9th December 2011
It will investigate former and current board members, auditors and other officials involved with the group over the last 30 years. The scandal has exposed some uncomfortable aspects of Japanese corporate governance, but could its ultimate effect be positive? Might it prompt Japanese companies and policymakers to address the stifling corporate culture that has dragged its economy lower?
Many believe that the Olympus scandal is a natural consequence of Japanese deferential corporate culture. This Forbes article is damning in its analysis of the problems inherent in Japan plc:
"In Japan only 3% of the largest publically traded companies have majority independent boards. Sony Corporation stands out- only two of its 15 directors are non-independent. Other well-known companies like Canon, Toyota, Nintendo and Suzuki have more serious board accountability problems."
It is not only in the corporate sector. The scandal has exposed the network of vested interests at work in Japan in general. The media, for example, stands accused of timidity over the scandal: The affair has shone a spotlight on Japan's media, where big newspapers – unlike the dogged muckrakers at Facta – stand accused of downplaying the story. "The mainstream press has been cautious," says Yasunori Sone, a media studies professor at Keio University. "At the initial stage, Japanese newspapers tend to write from the management point of view."
"Critics say that not only did the dozens of reporters that cover Olympus fail to follow Facta's scoop, their coverage of Mr Woodford's accusations has been circumspect, and mostly buried in the back of their papers. The Nikkei, Japan's pre-eminent business daily, published them on its front page only on Thursday, nearly two weeks after they emerged, in a story on the chairman's resignation."
These assessments would seem harsh were they based on just one incident, but there have been problems before. For example, the crisis at Toyota in 2010 was attributed to weak corporate governance : "Jeff Kingston of Temple University in Japan thinks the entire Toyota disaster has its roots in Japan's deferential corporate culture. Essentially, design problems weren't sufficiently challenged and critical information wasn't relayed properly to management due to Toyota's traditional Japanese corporate culture."
There have been limited improvements in corporate governance. This piece points out that the Government had recently enacted a whistleblower protection law, without which Woodford might not have felt so inclined to speak up.
While there is some appetite for change, GMI, a global corporate governance analyst group, says that companies are still slow to comply with the law:
"Almost half (176 out of 404) of then Japanese companies GMI covers do not have a single independent director on their boards. Furthermore only fewer than one in twenty of the Japanese companies GMI covers have boards that are majority independent. In contrast, seven out of ten of the 1002 companies GMI covers from Industrialized Europe have majority independent boards."
This is in spite of the Tokyo Stock Exchange (TSE) introducing a requirement for an independent board director in mid-2010. The TSE has, notably, not taken any action against Olympus in the wake of the scandal.
"Yasuhisa Abe, a director in the business infrastructure bureau at powerful lobby group Keidanren says: "I do not think that there are any problems in terms of the (corporate governance) system. The issue really is about individual firms". Abe said he understood the need to review the corporate law, but the process should not be linked to specific cases including Olympus, which is a member of the lobby.
"The lobby staunchly opposed making it mandatory to appoint external directors, a proposal that the Justice Ministry's panel is considering, noting that Olympus's three outside directors did not prevent the scandal."
Japan's corporate law is under review by politicians, though progress is slow. Political pressure may hasten the report's development:
Japan has proved resistant to change. The Olympus scandal may speed compliance with existing corporate governance regulation and it may push policymakers to quicker conclusions in their report on corporate law. But those investors expecting a sea-change in Japanese corporate culture may be sorely disappointed.
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