• Bloomberg


Olympus Corp.’s admission that it hid losses by overpaying advisers may lead to its delisting by the Tokyo Stock Exchange and is sparking criticism of corporate-governance standards in the world’s third-largest stock market.

Olympus, the world’s biggest maker of endoscopes, said this week it concealed losses by paying $687 million to advisers on a 2008 acquisition. The TSE said Thursday it moved the company to its watch list for possible delisting because of accounting fraud.

Olympus has lost more than ¥500 billion in market capitalization since mid-October, when the company ousted President Michael C. Woodford and he went public with accusations of fraud. The scandal may prompt Japan’s publicly traded companies to improve self-regulation and responsiveness to investors, according to fund managers and strategists.

“This is a case where Japan’s outmoded practice of corporate governance remained and reared its ugly head,” said Shuhei Abe, president of Sparx Group Co. “With the Olympus case, it will no longer be justifiable for Japan Inc. to continue practicing under the excuse of the ‘Japan way of doing things.’ “

Olympus’ troubles compound the woes of the stock market, which reeled in the aftermath of the March 11 earthquake and tsunami. The Nikkei 225 stock average has lost 14 percent this year, and the value of shares listed in Japan now trails the U.S. and China.

Foreign funds, including Olympus investor Southeastern Asset Management Inc., came to Japan to hold corporate directors responsible and seek higher returns. A government panel asked the TSE to bolster corporate-governance rules, and the Asian Corporate Governance Association said in 2008 that failure by Japanese corporate leaders to meet global standards would discourage investment in the country.

“The Japanese market is already looking unattractive to foreign investors,” said Hideaki Tsukuda, managing partner at Egon Zehnder International’s Tokyo office. “Japanese companies really have to get their acts together, taking this opportunity to strengthen their corporate-governance practices.”

Under TSE rules, a company found to have falsified earnings statements is first placed on the watch list, where it is kept for a month. During that period, the exchange will review the magnitude of the wrongdoings, including whether the falsification was done in an organized manner.

Should the falsification be considered malicious, the TSE may decide to delist the company. Once that decision is made, a monthlong waiting period commences before the stock is formally delisted.

“We will be wait for the findings of the third-party (investigative) committee, consider the adequacy of information disclosure and potential impact based on the exchange’s rules,” said Kazuhiko Yoshimatsu, head of corporate communications at the TSE.

The companies previously delisted for fabricating earnings statements include Livedoor Co., Seibu Railway Co. and Kanebo Ltd., according to the bourse’s website.

Tadashi Kageyama, the Hong Kong-based head of Asia-Pacific investigations at risk consultant Kroll Inc., said he has investigated more than 150 corporate governance cases in the region during the past decade. Kageyama said he is “not really surprised to see a case like this.”

“Many times I have been disappointed when working with Japanese companies by them not giving full access,” he said. “The government needs tougher penalties on white-collar crime.”

Listed companies must submit their earnings statements by Monday, based on the Financial Instruments and Exchange Law. Should Olympus fail to disclose all the statements necessary, it faces the risk of being delisted, said Yoshihiro Ito, chief strategist at Okasan Online Securities Co.

“I would imagine that Olympus would do its best to file earnings by the deadline,” Ito said. “But I don’t think that means it’s the end of the scandal because the focus will be on their disclosure of past earnings statements.”

Olympus President Shuichi Takayama this week reversed earlier denials of wrongdoing and said the company was looking into the role played by special-purpose funds in hiding the losses, which date to the 1990s. At least eight Cayman Islands entities have been linked to Olympus acquisitions that are suspected of playing a role in the accounting scandal.

Five of those no longer exist, according to a search of the Caymans registry, which doesn’t give details on the individuals behind the companies.

The mechanism for hiding the losses is still under investigation, Takayama said. Japanese and U.S. regulators are probing allegations by Woodford that more than $1.5 billion was siphoned through offshore funds.

Olympus is included both in the Nikkei average and the broader Topix index. Company shares have lost more than 76 percent of their value this year.

A possible delisting may prompt investors to sell their holdings to cut losses, while those managing index-tracking funds may have to sell once the delisting is decided to avoid tracking errors.

Meiji Yasuda Asset Management Co. said this week that eight funds it manages sold all their shares in Olympus.

The insurer’s investment arm sold the shares due to uncertainties over Olympus’ future profitability, the company said in a statement.

Terumo Corp., the biggest corporate shareholder in Olympus, said it did not rule out an option to sell stakes in the company. Terumo, Asia’s largest medical devices company, owned 6.81 million Olympus shares, or 2.51 percent of the total shares outstanding, as of March 31, making the company the 10th-largest shareholder, according to data compiled by Bloomberg.

“I had been saying Japan has great value and corporate governance is strong,” said Nicholas Smith, a Japan strategist at CLSA Asia-Pacific Markets Ltd. “Then Olympus blew and clients are asking if Japanese corporate governance is really OK.”

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