Law in the Internet Society

Lessons from Olympus

-- By ShawnFetty - 26 Dec 2011


Despite not knowing the full extent of wrongdoing—the breadth of complicity or links to organized crime—the Olympus scandal is an opportunity to cultivate perspective on corporate governance and Japanese culture more broadly.

As the investigation unfolds, legally-minded observers will wonder about Japan’s corporate governance scheme. For reference, it is overall very similar to American corporate governance, but scandals historically inspire reform. Since the Olympus scandal strikes many as a particularly egregious failure of the current law, changes can be expected. Nevertheless, in the case of Olympus, reforms aimed at corporate governance law obfuscate the most important elements of the scandal and its wake.

More corporate governance law is not the solution

Even granting that most of the problematic behavior occurred in the late 1990s, the Olympus scandal comes right on the coattails of nearly a decade of corporate governance reform in Japan. In response to unrelated corporate scandals in the 1990s—which incidentally also involved board-sanctioned cover-ups--and Japan’s declining economic significance, these reforms strengthened the role of statutory corporate auditors and adopted additional elements of American corporate governance: increased oversight through smaller board sizes, increased personal liability for directors, and independent director requirements. All that, and it still took a foreign executive, foreign press, and an uncirculated Japanese newspaper to blow the whistle.

More importantly, the institutional and cultural backdrop to the Olympus scandal raises broader doubts about the relevance of corporate governance law to business reality. For Olympus, it is evident that independent directors and statutory auditors posed no check on chairman Kikukawa’s control. Ousted CEO Woodford and others point out that the entire Olympus board was beholden to Kikukawa. Given the deep personal connections among board members and high executives--a situation common but not unique to Japanese corporations--perhaps no one should have expected serious oversight. This trend alone erodes directors’ responsibility to shareholders. One targeted response to that will be even stricter independent director requirements, but empirical studies have cast doubt on the effectiveness of this strategy.

The big picture of Japanese business

We anticipate entrenchment and inner circle politics in longstanding institutions like Olympus. What foreign observers, including Woodford, did not anticipate was insidious corporate entrenchment throughout the Japanese business system. Consider what happened to Woodford once he blew the whistle. Olympus’s foreign shareholders rallied behind Woodford in denouncing the board. Woodford thought he might use this momentum to purge the board through a proxy fight.

This campaign was utterly thwarted when Japanese institutional shareholders (collectively holding 60% of the shares) casually rejected Woodford and rallied behind the existing Olympus board. If that failed to deflect the threat, rumors held that Olympus would, with the aid of Japanese lenders, stage a leveraged buyback to dilute foreign shareholders’ interests. This reaction disturbed many, but it should not have surprised them, given the context.

Readers will be familiar with broader aspects of Japanese culture implicated by the Olympus scandal: the primacy of social hierarchies and the inside-outside paradigm. For example, when Woodford blew the whistle, he—as a white, non-Japanese speaking foreigner—was castigated as someone who simply “did not like Japan.” [One wonders about Woodford’s initial promotion given this background] Consider also that the decision to cover-up decades of malfeasance was apparently rationalized as respecting the careers of one’s predecessors. Much has also been written about the almost familial links between Japanese business organizations. All are admittedly important, but rather than further rehash these, I draw your attention to less obvious aspects of Japan that contributed to the scandal.

What can we work on

Whistleblowers are unsavory characters in Japanese culture, so the cards were stacked against Woodford from the beginning. Part of this is that corporations and corporate executives enjoy far wider public approval in Japan than in, for example, the United States. Moreover, because Japan has an illiquid labor market, employees invest more heavily in their firm, consequently caring more about its continuity and success. As a result, whistleblowers have fared poorly in Japan.

A 2004 act offered whistleblowers their first shred of legal protection. The act arguably did not go far enough. In 2008, Olympus management retaliated against an employee for blowing the whistle on a compliance matter: an act that was upheld by the district court. While the High Court reversed, no one knows how the Supreme Court will rule. As an amusing aside, the plaintiff, Masaharu Hamada, was among those interviewed during the December police raid on Olympus. If boards can’t exercise oversight, at least better protection for whistleblowers will promote integrity.

A complementary problem is the Japanese media’s apparent passivity towards corporate scandal. It is telling that the investigation only progressed because of the involvement of foreigners. As above, part of this problem is cultural, but Japan’s strict defamation laws, under which journalists have faced serious jail time, are a major element. Ultimately, in Japan, the Press poses no threat when it comes to exposing corporations’ dirty secret. That has become a job for organized crime.


I do not intend to offer any scathing critique of Japanese culture here. After all, the reaction of the Japanese public and Japanese law enforcement has been reassuringly against Olympus. Japanese shareholders also recently filed suit against the various culpable board members and executives. My focus is rather on the fact the corporate governance law is bound by a larger context.

From a broader perspective, it should be obvious that any number of forces outside the corporate governance scheme played a part in shaping the Olympus scandal. In many cases these are entirely extralegal considerations, but I would argue that the impact of these forces is substantially greater than the impact of the corporate governance scheme. Corporate governance reform has been driven by the importation of foreign law: law that does not address problems particular to Japanese corporate actors.

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r3 - 04 Sep 2012 - 22:02:27 - IanSullivan
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