $687 million apparently paid to advisers as part of the Gyrus acquisition. Woodford said that he asked Hisashi Mori and some confidants about the FACTA report. Woodford says that at a lunch meeting in August with Kikukawa and Hisashi Mori, Olympus' compliance officer, Kikukawa revealed he ordered staff not to tell Woodford about the allegations because Woodford was "too busy" dealing with other matters. Kikukawa then apparently dismissed the article as "tabloid, sensationalist journalism". Upon learning about a second article referring to payments by Olympus to "anti-social forces", Woodford began to write a series of letters to Mori and/or Kikukawa regarding his concerns as to governance issues "relating to the company's M&A activities". There were six letters in all. Woodford copied later letters to the company's auditors, and threatened to resign if he did not receive satisfactory responses about the 2008 Gyrus acquisition costs, and the goodwill impairment of around $600 million made that year for the other acquisitions. According to Woodford, Kikukawa made him CEO to stop him from resigning. The New York Times
suggested that the promotion may have been meant to instil Woodford with a greater sense of loyalty to the board. Nikkei Business noted that the announcement was made only in its English web page and queried Olympus; it commented: "Woodford's title had changed from COO to CEO, but it did not signify any real change in the company's leadership. Woodford himself was soon to realise that his appointment to CEO was in name only."
Unbeknownst to the board, and feeling that an internal probe would not get all the necessary answers, Woodford brought in accounting firm PricewaterhouseCoopers
(PwC) to give substance to his suspicions.
Woodford copied his final two letters to senior members of the Ernst & Young
organisation in Japan, Europe and the United States, as well as its global chairman and CEO. According to a report by PwC, a "success fee" of $687 million for the Gyrus acquisition was paid to two small firms, US-based Axes America LLC and Cayman Islands-based Axam Investments Ltd. PwC also examined the transactions resulting in the $600 million write-down.
Kikukawa arrived late to an emergency board meeting on 14 October that he had convened, cancelled the circulated agenda, and asked the board to consider removing Woodford from his post of chief executive. Woodford was not allowed to speak; the motion was carried by 14 of the 15 directors. That day, to explain the management change, Kikukawa circulated a staff email saying that Woodford had "ignored established decision-making processes and created many wedges among the managers and within the organization ... vastly different to what we had expected of him, which was to accelerate decision-making and speed up the management."
After Woodford was deposed, Kikukawa was re-appointed president and CEO of Olympus. One week later, Kikukawa accused Woodford of having created "a gang" of direct reports that circumvented Mori, his supposed immediate subordinate. Kikukawa resigned on 26 October "to restore confidence in the company under the new management". At the press conference, he declared Olympus to be clean, continued to accuse Woodford of attempting to seize power, and maintained Woodford was "autocratic", and that his alleged offences "included intimidation of my own staff." Woodford said on Bloomberg Television
: "The board has to go, they're all toxic, they are all contaminated." On 30 November, Woodford announced that he would resign from the Olympus board, and added that his decision was unrelated to the official investigations in Japan, the UK and the USA.
was Olympus' main broker, but went bankrupt after accumulating ¥260 billion in tobashi investment losses. In 1998, Nomura succeeded as Olympus' main broker. Prompted by the Yamaichi collapse, new "mark to market" accounting rules were made mandatory in 1999, from which time companies were obliged to disclose losses on their securities investments in a timely manner. Thomson Reuters
reported that US$687 million, equal to 31 percent of the acquisition price, was paid to a middle-man as a "success fee", whereas this is usually 1–2 percent. As part of his proof, Woodford released the report from PwC which showed that the sum of $670 million of the advisory payments was paid over to AXAM Investments Ltd., a Cayman Islands company. In June 2010, three months after receiving its final fees from Olympus, it was struck off by local company registry for non-payment of license fees. Olympus revealed that the Axes fee included fees paid to Perella Weinberg Partners UK, who acted as financial advisor, and US law firm Weill, Gotshal & Manges, who acted as legal advisers.
The Telegraph
said it has seen documents indicating a "Mr Sagawa" was a director of Axam Investments and Axes America that received a $687 million advisory fee for the Gyrus acquisition. The Financial Times said its principals were former Nomura employees. The link to the scam caused Nomura shares to fall, though the bank denied involvement, claiming it was "based on speculation and not on fact". Akio Nakagawa and Hajime Sagawa, both of whom started their careers at Nomura Securities and were also colleagues at Drexel Burnham Lambert and PaineWebber, were behind Axes, according to Reuters. Nakagawa, who was once head of equities at PaineWebber in Japan in the early 1990s, had long-standing relationship with Olympus. A former Paine Webber banker attested that Nakagawa and Sagawa were handlers for Olympus, and they made use of Bermuda-based funds valued at "hundreds of millions of dollars" to manage its balance sheet using Japanese accounting loopholes. Axes America, having negotiated the success fee for Gyrus in a combination of cash and stock, then transferred the stock component to AXAM Investments, an affiliate registered in the Cayman Islands. In 2010, the stock was sold back to Olympus for $620 million.
Nobumasa Yokoo, former banker who had dealt with Olympus when he worked for Nomura, is also cited as being behind certain other of the transactions under the spotlight. Having founded Global Company in the late 1990s, he persuaded Olympus to invest ¥30 billion in their venture capital fund in 2000. In 2003, Olympus made a piecemeal acquisition of an information technology group, ITX, whose chief financial officer was Yokoo's older brother. The elder Yokoo became a group executive officer after Olympus became majority owners. Nobumasa Yokoo also introduced three small, unprofitable companies in which he was shareholder and executive that Olympus acquired for ¥73.4 billion – News Chef, a maker of microwave cookware, Altis and Humalabo. According to The Wall Street Journal (WSJ), Olympus acquired the companies from Cayman Island based funds between 2007 and 2010. Nikkei Business reported informed sources deriding these as "shell companies". Part of the transaction took place on 25 April 2008, when Olympus paid the equivalent of $177 million to funds named Dynamic Dragons II and Global Targets. The WSJ noted that there were a large number of frequent and complex corporate changes (name and ownership) but determined from the paper trail that Dynamic Dragons II "was part of a network of elusive Japanese firms and financiers that often invested together, and whose ties and identities were constantly shifting." Kenji Takasago, associate professor at Kobe University
suggested the complexity of the scheme was to obscure the money trail.
Jake Adelstein, former crime reporter for the Yomiuri Shimbun
, said these three acquired companies "shared addresses and office space with several other companies with different names but sometimes the same employees, creating a web of real and paper companies that make tracking the money very difficult." He also alleged that "one of the auditors involved a corporate blood brother ... to the Yamaguchi-gumi
." Sankei Shimbun
said there were perhaps 10 brokers involved in the acquisition schemes, and that while they "are not members of crime syndicates themselves ... [some] ... conduct economic activities together with antisocial forces ... There is the possibility that Olympus has supplied cash (to organised crime) as a result." However, the investigatory panel set up by Olympus rejected reports the allegations that the acquisition funds could found their way to organised crime. Panel chairman Tatsuo Kainaka said "Our committee has confirmed no such facts in its investigations so far."
