04 April 2014
Shortly after being appointed as the first non-Japanese president at Olympus in April 2011, Michael Woodford blew the whistle on a $1.7 billion accounting fraud.
In July 2011, Japanese business magazine FACTA published damning information about executives at Olympus hiding fraud through complex M&A activity and off-balance sheet transactions. Recently appointed president, Michael Woodford, demanded a full investigation into the losses. The board then turned against him and unanimously voted to fire him in October 2011, ending his 30-year tenure with the company. The events that unfolded after Michael blew the whistle in Japan read like a John Grisham novel, putting not only his career in jeopardy but his life – with threats linked to the Japanese criminal underworld. Michael reveals more to Governance + Compliance about the scandal and its aftermath, in particular how Japanese culture affected Olympus’ corporate environment. He shares his thoughts on power and corruption, as well as the wider governance issues associated with whistleblowing.
Did you think you’d be fired for blowing the whistle?
I thought it was a possibility, but logically, with a board of 14 including three non-executives, it would be the wrong thing to fire me for.
Was there any attempt by the board to cover up the reasons for its decision to fire you?
When I was fired, the board was unanimous. Although anyone could see that you don’t buythree companies with no turnover for $1 billion or pay $700 million in fees to the Cayman Islands.The president who took over [after the briefly reinstated former president, Kikukawa] Takayama– who I liked – stood up at a press conference and said these three companies were important for the strategic direction of the company. He maintained that we had made the right decisions. What is truly Alice in Wonderland is that it was out there – the Financial Times, Wall Street Journal, New York Times and Thomson Reuters had all publicised it – yet the board thought they could come up with such nonsense. The Japanese media acted like the press office for Olympus and reported exactly what the company said, publishing stories that suggested I had left the company because of cultural differences. It is unbelievable that 14 highly educated people supported this decision.
Was the entire board aware of the fraud?
They either knew or they were stupid. Three executives of Olympus, Kikukawa, Mori and thestatutory auditor, Yamada, who was a previous senior vice president, were indicted. All admitted their guilt and received multi-year sentences – but suspended. This fraud was ongoing throughout three presidencies: Shimoyama was the first, then Kishimoto, and thenKikukawa. Shimoyama and Kishimoto were timebarred in Japan, and the judge said it would be unfair to just punish Kikukawa.
In Japanese, this type of behaviour is called ‘tobashi’ – to make it fly away. They secretly controlled offbalance- sheet vehicles and, as far as we know, the company lost huge amounts of money buying highrisk securities in the 1980s. These things then fell away and were basically worthless, but they were still on the books at full value. At the time, Japanese accounting standards were changing, which meant – in very simple terms – they sold those assets to off-balance-sheet vehicles for the full value that was listed in the books, which they had to repay. This wasrecycling the money back from the Cayman Islands – it was fraud. Lots of people helped facilitate this and have made lots of money.
Did they expect you not to notice or, when you did, not to say anything?
In Japan, everyone follows orders. It’s as if the emperor has no clothes on. It’s just extraordinary. I’msure there is, and will be, hundreds, if not thousands, of companies like Olympus. I think Kikukawa made a miscalculation when he appointed me and he was unlucky that there was a whistleblower in the company who initially went to FACTA.
Do you know who that was?
Yes – meeting this man was one of the most moving occasions of my life. I’ll say ‘man’ because everyone is a man in corporate Japan. His wife doesn’t know that he was the whistleblower to this day because she would be critical of him. The person has suffered greatly, they [the Olympus board] must know who he is, but I know and so many other journalists know, and there is safety in that.
Would you do what you did again?
Yes. I had no real choice, unless I turned my head or became a part of it.
Is this a cultural problem inherent in corporate Japan?
Yes. If Olympus were a Western company, once FACTA had published its story, financial journalists would have spoken to the company’s IR and PR departments. If the journalists didn’t get common sense answers, the story would escalate. In Japan, however, the media is clearly incredibly afraid of attacking a company. I believe this is not because of a loss of advertising income from that company, but because that publication would have been seen to be acting against the interests of the whole club. The Western institutional investors of Olympus, including Harris Associates, Baillie Gifford and Southeastern Asset Management, started to seek my reinstatement and the dismissal of the board, but the Japanese investors didn’t say anything. They wouldn’t criticise the incumbent board or offer a word of support for me.They were clearly more annoyed that I was making a noise, rather than about the fraud itself.
Do you think fraud is a particular problem during M&A activity?
Yes – especially in Japan because people don’t ask questions. Power corrupts and if power is not held to account problems will arise. A sign of a large company in distress is often the use of second-tier, third-tier, even fourth-tier accounting firms. The question needs to be asked, why are they using these tiny firms?
Can changing auditor be problematic when handing over information?
I find it extraordinary that the accountants missed the Olympus fraud, I really do. At the handover they had an independent investigation that looked at the issues with an academic and an accountant so that it was done in the right way.
Do you think that the audit process is fundamentally flawed around the world?
I believe that relationships get far too comfortable. I believe in the mandatory rotation of auditing firms; if this were every ten years, the ‘big four’ would know that somebody else is going to look at what they’ve been doing. This would lead to a much more detached relationship. For example, if you compare the relationship between a patient and doctor there are lots of rules. However, if you keep meeting the same senior partner responsible for your audit and they take you to Wimbledon, where you make decisions together, it is a problem. I also think the audit process should be much more forensic. When I started out in business, they literally counted the widgets on the production line and there was lot of transaction checking. It’s now all very high-level.Another problem is that so much of accounting is open to interpretation, including issues such asgoodwill or inventory valuations.
