Japan's Corporate Olympus

The most salient feature of the Olympus scandal, which forced Chairman Tsuyoshi Kikukawa to resign yesterday, is that it never would have become a scandal at all if the company hadn't hired a foreigner as CEO. Michael Woodford, a 30-year veteran of the company, was fired on Oct. 14 after he started asking questions about $1.3 billion in acquisition writedowns and advisory fees. According to a company spokesman, there were "major differences in management style and direction."

Truer words were never spoken. The details of what transpired within Olympus may well remain forever murky. Clear as day is that far too few people so far—including the management of the company, Japanese regulators, politicians and the mainstream media—have wanted the truth uncovered. Only a small investigative magazine, Facta, went digging, and within the company only Mr. Woodford felt compelled to speak out. And only after 10 days of global coverage embarrassed Japan Inc. did Mr. Kikukawa fall on his sword.

Somehow Japanese corporate governance is always on the cusp of reform. We've lost track of the number of times such scandals have spurred reform initiatives only for managers to find new ways to dodge accountability. Olympus's board includes three independent directors, for example, but they lack corporate expertise, making their role questionable.

Back in the 1980s when Japan was about to take over the world, insulating management from accountability used to be counted as one of the strengths of the Japanese economy, since it supposedly allowed companies to take a longer term view and promoted social harmony. In reality it freed managers to use cheap bank credit to seek market share instead of profits, and make decisions based on their own relationships instead of the bottom line.
As a result, Japanese shares have performed dismally over the last two decades. The Nikkei 225 index is down 17% this year, and the average company is trading at 0.9 times book value.

Proof that Japan is unwilling to change came in the mid-2000s, when the courts jailed Takafumi Horie, CEO of Livedoor, and Yoshiaki Murakami, founder of the Murakami Fund. The two were accused of securities fraud, but their real sin was to shake up the market by mounting hostile takeovers of underperforming firms. The kind of "American-style" capitalism that would remove poorly performing managers was clearly intolerable.

Other signs that Japan is slipping back into its old ways is the resurgence of cross-shareholdings among related companies, and the low level of dividend payments, despite large cash holdings. Companies continue to hold their annual general meetings on the same few days in June, ostensibly to prevent organized crime racketeers from extorting money in return for not asking impertinent questions. But one has to ask why managers are so afraid of difficult questions in the first place.

Tokyo Electric Power, or Tepco, is the biggest corporate governance scandal of them all. The company's low safety standards at its Fukushima nuclear plant and the resulting disaster are sometimes treated as an isolated incident. But in 2002 a whistleblower exposed glaring lapses at the same plant. The company promised to reform, and undertook lots of cosmetic changes. But as Nicholas Benes wrote in these pages in June, Japan lacks the regulatory framework and culture to make managers accountable even if they were willing to submit.

Olympus has lost half of its value, so investigators will be obligated to give the public a modicum of insight into what happened. But don't count on it having a lasting impact. In the end such spectacular failures are less important than chronic mismanagement across the corporate sector, which the Japanese elite closes ranks to conceal. Perhaps that's because the men who hold the top posts in the corporate world, civil service and parliament are perfectly content with a system that is billed as communitarian but in reality serves their personal interests.