In September 2008, to top up the cash part of the advisors' success fee, Gyrus issued ¥176.98 million of preferred stock to the AXAM against the advice of company auditors, according to Nikkei Business Daily
. Olympus paid over a further $50 million, nominally as cash settlement for warrants. Regulatory disclosures in the UK show that the preferred stock was allotted on 30 September by Tsuyoshi Kikukawa, Hisashi Mori and Akihiro Nambu (the latter being head of investor relations for Olympus). The identity of the beneficiary – Axam Investments – was only made publicly known more than 18 months later. Three days after the preferred stock was allotted and without the benefit of professional advice, a "supplemental agreement" was signed by Olympus officers that gave AXAM power of veto over "any important decision in the Gyrus business".
A buyback of preferred shares for $530–590 million was authorised by the Olympus board. Axam subsequently negotiated a further increase in the value of the shares, for which Olympus finally paid $620 million in March 2010. According to a UK corporate filing for Gyrus, the value of the securities at the time was disclosed as $177 million. Bloomberg notes that executives Olympus had delayed accounting for the true cost of the 'success fees' of Gyrus until March 2011, by which time Axam Investments had been struck off by the Cayman Islands registrar for nine months.
research note. Olympus issued statements on 19 October defending the acquisitions of Altis, News Chef and Humalabo, saying that they "were determined to have great potential in the medical and health care industries." Press reported that although the three companies had "miniscule capital funds", their combined business value was estimated at between ¥96.9–124.6 billion (US$1.3–1.6 billion). Olympus denied that the acquisitions were unrelated to the core business. The description given of the companies on 19 October, and how they fit into the group's strategy, were contradicted by the later statement: initally, Altis was described as being engaged in "environmental solutions business proposing resources recycling and CO2 reduction focused on petrochemical plants." In a 27 October disclosure, the unit was "mainly engaged in recycling business for medical waste." Humalabo was described initially said to undertake "research and development/sale of skin improving substances using [a fungus known as] basidomycota," but in the later statement was said to be "mainly engaged in development of [health] supplements with ingredients extracted from shiitake mushroom mycelium." While the basic description of News Chef as a maker of cookware for microwave ovens was not changed, Olympus added that "disease prevention and prognosis through foods" was one of its objects.
Olympus said on 19 October that the value of the stakes in the three companies had been impaired
by ¥55.7 billion – more than three-quarters of the acquisition cost, blaming it on "worsened external environment following the 2008 recession." However, it later admitted that "the business prospect diverged from the assumption we had at the time of the investment."
Olympus delegated the task of selecting members to its third-party panel to investigate the allegations to two men who were appointed to the board in June – Yasuo Hayashida, physician and visiting professor at Juntendo University
, and Hiroshi Kuruma, a former executive at the Nikkei business daily. On 1 November, Olympus announced the composition of its third-party panel, headed lawyer and former Supreme Court justice, Tatsuo Kainaka. The panel would include four lawyers and one certified public accountant.
In the week of 6 November, Olympus announced that Hisashi Mori had been dismissed; auditor Hideo Yamada had resigned. At a press conference, Takayama revealed he had known “absolutely nothing” about the scheme until Mori informed him on earlier on in the week. He said Kikugawa, Mori and Yamada were not responsible for the initial investments, but had covered up the losses "with the company's best interests at heart".
At the news conference, Takayama bowed as he apologised for the "highly inappropriate disposal" of the losses. The Financial Times said Takayama had not addressed "the size and origin of Olympus’ past losses; the identity of the executives who approved the initial cover-up; the exact means by which it was executed; and the reason it took so long to dispose of the bad assets."
Ahead of the much-awaited board meeting on 25 November, to be attended by Woodford, two directors – Kikukawa and Mori – announced their resignation; Yamada, who enjoyed observer status on the board, also resigned. Separately, current president Shuichi Takayama said the board members would resign once "the path to Olympus' revival became clear." However, Woodford said: "If they have an iota of care for the company then they should ... resign in the near future."
until the latter collapsed in 2002, when KPMG Azsa
became its auditor. KPMG remained the auditor up until 2009, after which the Ernst & Young ShinNihon (E&Y) took over. At no point were any major issues signalled by the company's auditors; The Financial Times (FT) reported that KPMG had raised some questions when the firm audited Olympus, but audit reports were always unqualified, and E&Y signed off on "clean" audit reports in 2010 and 2011. According to an email sent by former chairman Tsuyoshi Kikukawa that Michael Woodford made public, Olympus had replaced KPMG with E&Y after it expressed disagreement with the accounting treatment of the Gyrus acquisition. The FT queried why, this being the case, KPMG had signed off on the 2009 accounts. Tsutomu Okubo
raised a question in the upper house of the Diet
as to why the auditors apparently failed to stop the cover-up; the Japanese Institute of Certified Accountants said that it would look into the the auditors' role.
, the auditors to Gyrus resigned "partly because of its client's accounting for the securities". KPMG qualified Gyrus' accounts because they could not ascertain that Axam was not a related party. The auditors also took issue with the accounting treatment of the preference shares. Ernst & Young, the firm that succeeded KPMG, also expressed reservations about the 2010 Gyrus accounts for uncertainty, due to the lack of information about Axam. Bloomberg noted that both Gyrus annual reports were filed late: instead of filing within the nine-month statutory limit, the accounts were filed more than a year from the company's year end. In late November 2011 Michael Andrew, KPMG International global chairman, said his firm had complied with its legal obligations to pass on information related to Olympus’s 2008 acquisition of Gyrus, and were removed as auditors for so doing. Andrew said: “It’s pretty evident to me there was very, very significant fraud and that a number of parties had been complicit.”
went further, to suggest that the payments could be linked to the Yakuza
. The Financial Times reported that relevant authorities in several jurisdictions were investigating the case. The Federal Bureau of Investigation
(FBI), which had also been given files about the suspicious transactions by Woodford, opened its case in mid-October; other federal law enforcement agencies, including federal prosecutors in Manhattan, have taken an interest. The SEC is said to be examining Axes America. Experts speculate that US investigators were assessing whether there were kickbacks to Olympus officials or whether money laundering or other illicit acts were involved. The British Serious Fraud Office and the FBI were said to be working with the Japanese Financial Services Agency. Olympus disclosed that they were being investigated by the Tokyo Metropolitan Police, while unnamed sources said that a unit of the Tokyo police dealing with organised crime may also be involved in the investigation. The Japanese Securities and Exchange Surveillance Commission
(SESC) and the Tokyo Stock Exchange are also reported to have taken an interest in the case.
The New York Times published details of an official investigators' memorandum prepared for the SESC, the Tokyo prosecutor’s office and the Tokyo Metropolitan Police Department which stated the true magnitude of losses was ¥481 billion ($6.25 billion). It said that of the "questionable acquisition payments, investments and advisory fees" made between 2000 to 2009, only ¥105 billion has been accounted for in some way. Investigators named Tsubasa Net, a software maker acquired by Olympus through ITX in 2005, as “a front company” with known affiliations with the Yamaguchi Gumi. Altis, Humalabo and News Chef – acquisitions advised by Global Company – were also identified as front companies with links to organized crime.
, Deutsche Bank
and Nomura Securities, concerned about corporate governance issues at the company as well as it balance sheet, all immediately downgraded their stock ratings. Goldman Sachs, who had only upgraded its rating in a report dated 12 October, suspended its coverage after Woodford was removed from office. Nomura and JPMorgan announced on 20 October that their coverage of the company was halted. It was reported that Government of Singapore Investment Corp.
, the Singapore sovereign wealth fund which was one of the principal shareholders, immediately disposed of its 2 percent stake on the first hint of scandal. Share price plunged several days running upon market fears that the shares would be delisted as the company could not meet its reporting mandatory deadline for its quarterly results; In the week to 18 November Nippon Life announced that its stake had been reduced by one-third, from 8.18 percent to 5.11 percent, because of the uncertainty; Mitsubishi reduced its stake from 10 percent to 7.6 percent.
