On October 14, 2011, British-born Michael Woodford, CEO of Olympus, was fired after the firm’s board of directors unanimously voted for his dismissal. Olympus is a Japanese company that is well known for cameras, but the company also produces products such as medical imaging equipment. Woodford had worked at Olympus for 30 years, starting as a junior salesman selling surgical instruments. Woodford’s tenure as CEO barely lasted half a year because he was only promoted to CEO in April 2011. Woodford’s vision was to not keep the status quo at Olympus but to shake up the organization. Although Japanese firms tend to focus on harmony and consensus in making strategic decisions, Woodford wanted to challenge the current mind-set of the Olympus executives by playing devil’s advocate, forcing the executives to justify their decisions. It appeared that Woodford’s rebel-like nature was his ultimate downfall because he wanted to make quantum adjustments in the corporate culture at Olympus. At the same time, the organization as a whole was resisting any change.

Therefore, the initial justification of the firing of Woodward was that there was a disagreement between Woodward’s view on the corporate culture and his management style.1 In response to the firing, Tsuyoshi Kikukawa, the chairman of Olympus, stated that Woodford was not able to understand the way business had been done at Olympus for 92 years. Kikukawa also claimed that Woodford did not follow the proper chain of control and gave orders to lower-level employees without going through their supervisors. Woodford was warned that he was ignoring Olympus’s organizational structure and that he needed to stop doing it. Woodford was told that even though he would no longer be CEO, he would still be a board member at Olympus. From the beginning of the controversy, however, Woodford claimed that he was not fired because of a disagreement over his management style or because of his vision to change the firm’s corporate culture.

The Acquisitions

Woodford stated that he was fired for challenging Olympus officials to explain a story that was published in a Japanese financial magazine, Facta, in July 2011 that claimed that Olympus paid exorbitant premiums on four acquisitions that occurred between 2006 and 2008. When asked by Woodford to explain the story, the Olympus executives told Woodford that he was too busy to worry about it and that the Olympus executives would address the issue. For one acquisition of a UK medical equipment company, Gyrus ACMI, Woodford discovered that Olympus paid $687 million in advisory fees to a Cayman Islands–based company, Axam Investments, that did not have any ties to Olympus. The amount of the fees was equivalent to approximately one third of the total acquisition price of $2.2 billion.3 In the other three acquisitions, Olympus bought a plastic medical-waste disposal company called Altis; a company that makes microwave cookware called New Chef; and the third company, called Humalabo, that was in the mail-order cosmetics business. Acquisitions have long been considered a part of sound corporate strategy, though companies usually select acquisitions that are related to their core business. The Olympus acquisitions, however, were not related at all to Olympus’s core of developing products that use lens and camera-like devices. When acquisitions are unrelated, there is no chance for the firm to develop synergistic links between the different divisions based on such factors as similar customers or products. Despite their unrelatedness, Olympus put a value of $912 million on the purchase of these small unfamiliar firms that were not listed on a stock exchange. The premium paid for the acquisitions was supported by Olympus writing down the values of the companies from 68 to 83% one year after the acquisition took place.4 On October 18, 2011, Kikukawa admitted to paying a high advisory fee for the Gyrus acquisition but refuted Woodford’s estimates. Kikukawa claimed that Olympus “only” paid about one half of the $687 million ($390 million) that Woodford had claimed went to Axam Investments for advisory fees. Other Olympus executives had stated that the initial agreement was to pay the advisor $5 million and 1% of the value of the acquisition. This amount was renegotiated upward after many rounds, yet there did not appear to be any additional benefit for Olympus to agree to pay such a high fee.5 The following day, Olympus reversed its course and agreed with Woodford’s figure of $687 million being paid to advisors for the Gyrus acquisition. Olympus’s response to the fee controversy was that it had performed the proper due diligence on the acquisition.

