The Olympus corporate scandal of 2011 - Research Paper Example

? Olympus Corporate Scandal of Erik Moller Corporate Governance Mr. Alain Reid Glion Institute of Higher Education Table of Content Table of Content 2 Introduction 3 Olympus Corporate Scandal 6 Corporate Governance 7 Corporate Governance in Japan and steps taken 10 Corporate governance faces major crisis in Japan. Managers who give poor performance are not removed from their post after the nuclear disaster. Among 38 countries, Japan holds only 33rd position for corporate governance. A brokerage firm, CLSA, complained that Japanese firms "express hostility to reforms". There are mediocre corporate rules and regulations (Olympian Depths, 22nd October, 2011). The Olympus Corp is on its way to recover from the fraud though. They proposed a new board of directors and appointed an Executive Officer Hiroyuki Sasa, the current president of Japan Research Institute in order to succeed President Shuichi Takayama (Xinhua, 2012) The ex-chairman Tsuyoshi Kikukawa was accused by the prosecutors along with the ex executive vice-president Hisashi Mori and previous auditor Hideo Yamada for the with the net worth of the company rising in terms of financial statements of March 2007 and 2008. Apart from these six people were arrested on grounds of suspicion. Olympus commented “We take these charges very seriously and will continue to strengthen our corporate governance…We again express our deep apologies to shareholders, investors, business partners, customers and other related parties for causing trouble” (Japan prosecutors charge key figures in Olympus scandal, 2012) Investigation is still going on under the law enforcement agencies of Japan, Britain and the United States. The company admitted to improper accounting methods. 10 Conclusive remarks 10 References 12 Gallagher, C. & Negishi, M. (2012), Japan prosecutors charge key figures in Olympus scandal, Reuters, retrieved on March 12, 2012 from: http://www.reuters.com/article/2012/03/07/us-olympus-idUSTRE8260C920120307 12 Xinhua (2012), “Japan's scandal-hit Olympus lines up new board”, China.org.cn, retrieved on March 12, 2012 from: http://www.china.org.cn/business/2012-02/27/content_24745598.htm 14 Introduction A corporate body has a distinct legal status and has characteristics and liabilities that are separate from those of its members. It has the right to exist for indefinite period of time. New corporations are created after having them registered and their main purpose is to conduct business and commerce. A corporate body can be owned by two or more individuals who form a partnership with an agreement among themselves to share profits and losses in a pre-determined ratio. A partner can have limited or unlimited liability. A limited liability partner is one whose responsibility for company’s debts is limited only to the amount of his capital contribution. Unlimited liability means when a company is declared bankrupt, then the partner’s personal assets can be seized to clear the debts (Committee on Homeland Security and Governmental Affairs, 2006, pp.68, 70). All corporate bodies have some common purposes. A corporation garners the interests and funds of its owners to serve the interests of the public. It shall ensure fair profits for its partners but not by endangering the stake of other shareholders. Every corporate body needs to satisfy the needs of the current generation and at the same time must have an insight into the needs of future generations. A corporate body must perform its activities in a legal and ethical manner (New Principles for Corporate Design, n.d.) Management, Board of Directors and Owners The success of a corporate body depends mostly upon the performance of its management personnel. The management should apply proper strategy and innovations in their performance to bring in more profits on a sustained basis for the organisation by improving the performance of the employees and also by encouraging efficient contribution by those who contribute. Performance management works in combination with corporate management in service industries like the public transport industries. This is because in these industries labour is important not only to provide services but also for dealing with customers by marketing and selling. To achieve system objectives, it is necessary to measure the performance of the management and this is linked with “performance indicators”. The management needs to gather and make optimum use of corporate resources to achieve the desired goals. Management also needs to allocate activities to appropriate persons according to their forte to gain maximum success. Management needs to ensure that all activities are carried on in organised pattern to get optimum returns from individual worker to achieve the organisational goals (Corporate Management, n.d., pp. 67,69). Effective management is crucial for any corporate body. It can be attained by proper planning and strategies. It is the duty of the management to provide the employees with concrete ideas about the organisation’s goals and principles to help them get a clear picture of their responsibilities. It is also important on the part of management to properly motivate the employees so that they can give their best performance according to their capabilities. Major factors that can motivate the employees are “leadership, clear organizational and individual goals, rewards based on performance, participatory supervision” (The Role of Management, n.d.) The Board of Directors (BOD) is a “group of people legally charged with the responsibility to