Some major foreign institutional investors have pushed to bring back ousted chief executive Michael Woodford: UK fund manager Baillie Gifford
, Harris Associates, and Southeastern Asset Management, owning respectively 4 percent, 5 percent and 5 percent stake, all believed he was the best candidate to lead the cleanup. Other investors have demanded more disclosures from the company about the state of its affairs. Domestic investors, including Nippon Life Insurance (8.4 percent stake), demanded "prompt action."
On 2 November, a shareholder from Nara Prefecture
was reported to have asked the company's auditor to bring a case against former executives of Olympus to court to reimburse ¥140 billion yen ($1.79 billion) to the company, failing which he will sue them through another rights group, Lawyers for Shareholders' Rights. Two American law firms announced that they were initiating 'investigations' Olympus Corporation and some of its directors and were seeking investors who purchased Olympus ADRs between 7 November 2006 and 7 November 2011 on the grounds that the company's share price had been inflated through false accounting and that directors had hidden substantial losses by "false statements and material omissions".
The quotation price of Olympus shares on the Tokyo Stock Exchange
(TSE) as of 15 November had fallen by some 75 percent since the scandal erupted. The price continued to be volatile: trading was halted as its price hit the upper limit for price falls. On 14 and 15 November, after the threat of delisting ebbed, trading in its shares was once again halted when price rose by the upper limit of ¥100. Trading only took place after hours as there was a glut of unsatisfied buy orders. The share price rose in four straight trading sessions, reaching 834 yen at one point on 16 November.
Many longtime employees of Olympus Corp are shocked and angry, and feel betrayed by the executives who are responsible for bringing public humiliation onto the company. Former director Koji Miyata started a web site, called Olympus Grassroots, demanding clean-up at the company they say they love Miyata also circulated a petition targeted at employees calling on the reinstatement of Woodford. As Olympus has a 70 percent market share in endoscopy, the scandal caused anxiety and concern among the medical profession, which sees Olympus endoscopes as irreplaceable.
The acquisition price tag was justified using sales forecast for the three companies – Altis, Humalabo and News Chef – of ¥88.5 billion (US$1.2 billion) for the fiscal year ending March 2013 – which CFO Asia said was "practically impossible to achieve". It further noted that the combined sales targets for the three companies for the fiscal year to March 2012 were subsequently reduced by 93 percent to a combined ¥6.5 billion (US$85.7 million). Despite the suspicions of wrongdoing, Olympus strongly denied suggestions that the transactions were "something illegal or unauthorized." CFO Asia said that if there was truly no corporate malfeasance, there are "uncomfortable questions about the competence of the internal and external teams that evaluated the three acquisitions, as well as the capabilities of the senior managers and board members that accepted the sky-high valuations and approved the deals." Nikkei Business said similarly that the size of the losses "could very well call management responsibility into question"
In a commentary in the Financial Times entitled "Olympus’s deceit was dishonourable", John Gapper noted that "It is still possible to believe that the accused trio of directors ... thought they were behaving honourably ... [in hiding] failure discreetly and not to make their predecessors lose face." He noted that accounting scandals were not uniquely Japanese, but that 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". Gapper criticised the weakness in governance, particularly how 12 out of 15 directors were either executives or former executives of the company, and that Hideo Yamada, head of the Audit Board, was complicit in the scam. He also noted that auditors KPMG and Ernst & Young would have to answer tough questions about why the manipulation was never discovered or properly questioned.
Bloomberg View columnist William Pesek said: "Japan's corporate culture of denial, of ignoring problems and letting them fester, keeps running up against a globalized world that values agility, innovation and transparency. Olympus demonstrates all too painfully how much Old Japan tolerates a lack of accountability among senior executives; inadequate disclosure; a disinclination to challenge authority and absolute deference to corporate boards regardless of share performance." While he also observed that the independence of the directors was inadequate, he said Japanese executives were much more moderately paid compared to American ones. "Shareholders assume directors are smart, devoted people working for the good of Japan Inc. Tough questions are rarely asked."
During a press conference in early November, Financial Services minister Shozaburo Jimi
said the market should not call into question the standards of corporate governance of other listed companies just because of Olympus. However, some journals linked the case of Daio Paper Corp, also subject of a scandal involving diversion of funds by its chairman.
Michael Woodford (executive)
Michael C. Woodford, MBE is a British businessman and former President and CEO of Olympus Corporation.He was the first non-Japanese person to be appointed as the company's CEO...
was suddenly ousted as chief executive of international optical equipment manufacturer, Olympus Corporation
Olympus Corporation
is a Japan-based manufacturer of optics and reprography products. Olympus was established on 12 October 1919, initially specializing in microscope and thermometer businesses. Its global headquarters are in Shinjuku, Tokyo, Japan, while its USA operations are based in Center Valley, Pennsylvania,...
. He had been only two weeks into the job when he exposed "one of the biggest and longest-running loss-hiding arrangements in Japanese corporate history", according to the Wall Street Journal
The Wall Street Journal
The Wall Street Journal is an American English-language international daily newspaper. It is published in New York City by Dow Jones & Company, a division of News Corporation, along with the Asian and European editions of the Journal....
. The incident raised concern about the endurance of tobashi schemes, and the strength of corporate governance
Corporate governance
Corporate governance is a number of processes, customs, policies, laws, and institutions which have impact on the way a company is controlled...
in Japan.
Woodford alleged that his removal was related to several prior acquisitions he had been seeking answers to, particularly the US$2.2 billion deal in 2008 to acquire British medical equipment maker Gyrus Group. Eyebrows were raised about the US$687 million paid to a middle-man as a success fee – a sum equal to 31 percent of the purchase price, and which ranks as the highest ever M&A fee. The company initially responded, on 19 October, that "major differences had arisen between Mr. Woodford and other management regarding the direction and conduct of the company’s business".
Sums Olympus paid out relating to other acquisitions were also mentioned in the press. Reports also said the company acquired three other Japanese companies outside its core business, and recognised that the assets were worth US$721 million less than their acquisition value 12 months previously. The facts concerning the apparently irregular payments exposed in article in Japanese financial magazine FACTA had come to Woodford's attention. Japanese press speculated on a connection to organised crime. Olympus defended itself against allegations of impropriety, citing its Audit Board's view that "no dishonesty or illegality is found in the transaction itself, nor any breach of obligation to good management or any systematic errors by the directors recognised."
On 26 October, Tsuyoshi Kikukawa resigned as president; he was replaced by Shuichi Takayama. On 8 November 2011, the company admitted that the company's accounting practice was "inappropriate" and that money had been used to cover losses on investments dating to the 1990s. The company blamed the inappropriate accounting on former president Tsuyoshi Kikukawa, auditor Hideo Yamada and executive vice president Hisashi Mori.
Background
Olympus Corporation, a major Japanese manufacturer of optical equipment listed on the Tokyo Stock ExchangeTokyo Stock Exchange
The , called or TSE for short, is located in Tokyo, Japan and is the third largest stock exchange in the world by aggregate market capitalization of its listed companies...
had, according to its accounts as at 31 March 2011, consolidated net sales of ¥847,105 million (US$10,589 million) in the year, and total shareholders' equity of ¥262,462 million (US$3,281 million). The group employs close to 40,000 people around the world. Its assets of ¥1,063,593 million (US$13,295 million) as at 31 March 2011 included ¥175,472 million (US$2,193.4 million) of goodwill. Under the leadership of Tsuyoshi Kikukawa, who became president in 2001, the company's revenues increased from ¥467 thousand million (billion) to ¥847 billion while the profits were a relatively constant ¥35 billion.
