Board Failings 1

Board Failings at Olympus Japan

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Table of Contents
Introduction................................................................................................................................3
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 Board Failings 2

Discussion..................................................................................................................................3

Key Issues...............................................................................................................................4

Recommendations...................................................................................................................5

Conclusion..................................................................................................................................5

References..................................................................................................................................6

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Introduction
Corporate governance defines the rules on how different businesses needs to be managed
[ CITATION Nat19 \l 16393 ]. However, for Japanese firms, the corporate governance has always
been an issue for the foreign investors. In the business world, shares usually represent the
fraction of the ownership of the company. But despite this, for the Japanese firms the
outsiders who become the owners of the companies often feel disappointed as they are not
being allowed to have any participation in the corporate decisions and neither are they
allowed to appoint directors for the firm. The following report focus on one of the biggest
corporate scandal of Japan i.e. “Olympus” that shows the perfect example of the imperfect
and bad Japanese management style and corporate governance. The report will focus on the
key issues that led to the board failings at Olympus and the recommendations for the same
will be made later in the report.

Discussion
Olympus is the leading internal optical equipment manufacturer of Japan [ CITATION Col14 \l
16393 ]. The Olympus scandal came to light on 14 October 2011 when the company suddenly
fired its British-born CEO Michael Woodford. After becoming the CEO of the company,
Michael exposed the biggest scandal and financial fraud and one of the longest running
financial fraud-hiding scandal ever in the history of Japan. As a result, he was asked by the
board of members to leave the company and his position. The incident focused on the
discrepancies in the management style and the corporate governance system followed by the
Japanese firms.

The incident wiped almost 80% of the company’s stock market evaluation [ CITATION Aro12 \l
16393 ]. The investigations were carried out across UK, US and Japan regarding the
transactions and ultimately the investigation led to the arrest of the various directors, senior
managers and executives of the company. All of them were also accused of considerable
turmoil of the corporate governance system of Japan.

Key Issues
From the investigation, it became clear that it was the failure of the director’s board of the
company to provide effective rights to their independent directors. The company had total 15
directors, out of which 12 of the directors of the company are the company’s executives.
Therefore, out of 15 directors, the company only had 3 independent directors and no one of
them has experience of the industry [ CITATION NGD17 \l 16393 ].

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As per the Japanese Law, the directors in the company are supposed to supervise the
representative director but in actual scenario, the directors of the Japanese firms are often
selected by the individual whom they are expected to provide supervision [ CITATION NGD17 \l
16393 ]. This becomes the most critical issue in the corporate governance of the Japanese
Firms as it creates accountability issues as well as empowers a single authority with lot of
powers. The similar was the case in the Olympus Scandal. Despite being the CEO, Woodford
realized that the board of directors, instead of following him, were following the orders of the
chairman.

The scandal became the biggest as well as longest-lived financial fraud scandal in the
corporate history of whole Japan. Another major issue involved in the incident was the high
amount involved in the financial fraud made by the company that was more than $1 billion
[ CITATION Nat19 \l 16393 ]. The company as well as its board of directors tried to hide the
financial transactions made illegally to various UK firms.

Another major key issue in the corporate governance system of the Olympus was that among
3 of the independent directors of the company, one used to be a medical doctor by profession
and there existed no single independent director in the firm who had a significant experience
of risk management [ CITATION Col14 \l 16393 ]. This became the main reason why Olympus’s
corporate governance system was being given the “D” rating by the GMI which is the
corporate governance research firm of Japan. The same problem is faced by most of the
companies in Japan.

The major issue in most of the Japanese Firms including Olympus is that they do have an
average level of independence of their board of directors is only 20%. In contrary to this,
majority of the public listed companies i.e. almost 92% of the companies in US have their
independent directors while in Japan, merely 3% of the public listed companies have the
independent board members [ CITATION Nat19 \l 16393 ].

Recommendations
 It is recommended that Olympus should focus on appointing outside and independent
directors for the firm in order to make significant improvement in its corporate
governance system. However, it is difficult for the company to agree to the legal
requirements required by the new system but in order to overcome the risks and to make
improvements in its governance structure, the company should experiment new ways

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such as combining the best of the board members with the best monitoring members of
the firm.
 Moreover, the company needs to provide the company auditors with more powers some
of which are limited to them and that directors of the company does not have. In addition
to this, the auditors must be provided with the right of investigation so as to enable them
to obtain all the necessary information and the authority to raise a legal obligation in case
of illegal corporate acts.
 The company should allow its auditors to attend the meetings of the board of members
and have the right to voice their opinions.
 Lastly, the independent directors of the company can play the most important role in
improving the governance structure of the firm. They can play the effective role in
monitoring the top management and other self-dealing directors and hence obtain the
necessary information. This is possible if the independent directors in the mixed system
cooperates with the knowledgeable insiders such as company auditors and other control
departments of the firm. However, it is important that all independent directors come
forward for this as it is less likely that a single independent director can challenge the
decision making of the senior management.

Conclusion
To conclude, Olympus is considered to be the biggest and most controversial financial
scandal in the history of the Japan. The scandal wiped away almost 82% of the share prices
within the month of the incident which was further led by the resignation of the various board
members and the arrest of the various senior officials involved in the fraud which totally
destroyed the reputation of the company and its market evaluation. Therefore, it is required
that company adopts the innovative experimentation recommended above so as to make
necessary improvements in its corporate governance system. The company therefore needs to
adopt the best business practices and look out for appointing more independent directors in its
board of directors who are allowed to exercise their powers and authorities.

References
Aronson & E., B., 2012. The Olympus Scandal and Corporate Governance Reform: Can
Japan Find a Middle Ground between the Board Monitoring Model and Management Model.
Pacific Basin Law Journal, 30(95-132).

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Flannery, N. P., 2019. Problems at Olympus a Sign of Investor Risk at Major Japanese
Companies. [Online]
Available at: https://www.forbes.com/sites/nathanielparishflannery/2011/10/25/a-setting-sun-
recent-scandal-at-olympus-a-sign-of-deeper-governance-issues-at-japanese-
companies/#bde7b54d00f2
[Accessed 6 April 2020].

Jones, C. P., 2014. Corporate governance in the shadow of Olympus. [Online]

Available at: https://www.japantimes.co.jp/community/2011/12/13/issues/corporate-
governance-in-the-shadow-of-olympus/#.XorgWFwzbIU
[Accessed 6 April 2020].

NG, D., 2017. How Olympus was almost brought down by one of the worst corporate
scandals. [Online]
Available at: https://www.channelnewsasia.com/news/cnainsider/how-olympus-was-almost-
brought-down-by-one-of-the-worst-9440206
[Accessed 6 April 2020].