govern a corporation”. It is the responsibility of the BODs to build up a company and represent the company’s mission through advocacy of its products and services. It is also the responsibility of the BODs to appoint an efficient and qualified executive for proper management of the company. The BODs need to regularly evaluate the performance of the executive based on his coordination with the board, his leadership qualities, his manner of product or service implementation and how efficiently he manages the organisation and the employees. The BODs also need to look after efficient management of company resources. They also need to accept responsibilities for all policies and conditions of the company. The BODs are responsible to answer any queries of everyone who has interest in the company or is affected by the company’s performance (Carter, n.d.). In a company, although the BODs make all decisions regarding the welfare of the company, they do so in the name of the shareholders and so it is the responsibility of the shareholders to elect appropriate members as BODs. The small shareholders do not have much role to play in the election process. The larger shareholders play a crucial role and can appoint themselves or can elect people to represent them on the board. The BODs represent the interests of the owners and shareholders of the company. The top executives are answerable to the BODs. The owners of a company need not actively engage themselves in the working process to exercise their power. For daily functioning of the company, the owners can appoint executives. “The control and realisation of will is embodied in the owners of the company even if they do not participate actively in the collective labour. (Eldred, 1984, pp.88-89) Corporate Social Responsibility Corporate Social Responsibility (CRS) is a “social contract between corporations and society, based on long-term social demands and expectations”. Its concept is to give equal treatment to all consumers and be honest with the shareholders. It also needs to develop an enterprise of ethics and to fulfill social missions by developing employee efficiency to meet the market demands. It is also the responsibility of the CRS to efficiently use company resources for betterment of the society. There are three principles of CSR. The first principle is to give equal treatment to all consumers and be honest with all stakeholders. The second principle is to establish an organisation that will give value to ethics, to drive the employees to satisfy the market demands and also be beneficial to the society. The third principle is to utilize resources for additional benefit of the society at large. The expectations of consumers from a company are generally high. They expect that the company along with making profit will also look after the overall welfare of the society. That is why companies need to take social responsibility into account before making any planning regarding business decisions. Furthermore, along with giving a safe working environment for the employees, the company should also take care of economic and social needs of the employees. In short, the major responsibility of CRS is to “establish good relationships among investors, employees, consumers, governments, suppliers and customers”. (Kreng and Huang, 2011, pp.530,539) Olympus Corporate Scandal Olympus Corporation is a Japanese company that manufactures optical instruments and was established in 1919. It invented many technologies in medical-imaging and one such technology is endoscope. In the global stock market it had 70 percent share in October, 2011. In the last four years, there has been a steep drop in net sales. The camera division could not yield profits. Michael Woodford was appointed as president after he managed to reduce the cost of production and increased Olympus’s business in Europe. (Olympian Depths, 22nd October, 2011). In June of 1998, there was a rumor that the company suffered monumental losses on “derivatives trading”. This was followed by the fall of value of its shares by 11 percent in just three days. Olympus rigidly denied all such rumors and continued to exhibit profits in its balance sheet. Tsuyoshi Kikukawa who was the president of Olympus at that time assured the investors that nothing was wrong in the profit structure of the company. In October, 2011, the rumor was proved to be genuine when astounding revelations were made by Michael Woodford (Corporate Japan Rocked by Scandal at Olympus, 9th November, 2011). Woodford was Chief Executive Officer of Olympus for only two weeks before he was removed from the position on 14th October, 2011. Apparently the reason cited was that his management style was not compatible. Woodford made allegations that he was forced to resign after he had questioned the BODs on several previous acquisitions. He particularly challenged the $687 million paid as fees to a middleman in 2008 while acquiring Gyros Group which is a British company that makes medical equipments. The amount was almost 31 percent of the purchase price while “usually such payments range from 1 percent to 5 percent of the transaction cost”. He claimed that the “entire board of the company is toxic and must be replaced”. He was replaced by Tsuyoshi Kikukawa and this caused share values to fall by 56 percent. Kikukawa resigned from his post on 26th October, 2011 after he had apologized at a press briefing for “causing concerns due to the share decline”. He, however, denied any fraud in past acquisitions. Olympus then promised to set up an “independent committee” to investigate all