Olympus Corp. shareholders may get to exercise rights to nominate directors their U.S. counterparts lack after ousted Chief Executive Officer Michael Woodford said he would propose a new board without the approval of management.
Japanese rules allow shareholders to place nominees directly on proxy ballots for a vote by all stock owners. The right to nominate directors without management approval was initially included in the Dodd-Frank Act financial reforms in the U.S., then judged against in court.
Woodford is seeking a slate of new directors, a demand echoed by an independent panel that called the Japanese camera maker’s board “yes men” this week for failing to stop a $1.7 billion scheme to hide losses. Proxy access under Japan’s Company Law may be the only tool Woodford, a Briton, has to trump the power of management in a country where foreign investors have been frustrated in attempts to pry control from entrenched executives in takeovers.
“The Company Law has some very superior aspects in Japan,” said Nicholas Benes, representative director of The Board Director Training Institute of Japan, a government-certified non-profit group. For board nominations, “investors would like to propose their own alternative. But they can’t do that in the U.S. without mounting a very costly proxy battle,” he said.
U.S. Reformers Denied
A federal appeals court in July struck down the Securities and Exchange Commission’s so-called proxy access rule initially included in Dodd-Frank.
Woodford, dismissed as Olympus CEO on Oct. 14, has said company executives should have no say over board nominations because they were involved in or tolerated malfeasance. The 30-year Olympus veteran, promoted to CEO this year, was fired after questioning $1.4 billion in takeover costs now at the center of criminal investigations.
The shares gained 4.9 percent to 1,183 yen as of 1:39 p.m. in Tokyo. The company’s market value has dropped by more than half since Woodford’s dismissal.
“It’s completely inappropriate for the current management team, who are tainted by its past mistakes, to make choices about the identity of new board members,” Woodford said in a statement last week as he resigned from the board. “I intend to liaise with all interested stakeholders with a view to formulating a proposal for the constitution of a new board.”
Woodford has also said he would like his old job back.
Southeastern Asset Management Inc., Olympus’s largest overseas shareholder, has joined the calls for a new board.
‘Rotten to the Core’
“A new slate of directors proposed only by the current board would not be sufficient,” Josh Shores, a London-based principal at Southeastern, said by e-mail.
Three former Olympus chairmen and three senior aides were “rotten to the core,” according to the report released Dec. 6 by the independent panel, set up by the company following Woodford’s dismissal and allegations. Others involved in the fraudulent accounting “should be fully eliminated,” it 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. “The managers may have been foul, but Olympus’s main business is good.”
Olympus President Shuichi Takayama said yesterday shareholders would get the chance by late February at the earliest to vote on new directors, and on whether Woodford should return.
“Woodford did have a dogmatic style, but he also shed light on the issue, and that is something not one of us could do,” Takayama said. “He deserves recognition for doing that.”
Repeated attempts to reach Olympus executives involved in the schemes at their homes have failed.
While U.S. shareholders lack the proxy access Japanese investors have, boards in the U.S. have more independent directors who wouldn’t hesitate to respond to fraud confessions, Benes said.
“When there’s the kind of admitted malfeasance that we now have in the Olympus case, independent directors would move very quickly,” said Benes. U.S. directors would “act as quickly as possible to get rid of all managers who had been involved in malfeasance and replace them and that would frankly, undoubtedly in this case, include anyone who for whatever reason voted to terminate Mr. Woodford.”
Olympus has reported that three, or 20 percent, of its 15 directors are independent. The designation doesn’t always reflect the necessary distance from management, Benes said.
U.S. Reform Advocates
Corporate governance reform advocates in the U.S., including former New York City Councilwoman Melinda Katz, have said proxy access would allow them to select more accountable directors.
“Many boards remain too unaccountable to shareholders for the decisions they make,” Katz wrote in comments to the SEC on a proposal to include proxy access in Dodd-Frank. “The proposed rule changes would give shareholders a greater say in the governance of public corporations and a way to nominate as many as one-fourth of a company’s directors.”
Chief executives including Robert McDonald of Procter & Gamble have said the costs of proxy access for shareholders outweigh its benefits.
“Proxy access will exacerbate the push toward short-term financial results rather than the creation of long-term shareholder value,” McDonald wrote in a letter to the SEC available on the regulator’s website.
The scale of the fraud and failure of Olympus’s board 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 Dec. 6 panel report said.
The study 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.”