The Olympus scandal was a case of accounting fraud exposed in Japan in 2011 at optical equipment manufacturer Olympus. On 14 October, British-born Michael Christopher Woodford was suddenly ousted as chief executive. He had been company president for six months, and two weeks prior had been promoted to chief executive officer, when he exposed "one of the biggest and longest-running loss-hiding arrangements in Japanese corporate history", according to The Wall Street Journal. Tsuyoshi Kikukawa, the board chairman, who had appointed Woodford to these positions, again assumed the title of CEO and president. The incident raised concern about the endurance of tobashi schemes, and the strength of corporate governance in Japan.
Apparently irregular payments for acquisitions had resulted in very significant asset impairment charges in the company's accounts, and this was exposed in an article in the Japanese financial magazine FACTA and had come to Woodford's attention. Japanese press speculated on a connection to Yakuza (Japanese organised crime syndicates). Olympus defended itself against allegations of impropriety.
Despite Olympus' denials, the matter quickly snowballed into a corporate corruption scandal over concealment (called tobashi) of more than 117.7 billion yen ($1.5 billion) of investment losses and other dubious fees and payments dating back to the late 1980s and suspicion of covert payments to criminal organisations. On 26 October, Kikukawa was replaced by Shuichi Takayama as chairman, president, and CEO. On 8 November 2011, the company admitted that the company's accounting practice was "inappropriate" and that money had been used to cover losses on investments dating to the 1990s. The company blamed the inappropriate accounting on former president Tsuyoshi Kikukawa, auditor Hideo Yamada and executive vice-president Hisashi Mori.
By 2012 the scandal had developed into one of the biggest and longest-lived loss-concealing financial scandals in the history of corporate Japan; it had wiped 75–80% off the company's stock market valuation, led to the resignation of much of the board, and triggered investigations across Japan, the UK and US. Among the people criminally charged in this scandal, only two securities brokers went to prison for 3–4 years. A shareholder derivative suit in 2019 fined three Olympus board members for 59.4 billion yen (US$594 million), the largest of its kind in Japanese history. This scandal also raised considerable turmoil and concern over Japan's prevailing corporate governance and transparency and the Japanese financial markets. Woodford received a reported £10 million ($16 m) in damages from Olympus for defamation and wrongful dismissal in 2012; around the same time, Olympus also announced it would shed 2,700 jobs (7% of its workforce) and around 40 per cent of its 30 manufacturing plants by 2015 to reduce its cost base.
Background
Olympus Corporation, a major Japanese manufacturer of optical imaging laboratory and medical equipment listed on the Tokyo Stock Exchange had, according to its accounts for the year ended 31 March 2011, consolidated net sales of ¥847.1 billion (US$10.6 billion) in the year, and total shareholders' equity of ¥262.5 billion (US$3.3 billion). The group employs close to 40,000 people around the world. Its assets of ¥1 trillion (US$13.3 billion) as at 31 March 2011 included ¥175.5 billion (US$2.2 billion) of goodwill, an intangible asset. Under the leadership of Tsuyoshi Kikukawa, who became president in 2001, the company's revenues increased from ¥467 billion to ¥847 billion while the profits were a relatively constant ¥35 billion.
During the 1980s, many Japanese corporations relied on investments to bolster dwindling profits, particularly in its exports, which had been eroded by a strong yen. Toshiro Shimoyama, Olympus president from 1984 to 1993, admitted to the Nikkei industrial daily newspaper in 1986: "When the main business is struggling, we need to earn through zaitech" (meaning financial engineering). Olympus invested in financial derivatives and other risky investments to boost profits. However, Shimoyama said he "does not remember" any attempt to conceal losses (tobashi) during his tenure as president: "As president it wasn't the case where all financial reports would come to me, so I have no memory. During that time Masatoshi Kishimoto was the treasurer ... I wouldn't have heard financial details." Kishimoto, Olympus president from 1993 to 2001, in turn denied involvement in concealing losses, and instead suggested possible implication of Hideo Yamada, whom he said he supervised poorly.
In 1991 Olympus had to take losses of ¥2.1 billion on the value of its investments after the investment bonanza ended. In June 1998, Olympus was subject of market rumours that it had suffered sizeable trading losses on derivatives which caused its shares to plunge by 11 per cent. The rumours were emphatically denied by Olympus, which subsequently announced record profits. The company further disclosed during its interim results in October 1999, that it had lost nearly ¥17 billion from interest rate and currency swaps. The company also reported that it had lost ¥2.9 billion in the Princeton Economics International Ponzi scheme. According to Bloomberg, the annual report of Olympus Corporation for the year ended 31 March 2010 showed a ¥15.5 billion ($201 million) prior period adjustment for "loss related to the purchase of preference shares from [an unnamed] third party"; goodwill on its balance sheet also increased by ¥13.5 billion yen to account for the purchase. In September 2011, Olympus announced that it had written off part of a ¥45 billion investment in emerging market bonds. BusinessWeek noted that the ratio of company debt relative to equity ranked Olympus among the top 2 percent most highly geared of Japan's largest companies, while The Financial Times commented that its capital base – an equity ratio in 2011 of below 14 percent – is the weakest among its peer group. Olympus is the only Nikkei 225 constituent whose intangible assets – principally goodwill of around ¥168 billion – exceeds net assets (¥151 billion).