acquisitions after three major shareholders expressed concern over the 2008 deal (Yasu, 2011). The suspicious transactions were first brought into the limelight in the summer of 2011 by a magazine called Facta. It was however not given much attention by the mainstream press of Japan. Even the local media did not make any substantial story regarding the investments. This was quite surprising, mainly because the market value of Olympus had reduced by almost 50 percent. Olympus even threatened that it will sue Woodford for giving out confidential information to the press. (Olympian Depths, 22nd October, 2011). Corporate Governance Corporate Governance is a “set of systems, principles and processes by which a company is governed”. It provides directives to manage and control a company so that it can achieve its objectives so as to make maximum profits and also can give positive returns to the stakeholders. Stakeholders can range from “management to BODs to shareholders to employees to customers and also the society” (What is Corporate Governance?, 18th January, 2009). The major failure of Corporate Governance can happen from expropriation of the outside investors. Such investors can be shareholders or creditors on whose shoulders lies the control of the company. Huge quantity of money can be stolen from the outside investors by the controlling shareholders and their allies. This illegal practice discourages the investors from putting their funds into corporate sector. This leads to “low valuation of corporate assets, stunted capital market, and slowed economic growth.”. The most important element of Corporate Governance is to see that legal rules are made by the court to stop or at least curb the expropriation of investors. (Chong & Lopez-de-Silanes, 30th July, 2007, p.xvii) Responsibility in Olympus scandal The Olympus Scandal of 2011 has increased the concern of the investors over the efficiency of Corporate Governance in an industralised nation like Japan. After Michael Woodford was fired from the post of president of Olympus in October he remained in the company in a non-executive position but later on he resigned from the Board after claiming that the entire Board needs to be replaced. Although Olympus initially vehemently denied all allegations, later on the company admitted that it has been incurring losses over 20 years and such losses were being concealed. An investigating committee was set up in November which exposed Tsuyoshi Kikukawa along with former statutory auditor and accounting head as the core players in the scandal. The committee also stated that Olympus was a corporate that did not give freedom to people to speak. The company was composed of people who were more interested in their personal gains than the overall betterment of the company. There was also lack of loyalty of the management towards the shareholders. The company was directed to refile its accounts because of existence of fraud in precious accounts. The company followed the instruction hours before the deadline to avoid being delisted from the Tokyo Stock Exchange. This entire issue raised questions regarding the standards of corporate governance in Japan. The concern was mainly over whether this incident was a lone incident or whether it implies a wider incompetence of corporate governance in Japan. The question remains about the reputation of Japan in the corporate world in the global arena. The failure of corporate governance brought in forefront the lack of independent members in the Board of Olympus. The Tokyo Stock Exchange lists only those companies who appoint minimum of one director and auditor who will share common interests with the shareholders. The core responsibility of corporate governance is to see that common interests are maintained between the shareholders and the corporate executives. In Europe and North America, it is compulsory for a company to have a high number of independent non-executives on the board. It is apparent that the performance of corporate governance in Olympus is far below efficiency. According to Woodword “The only way forward is an entirely new board of directors, untainted by the past scandal.” (Tabuchi, 2011) Those involved in the scandal An outside panel was created by Olympus to investigate the scandal. It was headed by a former Supreme Court judge of Japan. It exposed that Akio Nakagawa, Hajime Sagawa and Nobumasa Yokoo were former bankers who guided Olympus on how to conceal the losses in the Balance sheet. The panel also said that several other banks were requested by Olympus to submit “incomplete financial statements” to auditors. This was done to hide financial embezzlements which according to the panel amounted to about $1.7 billion and also to conceal investments that were proved to be unsuccessful. However, there is no evidence that the banks were aware of the illegal motives of Olympus. One such bank was Societe Generale of France. The panel, however, attempted to limit their accusations. Auditors like KPMG AZSA and Ernst & Young ShinNihon were also criticised for not being able to detect the fraud. KPMG AZSA was the auditor in 2009, and it raised vital questions on some specific investments, but later backed down and approved all financial statements of Olympus after the company convinced the auditors that an inquiry made by a third party did not find anything wrong in the investments. Kikukawa who was the former chairman and couple of other executives were also responsible for concealment of losses. The report of the investigating panel stated that “The management was rotten to the core, and infected