Rarely in the history of Japan Inc. has there been a more remarkable board meeting. On Nov. 25, the directors of Olympus Corp. gathered at their Tokyo headquarters, their company under siege. Once a solid international brand, a maker of cameras and medical equipment, the company is now at the center of a global investigation as to whether, and to what extent, its top management was involved in funneling billions of dollars in allegedly illicit payments to offshore accounts. Investigators believe those payments, made for over a decade, may have mostly ended up in the hands of organized criminal groups in Japan. The company denies any yakuza connection, but if one is proved, Olympus will be delisted and almost certainly cease to exist in its current form.
At the center of the meeting was Michael C. Woodford, 51, the company's former president and CEO turned whistle-blower. Woodford brought his suspicions about the payments to the man who had been his mentor at Olympus, chairman Tsuyoshi Kikukawa. He was brushed off and then fired on Oct. 14 after asking for Kikukawa's resignation. Woodford fled Japan that same day for his native Britain. Although he didn't name specific threats, he says he did so out of fear for his safety. He then went public with his suspicions, and amid the worsening scandal, Kikukawa stepped down on Oct. 26. (See the top 10 CEO scandals.)
When Woodford returned to Tokyo for the board meeting (though fired, he was still on the board because of a quirk in Japan's corporate-governance rules), all hell had broken loose. He was mobbed by cameramen and reporters as he arrived at Narita airport and was protected by several police officers as he made his way into town. "I find myself in a John Grisham novel," Woodford later said. But the Olympus scandal is not fiction; it may, in fact, turn into the biggest corporate scandal in Japanese history.
If suspicions about yakuza involvement are proved accurate, it will not be the first time Japan Inc. has been linked to organized crime. Throughout the 1990s, the Japanese government ramped up its efforts to crack down on standard criminal activity like prostitution and gambling. In response, the yakuza went white collar. It started with small stuff like shareholder intimidation. Then, in 1997, six executives, including the chairman of what was then Japan's largest bank, Dai-Ichi Kangyo, were convicted of making payments to a gangster who later admitted he was an extortionist and was also convicted. (See photos of stagnant Japanese economy.)
The yakuza continued to cast a sinister pall in ensuing years -- even over foreign-owned firms. In early 2008, Lehman Brothers' Tokyo office was defrauded of $355 million it loaned to a biotech company for what it thought was medical-equipment financing. The money was simply stolen in what investigators believed was a yakuza scam (though the suspicion was not proved). By then, according to American journalist Jake Adelstein, who for years has written about the yakuza, Japan's Securities and Exchange Surveillance Commission (SESC) suspected hundreds of companies of having been infiltrated by yakuza.
Read "As the Olympus Scandal Shows, Corporate Japan Is as Shoddily Governed as Ever."
The unfolding Olympus scandal also has its roots in the 1990s -- specifically in the bursting of the Japanese bubble. Before then, making money seemed effortless. Even blue-chip companies were taking funds from their traditional lines of business and pouring them into the ever rising stock and real estate markets -- a practice known as zaitech trading. Olympus was one of them. Toshiro Shimoyama, who ran the firm from 1984 to '93, admitted as much. "When the main business is struggling, we need to earn through zaitech," he told a press conference in 1986. But when the economy tanked -- Japan's leading stock index, the Nikkei, peaked in December 1989 -- zaitech profits became embarrassing losses for scores of companies, and the losses deepened as the decade progressed. That, by the company's own account, is what happened at Olympus.
Like many other corporations, Olympus tried to hide its losses through financial sleight of hand. The idea was to pay someone, or some company, to acquire the bad investments, thus getting them off the books. When the markets recovered, the investments would then be transferred back to the original owner. This process became known as tobashi (to blow away). The problem, for Olympus and many others, was that the markets never did recover. (See the top 10 crooked CEOs.)
What happened next is now at the center of the Olympus controversy. From 2006 to '08, according to the company, it paid almost $1 billion to acquire three Tokyo-based companies that had no revenue, no operating history and no relation to its core businesses. It then purchased, in 2008, British medical-equipment maker Gyrus for nearly $2 billion -- a deal on which it paid an astonishing $687 million fee to two financial-advisory firms that later shut their doors. (None of these companies have been charged with wrongdoing.) Both Shuichi Takayama, current Olympus president, and a panel the company put together to look into the payments admit they were made to disguise zaitech losses. In effect, Olympus was trying to create ostensibly legitimate transactions on its books that were roughly equivalent to the size of those losses.
The Tokyo prosecutor's office and the SESC suspect that Olympus made $6 billion in tobashi-related payouts over 10 years, much of it to entities suspected of criminal links. One such 2005 payment, first reported in the New York Times, involved $208 million that was used to acquire a tech company that authorities believe is a front set up by Yamaguchi-gumi, Japan's biggest yakuza group. The probe now needs to establish if Olympus chose to run its tobashi schemes through entities that may be linked to organized crime or if it was coerced into doing so. Investigators also believe it is likely that the amount Olympus paid out exceeds its zaitech losses. "Extortion," says one source close to the affair, "is what these guys do." (Read "Olympus Scandal: A Confession, but Still No Answers.")
At the meeting on Nov. 25, Woodford said, directors agreed that the money trail needed to be followed wherever it led. He said the firm hoped to restate its accounts by Dec. 14, factoring in all payments made from 2000 to '09, but he also emphasizes that evidence of yakuza links is "not yet definitive at all." If authorities are able to confirm their suspicions, however, it could mean the dismemberment of Olympus. Delisted, its businesses would be cheap acquisitions for a competitor. (Its valuation is already down almost 75% from where it stood in early October.)
All of this may be why Woodford, who had insisted he wanted to return to help clean up the company, now says he's "not begging" for the job. His reluctance is hardly surprising. Investigators have only just begun sorting through the rot, but Olympus is already the epitome of a corporate-governance system that is at best complacent and, at worst, apparently far more sinister than that.
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