During the 1980s, many Japanese corporations relied on investments to bolster dwindling profits, particularly in its exports which had been eroded by a strong yen. Toshiro Shimoyama, Olympus president from 1984 to 1993, admitted to the Nikkei industrial daily
Nikkei Sangyo Shimbun
The , which means Nikkei Industrial Journal, is a Japanese daily newspaper published on weekdays by Nihon Keizai Shimbun, Inc.-External links:*...
newspaper in 1986: "When the main business is struggling, we need to earn through zaitech". Olympus invested in derivatives and other risky investments to boost profits. However, Shimoyama said he "does not remember" any attempt to conceal loses during his tenure as president: “As president it wasn’t the case where all financial reports would come to me, so I have no memory. During that time (former Olympus president) Masatoshi Kishimoto was the treasurer ... I wouldn’t have heard financial details.”
The first sign that all was not well came in 1991, when Olympus had to take losses of ¥2.1 billion on the value of its investments after the investment bonanza ended in 1990. In June 1998, Olympus was subject of market rumours that it had suffered sizeable trading losses on derivatives which caused its shares to plunge by 11 percent. The rumours were emphatically denied by Olympus, which subsequently announced record profits. In September 2011, Olympus announced that it had written off part of a ¥45 billion investment in emerging market bonds. The company further disclosed during its interim results in October 1999, that it had lost nearly ¥17 billion from interest rate
Interest rate swap
An interest rate swap is a popular and highly liquid financial derivative instrument in which two parties agree to exchange interest rate cash flows, based on a specified notional amount from a fixed rate to a floating rate or from one floating rate to another...
and currency
Currency swap
A currency swap is a foreign-exchange agreement between two parties to exchange aspects of a loan in one currency for equivalent aspects of an equal in net present value loan in another currency; see foreign exchange derivative. Currency swaps are motivated by comparative advantage...
swaps. The company also reported that it had lost ¥2.9 billion in the Princeton Economics International Ponzi scheme
Ponzi scheme
A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from any actual profit earned by the individual or organization running the operation...
. According to Bloomberg
Bloomberg L.P.
Bloomberg L.P. is an American privately held financial software, media, and data company. Bloomberg makes up one third of the $16 billion global financial data market with estimated revenue of $6.9 billion. Bloomberg L.P...
, the annual report of Olympus Corporation for the year ended 31 March 2010 showed a ¥15.5 billion ($201 million) prior period adjustment for "loss related to the purchase of preference shares from [an unnamed] third party"; goodwill on its balance sheet also increased by ¥13.5 billion yen to account for the purchase. BusinessWeek
BusinessWeek
Bloomberg Businessweek, commonly and formerly known as BusinessWeek, is a weekly business magazine published by Bloomberg L.P. It is currently headquartered in New York City.- History :...
noted that ratio of a company's debt relative to its equity ranks Olympus among the top 2 percent most highly geared of Japan's largest companies, while The Financial Times commented that its capital base – an equity ratio
Equity ratio
The equity ratio is a financial ratio indicating the relative proportion of equity used to finance a company's assets. The two components are often taken from the firm's balance sheet or statement of financial position , but the ratio may also be calculated using market values for both, if the...
in 2011 of below 14 percent – is the weakest among its peer group. Olympus is the only Nikkei 225
Nikkei 225
The , more commonly called the Nikkei, the Nikkei index, or the Nikkei Stock Average , is a stock market index for the Tokyo Stock Exchange . It has been calculated daily by the Nihon Keizai Shimbun newspaper since 1950. It is a price-weighted average , and the components are reviewed once a year...
constituent whose reported goodwill
Goodwill (accounting)
Goodwill is an accounting concept meaning the value of an entity over and above the value of its assets. The term was originally used in accounting to express the intangible but quantifiable "prudent value" of an ongoing business beyond its assets, resulting perhaps because the reputation the firm...
(¥168 billion) exceeds net assets (¥151 billion).
Spending spree
Having spent some US$4 billion during this period under the stewardship of Kikukawa, the company's aggressive strategy of external growth was not without criticism. According to an Olympus employee, the acquisitions process and funds movements were under the tight control of a small circle of executives in the 'Financial Affairs Group'. Japanese business daily is quoted as saying more than a hundred businesses were acquired during Kikukawa's tenure, and that the majority were unlisted and loss-making. The investments were in diverse sectors such as pet care and DVD production, and often had little connection with the core Olympus business. The most significant acquisition was the British medical equipment maker Gyrus Group, acquired in 2008 at a cost of $2 billion – the equivalent of almost 5 times turnover and 27 times EBITDAEBITDA
EBITDA is an acronym for earnings before interest, taxes, depreciation, and amortization. It is a non-GAAP metric that is measured exactly as stated. All interest, tax, depreciation and amortization entries in the income statement are reversed out from the bottom-line net income...
. In the same year, Olympus also paid out ¥73.5 billion ($965 million) when it acquired three "small venture firms" – Altis, Humalabo, and NewsChef. By contrast, in 2009 Olympus sold its profitable diagnostics unit it had built up over 40 years to Beckman Coulter
Beckman Coulter
Beckman Coulter Inc., is a company that makes biomedical laboratory instruments. Founded by Caltech professor Arnold O. Beckman in 1935 as National Technical Laboratories to commercialize a pH meter that he had invented, the company eventually grew to employ over 10,000 people, with $2.4 billion in...
for $1 billion – approximately two times turnover – to free up capital.
Enter and exit Woodford
On 1 April 2011 British-born Michael WoodfordMichael Woodford (executive)
Michael C. Woodford, MBE is a British businessman and former President and CEO of Olympus Corporation.He was the first non-Japanese person to be appointed as the company's CEO...
, an Olympus veteran of 30 years, was promoted to the post of president and chief operating officer. Woodford, previously executive managing director of Olympus Medical Systems Europa, replaced Tsuyoshi Kikukawa and became the first ever non-Japanese chairman of Olympus. Six months later (on 1 October), Olympus elevated him to its chief executive officer. At the time of Woodford's appointment, he was regarded as an unlikely choice. Reuters
Reuters
Reuters is a news agency headquartered in New York City. Until 2008 the Reuters news agency formed part of a British independent company, Reuters Group plc, which was also a provider of financial market data...
reports there were rumours that he only got the job because he would be "easy to control"; some Japanese observers saw Woodford, who speaks no Japanese, as the chairman Kikukawa's new pet. An article in FACTA underlined the sceptics' views, saying "The fact that the company picked a bottom-ranking foreign executive director with virtually no significant responsibilities from amongst a total pool of 25 potential candidates, including the vice-president who was responsible for medical instruments ... set tongues a-wagging." Woodford's promotion was announced through a press statement without calling a news conference. The press release, which was full of praise for Woodford, mentioned his success in cutting costs and presented him as the "new global face of Olympus". According to Woodford, Kikukawa had reminded him privately upon appointing him president: “I am the one who has the authority to hire and fire, and to decide remuneration for board members and the next tier down of management," thus signalling Woodford was "little more than his puppet". Woodford recalls that there appeared to be "strange goings-on at the company" in 2008 – for example, the Gyrus acquisition ought to have been within his scope but was instead handled from Tokyo. So Woodford set off on a trip to Tokyo to resign, but decided to stay after Kikukawa promoted him to oversee all of Olympus’ European businesses and appointed him to the main Olympus board.