those around it” (Tabuchi & Bradsher, 7th December, 2011) Corporate Governance in Japan and steps taken Corporate governance faces major crisis in Japan. Managers who give poor performance are not removed from their post after the nuclear disaster. Among 38 countries, Japan holds only 33rd position for corporate governance. A brokerage firm, CLSA, complained that Japanese firms "express hostility to reforms". There are mediocre corporate rules and regulations (Olympian Depths, 22nd October, 2011). The Olympus Corp is on its way to recover from the fraud though. They proposed a new board of directors and appointed an Executive Officer Hiroyuki Sasa, the current president of Japan Research Institute in order to succeed President Shuichi Takayama (Xinhua, 2012) The ex-chairman Tsuyoshi Kikukawa was accused by the prosecutors along with the ex executive vice-president Hisashi Mori and previous auditor Hideo Yamada for the with the net worth of the company rising in terms of financial statements of March 2007 and 2008. Apart from these six people were arrested on grounds of suspicion. Olympus commented “We take these charges very seriously and will continue to strengthen our corporate governance…We again express our deep apologies to shareholders, investors, business partners, customers and other related parties for causing trouble” (Japan prosecutors charge key figures in Olympus scandal, 2012) Investigation is still going on under the law enforcement agencies of Japan, Britain and the United States. The company admitted to improper accounting methods. Conclusive remarks The main concern after the Olympus scandal is that investors may think twice before investing in Japanese companies. The scandal has highlighted the shortcoming of Japan’s Corporate Law and it needs to be reviewed. It is being considered that external directors be appointed in companies to avoid such scandals although the three external directors of Olympus did not do anything to prevent the scandal. According to Yasuhisa Abe who is director of Keidanren's business infrastructure bureau says “there are no prevention measures. It is not a matter of preventing such cases by creating some kind of a structure.” (Kubota, 7th December, 2011) References Committee on Homeland Security and Governmental Affairs (14th November, 2006). Failure to Identify Company Owners Impedes Law Enforcement, Washington: DIANE Corporate Management, (n.d.) sputnicproject, retrieved on 1st February, 2012 from: http://www.sputnicproject.eu/docs/sotar/sotar-4.pdf Eldred, M. (1984). Critique of Competitive Freedom, Sydney: Kurasje Gallagher, C. & Negishi, M. (2012), Japan prosecutors charge key figures in Olympus scandal, Reuters, retrieved on March 12, 2012 from: http://www.reuters.com/article/2012/03/07/us-olympus-idUSTRE8260C920120307 Japan prosecutors charge key figures in Olympus scandal, (2012), Reuters, retrieved on March 12, 2012 from: http://www.reuters.com/article/2012/03/07/us-olympus-idUSTRE8260C920120307 Kubota, Y. (7th December, 2011). Japan business lobby says Olympus case an outlier, Reuters, retrieved on 1st February, 2012 from: http://www.reuters.com/article/2011/12/07/us-olympus-governance-idUSTRE7B60JV20111207 Kreng, V.B. and Mao-Yao Huang (2011). Corporate Social Responsibility: Consumer Behaviour, Corporate Strategy, and Public Policy, Social Behaviour and Personality, 39.4, retrieved on 1st February, 2012 from: http://web.ebscohost.com/ehost/pdfviewer/pdfviewer?sid=d27c1151-c4e4-46b7-994f-f3607cde2df4%40sessionmgr15&vid=6&hid=7 Olympian Depths, (22nd October, 2011) Economist, 400(8756), retrieved on 1st February, 2012 from: http://web.ebscohost.com/ehost/detail?sid=03e77daa-bcfc-4e56-a7a3-27189c5f1e02%40sessionmgr14&vid=9&hid=125&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d#db=aph&AN=66816345 New Principles for Corporate Design, (n.d.) corporation2020, retrieved on 1st February, 2012 from: http://www.corporation2020.org/ Thomson, L.M (18th January, 2009). What is Corporate Governance?, The Economic Times, retrieved on 1st February, 2012 from: http://articles.economictimes.indiatimes.com/2009-01-18/news/28462497_1_ corporate-governance-satyam-books-fraud-by-satyam-founder The Role of Management, (n.d.) MSH, retrieved on 1st February, 2012 from: http://erc.msh.org/quality/itoview1.cfm Tabuchi, H. (1st November, 2011). Olympus Sues Executives Over Cover-Up, but Does Not Dismiss Them, The New York Times, retrieved on 1st February, 2012 from: http://web.ebscohost.com/ehost/detail?sid=7e7125fc-d802-4196-8355-179983784701%40sessionmgr11&vid=6&hid=7&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d#db=aph&AN=70224800 Tabuchi, H. and K. Bradsher (7th December, 2011). The Culture was Corrupt at Olympus, Panel Finds, The New York Times, retrieved on 1st February, 2012 from: http://web.ebscohost.com/ehost/detail?sid=6b7e90f1-eefb-472a-8d02-86b73d3df00a%40sessionmgr13&vid=4&hid=7&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d#db=aph&AN=67692373 Tabuchi, H. (9th November, 2011), Corporate Japan Rocked by Scandal at Olympus, The New York Times, retrieved on 1st February, 2012 from: http://www.nytimes.com/2011/11/10/business/global/corporate-japan-rocked-by-scandal-at-olympus.html?pagewanted=all Yasu, M. (26th October, 2011). Olympus’ Kikukawa Quits as Axed Woodford Takes Complaint to FBI, Businessweek, retrieved on 1st February, 2012 from: http://www.webcitation.org/63EHvQPoD Xinhua (2012), “Japan's scandal-hit Olympus lines up new board”, China.org.cn, retrieved on March 12, 2012 from: http://www.china.org.cn/business/2012-02/27/content_24745598.htm Read More