Financial Times November 25th 2011
If Hollywood were making the movie, the imminent confrontation between Michael Woodford, the former CEO of Olympus, and the directors who dismissed him would be the perfect climactic scene.
He can walk into the board meeting on Friday confident that justice has triumphed. The company has admitted that the dodgy M&A transactions that he queried were a mechanism for covering massive off-hidden losses. Thanks to Woodford’s tenacity, the case is under investigation by the FBI, the SEC, the Tokyo prosecutors, and the UK’s Serious Fraud Office.
In a samurai movie the scene would play very differently. Woodford would be the disloyal retainer who rewarded his benefactors by selling them out to their enemies. The heroes would be the men who engineered the brilliantly complex M&A scheme. They failed but failed nobly, taking huge personal risk for the sake of the company.
The other directors could be forgiven for wondering what would have happened if Woodford had acted like the three monkeys and chosen to see , hear and say nothing. The reputation of a hundred-year old company would not have been besmirched. Its forty thousand employees would not be worrying about the future. Billions of dollars of market capitalization would not have been destroyed. Everyone would have been better off – including the foreign investors attracted by Olympus’s endoscope business, which generates unusually high margins for a Japanese manufacturer.
Financial scandals, from Enron and Madoff to China Forestry and MF Global, are a familiar part of the economic landscape, yet there is something unique, almost poignant about a classic Japanese scandal. There are no private jets or luxury yachts involved, no ice statues of Michaelangelo’s David urinating vodka. Nobody makes billions. Most likely nobody benefits at all. The aim of the deceit is to hide losses and keep the show on the road as long as possible.
The difference is not necessarily one of culture. J.K. Galbraith diagnosed what he called the “bezzle” in these terms – “In good times people are relaxed , trusting and money is plentiful But even though money is plentiful , there always people who need more.” Galbraith was referring to bull market scandals. Japan’s asset bubble burst twenty years ago and all its scandals since then have been bear market phenomena. With the world economy showing signs of “turning Japanese”, we may see an end to the bezzle elsewhere and more-Japanese-style scandals, particularly in the financial sector, as managements strive to boost their balance sheets by hook or by crook.
Even in the Japanese context, loss-hiding manouvres like the Olympus case have become rarer . Companies have been deleveraging for more than a decade and now have much less risk exposure. Japanese standards of corporate governance, although far from perfect, have been improving slowly and steadily. Gone are the days when managements would refuse to meet investors and mergers were enacted at a discount to prevailing stock prices. The METI (Ministry of Economy, Trade and Industry), once the bastion of Japanese protectionism, has taken the lead in promoting transparency and better governance, even arguing the case for the value of hostile takeovers and activist shareholders.
If Japan is becoming more receptive towards financial capitalism while many Western countries are traveling in the opposite direction, the cause lies in the contrasting historical record. Burst bubbles always discredit the system that spawned them, and bubble era Japan Inc. was as far from the free-wheeling, deregulated “Anglo-Saxon model” as you can get without state ownership. The financial system was rigid, highly compartmentalized and micro-managed by bureaucrats acting in what they imagined was the national interest. Even the highest-ranking bankers were modestly paid. There was no faith in the efficient markets hypothesis, little faith in the value of financial markets at all.
Once the damage done to the country’s economic fabric became too large to deny, a consensus formed in favour of reforms and liberalization. Japan introduced its version of the Big Bang financial reforms in 1998, a year after a serious banking crisis. Improvements have continued, albeit in a slow and piecemeal way. There is no equivalent of Occupy Wall Street in Tokyo, nor is there likely to be.
It would be no surprise if the Olympus scandal led to further much-needed reforms, such as a requirement for truly independent non-executive directors. An ideal candidate for that role at Olympus would be Michael Woodford himself. Then the movie would be more like a rom-com with a happy ending.