The company removed him two weeks into the job, due apparently to "differences in managing style". Woodford, however, alleged that his forced departure was linked to several prior acquisitions he questioned, particularly the US$2.2 billion deal in 2008 to acquire British medical equipment maker Gyrus Group. On 30 July Woodford's attention was drawn to a negative article in FACTA that alleged Olympus had made undisclosed payments for a series of acquisitions some of which outside its "core" camera and endoscope business, most notably a sum of $687 million apparently paid to advisers as part of the Gyrus acquisition. Woodford said that he asked Hisashi Mori and some confidants about the FACTA report. Woodford says that at a lunch meeting in August with Kikukawa and Hisashi Mori, Olympus' compliance officer, Kikukawa revealed he ordered staff not to tell Woodford about the allegations because Woodford was "too busy" dealing with other matters. Kikukawa then apparently dismissed the article as "tabloid, sensationalist journalism". Upon learning about a second article referring to payments by Olympus to "anti-social forces", Woodford began to write a series of letters to Mori and/or Kikukawa regarding his concerns as to governance issues "relating to the company's M&A activities". There were six letters in all. Woodford copied later letters to the company's auditors, and threatened to resign if he did not receive satisfactory responses about the 2008 Gyrus acquisition costs, and the goodwill impairment of around $600 million made that year for the other acquisitions. According to Woodford, Kikukawa made him CEO to stop him from resigning. The New York Times
The New York Times
The New York Times is an American daily newspaper founded and continuously published in New York City since 1851. The New York Times has won 106 Pulitzer Prizes, the most of any news organization...
suggested that the promotion may have been meant to instil Woodford with a greater sense of loyalty to the board. Nikkei Business noted that the announcement was made only in its English web page and queried Olympus; it commented: "Woodford's title had changed from COO to CEO, but it did not signify any real change in the company's leadership. Woodford himself was soon to realise that his appointment to CEO was in name only."
Unbeknownst to the board, and feeling that an internal probe would not get all the necessary answers, Woodford brought in accounting firm PricewaterhouseCoopers
PricewaterhouseCoopers
PricewaterhouseCoopers is a global professional services firm headquartered in London, United Kingdom. It is the world's largest professional services firm measured by revenues and one of the "Big Four" accountancy firms....
(PwC) to give substance to his suspicions.
Woodford copied his final two letters to senior members of the Ernst & Young
Ernst & Young
Ernst & Young is one of the largest professional services networks in the world and one of the "Big Four" accountancy firms, along with Deloitte, KPMG and PricewaterhouseCoopers ....
organisation in Japan, Europe and the United States, as well as its global chairman and CEO. According to a report by PwC, a "success fee" of $687 million for the Gyrus acquisition was paid to two small firms, US-based Axes America LLC and Cayman Islands-based Axam Investments Ltd. PwC also examined the transactions resulting in the $600 million write-down.
Kikukawa arrived late to an emergency board meeting on 14 October that he had convened, cancelled the circulated agenda, and asked the board to consider removing Woodford from his post of chief executive. Woodford was not allowed to speak; the motion was carried by 14 of the 15 directors. That day, to explain the management change, Kikukawa circulated a staff email saying that Woodford had "ignored established decision-making processes and created many wedges among the managers and within the organization ... vastly different to what we had expected of him, which was to accelerate decision-making and speed up the management."
After Woodford was deposed, Kikukawa was re-appointed president and CEO of Olympus. One week later, Kikukawa accused Woodford of having created "a gang" of direct reports that circumvented Mori, his supposed immediate subordinate. Kikukawa resigned on 26 October "to restore confidence in the company under the new management". At the press conference, he declared Olympus to be clean, continued to accuse Woodford of attempting to seize power, and maintained Woodford was "autocratic", and that his alleged offences "included intimidation of my own staff." Woodford said on Bloomberg Television
Bloomberg Television
Bloomberg Television is a 24-hour global network broadcasting business and financial news. It is distributed globally, reaching over 200 million homes worldwide. It is owned and operated by Bloomberg L.P...
: "The board has to go, they're all toxic, they are all contaminated." On 30 November, Woodford announced that he would resign from the Olympus board, and added that his decision was unrelated to the official investigations in Japan, the UK and the USA.
Intermediaries
In the early 1990s, Yamaichi SecuritiesYamaichi Securities
was a Japanese securities trading firm. The company announced it would cease operations on November 24, 1997 and was declared bankrupt by the Tokyo District Court on June 2, 1999.- History :...
was Olympus' main broker, but went bankrupt after accumulating ¥260 billion in tobashi investment losses. In 1998, Nomura succeeded as Olympus' main broker. Prompted by the Yamaichi collapse, new "mark to market" accounting rules were made mandatory in 1999, from which time companies were obliged to disclose losses on their securities investments in a timely manner. Thomson Reuters
Thomson Reuters
Thomson Reuters Corporation is a provider of information for the world's businesses and professionals and is created by the Thomson Corporation's purchase of Reuters Group on 17 April 2008. Thomson Reuters is headquartered at 3 Times Square, New York City, USA...
reported that US$687 million, equal to 31 percent of the acquisition price, was paid to a middle-man as a "success fee", whereas this is usually 1–2 percent. As part of his proof, Woodford released the report from PwC which showed that the sum of $670 million of the advisory payments was paid over to AXAM Investments Ltd., a Cayman Islands company. In June 2010, three months after receiving its final fees from Olympus, it was struck off by local company registry for non-payment of license fees. Olympus revealed that the Axes fee included fees paid to Perella Weinberg Partners UK, who acted as financial advisor, and US law firm Weill, Gotshal & Manges, who acted as legal advisers.
The Telegraph
The Daily Telegraph
The Daily Telegraph is a daily morning broadsheet newspaper distributed throughout the United Kingdom and internationally. The newspaper was founded by Arthur B...
said it has seen documents indicating a "Mr Sagawa" was a director of Axam Investments and Axes America that received a $687 million advisory fee for the Gyrus acquisition. The Financial Times said its principals were former Nomura employees. The link to the scam caused Nomura shares to fall, though the bank denied involvement, claiming it was "based on speculation and not on fact". Akio Nakagawa and Hajime Sagawa, both of whom started their careers at Nomura Securities and were also colleagues at Drexel Burnham Lambert and PaineWebber, were behind Axes, according to Reuters. Nakagawa, who was once head of equities at PaineWebber in Japan in the early 1990s, had long-standing relationship with Olympus. A former Paine Webber banker attested that Nakagawa and Sagawa were handlers for Olympus, and they made use of Bermuda-based funds valued at "hundreds of millions of dollars" to manage its balance sheet using Japanese accounting loopholes. Axes America, having negotiated the success fee for Gyrus in a combination of cash and stock, then transferred the stock component to AXAM Investments, an affiliate registered in the Cayman Islands. In 2010, the stock was sold back to Olympus for $620 million.
