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Olympus Corp. (OCPNY.PK) and three of its former executives pleaded guilty this week to charges related to a $1.7 billion accounting cover-up, the media reported. During the year since the Japanese equipment maker's former CEO Michael C. Woodford raised questions about its deal-making, Olympus has made some improvements to its corporate governance, but continues to show serious weaknesses that interfere with its ability to balance the powers of its managers.

To be sure, it's positive that the former chairman Tsuyoshi Kikukawa, executive vice president Hisashi Mori, and internal auditor Hideo Yamada no longer manage the company. They reportedly face up to 10 years in jail and fines of up to ¥10 million (about $128,000), according to media. The company could receive a fine as well, but media reports about its size were inconsistent.

Getting rid of corrupt managers isn't the only step that Olympus has taken to turn over a new leaf in recent years. Under pressure from shareholders after its scandal erupted, Olympus called an extraordinary meeting in April to replace much of its management and board, which now comprises eleven members, including six outside directors expected to use objective judgment. In June 2011, Olympus had an unwieldy fifteen directors on its board.

Before the scandal, the company also had only one corporate auditor, the recently convicted Mr. Yamada, and a substitute auditor Shinichi Hayashi. Now Olympus has two standing corporate auditors who meet regularly and two outside ones; it is unclear to what extent this expansion of heft will improve the auditing team's accountability, as it also potentially opens the way for confusion as to who is responsible for what. Global companies typically have a standing audit committee consisting of around three people, with one among them clearly designated as the chair who takes full responsibility.

The new board displeased some investors. Southeastern Asset Management said it had pushed Olympus to choose independent board candidates who would protect the value of its medical business. Instead, the Memphis-based shareholder found that Olympus's "independent" directors were weighted toward creditors, as board chairman Yasuyuki Kimoto is a former executive from Sumitomo Mitsui Banking Corp., the company's largest creditor. "We decided to sell in March when the announcement of the new president and board nominees indicated that shareholder interests would not necessarily be the primary focus," Southeastern Asset Management said in its report for the quarter ended March 31.

In another problem for shareholders, Olympus continues to suffer from minimal disclosure to the international community about its activities. For example, the English language results notice for its April shareholder meeting runs four pages and merely lists the names of directors, in contrast with more typical global proxy filings such as The Procter & Gamble Co.'s, which is 75 pages long and includes everything from board director biographies to details about term limits. Olympus discloses so little data about its financial performance, it's impossible to calculate an Accounting and Governance Risk (AGR ®) score for the company that would indicate the level of its risk relative to peers in the region.

Olympus has made improvements in the past that led to dubious results, such as its establishment in April 2005 of a business unit tasked with promoting corporate social responsibility initiatives. Clearly that effort failed to prevent Mr. Kikukawa from reportedly falsifying the firm's financial filings between 2007 through 2011.

In an indication that Olympus is still cleaning up its act, the company said on August 1 that it dismissed Bang II Seok in June from his position as executive officer and CEO & President of its unit in South Korea, after revelations that he had engaged in "illegal business conduct." He forged a document and is under investigation for various forms of misconduct including embezzlement, the Japan Times reported, but his dismissal is unrelated to the Woodford scandal. On the same day, Bloomberg reported that Olympus uncovered "irregularities" at a doctor-training program in Brazil that may have violated U.S. anti-bribery law.

Certainly, it takes longer than a year to change a corporate culture fostered by senior managers that committed the crimes to which Messrs. Kikukawa, Mori, and Yamada recently pleaded guilty. But to reach that goal, Olympus could have gotten off to a stronger start.

Region: Japan

Country: Japan

Sector: Healthcare

Industry: Advanced Medical Equipment

Market Cap: JPY 421,846.0 mm (Large Cap)

ESG Rating: D

AGR Rating: N/A

Source: Olympus's Efforts To Improve Corporate Governance Leave Room For More