The Ramifications of the Firing

Less than a week after Woodford was fired, Nippon Life and Harris Associates demanded an explanation from Olympus for the advisory fees paid for the acquisition. As two of the largest shareholders of Olympus—Nippon owned 8.26% of the stock, and Harris Associates owned a 4% share—both companies demanded accountability from Olympus’s executives and board members. Furthermore, the Tokyo Stock Exchange, which trades Olympus shares, ordered the company to explain the advisory fees because the average amount of advisory fees is 1% of the acquisition price.7 Questions were also raised about the level of corporate governance at Olympus. A very firm “friendly” board had 12 of the 15 members being Olympus executives who were loyal to Kikukawa. In addition, a large percentage, 60% of the total shares, was held by Japanese corporations that believe that tradition and stability are needed by the board members. Within a week, the Olympus stock share price had fallen by 41%.8 On October 20, 2001, Olympus agreed to set up a third-party committee to investigate the acquisition. The probe was to be responsible for understanding how these fees were created and accepted as part of the negotiation. Olympus finally agreed to the probe, bowing to the increased pressure by major stockholders demanding transparency and objective information on how decisions were made during the acquisition process.9 On October 24, 2011, Kikukawa lashed out at Woodford in a memo posted on the firm’s internal website. Kikukawa called Woodford’s questioning of the acquisitions aberrant and unforgivable, and Kikukawa accused Woodford of using the controversy to try to consolidate his power base with top executives so they could force Kikukawa to resign. In addition, Kikukawa concluded that Woodford did not like Japan because he was always flying in his private jet to different countries in Europe and to his home in the United Kingdom. On the same day, the Federal Bureau of Investigation (FBI) announced it was starting an investigation of the transactions that took place at Olympus. The U.S. link with the investigation was that the company that owns Axam Investments is Axes Americas, a securities firm based in the United States.

On October 26, 2011, Kikukawa announced his resignation as president and chairman of Olympus. Kikukawa was not at the news conference when his resignation was announced. He was replaced by Shuichi Takayama who had been at Olympus for 41 years. Takayama stated that Kikukawa had acted appropriately during the acquisition process.

The Cultural Treatment of Due Diligence

The Japanese culture is steeped in traditions and customs. Along with harmony and consensus is the belief that trust is enough for due diligence. Although U.S. investors expect and demand objective due diligence in any action committed by management and the board, the Japanese philosophy is that the due diligence has been done before the decision has been made. By trusting the relationship the managers have with each other and fostering a trusting relationship with other stakeholders, Japanese managers believe that trust will “guarantee” that the correct actions are taken.

In addition, a quirk in the Japanese corporate governance system occurred during the 1990s when aggressive deal making took place by Japanese firms. Small Japanese shareholders, including some individuals with alleged ties to organized crime, basically extorted money from the companies at their annual shareholders meetings. The individuals threatened to challenge and dispute the meeting unless they were given money to keep quiet. The result was that a culture developed in which managers were never challenged, even by stockholders, at their annual meeting.

The Truth Starts Coming Out

On November 8, 2011, Olympus finally admitted that the payments were not for advisory fees. Actually, Olympus had incurred decades of investment losses and used a number of acquisitions to “write off” the losses by writing down the acquisition’s goodwill after the purchases had taken place. Takayama admitted that Olympus had carried out accounting practices that were not appropriate. Takayama accused former chairman Kikukawa, Vice President Hisashi Mori, and Corporate Auditor Hideo Yamada of committing the fraud and disclosed that he did not know of the scheme to cover up the losses until the previous day when Mori admitted the scheme to him. Olympus had used the scheme to cover up investment losses that had started in the 1990s. The amounts from the losses were calculated and then funneled through the funds that were used for the acquisitions. The money was written off when the value of the acquisitions was reduced once Olympus had acquired them.

The Use of Tobashi

The use of the tobashi procedure to write down trading losses is not a new one. This was a common occurrence in the early 1990s in Japan. Japanese companies would hide bad loans or they would divest unwanted stock through the practice of “tobashi.” Tobashi, which in Japanese means “fly away,” was used to “clean up” the financial statements of Japanese corporations. Tobashi usually involves transferring assets that have lost significant value to shell companies. By transferring the money-losing assets, the losses “fly away.”

Olympus would transfer the trading losses by pretending they were paying a premium on these different acquisitions. Olympus paid substantially higher advisory fees and other payments in the four acquisitions to cover up the losses. Approximately $2.6 billion in losses were hidden by making money “transfers” between Olympus and various clients.....

Questions

1. If Olympus is found guilty, will the fine of $17.3 million be enough? Why or why not?

2. Ethics hotlines can be an effective resource for identifying unethical actions in a company. Why, in your opinion, did Olympus allow the hotline to be run internally?

3. Japanese culture seems to play a large role in this case. Explain the concept of due diligence and how it differs in American culture.

4. What stakeholders are affected in this case, other than the shareholders?