Nobumasa Yokoo, former banker who had dealt with Olympus when he worked for Nomura, is also cited as being behind certain other of the transactions under the spotlight. Having founded Global Company in the late 1990s, he persuaded Olympus to invest ¥30 billion in their venture capital fund in 2000. In 2003, Olympus made a piecemeal acquisition of an information technology group, ITX, whose chief financial officer was Yokoo's older brother. The elder Yokoo became a group executive officer after Olympus became majority owners. Nobumasa Yokoo also introduced three small, unprofitable companies in which he was shareholder and executive that Olympus acquired for ¥73.4 billion – News Chef, a maker of microwave cookware, Altis and Humalabo. According to The Wall Street Journal (WSJ), Olympus acquired the companies from Cayman Island based funds between 2007 and 2010. Nikkei Business reported informed sources deriding these as "shell companies". Part of the transaction took place on 25 April 2008, when Olympus paid the equivalent of $177 million to funds named Dynamic Dragons II and Global Targets. The WSJ noted that there were a large number of frequent and complex corporate changes (name and ownership) but determined from the paper trail that Dynamic Dragons II "was part of a network of elusive Japanese firms and financiers that often invested together, and whose ties and identities were constantly shifting." Kenji Takasago, associate professor at Kobe University
Kobe University
Shindai is one of the leading universities in Japan. It can be seen in the several rankings such as shown below.-General Rankings:The university is ranked 10th in 2010 in the ranking "Truly Strong Universities" by Toyo Keizai...
suggested the complexity of the scheme was to obscure the money trail.
Jake Adelstein, former crime reporter for the Yomiuri Shimbun
Yomiuri Shimbun
The is a Japanese newspaper published in Tokyo, Osaka, Fukuoka, and other major Japanese cities. It is one of the five national newspapers in Japan; the other four are the Asahi Shimbun, the Mainichi Shimbun, Nihon Keizai Shimbun, and the Sankei Shimbun...
, said these three acquired companies "shared addresses and office space with several other companies with different names but sometimes the same employees, creating a web of real and paper companies that make tracking the money very difficult." He also alleged that "one of the auditors involved a corporate blood brother ... to the Yamaguchi-gumi
Yamaguchi-gumi
is Japan's largest and most infamous yakuza organization. It is named after its founder Harukichi Yamaguchi. Its origins can be traced back to a loose labor union for dockworkers in Kobe pre-WWII....
." Sankei Shimbun
Sankei Shimbun
is a daily newspaper in Japan published by the . It has the sixth highest circulation for a newspaper in Japan, and is considered as one of the five "national" newspapers...
said there were perhaps 10 brokers involved in the acquisition schemes, and that while they "are not members of crime syndicates themselves ... [some] ... conduct economic activities together with antisocial forces ... There is the possibility that Olympus has supplied cash (to organised crime) as a result." However, the investigatory panel set up by Olympus rejected reports the allegations that the acquisition funds could found their way to organised crime. Panel chairman Tatsuo Kainaka said "Our committee has confirmed no such facts in its investigations so far."
Structure of Gyrus commission
In mid June 2006 Olympus paid US-registered Axes America the sum of $3 million in "basic fees", and agreed to pay a "completion fee of 1 percent of the acquisition price in addition to the basic fee for advisory work relating to acquisitions." One year later, the agreed rate of "completion fee" to Axes was increased to 5 percent, payable in a mixture of cash, share options and warrants; it disbursed a further $2 million. When the Gyrus acquisition was announced, Olympus paid over $12 million, being the cash portion of the agreed "completion fee".In September 2008, to top up the cash part of the advisors' success fee, Gyrus issued ¥176.98 million of preferred stock to the AXAM against the advice of company auditors, according to Nikkei Business Daily
Nikkei Sangyo Shimbun
The , which means Nikkei Industrial Journal, is a Japanese daily newspaper published on weekdays by Nihon Keizai Shimbun, Inc.-External links:*...
. Olympus paid over a further $50 million, nominally as cash settlement for warrants. Regulatory disclosures in the UK show that the preferred stock was allotted on 30 September by Tsuyoshi Kikukawa, Hisashi Mori and Akihiro Nambu (the latter being head of investor relations for Olympus). The identity of the beneficiary – Axam Investments – was only made publicly known more than 18 months later. Three days after the preferred stock was allotted and without the benefit of professional advice, a "supplemental agreement" was signed by Olympus officers that gave AXAM power of veto over "any important decision in the Gyrus business".
A buyback of preferred shares for $530–590 million was authorised by the Olympus board. Axam subsequently negotiated a further increase in the value of the shares, for which Olympus finally paid $620 million in March 2010. According to a UK corporate filing for Gyrus, the value of the securities at the time was disclosed as $177 million. Bloomberg notes that executives Olympus had delayed accounting for the true cost of the 'success fees' of Gyrus until March 2011, by which time Axam Investments had been struck off by the Cayman Islands registrar for nine months.
Company's own disclosures
During a conference call with investors, Olympus Executive Vice President Hisashi Mori said the company may sue Woodford for leaking internal information to the press, according to a Morgan StanleyMorgan Stanley
Morgan Stanley is a global financial services firm headquartered in New York City serving a diversified group of corporations, governments, financial institutions, and individuals. Morgan Stanley also operates in 36 countries around the world, with over 600 offices and a workforce of over 60,000....
research note. Olympus issued statements on 19 October defending the acquisitions of Altis, News Chef and Humalabo, saying that they "were determined to have great potential in the medical and health care industries." Press reported that although the three companies had "miniscule capital funds", their combined business value was estimated at between ¥96.9–124.6 billion (US$1.3–1.6 billion). Olympus denied that the acquisitions were unrelated to the core business. The description given of the companies on 19 October, and how they fit into the group's strategy, were contradicted by the later statement: initally, Altis was described as being engaged in "environmental solutions business proposing resources recycling and CO2 reduction focused on petrochemical plants." In a 27 October disclosure, the unit was "mainly engaged in recycling business for medical waste." Humalabo was described initially said to undertake "research and development/sale of skin improving substances using [a fungus known as] basidomycota," but in the later statement was said to be "mainly engaged in development of [health] supplements with ingredients extracted from shiitake mushroom mycelium." While the basic description of News Chef as a maker of cookware for microwave ovens was not changed, Olympus added that "disease prevention and prognosis through foods" was one of its objects.
Olympus said on 19 October that the value of the stakes in the three companies had been impaired
Impaired asset
An impaired asset is a condition in which an asset's market value falls below its carrying amount and is not expected to recover. This means that an asset's market valuation is less than the book value of the asset and the future cash flows to be generated from the asset are less than the net...
by ¥55.7 billion – more than three-quarters of the acquisition cost, blaming it on "worsened external environment following the 2008 recession." However, it later admitted that "the business prospect diverged from the assumption we had at the time of the investment."
Heads roll
Then, at a press conference in Tokyo on 27 October, the president Takayama blamed Woodford for the decline in the company's share price, saying "If this secret information had not been leaked, there would have been no change in our corporate value." Takayama said the amounts paid for Gyrus "will pay off considering what value we will gain from the Gyrus acquisition in the future." He further justified the purchase of the three small Japanese companies as part of a strategy "to find new growth areas to reduce our over-reliance on the endoscope business." However, Mori, who was the main speaker, and Takayama were criticised by impatient journalists for their responses that meandered without addressing the issues.Olympus delegated the task of selecting members to its third-party panel to investigate the allegations to two men who were appointed to the board in June – Yasuo Hayashida, physician and visiting professor at Juntendo University
Juntendo University
is a private university in Japan. Its headquarters are on its campus in Bunkyo, Tokyo for School of Medicine and in Hiragagakuendai, Inzai, Chiba for School of Health and Sports Science...
