Olympus scandal
He had been company president for six months, and two weeks prior had been promoted to chief executive officer, when he exposed "one of the biggest and longest-running loss-hiding arrangements in Japanese corporate history", according to The Wall Street Journal.
Apparently irregular payments for acquisitions had resulted in very significant asset impairment charges in the company's accounts, and this was exposed in an article in the Japanese financial magazine FACTA and had come to Woodford's attention.
The eventual cost of the Transaction to Olympus is extremely significant and is as a result of a number of actions taken by management which are questionable and which give cause for concern ... We were unable to confirm that there has been improper conduct, however, given the sums of money involved and some of the unusual decisions that have been made it cannot be ruled out at this stage ...
Following his appointment, Woodford persisted in pressing the issue of the questionable transactions, and, based on his belief that an internal probe would not get all the necessary answers, he also engaged accounting firm PricewaterhouseCoopers (PwC) to give substance to his suspicions.
[3][27] Woodford copied his final two letters to senior members of the Ernst & Young organisation (auditors to Olympus) in Japan, Europe and the United States, as well as their global chairman and CEO.
"[32] By contrast, Woodford alleged that his forced departure was linked to several prior acquisitions and payments he questioned, particularly the US$2.2 billion deal in 2008 to acquire British medical equipment maker Gyrus Group,[35] and said on Bloomberg Television: "The board has to go, they're all toxic, they are all contaminated.
"[42] During a conference call with investors on 17 October (reported in a Morgan Stanley research note), Olympus Executive Vice-President Hisashi Mori said the company might sue Woodford for releasing internal information to news media.
The description given of the companies on 19 October, and how they fit into the group's strategy, were contradicted by the later statement: initially, Altis was described as being engaged in "environmental solutions business proposing resources recycling and CO2 reduction focused on petrochemical plants."
Humalabo was initially said to undertake "research and development/sale of skin improving substances using [a fungus known as] basidomycota", but in the later statement was said to be "mainly engaged in development of [health] supplements with ingredients extracted from shiitake mushroom mycelium."
[44] We wish to make a profound apology for all of the distress and trouble caused due to the recent series of media reports and fall in the stock prices triggered by our recent change in President ... We shall provide updates in a timely manner through the Tokyo Stock Exchange's disclosure network and our website ... We sincerely hope to conclude this situation as quickly as possible to restore society's trust in us and to bring reassurance to our customers, business partners, shareholders and employees ...The past acquisitions mentioned in the media were handled with the appropriate evaluation and procedures ...
At a press conference in Tokyo on 27 October, president Takayama blamed Woodford for the decline in the company's share price, saying "If this secret information had not been leaked, there would have been no change in our corporate value."
[48] Olympus delegated the task of selecting members of its third-party panel to investigate the allegations to two men who were appointed to the board in June: Yasuo Hayashida, a physician and visiting professor at Juntendo University, and Hiroshi Kuruma, a former executive at Nikkei Business.
Investigators named Tsubasa Net, a software maker acquired by Olympus through ITX in 2005, as "a front company" with known affiliations with the Yamaguchi Gumi, the largest of Japan's yakuza organisations.
[60] According to an email sent by former chairman Tsuyoshi Kikukawa that Michael Woodford made public, Olympus had replaced KPMG with EY after the former expressed disagreement with the accounting treatment of the Gyrus acquisition.
In its audit letter to Gyrus Group dated 26 April 2010, KPMG considered that there were "circumstances connected with our ceasing to hold office that should be brought to the attention of the company's members or creditors.
[24] In late November 2011 Michael Andrew, KPMG International global chairman, said his firm had complied with its legal obligations to pass on information related to Olympus's 2008 acquisition of Gyrus, and were removed as auditors for so doing.
[78] On 6 January 2012, on failing to secure support from Japanese institutional shareholders, Woodford said that the 12-week public scandal had taken an enormous emotional toll on him and his family, and announced that he would abandon his proxy fight to take control of the Olympus board.
CFO Asia said that if there was truly no corporate malfeasance, there are "uncomfortable questions about the competence of the internal and external teams that evaluated the three acquisitions, as well as the capabilities of the senior managers and board members that accepted the sky-high valuations and approved the deals.
[28] In a commentary in the Financial Times entitled "Olympus's deceit was dishonourable", John Gapper noted that "It is still possible to believe that the accused trio of directors ... thought they were behaving honourably ... [in hiding] failure discreetly and not to make their predecessors lose face."
He noted that accounting scandals were not uniquely Japanese, but that it was "a nice piece of corporate satire to conceal losses by exploiting the widespread habit of paying too much for acquisitions and writing them down – the 'advisory fee' was especially creative".
Bloomberg View columnist William Pesek said: "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."
"[85] During a press conference in early November, Financial Services minister Shozaburo Jimi said the market should not call into question the standards of corporate governance of other listed companies just because of Olympus.
[98] A former Paine Webber banker attested that Nakagawa and Sagawa were handlers for Olympus, and they made use of Bermuda-based funds valued at "hundreds of millions of dollars" to manage its balance sheet using Japanese accounting loopholes.
Nobumasa Yokoo also introduced three small, unprofitable companies in which he was shareholder and executive that Olympus acquired for ¥73.4 billion – News Chef, a maker of microwave cookware,[97] Altis and Humalabo.
[101] The WSJ noted that there were a large number of frequent and complex corporate changes (name and ownership) but determined from the paper trail that Dynamic Dragons II "was part of a network of elusive Japanese firms and financiers that often invested together, and whose ties and identities were constantly shifting."
[27] In September 2008, to top up the cash part of the advisors' success fee, Gyrus issued ¥176.98 million of preferred stock to the AXAM against the advice of company auditors, according to Nikkei Business Daily.
[27] Regulatory disclosures in the UK show that the preferred stock was allotted on 30 September by Tsuyoshi Kikukawa, Hisashi Mori and Akihiro Nambu (the latter being head of investor relations for Olympus).
[24] Three days after the preferred stock was allotted and without the benefit of professional advice, a "supplemental agreement" was signed by Olympus officers that gave AXAM power of veto over "any important decision in the Gyrus business".
Bloomberg notes that executives Olympus had delayed accounting for the true cost of the "success fees" of Gyrus until March 2011, by which time Axam Investments had been struck off by the Cayman Islands registrar for nine months.
