Scandal at Olympus: The CEO Who Knew Too Much

In the days after he was promoted to President at a big Japanese multinational — just eight months ago — Michael Woodford was on a trajectory to succeed to the highest executive level, becoming the latest example of how much "Japan Inc." was changing. The rule had been that foreigners could never dream of occupying C-suite in Japan because they would never understand the subtle ways Japanese corporations work and succeed. But Carlos Ghosn had famously remade Nissan; and Sir Howard Stringer is the big boss at Sony Corp. Woodford's ascendancy at Olympus Corp., the famous Japanese camera company, seemed to be continuing proof that foreigners were no longer even exceptions to the rule.

Indeed, Woodford reached the top very quickly. An affable Brit who had run the U.K. and U.S. operations for Olympus was named CEO of Olympus three weeks ago. The decision was made by his chief ally at the company — a man he considered a friend — Tsuyoshi Kikukawa, the company's chairman. Kikukawa said he was "extremely pleased" with the job Woodford had done so far. That, however, was not quite end of story — and the work that Woodford had begun as President would come into fruition, much to Kikukawa's chagrin. A very messy reality began to intrude on what appeared to be another warm and fuzzy tale of cross cultural corporate bonding.

Woodford in his time in Tokyo had been digging into four separate acquisitions Olympus had made from 2006 to 2009. Three of the four had already had their assets written down to just a fraction of the nearly $1 billion Olympus paid to buy them. Each of the firms involved in those three cases — a recycling company, a company that makes anti-aging cosmetics, and a company that makes microwave oven-safe food containers — were registered in the Cayman Islands, a famous tax haven in the Caribbean. And all three were dissolved shortly after the deals were done. Extraordinarily, at a press conference on Oct. 27, Olympus executive vice president Hisashi Mori said that the only information his company has about the shareholders of the three are the names of the entities in the Caymans that the payments went to — for example, one called Neo Strategic Venture LP — and bank account numbers. Said Mori: "We know nothing about who they are."

In the fourth case, Woodford discovered that after acquiring Gyrus, a U.K. based medical instruments company, for $2.2 billion in 2008, top management in Olympus paid, according to Woodford, $687 million as a "transaction fee" to two investment bankers — a payment that also went into a Cayman Islands account that also subsequently was dissolved. Merger and acquisition bankers on Wall Street can earn hefty fees for sizeable deals. But in this case, the "fee" was a third of the size of the transaction — a stupefying amount given that a typical fee is about 1% of the deal's size. "Where do I sign up for their business," a Tokyo based M&A banker cracked after hearing the news.

In 2009, Olympus's board had hired an independent auditor to go over the deals and the payments. According to an article in the Wall Street Journal, the report declared that the company's directors had done nothing wrong.

All of this was too much for Woodford, who on Oct. 11 wrote a memo to Kikukawa in which he described "a catalogue of calamitous errors and exceptionally poor judgment which "has resulted in the destruction of shareholder value of $1.3bn." He called on the chairman to resign. Instead, at a board meeting three days later, Olympus sacked Woodford. He was to clear out his office immediately, and "take a bus to the airport," advised one of his former colleagues. Kikukawa, in a memo later distributed internally, called Woodford's questions about the deals "aberrant" and "unforgivable, and added that he felt the former CEO "did not like Japan."

Woodford left Olympus's office in Tokyo as ordered, then quickly went public with his version of events. And far from being just a corporate scandal — however large — he has made it clear that he suspects there may be something more "sinister' 'involved. "If you make payments which are just so huge and, there's no answer, that's when concerns arise of more sinister issues," he told the Financial Times. "We have come into this firestorm of scrutiny and publicity, which normally would not be the case [in Japan]. It's so extreme. They [Olympus's management] obviously fear something much greater than the publicity. I can find no other explanation."

Woodford's use of the word "sinister" plainly implies that he suspects criminal elements may have been involved in this saga. It's an explosive allegation, to be sure, but sufficiently credible that both the FBI in the United States and Scotland Yard's Serious Crimes unit in London are now reportedly investigating (Woodford has turned over his documentation to both agencies). On October 26, with the company's stock price down by more than 50%, Kikukawa resigned as chairman. The stock rebounded 23% in response. But, at a press conference the next day, Kikukawa's successor, Shuichi Takayama, again defended the $687 million payment Olympus had made in connection with the Gyrus deal, saying the payment was above board and appropriate. (Takayama did not appear to dispute the size of the payment; earlier in the scandal, an Olympus spokesman said the fee paid in the Gyrus deal was just half the size of what Woodford claimed.) The same day, Japanese press reports said that Tokyo's Securities and Exchange Surveillance Commission had begun its own investigation into the affair. Reuters reported that Takayama was asked about a Yakuza connection and responded, "I am absolutely not aware of any such thing."

It is still far from clear whether Woodford's suspicions that "sinister" elements were involved at Olympus will be borne out. But it's also a fact that for decades there have been links between organized crime groups — the Yakuza — and Japan Inc. Companies have long used members of organized crime groups to ensure that annual meetings are peaceful — that pesky shareholders don't get too out of line with annoying questions of management. In 1999, the chairman of what was then Japan's largest bank, Dai Ichi Kangyo, was convicted of paying off these so-called sokaiya — corporate shake down artists — and given a nine-month sentence. Three years ago, in response to reports that organized crime had gone upscale and was investing large sums in publicly held companies, Japan's Securities and Exchange Surveillance Commission compiled an index of more than 50 listed firms with alleged ties to organized crime.

That Woodford has suspicions as to where Olympus's outsized payments may have ended up, in other words, is hardly surprising. Red flags abound. Money disappears into Cayman Island accounts, which in turn disappear into the ether. Olympus says, in three of the instances, it has no idea who got the money. The sums involved are astounding. Olympus Corp. has an international reputation to uphold, built over decades. Astonishingly, that reputation now lies squarely in the hands of law enforcement and regulatory agencies — both at home and abroad — trying to figure out where the money went.