What Lessons does the Olympus Saga hold for Singapore and our SWFs?

Olympus has been much in the news recently. Originally a camera company, these days much of its business comes from medical technology such as endoscopes and microscopes.  It also gained the distinction of being one of the few Japanese companies, including Sony and Nissan to appoint a foreign CEO. Namely, Michael Woodford, a Briton.

On October 14th Olympus sacked Mr. Woodford after he raised questions about what he saw as unjustifiably large payments totaling US$1.3 billion in relation to certain corporate transactions. Olympus blamed the sacking on major differences between Michael C. Woodford and the rest of the management team.

As soon as I read the news I couldn’t help thinking of Charles ‘Chip’ Goodyear. The sentiments expressed in the official statements sounded so similar.  Then again I am always wary of monoliths, whether non-democratic governments or multi-national companies, which wheel out Culture as an excuse for carrying on doing what they do without accountability.

Indeed Olympus issued a statement which in addition to the major differences cited  goes on to say that the company will establish a Japanese style management in which “all our employees will head for the same direction” (sic). Here in Singapore they like the phrase ‘Asian values’ and in fact Temasek Holdings and PAP government statements can sound very similar to the Olympus board when they call for “cohesion” and “constructive” politics.  Simply asking awkward questions and refusing to keep quiet is out of step with Japanese style management values/Asian values.

What were the details of the transactions about which Woodford sought answers? In 2008 Olympus acquired Gyrus Group, a British company, for over US$2 billion. In connection with this transaction it ended up paying US$687 million to a pair of obscure corporate advisory firms headed by two Japanese bankers.  This payment represented nearly one-third of the value of the acquisition. Usually the fees in this type of transaction are around 1% of the value of an acquisition. Once they had got the money, the two bankers behind the advisory firms wound them up. They have since refused to comment.  After the news broke, the FBI have also announced that they are conducting an investigation to see if any US laws were broken.

Olympus also paid US$773 million in 2008 to acquire three small loss-making firms in businesses unrelated to its own. In making the acquisitions it was advised by a company called Global Company which owned stakes in the three companies.  The relationship with Global Company was overseen by Mr. Kikukawa, the company chairman. This is the same Kikukawa who dismissed Woodford. After buying the companies, Olympus within a year wrote off two-thirds of the acquisition cost.

After Mr. Woodford’s sacking and the subsequent revelations about questionable payments, Olympus’s share price collapsed, falling by 50%.  In typical Japanese fashion Mr. Kikukawa was forced to commit the metaphorical seppuku and resign.  In Japan this falling on the sword is usually seen as the end of the matter and business goes on as usual with a new name at the helm.  In fact the company has promised a third-party inquiry but this clashes with statements by the new Chairman who is still insisting that there were no improprieties.

Today there were more revelations. Robert Mundell, a Nobel Prize-winning economist and the only foreign director on Olympus’s board when these transactions took place, made three trips to Japan prior to joining the board which were paid for by Axes Japan, a company owned by the same people who owned the advisory firm, Axes America, that was paid the outsize fee. However it is not known whether Mundell attended any of the meetings which approved the transactions or whether he recused himself.

In Olympus’s case the company has been punished by the markets for what appear to have been shareholder-value destroying transactions. Previously bullish analysts have swiftly revised their ratings and the company will be forced to pay lip service to the values of transparency and accountability by commissioning a third party inquiry. However much management might wish to escape scrutiny of their activities by appealing to strictly Japanese values this is impossible when their company is listed on the first section of the Tokyo Stock Exchange and has or had a significant international shareholding. The scandal has prompted even the Japanese PM to weigh in. This is highly unusual for a Japanese leader but he feels the controversy will harm his country’s image.

To quote his words, “it will be a problem if people take the events at this one Japanese company and generalize from that to say that Japan is a country that does not follow the rules of capitalism.” He is worried about the damage this could do to Japan’s reputation as a place to invest.

As I said above, the Olympus affair would appear to have uncanny parallels with the resignation of Chip Goodyear as CEO-designate of Temasek,  a few months after being appointed. In this case there was no public sacking. Instead the resignation was supposedly by mutual agreement citing “unresolved strategic differences”.   The lack of explanation failed to satisfy Singaporeans. It is notable that when pressed in Parliament to elaborate on the reasons for the resignation Finance Minister Tharman said that it would not be in the public interest to do so.

If Temasek had been a publicly listed company, then the lack of disclosure might have been a strong signal to investors that perhaps corporate governance was not all it should be and that they should head for the exit. After all asymmetric information between corporate “insiders” and “outsiders” is a key reason why there is a share price discount for poor corporate governance.

However Temasek (and GIC) are not publicly listed. Thus Singaporeans are locked in to their “investment”, with no ability to sell and get their money out. They cannot sack the management if it is deemed to have performed poorly. And they can’t even ask for a third Party enquiry.  That is why I have consistently advocated the privatization and listing of Temasek and GIC and the distribution of shares to Singaporeans so that we become actual stake-holders rather than fantasy ones.

Too often the words “Asian values” are used in a self-serving manner designed to prevent questioning and accountability.  The British president of Olympus was sacked for being” un-Japanese”.  But they knew he was not Japanese when they appointed him.   They seemed taken aback that he was demanding answers to questions that the company’s board did not want asked. In truth his sacking had little to do with being Japanese or not. They just did not want the extent of their destruction of shareholder value exposed.

In Singapore unfortunately our government and most of our Parliamentary Opposition seem to have the same mindset.  Sadly our Opposition, with one or two exceptions, has so far been prepared to play the same role as the tame external directors on Olympus’s board and not hold the government to account. What we need in Parliament is more Mr. Woodfords and less Mr. Kikukawas.

Our government is always keen to slavishly import ideas and so-called expertise from Britain and other democratic countries when it suits them.  The state controlled media are quick to report slavish adulation of our government by foreigners that were it critical would be swiftly condemned as interfering in domestic politics. We should not be gulled into thinking that the right to ask questions and demand accountability and transparency are a Western import we should do without.  Just as shareholders have the right to demand accountability from the managers of the companies they own, so we as citizens have the right and indeed the duty to subject government policies to scrutiny and hold ministers accountable. Indeed it is key to our ability to be taken seriously as a First World nation.

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