Ten years ago, corporate America was rocked by a series of accounting scandals that destroyed one of the world’s largest accounting firms (Arthur Andersen) and led to the passage of the Sarbanes-Oxley Act (Sarbox, or sometimes simply referred to as SOX). A number of well-known American companies — notably Enron, Tyco, Adelphia, and WorldCom — suffered a partial or total collapse as a result of mismanagement and breach of fiduciary duty during the 1980s and 1990s by their boards and top executive, who tried to cover up their misdeeds.
Though Enron and its contemporaries have since faded from the headlines, it has become clear in successive years that“creative accounting” was practiced at more than just a few firms. We do not yet know the full extent of the wrongdoing committed or perpetuated in the boardrooms of the world’s biggest companies during the “Excessive Eighties” and “Nifty Nineties”.
But with each passing year, we’re learning more.
The latest company to be tarnished by serious, substantiated allegations of accounting fraud is Olympus, a Japanese-based maker of imaging and medical equipment. Originally founded in 1919, Olympus is nearly one hundred years old.
A couple of months ago, Olympus unexpectedly fired its chief executive officer, Michael C. Woodford, after just two weeks on the job, claiming he was “unable to understand that we need to reflect a management style we have built up in our ninety-two years as a company.” (Prior to Woodford’s selection as chief executive, which was engineered by Tsuyoshi Kikukawa, Olympus had been run exclusively by a succession of Japanese businessmen).
The strange decision surprised analysts, because Woodford has been billed as the company’s new global face only days earlier. Something seemed wrong.
And indeed, something was wrong.
It turns out that Woodford was fired because he started asking too many questions after he was promoted — and because he used his authority as chief executive officer to begin inspecting the company’s books, which he correctly suspected were cooked. Woodford’s actions created a huge problem for Kikukawa, who hastily arranged for Olympus’ board to get rid of Woodford. Following Woodford’s ouster, Kikukawa had himself reappointed as president and chief executive officer.
But Woodford did not go quietly into the good night. He delivered a trove of incriminating data to the press and to authorities, in the United Kingdom, United States, and Japan (Olympus has holdings in all three countries). And he publicly assailed Kikukawa and the board for his unjustified sacking.
In the wake of his ouster and disclosure, Olympus’ share price dropped like a rock, and several investment banks suspended their coverage of the company.
Initially, Kikukawa and several of Olympus’ other directors tried to fight back and refute Woodford’s allegations; they even threatened legal action. Woodford dismissed the threats, telling The New York Times he believed Kikukawa and his cronies were getting desperate. And he was correct.
On October 26th, Kikukawa resigned as president and CEO, though he continued to deny any wrongdoing. The company’s board appointed director Shuichi Takayama as his successor. An outside committee appointed by Olympus determined in early November that the excessively large merger payouts that Woodford had questioned had indeed been used to cover up losses on investments.
Olympus subsequently fired Hisashi Mori, one of Kikukawa’s deputies, who was involved in the accounting cover-up. Takayama admitted publicly that there had been “inappropriate dealings”, but continued to downplay the allegations, even as the Tokyo Metropolitan Police launched an investigation of the company.
On November 10th, Olympus disclosed that the release of its second-quarter earnings would be delayed for a second time while the company completed an investigation of its own finances. The Tokyo Stock Exchange responded by threatening to delist Olympus’ stock if it failed to submit its report by December 14th (which is less than a week from today).
Major shareholders, meanwhile, began joining Woodford in demanding that the entire board step down. Woodford — who remained a board member following his ouster, because only shareholders can dismiss directors — announced in mid-November that he would return to Japan to confront Olympus’ board at its next regularly-scheduled meeting.
Prior to his arrival, Olympus announced that Kikukawa, Mori, and Olympus auditor Hideo Yamada had all left the board, in addition to having departed from the company’s executive suite. Olympus’ remaining directors also made public a pledge to follow suit and leave once the company had recovered from the scandal. But they provided no timeframe for following through on their promise.
After a dissatisfying meeting with the board, Woodford announced on November 30th that he would resign as a director of Olympus, but vowed to work with stakeholders and shareholders to construct a new board. Woodford had previously offered to return to Olympus as its chief executive officer to lead a turnaround, but the board evidently had no interest in reinstating him.
On Tuesday of this week, an outside panel appointed by Olympus to investigate the scandal released its findings, excoriating Kikukawa and his cronies and vindicating Woodford. The report described Olympus’ most recent management as “rotten to the core”. It “infected those around it”, the investigators concluded.
Woodford praised the report, and renewed his call for change in a statement to employees, shareholders, and the press.
Let us hope that the findings announced today by the third-party panel will help catalyze positive change at Olympus. My overriding concern is the welfare of Olympus employees and their family members, of Olympus’s long-term shareholders, and of Olympus’s customers. That concern will be first in mind as I carefully evaluate the content of the report that was issued today.
The panel’s report has made one thing painfully clear: the massive scale of the malfeasance from which the present directors and statutory auditors persistently averted their gaze. I sought to call attention to the wrongdoing through a series of six letters in English and Japanese, copied to all the members of the board, and through the submission of a damning report by PricewaterhouseCoopers. Yet not a single director stood up in support of my efforts to expose what had taken place.
Olympus and its shareholders would have incurred far less damage if the current directors had acted appropriately on the clear signs of misconduct that I had explicitly brought to their attention. Now, the work of revitalizing Olympus can proceed only under the leadership of untainted executives.
We at NPI thank Mr. Woodford for his courage and his commitment to Olympus’ well-being. NPI has been a loyal Olympus customer for years, so this scandal is of real concern to us. (We use Olympus cameras to produce our photojournalism and Olympus recorders to create podcasts and transcribe interviews).
We believe that Mr. Woodford is the right person to lead a turnaround of Olympus. Thanks to his years of experience as a manager, he knows the company inside out, and he cares about its future. But more importantly, he has demonstrated that he is a man of integrity. He dared to speak the truth when no other Olympus director would. In choosing to challenge Kikukawa, he took a stand for the company’s shareholders and customers. And last week, he sensibly resigned from Olympus’ board after concluding that it wasn’t going to listen to reason.
We agree with Woodford that Olympus can recover from this disaster — but only if it rids itself of the crooks and yes men who betrayed its shareholders and customers.
As he put it: “Olympus remains a great company that boasts a proud history, superior human resources, distinctive products, and unparalleled technology.”
As loyal and satisfied customers, we want to see Olympus get back up on its feet, rebuild its reputation, and move forward into a new era under new management and a completely new board of directors.
We will continue to monitor developments in the coming weeks and months, and support Mr. Woodford’s efforts to make Olympus whole again.