By Kimberly Gladman, Director of Research and Risk Analytics
In a riveting speech to the Council of Institutional Investorsyesterday, former Olympus President Michael Woodford described the events leading to his discovery of the massive fraud at the Japanese equipment maker, as well as his subsequent dismissal. The personal details were compelling. Woodford told the audience about the sleepless nights he spent after a small Japanese magazine first published allegations of improper M&A accounting, as well as ties between Olympus and organized crime. He described the surreal atmosphere in the Tokyo office, where his colleagues placidly pretended everything was fine and his inquiries were met with complete stonewalling; his dramatic post-firing flight from his company apartment, suitcase in hand; and the surreptitious phone call he made from a public park to the Financial Times reporter who broke the story in the West.
Equally fascinating, however, was his description of the norms of Japanese corporate governance and business practices. British-born Woodford spent thirty years at Olympus, and was a business celebrity in Japan as a rare foreign “salary man,” or lifelong employee. But looking back on it now, he noted that relationships between companies and auditors in Japan are frequently “incestuous,” and that he thinks many other Japanese companies’ accounts are likely to be unreliable. The highest value for corporate executives in Japan, he said, is to “be nice and polite to your boss,” and the few non-executive directors who exist are often just as deferential as employees. Meanwhile, the press in Japan is “self-censoring” (no other Japanese outlet picked up on the small paper’s reports until the Western papers did so). The country’s institutional investors are largely passive and uncritical of the corporations in which they invest; and cross-shareholdings among companies also preserve the status quo. The bottom line according to Woodford? “If you’re thinking of investing in Japan: Don’t.”