Why Japan Inc can see no evil
Some Japanese newspapers reported over the weekend that a government panel of experts will recommend the mandatory appointment of outside directors to the country's biggest companies. The intention would be to avoid a repeat of the scandal involving Olympus, the camera and medical equipment maker, whose bosses are under investigation for possible fraudulent dealings and crimes involving billions of dollars.
The suggestion of independent directors is worth half a cheer. It is a long way even from being discussed as a real proposal. To be effective, it would need to be part of a package of measures that would clean up doubtful accounting practices and try to prevent cosy ties between business executives, politicians and even gangsters.
As Olympus shows, Japanese businesses are not keen to reform and less so to be reformed. The mainstream domestic media is supine towards big business and was loath to investigate possible misdeeds at Olympus even when some of them were clear to see. The Japanese financial authorities so far have shown a toothless frown. The politicians haven't got a clue, except that business is good for donations.
More than four months have passed since the brave magazine Facta pulled back the curtain to expose questionable deals at Olympus, and two months have elapsed since the then-new chief executive, Michael Woodford, blew the whistle and asked the board questions concerning US$3 billion in deals that did not make commercial sense. For this, he was fired.
A combination of pressure from Woodford, with support from Nippon Life, the company's biggest shareholder, and other foreign funds that own Olympus stock, aided and abetted by persistent questioning from the foreign press, has kept Olympus in the murky limelight and turned the issue from a saga of poor management to a scandal involving fraud or worse.
Reuters on Sunday tracked down Akio Nakagawa, one of the key shadowy figures in the Olympus hinterland, at a Hong Kong apartment block. Nakagawa's US investment company earned the world's biggest fee, US$687 million, for advice on a takeover deal. The sum was equivalent to about 35 per cent of the US$2 billion deal in which Olympus bought Gyrus, a British maker of medical devices. Normally 1 or 2 per cent is paid for such advice. Olympus claimed to have no knowledge of Nakagawa's whereabouts. The Japanese media - and the Japanese authorities - were not on the scene before, or after, Reuters.
Had he been a sumo wrestler playing truant and soccer in Mongolia while claiming to be injured, hordes of Japanese television and print reporters would have been swarming all over the country to investigate the heinous crime, in hunting packs that would make British red-top tabloid reporters look like a tea-party of elderly aunts. The press and sumo guardians hounded bad- boy sumo wrestler Asashoryu Akinori from the sport because he did not 'respect' Japanese traditions.
The Olympus scandal is instructive of Japan's business culture. Olympus itself prevaricated and tried to pretend there were no problems. Former chairman Tsuyoshi Kikukawa originally claimed the payments for advice were normal business practice, just as the money spent on buying small companies with little to no relationship with Olympus' core business was part of a properly considered expansion plan.
When the sacked Woodford took his case public with interviews with the foreign press, Olympus threatened to sue him for divulging confidential corporate information. When the foreign press was publishing front-page articles, the Japanese media did not want to know. It took four days before Nihon Keizai, the leading financial and business newspaper, put the Olympus saga on its front page.
Only the cash-strapped Japan Times, using a Bloomberg report, and a perceptive opinion article by former British ambassador Hugh Cortazzi, recognised what the scandal meant for Olympus and Japan. The Japanese authorities similarly tried to look the other way until American and British authorities began investigating possible criminal activities in the Olympus scandal.
Even today, questions are coming thicker than answers, but it appears that the controversial deals and questionable payments were part of a scam to cover up losses going back 20 years to the bursting of Japan's bubble economy. Apart from charges of false accounting and possible fraud, there are also questions as to whether money was channelled through or payments made to criminal gangs. When questions of yakuza involvement were first raised, Olympus put a so-called independent panel to work, which declared in quick time that there were no such irregularities. But the Japanese police are not yet convinced.
Woodford, who kept his Olympus directorship even after being sacked as chief executive, went back to an Olympus board meeting last week with police protection. The priority now, he said, was to get the Olympus' accounts published by mid-December or the company faced delisting. Kikukawa and other key directors have quit, but the issue of whether Woodford should be invited back to start house-cleaning at Olympus is still unresolved, and leaves the company rudderless.
Japanese Prime Minister Yoshihiko Noda is worried the Olympus cover-up will damage the country's reputation as a place for good business practice. He should be, especially since the behaviour of the Tokyo Electric Power Company only recently showed a history of obfuscation, cover-up and collusion between company officials and bureaucrats.
Noda needs to be more active in urging government and companies to devise a corporate code with teeth - which should include independent directors and ways of ensuring their independence, clear definitions of responsibilities of directors to shareholders and employees, measures against insider trading and promotion of transparency of accounts, in all of which Japan has been seen to be lacking.