, and Hiroshi Kuruma, a former executive at the Nikkei business daily. On 1 November, Olympus announced the composition of its third-party panel, headed lawyer and former Supreme Court justice, Tatsuo Kainaka. The panel would include four lawyers and one certified public accountant.
In the week of 6 November, Olympus announced that Hisashi Mori had been dismissed; auditor Hideo Yamada had resigned. At a press conference, Takayama revealed he had known “absolutely nothing” about the scheme until Mori informed him on earlier on in the week. He said Kikugawa, Mori and Yamada were not responsible for the initial investments, but had covered up the losses "with the company's best interests at heart".
At the news conference, Takayama bowed as he apologised for the "highly inappropriate disposal" of the losses. The Financial Times said Takayama had not addressed "the size and origin of Olympus’ past losses; the identity of the executives who approved the initial cover-up; the exact means by which it was executed; and the reason it took so long to dispose of the bad assets."
Ahead of the much-awaited board meeting on 25 November, to be attended by Woodford, two directors – Kikukawa and Mori – announced their resignation; Yamada, who enjoyed observer status on the board, also resigned. Separately, current president Shuichi Takayama said the board members would resign once "the path to Olympus' revival became clear." However, Woodford said: "If they have an iota of care for the company then they should ... resign in the near future."
Auditors' rôle
The accounts of Olympus were audited in the 1990s by the Japanese affiliate of then 'big five' accounting firm Arthur AndersenArthur Andersen
Arthur Andersen LLP, based in Chicago, was once one of the "Big Five" accounting firms among PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst & Young and KPMG, providing auditing, tax, and consulting services to large corporations...
until the latter collapsed in 2002, when KPMG Azsa
KPMG
KPMG is one of the largest professional services networks in the world and one of the Big Four auditors, along with Deloitte, Ernst & Young and PwC. Its global headquarters is located in Amstelveen, Netherlands....
became its auditor. KPMG remained the auditor up until 2009, after which the Ernst & Young ShinNihon (E&Y) took over. At no point were any major issues signalled by the company's auditors; The Financial Times (FT) reported that KPMG had raised some questions when the firm audited Olympus, but audit reports were always unqualified, and E&Y signed off on "clean" audit reports in 2010 and 2011. According to an email sent by former chairman Tsuyoshi Kikukawa that Michael Woodford made public, Olympus had replaced KPMG with E&Y after it expressed disagreement with the accounting treatment of the Gyrus acquisition. The FT queried why, this being the case, KPMG had signed off on the 2009 accounts. Tsutomu Okubo
Tsutomu Okubo
is a Japanese politician of the Democratic Party of Japan, a member of the House of Councillors in the Diet . A native of Kurume, Fukuoka and graduate of Kyoto University, he worked at Tokyo Bank from 1984 to 2004. He was elected to the House of Councillors for the first time in 2004.- External...
raised a question in the upper house of the Diet
House of Councillors
The is the upper house of the Diet of Japan. The House of Representatives is the lower house. The House of Councillors is the successor to the pre-war House of Peers. If the two houses disagree on matters of the budget, treaties, or designation of the prime minister, the House of Representatives...
as to why the auditors apparently failed to stop the cover-up; the Japanese Institute of Certified Accountants said that it would look into the the auditors' role.
UK disclosures
According to a letter filed with the Registrar of CompaniesRegistrar of Companies
The Registrar of Companies for England, Wales & Scotland is the official responsible for Companies House, which deals with all filings relating to the Companies Act 1985 to 2006, ensuring the document filings are kept up-to-date and deals with any breaches of the Companies Act.The Registrar Of...
, the auditors to Gyrus resigned "partly because of its client's accounting for the securities". KPMG qualified Gyrus' accounts because they could not ascertain that Axam was not a related party. The auditors also took issue with the accounting treatment of the preference shares. Ernst & Young, the firm that succeeded KPMG, also expressed reservations about the 2010 Gyrus accounts for uncertainty, due to the lack of information about Axam. Bloomberg noted that both Gyrus annual reports were filed late: instead of filing within the nine-month statutory limit, the accounts were filed more than a year from the company's year end. In late November 2011 Michael Andrew, KPMG International global chairman, said his firm had complied with its legal obligations to pass on information related to Olympus’s 2008 acquisition of Gyrus, and were removed as auditors for so doing. Andrew said: “It’s pretty evident to me there was very, very significant fraud and that a number of parties had been complicit.”
Law enforcement and regulators actions
Following his dismissal, Woodford passed on a file of information to the British Serious Fraud Office, and requested police protection. He hinted that the payments may have been linked to "forces behind" the Olympus board; Japanese newspaper SankeiSankei Shimbun
is a daily newspaper in Japan published by the . It has the sixth highest circulation for a newspaper in Japan, and is considered as one of the five "national" newspapers...
went further, to suggest that the payments could be linked to the Yakuza
Yakuza
, also known as , are members of traditional organized crime syndicates in Japan. The Japanese police, and media by request of the police, call them bōryokudan , literally "violence group", while the yakuza call themselves "ninkyō dantai" , "chivalrous organizations". The yakuza are notoriously...
. The Financial Times reported that relevant authorities in several jurisdictions were investigating the case. The Federal Bureau of Investigation
Federal Bureau of Investigation
The Federal Bureau of Investigation is an agency of the United States Department of Justice that serves as both a federal criminal investigative body and an internal intelligence agency . The FBI has investigative jurisdiction over violations of more than 200 categories of federal crime...
(FBI), which had also been given files about the suspicious transactions by Woodford, opened its case in mid-October; other federal law enforcement agencies, including federal prosecutors in Manhattan, have taken an interest. The SEC is said to be examining Axes America. Experts speculate that US investigators were assessing whether there were kickbacks to Olympus officials or whether money laundering or other illicit acts were involved. The British Serious Fraud Office and the FBI were said to be working with the Japanese Financial Services Agency. Olympus disclosed that they were being investigated by the Tokyo Metropolitan Police, while unnamed sources said that a unit of the Tokyo police dealing with organised crime may also be involved in the investigation. The Japanese Securities and Exchange Surveillance Commission
Securities and Exchange Surveillance Commission
The is a Japanese commission which comes under the authority of the Financial Services Agency. It is responsible for “ensuring fair transactions in both securities and financial futures markets.”...
(SESC) and the Tokyo Stock Exchange are also reported to have taken an interest in the case.
The New York Times published details of an official investigators' memorandum prepared for the SESC, the Tokyo prosecutor’s office and the Tokyo Metropolitan Police Department which stated the true magnitude of losses was ¥481 billion ($6.25 billion). It said that of the "questionable acquisition payments, investments and advisory fees" made between 2000 to 2009, only ¥105 billion has been accounted for in some way. Investigators named Tsubasa Net, a software maker acquired by Olympus through ITX in 2005, as “a front company” with known affiliations with the Yamaguchi Gumi. Altis, Humalabo and News Chef – acquisitions advised by Global Company – were also identified as front companies with links to organized crime.
Stakeholders' reactions
Olympus had a market capitalisation of ¥673 billion yen on 13 October, immediately before Woodford was sacked. By the end of the next day, the valuation had fallen to ¥422 billion ($5.5 billion). Analysts at Goldman SachsGoldman Sachs
The Goldman Sachs Group, Inc. is an American multinational bulge bracket investment banking and securities firm that engages in global investment banking, securities, investment management, and other financial services primarily with institutional clients...