External growth Having spent some US$4 billion during this period under the stewardship of Kikukawa, the company's aggressive strategy of external growth was not without criticism. According to an Olympus employee, the acquisitions process and funds movements were under the tight control of a small circle of executives in the "Financial Affairs Group". Japanese business daily is quoted as saying more than a hundred businesses were acquired during Kikukawa's tenure, and that the majority were unlisted and loss-making. The investments were in diverse sectors such as pet care and DVD production, and often had little connection with the core Olympus business. The most significant acquisition was the British medical equipment maker Gyrus Group, acquired in 2008 at a cost of $2 billion – the equivalent of almost 5 times turnover and 27 times EBITDA. In the same year, Olympus also paid out ¥73.5 billion ($965 million) when it acquired three "small venture firms" – Altis, Humalabo, and NewsChef. By contrast, in 2009 Olympus sold the profitable diagnostics unit it had built up over 40 years to Beckman Coulter for $1 billion – approximately two times turnover – to free up capital.
Exposure of the scandal
Woodford's background and inquiries British-born Michael Christopher Woodford was an Olympus veteran of 30 years, and previously executive managing director of Olympus Medical Systems Europa. As European Director in 2008, Woodford had noticed the "strange goings-on at the company" such as the Gyrus acquisition, which should have been within his scope but was instead handled from Tokyo. (Woodford had set out to resign over the matter but stayed with Olympus after being reassured on the acquisition and being promoted to oversee Olympus' European businesses and appointed to the main Olympus board). However, on 30 July 2011, the matter surfaced again, when Woodford's attention as president was drawn by German colleagues to an article in Facta that alleged Olympus had made undisclosed payments for a series of acquisitions some of which were outside its "core" camera and endoscope business, most notably a sum of $687 million apparently paid to advisers as part of the Gyrus acquisition.
Woodford said that he asked Hisashi Mori and some confidants about the Facta report, and stated also that at a lunch meeting in August with Kikukawa and Hisashi Mori, Olympus' compliance officer, Kikukawa revealed he ordered staff not to tell Woodford about the allegations because Woodford was "too busy" dealing with other matters. Kikukawa dismissed the article as "tabloid, sensationalist journalism". Upon learning about a second article referring to payments by Olympus to "anti-social forces", a euphemism for yakuza (Japanese criminal organisations), The Japan Times notes that from the start, Facta remained the lone Japanese journal to scoop the Olympus accounting irregularities until the scandal broke in Western media sources after Woodford exposed the matter. Woodford began to write a series of six letters to Mori and/or Kikukawa regarding his concerns as to governance issues "relating to the company's M&A (acquisitions) activities". Woodford copied later letters to the company's auditors, and threatened to resign if he did not receive satisfactory responses about the 2008 Gyrus acquisition costs, and the goodwill impairment of around $600 million made that year for the other acquisitions.
On 1 April 2011, Woodford was promoted to the post of president and chief operating officer, replacing Kikukawa and becoming the first ever non-Japanese chairman of Olympus.
Woodford's appointment as CEO Six months after Woodford's appointment as COO and President, on 1 October, he was elevated to chief executive officer, with Olympus stating that since his appointment as president/COO, "the Board have been extremely pleased with the progress made under Mr. Woodford's leadership in this role, which has exceeded the expectations at the time of his appointment." At the time of Woodford's appointment, he was regarded as an unlikely choice. Reuters reports there were rumours that he only got the job because he would be "easy to control"; some Japanese observers saw Woodford, who speaks no Japanese, as Kikukawa's new pet. An article in Facta underlined the sceptics' views, saying "The fact that the company picked a bottom-ranking foreign executive director with virtually no significant responsibilities from amongst a total pool of 25 potential candidates, including the vice-president who was responsible for medical instruments ... set tongues a-wagging."
Woodford's promotion was announced through a press statement without calling a news conference. The press release, which was full of praise for Woodford, mentioned his success in cutting costs and presented him as the "new global face of Olympus". According to Woodford, Kikukawa had reminded him privately upon appointing him president: "I am the one who has the authority to hire and fire, and to decide remuneration for board members and the next tier down of management," thus signalling Woodford was "little more than his puppet". The New York Times similarly suggested that the promotion may have been intended to instill Woodford with a greater sense of loyalty to the board, and Woodford suggested it was done to reduce his motivation to resign. Nikkei Business noted that the announcement was made only in its English web page, and after talking to Olympus, it commented: "Woodford's title had changed from COO to CEO, but it did not signify any real change in the company's leadership. Woodford himself was soon to realise that his appointment to CEO was in name only."
Woodford's removal as CEO