Olympus Corp (7733). “yes men” who failed to stop senior managers spending 135 billion yen ($1.7 billion) in a cover-up of losses over more than a decade should be removed, according to the findings of a monthlong probe.
Three former chairmen of the Japanese camera maker and three senior aides were “rotten to the core,” according to the report released yesterday by an independent panel. Others “involved in the fraudulent accounting one way or the other, and auditors who did nothing when the auditing firm pointed out the issues” in 2009 “should be fully eliminated,” it said.
Michael Woodford, whose dismissal as Olympus president on Oct. 14 sparked the inquiry, and shareholders have called for a revamp of the board and management. The scale of the fraud and failure of the company’s corporate governance structure to stem it eroded all Japanese companies’ credibility and highlighted the need to break from a tradition where deference to superiors prevents employees from “rocking the boat,” the report said.
“The entire board should be changed as they all share the blame,” said Mitsushige Akino, who oversees about $600 million in Tokyo at Ichiyoshi Investment Management Co. (8624) “The managers may have been foul, but Olympus’s main business is good. If the board changes, it’s still possible for the company’s shares to regain this year’s highs.”
The company has shed more than half its market value since Woodford was fired, as it admitted using offshore vehicles to hide investment losses dating back decades and the Tokyo Stock Exchange threatened to delist the shares.
Investors including David Herro, chief investment officer at Chicago-based Harris Associates LP, said there may now be less of a delisting threat following the report’s findings. Harris held a 3.9 percent stake in Tokyo-based Olympus as of Sept. 30, according to data compiled by Bloomberg.
“I must give more credit to the panel than I would’ve thought I’d be doing,” Woodford said in an interview with Bloomberg Television. “For the remit that it had, it’s very clear that it’s condemning.”
Olympus said in a statement it accepts the panel’s report and that it will make all efforts to ensure it isn’t delisted. An internal committee will seek to clarify which officials still at Olympus were responsible for covering up the losses, according to a memo from President Shuichi Takayama, a copy of which was given to Bloomberg News.
Yesterday’s panel report traced a global network of mostly Japanese advisers who used offshore companies in the Cayman Islands and British Virgin Islands to hide impaired financial securities and channel funds to conceal those losses.
The company began making financial investments after 1985 as a strong yen hurt operating profit, the panel said. When Japan’s stock-market bubble burst at the end of 1989, it purchased high-risk products and structured bonds in an effort to recoup the loss. In late 1990, the company had a little less than 100 billion yen of unrealized losses, and this swelled to 118 billion yen by 2003, it said.
Masatoshi Kishimoto, 75, who was company president for eight years from 1993, and his successor Tsuyoshi Kikukawa were among former executives at Tokyo-based Olympus involved in the cover-up, according to the report. Hisashi Mori, a former executive vice president, and Hideo Yamada, a company auditor, were also implicated. They have now left the company.
The panel, chaired by former Supreme Court Judge Tatsuo Kainaka, carried out 189 interviews, including ones with the former officials. Repeated attempts by Bloomberg News to reach Olympus executives involved in the schemes at their homes have failed.
The report found failings at all levels in the corporate governance structure, including the auditing of accounts by the local affiliates of KPMG LLP and Ernst & Young LLP.
“There were a lot of yes men among the directors,” it said. “The board had become a mere formality,” while the outside directors were “not appropriate.”
Woodford, who questioned takeover costs including fees paid to a now-defunct Cayman Islands fund in the $2.1 billion takeover of Gyrus Group Plc in 2008, resigned as a director Dec. 1 in the first step of a campaign to take control from the board that fired him.
“Not a single director stood up in support of my efforts to expose what had taken place,” Woodford said in an e-mailed statement last night. “Olympus and its shareholders would have incurred far less damage if the current directors had acted appropriately.”
Olympus paid Cayman-based Axam Investment Ltd. $670 million in fees as part of the Gyrus buyout. Hajime Sagawa, who was a director of Axam, has left Florida for the Cayman Islands, his brother-in-law said in a Dec. 1 interview. Sagawa divorced his wife a month ago and sold her their Boca Raton home for $10. Sagawa, who hasn’t made a statement since Axam’s role in the Olympus scandal was revealed, and Akio Nakagawa were named by the panel as key figures who aided Olympus to structure its loss-hiding schemes.
“He’s down in the Cayman Islands,” Gary Nevis, Sagawa’s brother-in-law, said in a Dec. 1 telephone interview, citing a conversation he had last week with his sister, Sagawa’s ex-wife.
Investigators in Japan, the U.S. and U.K. are still probing the transactions. The panel said it found no evidence that money was funneled to criminal gangs.
To contact the editor responsible for this story: Ben Richardson at firstname.lastname@example.org