How can companies establish the right culture, and what do you think that is?
What I found profoundly disturbing wasn’t the bad guys in Japan, but the way my colleagues in America, England and Germany reacted. Many had helped me expose the scandal, including a number of chartered accountants. It wasn’t a power play in the boardroom. I was already the CEO and president, they all knew it was about exposing a $2 billion fraud. They had seen the PwC report that stated that it was logical to bring in forensic accountants. When I was sacked, within an hour of my dismissal, people who I’d known for 30 years, Westerners who had helped, who hadn’t done anything in the scandal itself, moved away.
These weren’t twenty-something managers with a big mortgage, they were people earning large amounts of money for long periods of time, and knew me. That told me that most people care about themselves and their families, and to hell with anyone else. It’s not that they go off and do bad things. It’s just that when things go wrong, they don’t want to get involved.
What made you speak out?
Once I saw the behaviour of Kikukawa and Mori,there was no turning back. People ask, what wouldhave been your reaction if they’d taken you into their confidence? It’s an interesting question. I think I would have acted just the same but I would have felt greater personal warmth towards them. Kikukawa’s argument was that he did it for the company. If he really did, once the story was out in the newspapers, he would have resigned. I would have still had some respect for him. He held on though, clinging to the walls, to maintain his status as emperor. He did it for himself.
How can whistleblowers lower down in their companies be confident they will be heard?
I’ve now become the patron of the charity Public Concern at Work (PCaW), which was responsible for bringing the Public Interest Disclosure Act. We’ve just finished a whistleblowing commission, which enshrines rights and makes sure mechanisms exist for what whistleblowers should do because in most organisations, if you don’t trust your bosses, you don’t know where to go. One proposal is that a nonexecutive director should be responsible for overseeing whistleblowing. Once upon a time non-executives were paid a £50,000 salary and had a nice lunch four times a year at board meetings. Now they’re often accomplished people at the end of their careers. They know that if they don’t demonstrate oversight and scrutiny, they can be held personally responsiblefor their decisions. So, if you are that non-executive director in your late fifties or sixties, you have to think about protecting yourself first.
Do you think problems among senior executives are exacerbated when more money is at stake?
I don’t think so. These people are usually paid huge amounts of money regardless of how much their company is making. Good governance starts in the boardroom; you can have a wonderful rhetoric about governance and company ethics, but if you’re paying yourself ludicrous amounts of money it is divisive.
People say that the best talent needs to be paid for but in my experience that is nonsense. Why isthe John Lewis Partnership such a success when executives in private companies of a similar size are paid infinitely more? It is said that people need to be paid global salaries, but there are other factors that keep people in their jobs besides pay. I don’t believe the management pool is so small; it is greed that is the fundamental problem.
What mechanism should be in place to enable people to challenge the board?
Whistleblowing is about illegality, or issues against the public interest. PCaW has recommended a code of conduct – which can be found at www.pcaw.org.uk – to enable employees to confidently speak out without fear of adverse repercussions.
Do you think that regulation or legislation in its current form misses the mark?
I think things are better than they were. The US Foreign Corrupt Practices Act applies around theworld if you trade in America. Britain has the Bribery Act, but the British regulatory authorities are poor relatives. However, the Financial Conduct Authority has impressed me – it has a lot of female managers incidentally, including previous whistleblowers and it also runs its own whistleblowing line. I think regulation is much more important than rhetoric, because what else do we have? Rhetoric relies upon human nature and that is flawed. It is important that fines are imposed not just on corporations but on individuals. If you look at recent scandals, for example, HSBC – in particular its Latin American affiliates money laundering for cartels – it’s extraordinary that no one went to prison. They reached settlements. There are too many cases like this. If directors allow this to happen they should be held accountable.
Can you identify some red flags of fraud?
A unique factor in Japan is companies using small accountancy firms, which are illogical for their size or international scope. In the West, it tends to be a lack of executive scrutiny or an abuse of power. I don’t think public companies should be run without an independent chair or adequate succession planning – remuneration and audit appointments also need to be chaired by strong non-executives.
What personal attributes do you think a good CEO needs to have?
They need to challenge themselves – I used to give the book Animal Farm to people when we promoted them. Thankfully these days there are more women CEOs because often the middle-aged men, surrounded by sycophants, are deluded. You can easily identify questionable behaviours when you see them with their new young wife; their own personal lack ofhumility and sense of their own mortality in a system that encourages these mega egos. This is why I think female CEOs are infinitely better than men – they seem to control their egos and they’re not so narrowminded. They don’t get lost in the microcosm of a particular company. Vanity is a very dangerous thing.
What do you think of Olympus’s governance measures now?
When the remaining members of the Olympus board had to stand down and a new board was appointed with a majority of outside directors, I wished the company well. I’m not going to sit on the sidelines after that. I think I served the company its greatest need – getting rid of that board and those people.
Michael Woodford’s book Exposure: Inside the Olympus Scandal: How I went from CEO to Whistleblower is out now.