[William Pesek] More money than brains leads to Olympus shock

Master of Business Administration programs the world over should add a new course: Olympus 101. For budding business magnates, it would be a timely exercise into how not to handle a crisis, run a major company or manage the third-biggest economy.

It says a lot when world-weary investors hardened by the shenanigans at Enron Corp., WorldCom Inc., Parmalat SpA and Wall Street are aghast at a corporate scandal. The Einsteins at Olympus Corp., the camera and medical-supplies maker, pulled off that feat and more in a week that can’t end soon enough for Japanese politicians and executives.

This still-unfolding story has it all: a proud company founded in 1919; the firing of a foreign president brought in to shake things up in ways a local wouldn’t; a very un-Japanese bout of public infighting; a whiff of possible yakuza involvement; bundles of squandered cash; clueless executives; a media frenzy; and regulators hoping the whole thing goes away.

The real intrigue has yet to come. What, if anything, will Japan do? In an ideal world, the answer is simple: The Olympus board would be fired and regulators would investigate this shameful affair with vigor, openness and sincerity to restore global confidence in Japan Inc.

The chronology began with Michael Woodford, Olympus’s first non-Japanese president, being dismissed after seven months on the job for the bogus charge of cultural insensitivity. Next, Olympus denied Woodford’s claim that he was axed for investigating why a fortune was spent on outside advisers without explanation. Then, Olympus suddenly recalled that, oh yeah, that’s right, it paid a whopping $687 million to advisers on its $2 billion purchase of Gyrus Group Plc. Now the company says it’s no big deal.

The only case in which that could possibly be true, as Curtis Freeze, founder of Honolulu-based Prospect Asset Management Inc. put it, is when a company “has more money than brains.” Really, I’d feel better investing with Bernie Madoff or the Marx Brothers than Olympus’s board. In a delicious bit of irony, Olympus Chairman Tsuyoshi Kikukawa on Monday will give a speech on “Global Social Responsibility from Japan to the World.” As if he has anything edifying to offer.

This is symptomatic of what ails Japan and comes on top of a dismal year that has included a deadly earthquake and a tsunami; an endless radiation crisis; credit downgrades; deepening deflation; a surging yen that’s cramping exporters and a fifth prime minister since the Lehman Brothers shock of 2008. And now an “Olympus shock,” to quote Goldman Sachs Group Inc. strategist Kathy Matsui, reminds markets of Japan’s institutional failings.

This episode is about to get more attention. Nippon Life Insurance Co., the largest Olympus shareholder, and Harris Associates LP, are demanding answers after the dismissal of Woodford prompted a plunge of more than 45 percent in the stock price. FACTA magazine alleged that some Olympus payments may have gone to “anti-social” elements, a euphemism for organized crime.

When I travel and speak overseas, there is a troubling lack of interest in Japan. Audiences are at full attention when talk turns to China, India or Thailand. Mention Japan, and out come the BlackBerrys.

At a time when many are predisposed to tune out Japan, officials in Tokyo need to work harder and smarter. The same holds for corporations. A few are actually trying.

At a Bloomberg Link conference this week in Tokyo, Takeshi Niinami, the chief executive officer of convenience-store operator Lawson Inc., made a strong case. The 52-year-old talked of growth, expanding into China, free trade and the need for reform in corporate governance. It was the view of a New Japan that investors crave. But that’s the long-term perspective. More immediately, all anyone wants to talk about is Olympus and its widening fallout.

Japan’s corporate culture of denial, of ignoring problems and letting them fester, keeps running up against a globalized world that values agility, innovation and transparency. Olympus demonstrates all too painfully how much Old Japan tolerates a lack of accountability among senior executives; inadequate disclosure; a disinclination to challenge authority and absolute deference to corporate boards regardless of share performance.

The inadequacies of Japan’s corporate-governance system deserve scrutiny. Boards in Japan get less heat, partly because executives aren’t paid as obscenely as American ones. Shareholders assume directors are smart, devoted people working for the good of Japan Inc. Tough questions are rarely asked.

Yet what can we make of Olympus’s board dismissing a PricewaterhouseCoopers report on how vast sums of cash were blown during acquisitions? The board seemed more upset about Woodford studying the books than PwC’s findings. A few independent, outside directors might have led to a better result for Olympus and Woodford.

There’s a punch line somewhere in here, but it’s hardly a joking matter: The company may sue Woodford for leaking internal information to the press. If there’s any justice, securities regulators will ask Chairman Kikukawa and the rest of his board some very uncomfortable questions. The answers might reveal whether brains even come into play at Olympus. 

By William Pesek

William Pesek is a Bloomberg View columnist. The opinions expressed are his own. ― Ed.

(Bloomberg)