Board Failings at Olympus Japan

Institution Name

Author Name

Corse Name

Date

Table of Contents
Introduction................................................................................................................................3
1
Discussion..................................................................................................................................3

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

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

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

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

2
 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. Michael was being appointed as the CEO of
the company merely two weeks before the incident came to light. After becoming the CEO of
the company, Michael exposed the biggest scandal and financial fraud and one of the longest
running loss-hiding incident ever in the corporate history of Japan. He received an email that
gained his attention towards a magazine article that had accused Olympus of financial fraud
[ CITATION Nat19 \l 16393 ]. Woodford asked the chairman of the company about the incident
and also tried to enquire the board members of the incident but didn’t get any reply.
Moreover, he was asked by the board of members to leave the company and his position. The
total amount involved in the financial fraud made by the company was more than $1 billion
[ CITATION Nat19 \l 16393 ].The removal of the Michael Woodford from the position of the
chief executive officer of the company made Tsuyoshi Kikukawa assume the position of both
CEO as well as the president of the company. The incident focused on the discrepancies in
the management style and the corporate governance system followed by the Japanese firms.

 Soon the scandal became the biggest as well as longest-lived financial fraud scandal in the
corporate history of whole Japan. As a result, the incident wiped almost 80% of the
company’s stock market evaluation and this ultimately led to the resignation of the much of
the board members of the company [ CITATION Aro12 \l 16393 ]. The investigations were
carried out across UK, US and Japan regarding the transactions and ultimately the
3
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 the company’s board failed to effectively provide the
rights of the independent directors. The company total had 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 none of its independent directors had any
experience of the camera industry or the electronics industry [ CITATION NGD17 \l 16393 ].

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. Therefore, in
Japanese firms, instead of CEO being accountable to the board of directors of the company,
the CEO is actually the person to whom the whole board of directors is accountable to.
[ 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.

Therefore, this is this structure that made the board of directors get engaged in group thinking
and follow the orders of the chairman instead of getting engaged into rigorous debate. The
issue lies here in the corporate governance of Japanese firms that consists of most of the
insiders and have little or very few independent directors and among them there is no one
who can challenge the decision making of the most empowered member of the board.

Another major flaw 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.

4
The major issue in most of the Japanese Firms including Olympus is that they have an
average independence level 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 ].

This is the reason why the economy of Japan was eclipsed by that of China as the corporate
culture of most of its firms as well as the corporate governance system of Japanese firms is
full of hauls that needs to be fixed. Till then, the investors as well as the major business firms
like Olympus are under the impact of serious governance risks.

Recommendations
 It is required that Olympus 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 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.

5
 Conclusion
To conclude, Olympus is considered to be the biggest and most controversial financial
scandal in the corporate 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).

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].

6
7