Misgovernance at Olympus

OLympus cameraMichael Woodford lost his job on October 14. He had been CEO of Olympus, the Japanese maker of medical systems and cameras, only since last July; and as recently as September, the company’s Chairman had said he was “extremely pleased” with Mr. Woodford’s performance. But then the board fired him for “causing problems for decision making.”

He definitely was causing problems. He kept asking embarrassing questions about the Olympus’ 2008 acquisition of Gyrus, another medical equipment company. Olympus paid $2.2 billion for Gyrus, including $687 million in advisory fees to AXAM, an obscure Cayman Island firm that vanished from the trade register a few months after the deal. See this interview of Mr. Woodward in the Financial Times for more information.

The Olympus case reveals big weaknesses in Japanese corporate governance: unaccountable senior executives, weak disclosure standards, and dangerously passive shareholders. At the heart of these is an issue behind many failed companies and damaged lenders — poor governance.

Board Strength
Many things contribute to good governance, but the key factor is a strong board of directors. We think there are three dimensions to board strength.

Independence. The majority of directors on any board need to be independent of management. There are different standards of independence in use around the world, if not in Japan. Among the most rigorous is one from the Council of Institutional Investors, which defines independence this way: “An independent director is a person whose directorship constitutes his or her only connection to the corporation.”

Expertise. Directors of an effective board have relevant industry and management experience. They are well equipped to evaluate the company’s strategy, operating results, and finances, as well as the complexity, opportunities, and challenges management must deal with.

Effort. Being a director is hard work. Good directors spend a great deal of time and energy preparing for meetings, working on committees, and contributing to the decisions the board must make.

Board Strength at Olympus
How does the board at Olympus measure up to these standards?

Independence. Of fifteen directors on the board at Olympus, only three were outsiders. All the rest were executives of the company. It’s not clear that any of the outsiders were truly independent. In Japan, outside directors often come from subsidiaries or the company’s lead bank.

Expertise. Japanese disclosure about directors can be quite limited. But none of Olympus’ directors appear to have any top-level management experience or be seasoned deal makers.

Effort. Judging by Mr. Woodford’s account of the special board meeting at which he was fired, Olympus’ directors aren’t a very engaged or energetic bunch. Mr. Woodford was not allowed to speak, and there was no discussion. The board simply voted to approve every resolution Tsuyoshi Kikukawa, the Chairman, put before them.

It’s Not Over
The Olympus story is still unfolding. For more information on Mr. Woodford’s sudden departure, try this report in Reuters and this article in Fortune. Troubling new information about other deals with shadowy investment firms is emerging; see this article in the New York Times. And, as Japan Today reports, Mr. Kikukawa has resigned as chairman and president but remains on the board.

Whatever else develops, it’s clear that when it comes to Mr. Woodford’s dismissal, the rapid cycle of promote, praise, and pitch overboard doesn’t speak well for Olympus’ board. The company’s fumbling, contradictory explanations of the Gyrus acquisition only make management and the board look stupid or deceitful. So far, Olympus seems to be a poor example of how to govern a company. Who knows? As the story unfolds, it may prove to be an even worse one.


  1. Although given under slightly different circumstances and to a little different audience I think the following principals in this statement by Justice Harlan Fisk Stone in 1934 is appropriate given the misgovernance of Olympus, “I venture to assert that when the history of the financial era which has just drawn to a close comes to be written, most of its mistakes and its major faults will ascribed to the failure to observe the fiduciary principle, the precept as old as holy writ, that “a man cannot serve two masters.” No thinking man can believe that an economy built upon a business foundation can permanently endure without some loyalty to that principle. The separation of ownership from management, the development of the corporate structure so as to vest in small groups control over the resources of great numbers of small and uninformed investors, make imperative a fresh and active devotion to that principle if the modern world of business is to perform its proper function. Yet those who serve nominally as trustees, but relieved by clever legal devices, from the obligation to protect those whole interests they purport to represent, corporate officers and directors who award themselves huge bonuses from corporate funds without the assent or even the knowledge of stockholders…financial institutions which, in the infinite variety of their operations, consider only last, if at all, the interests of those who funds they command, suggest how far we have ignored the necessary implications of that principle. The loss and suffering inflicted on individuals, the ham done to a social order founded upon business and dependent upon its integrity, are incalculable”.

  2. Only the owners can decide if a company is poorly governed soI’m not sure you can conclude that Olympus is badly goverened only that it doesn’t have what one would like to see as a governance structure.

  3. Look at most boards at most organizations over time and “governance” remains an elusive goal more than the way to bet. I’ve been thoroughly fooled when chairing a board by staff and been staff reporting to boards, no matter how hard you try it’s just not an effective structure for deeply informed policy/big picture decisions let alone the micromanaging that’s more common on anything familiar to most board members.

    Assuming occasional visitors spoonfed bits of highly massaged information can cut right through to the key issues of complex companies even the top management barely understands from daily exposure is akin to that belief that consultants can solve anything, bankers know the business’s numbers, the accountant knows where the numbers being massaged for taxes all came from, and that Santa Claus is squeezing down your chimney right now with your heart’s desires.

    Comforting, just a bad way to bet.


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