The venerable firm is living out Japan's largest financial scandal, the result of management inflexibility, cronyism, and an old-school way of doing business that shuns outsiders.
We have looked at Kodak's corporate example of poor agility as the 131-year-old camera maker teeters on the brink of bankruptcy. And we have examined the use of bankruptcy itself by firms seeking a quick way out from under their self-imposed burdens (such as pension commitments). Olympus offers another example of how a lack of agility can sink a company, this one with a Japanese slant.
Olympus's troubles began last September when the Japanese magazine FACTA published an article questioning some odd-looking financial maneuvers. At the time the president was an Englishman, Michael Woodford, one of the few foreigners at the helm of a Japanese blue-chip company. He wrote to the board of directors repeatedly attempting to get records and information about the questioned transactions, which centered on M&A advisory payments to parties unknown -- two firms registered in the Cayman Islands, whose records had subsequently vanished. Frustrated by the lack of forthcoming information, Woodford acted without the board's knowledge or approval. He hired the firm of PricewaterhouseCoopers to do some forensic accounting.
PwC's report shocked Woodford and prompted him to write a letter to the chairman of Olympus's board, Tsuyoshi Kikukawa, suggesting that for the good of the company he (Kikukawa) and the vice-chairman should quietly resign. Instead, three days later on October 14, the board voted unanimously to fire Woodford.
The Englishman did not go quietly. He boarded the first plane for London -- in fear for his life, he said later, because the PwC report had pointed to the possible involvement of "anti-social elements," which is how Japanese refer to organized crime. Woodford went public with his letter to the chairman and urged regulators in Japan, the US, and the UK to investigate Olympus.
Olympus's stock promptly dropped by half: $3 billion in shareholder value evaporated following the $2 billion of the dodgy transactions.
More revelations emerged over the ensuing weeks. Board chairman Kikukawa resigned on October 26, followed soon thereafter by the vice-chairman and the company's internal auditor. On November 8 Olympus admitted that it had been cooking the books for 20 years; the stock price promptly tumbled from $15 to $6.
This week the company announced that it was suing 19 current and former executives for $47 million in compensation. Among the targets of the lawsuit are the three departed executives, the current president, and six of the 11 directors. Weirdly, these executives will stay in place, lame ducks, for the next two or three months. On this news the stock price jumped as investors speculated that Olympus's hobbled management would be unable to resist any attempted takeover. (Who exactly inside the company had the autonomy to put together the lawsuit was far from clear.)
Lessons for Agility
Following Japan's stock-market melt-down in the early 1990s, the country's business community was exposed to an influx of agile Western thinking -- and due diligence and best practices. These ideas took hold in some quarters, but at Olympus, the old rigidity continued to hold sway. The same insiders came and went, from Olympus to consulting firms and back again. The company eventually appointed outside directors to its board; but even those outsiders were associates and cronies of the insiders.
The PwC investigation found that the Olympus directors had exercised no due diligence in appointing, and paying exorbitantly for, the currently unknown merger-and-acquisitions advisors. (Ongoing investigation has revealed that these financial shenanigans were in service of covering up losses, dating from the 1990s, that had never been reported to shareholders.)
Start with basic honesty. Then add transparency and the invigorating influence of outside viewpoints. Let's hope that Olympus takes these agile thoughts to heart as it struggles to rebuild its management, and indeed its corporate culture, amid the worst financial scandal in Japan's history.