, Deutsche Bank
Deutsche Bank
Deutsche Bank AG is a global financial service company with its headquarters in Frankfurt, Germany. It employs more than 100,000 people in over 70 countries, and has a large presence in Europe, the Americas, Asia Pacific and the emerging markets...
and Nomura Securities, concerned about corporate governance issues at the company as well as it balance sheet, all immediately downgraded their stock ratings. Goldman Sachs, who had only upgraded its rating in a report dated 12 October, suspended its coverage after Woodford was removed from office. Nomura and JPMorgan announced on 20 October that their coverage of the company was halted. It was reported that Government of Singapore Investment Corp.
Government of Singapore Investment Corporation
The Government of Singapore Investment Corporation Private Limited is a sovereign wealth fund established by the Government of Singapore in 1981 to manage Singapore's foreign reserves...
, the Singapore sovereign wealth fund which was one of the principal shareholders, immediately disposed of its 2 percent stake on the first hint of scandal. Share price plunged several days running upon market fears that the shares would be delisted as the company could not meet its reporting mandatory deadline for its quarterly results; In the week to 18 November Nippon Life announced that its stake had been reduced by one-third, from 8.18 percent to 5.11 percent, because of the uncertainty; Mitsubishi reduced its stake from 10 percent to 7.6 percent.
Some major foreign institutional investors have pushed to bring back ousted chief executive Michael Woodford: UK fund manager Baillie Gifford
Baillie Gifford
Baillie Gifford is an investment management firm which is wholly owned by 36 partners, all of whom work full time for the firm. It was founded in Edinburgh in 1908 and still has its headquarters in the city...
, Harris Associates, and Southeastern Asset Management, owning respectively 4 percent, 5 percent and 5 percent stake, all believed he was the best candidate to lead the cleanup. Other investors have demanded more disclosures from the company about the state of its affairs. Domestic investors, including Nippon Life Insurance (8.4 percent stake), demanded "prompt action."
On 2 November, a shareholder from Nara Prefecture
Nara Prefecture
is a prefecture in the Kansai region on Honshū Island, Japan. The capital is the city of Nara.-History:The present-day Nara Prefecture was created in 1887, making it independent of Osaka Prefecture....
was reported to have asked the company's auditor to bring a case against former executives of Olympus to court to reimburse ¥140 billion yen ($1.79 billion) to the company, failing which he will sue them through another rights group, Lawyers for Shareholders' Rights. Two American law firms announced that they were initiating 'investigations' Olympus Corporation and some of its directors and were seeking investors who purchased Olympus ADRs between 7 November 2006 and 7 November 2011 on the grounds that the company's share price had been inflated through false accounting and that directors had hidden substantial losses by "false statements and material omissions".
The quotation price of Olympus shares on the Tokyo Stock Exchange
Tokyo Stock Exchange
The , called or TSE for short, is located in Tokyo, Japan and is the third largest stock exchange in the world by aggregate market capitalization of its listed companies...
(TSE) as of 15 November had fallen by some 75 percent since the scandal erupted. The price continued to be volatile: trading was halted as its price hit the upper limit for price falls. On 14 and 15 November, after the threat of delisting ebbed, trading in its shares was once again halted when price rose by the upper limit of ¥100. Trading only took place after hours as there was a glut of unsatisfied buy orders. The share price rose in four straight trading sessions, reaching 834 yen at one point on 16 November.
Many longtime employees of Olympus Corp are shocked and angry, and feel betrayed by the executives who are responsible for bringing public humiliation onto the company. Former director Koji Miyata started a web site, called Olympus Grassroots, demanding clean-up at the company they say they love Miyata also circulated a petition targeted at employees calling on the reinstatement of Woodford. As Olympus has a 70 percent market share in endoscopy, the scandal caused anxiety and concern among the medical profession, which sees Olympus endoscopes as irreplaceable.
Governance concerns
Masaki Shizuka of the TSE expressed the concern that "investor confidence in information provided by the company may decline." Tsutomu Okubo, who is to chair a new working team to discuss reforms to the company act to strengthen corporate governance, questioned whether the corporate auditor system was functioning properly, and whether the company’s accountants were acting as a proper check on management. Toshio Oguchi, representative director of Governance for Owners in Tokyo, argued that the affair pointed to a dysfunctional board: "Even if they didn’t know about the tobashi, the fact that the board approved the payment cannot have been a correct decision.”The acquisition price tag was justified using sales forecast for the three companies – Altis, Humalabo and News Chef – of ¥88.5 billion (US$1.2 billion) for the fiscal year ending March 2013 – which CFO Asia said was "practically impossible to achieve". It further noted that the combined sales targets for the three companies for the fiscal year to March 2012 were subsequently reduced by 93 percent to a combined ¥6.5 billion (US$85.7 million). Despite the suspicions of wrongdoing, Olympus strongly denied suggestions that the transactions were "something illegal or unauthorized." CFO Asia said that if there was truly no corporate malfeasance, there are "uncomfortable questions about the competence of the internal and external teams that evaluated the three acquisitions, as well as the capabilities of the senior managers and board members that accepted the sky-high valuations and approved the deals." Nikkei Business said similarly that the size of the losses "could very well call management responsibility into question"
In a commentary in the Financial Times entitled "Olympus’s deceit was dishonourable", John Gapper noted that "It is still possible to believe that the accused trio of directors ... thought they were behaving honourably ... [in hiding] failure discreetly and not to make their predecessors lose face." He noted that accounting scandals were not uniquely Japanese, but that 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". Gapper criticised the weakness in governance, particularly how 12 out of 15 directors were either executives or former executives of the company, and that Hideo Yamada, head of the Audit Board, was complicit in the scam. He also noted that auditors KPMG and Ernst & Young would have to answer tough questions about why the manipulation was never discovered or properly questioned.
Bloomberg View columnist William Pesek said: "Japan's corporate culture of denial, of ignoring problems and letting them fester, keeps running up against a globalized world that values agility, innovation and transparency. Olympus demonstrates all too painfully how much Old Japan tolerates a lack of accountability among senior executives; inadequate disclosure; a disinclination to challenge authority and absolute deference to corporate boards regardless of share performance." While he also observed that the independence of the directors was inadequate, he said Japanese executives were much more moderately paid compared to American ones. "Shareholders assume directors are smart, devoted people working for the good of Japan Inc. Tough questions are rarely asked."
During a press conference in early November, Financial Services minister Shozaburo Jimi
Shozaburo Jimi
is a Japanese politician of People's New Party, a member of the House of Councillors in the Diet . Jimi is a registered medical practitioner, and was a graduate of the department of medicine at Kyushu University in 1977...
said the market should not call into question the standards of corporate governance of other listed companies just because of Olympus. However, some journals linked the case of Daio Paper Corp, also subject of a scandal involving diversion of funds by its chairman.
External links
- "Ex-CEO of Olympus on Company's `Toxic' Board" (video). Street Smart. Bloomberg. 25 Oct. 2011. Archived from the original on 23 Nov. 2011
- Bacani, Cesar (8 Nov.2011) "Olympus Scandal: The End Game Begins" pg 1.23 CFO Innovation Asia Archived from the original on 11 Nov. 2011.
- "Letter 6: Serious Governance Concerns Relating To The Company’s M&A Activities". Letter from Michael Woodford to Tsuyoshi Kikukawa of 11 October 2011
- Gyrus Group Ltd.. Bloomberg BusinessWeek. Archived from the original on 29 Nov. 2011