Views on improving the integrity of global capital markets
04 November 2011

Corporate Governance in Japan — Plenty of Room for Improvement

Every year there are a few stories in the world of corporate governance that make investors shake their heads and say, “What was the board thinking?” The recent headlines involving Olympus in Japan may give the News Corp. phone-hacking scandal and the Sino-Forest phantom timber story a run for their money as corporate governance blunder of the year.

In 2008 Olympus bought Gyrus, a British company, for the equivalent of US$2.2 billion. In connection with this transaction, it paid an advisory fee of US$687 million to a firm incorporated in the Cayman Islands and another in New York — this advisory fee was more than 30 percent of the purchase price rather than the usual advisory fee of about 1 percent. This was red flag no. 1. The ultimate owners of these advisory firms are still unknown — a more alarming red flag no. 2. Michael Woodford, a British national and 30-year veteran of the company, was fired as Olympus CEO on 14 October after he began investigating about US$1.3 billion in acquisition write-downs and the aforementioned advisory fees related to takeovers that neither he nor a forensic accounting firm he hired could explain. Screaming red flag no. 3.

According to reports, the Olympus board voted unanimously at a 10-minute meeting to jettison Mr. Woodford, citing “difference of management style.” 

Mr. Woodford, in turn, challenged Olympus Chairman and President Tsuyoshi Kikukawa and other executives to explain the transactions. He also made public a PricewaterhouseCoopers report he commissioned that said the company may face regulatory and legal scrutiny because of the payments made in the acquisition of U.K.-based Gyrus.

Continuing Controversy
Things have begun to develop quickly, as just last week Olympus shares surged following the resignation of Kikukawa amid the growing scandal. Kikukawa’s resignation did not address the payment of fees of more than US$720 million of write-downs within 12 months of making three other acquisitions.

Japanese, British, and American authorities are now investigating these acquisitions, too. The company has established a committee to examine the deals in question. Because this committee will be made up of directors who joined the board after the deals in question, some investors are questioning the independence of these committee members, as they have been appointed by Olympus to investigate Olympus.

Corporate governance continues to be a challenge in Japan. According to the corporate governance rating firm GMI, the country ranks at the low end of league tables in governance, behind regional rivals Hong Kong, Singapore, and China. Currently in Japan, there is no requirement for independent directors on boards, and many corporate boards are filled with company insiders. Governance and compensation committees are a novelty, and nearly all annual meetings are held during the same week in June, making it nearly impossible for interested investors to constructively dialogue with managers and boards.

Positive Developments for the Future
There is, however, reason to believe that things may be improving. The Financial Services Agency (FSA) in Japan has been discussing ways to improve corporate governance in order to make the country more attractive to outside investment. Similarly, the Tokyo Stock Exchange has also put governance reforms on the agenda. Finally, there are efforts already underway by a select group in the Japanese House of Councilors, in conjunction with the Japanese Independent Directors Network, to improve the situation, though they admit it will be several years before any changes are apparent.

With regards to Olympus, a senior executive of the Tokyo Stock Exchange recently sent a strong signal when he suggested the possibility of a delisting if it was found that the company had seriously falsified information. Also, according to recent reports, some of Olympus’s largest shareholders, including Nippon Life, which holds 8 percent of Olympus’ shares, have demanded more disclosure.

That would be a good start.

About the Author(s)
Matt Orsagh, CFA, CIPM

Matt Orsagh, CFA, CIPM, is a senior director of capital markets policy at CFA Institute, where he focuses on corporate governance, ESG, and climate change analysis. He writes and speaks frequently on these topics on behalf of CFA Institute. His paper, Climate Change Analysis in the Investment Process was named “Best ESG Paper” by Savvy Investor in 2021.

1 thought on “Corporate Governance in Japan — Plenty of Room for Improvement”

  1. Yasuhiro Oshima CFA says:

    In addition to 3 red flags Mat mentions here, what annoye me as “poor corporate governance” are the following..

    1) At the 10 minutes “board meeting held” on around 14 October, Mr. Woodford was reportedly “ordered not to speak a word”, which seems total breach of constitutional right to speak and express, let alone, casts the doubt about the authenticity of such board resolutions.

    2) Upon the “qualified” audit results which were about to come out, Olympus have “shopped” to swich to other audit firms which, according to the articles, were likely to assert more accomodative representation.

    3) The person who, again according to some news sources, belonged to the security company and actively collaborated with Olympus in hiding and deferring appoximately US$1.3bn of lossess from soured speculation in the mid 1990s, became “independed Directors” after retiring from the securiies company.

    All these suggest, at least for me, even if you have framework and systems in place to make good corporate governance working, it is really up to the company Board who can put the company at significant stake depending upon how these systems are put in practice.

    Being a Japanese national, I am very dissapointed to observe such an abuse of the system took place at supposedly one of the blue chip companies Japan.

    At the same time, I am keen to find out what exactly happened at the Company with all the relevant stakeholders, including committe, shareholders, Independent Directors, and to draw meaningful takeaways on how, in addition to the framework and systems, Investors can promote the good corporate governance in Japan.

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