The recent dismissal of the British chief executive of Olympus has once again drawn the attention of European media to peculiarities in corporate governance in Japan. Accounting practices and lack of transparency have aroused particular concern.

It seems strange that Michael Woodford should have been so summarily dismissed from his post as chief executive to which after many years service in the company he was only appointed some months ago. If, as members of the board are reported to have alleged, his style of management was incompatible with traditional Japanese practices it is odd that he was ever appointed to the top post. His qualities as a manager including his forthright attitude must have been known to the board when he was appointed.

Presumably he was chosen because he was thought to be the only person who could challenge the traditional hierarchy and shake up the company’s cosy management methods. Did the board think that his attitudes would change and that he would suddenly become more flexible (and Japanese?) when faced by the serried ranks of the old guard in the company? Or did they suddenly realize that they had been rumbled and that the only way to preserve their outdated ways was to get rid of a troublesome boss? Or (and this is what some people suspect) was he dismissed because he had discovered some dirty tricks and his dismissal was thought to be the only way of burying a scandal? Mr. Woodford has reportedly questioned Japanese accounting practices and queried some peculiarly large payments (some $687 million) to two ‘advisory’ companies AXAM and AXES which were said to be registered in the Cayman Islands, a territory well known as a tax haven. According to an independent report by PwC, the well known and reputable firm of accountants, these companies no longer exist.

The timing and method of his dismissal has suggested that members of the board had a guilty conscience about the deal. It has even been hinted that there might be some Japanese political figures involved and that some “tattooed gentlemen” are determined to ensure that the true facts are suppressed.

If this controversy had arisen in a company listed on the London Stock Exchange it seems probable that the company’s shares would have been at once suspended and that the Financial Services Authority would have been called in immediately to investigate. Shareholders, Japanese and foreign, have a right to know whether any directors or/and employees of the company stood to benefit from the affair and why so much money was paid to entities which no longer exist and which were registered in such a place as the Cayman Islands.

Why did the Japanese media apparently wait until they saw reports of overseas criticism before they really began to investigate? Investigative journalism which recently led to the downfall of British Defense Secretary Liam Fox, is an important element in maintaining the rule of law and political accountability.

Without all the evidence it is not possible to make a fair judgment in this particular case. We may never know the real truth unless the Japanese authorities launch an immediate, full, independent and vigorous investigation of the allegations of malpractice in Olympus.

These allegations raise much wider issues. The most important is that of transparency. How far can all Japanese company accounts be regarded as reliable? Do all Japanese boards of directors recognize fully their responsibility to their owners (the shareholders) as well as to their employees? Do they ensure that all relevant information is released in such a way that insider dealing can be prevented? Do they take all reasonable measures to ensure that payments are only made for proper services rendered and at fair rates?

The Japanese public as well as overseas investors have lost money as a result of the obfuscation of the executives of Tepco in relation to the Fukushima nuclear plants. They seem at times to have been aided in obfuscation by officials supposed to be overseeing them. Is Olympus as guilty of obfuscation as Tepco or more so?

Another issue is corporate governance and the alleged clash of cultures between the “tough” Anglo-Saxon no-nonsense style and the more “flexible” consensus style adopted in Japan. There are clear differences that are hard to bridge, but maintaining the old cosy relationships and hierarchies will undermine Japan’s ability to compete. Small shareholders have little power anywhere in the world over the way in which the company in which they own shares operates, but pension funds and insurance companies do have real power. In the past they tended in Japan to belong to the same group and the old adage “you scratch my back and I will scratch yours” seemed generally to apply.

But Japanese pensioners in an aging society with a declining population are demanding a better return on pension fund investments. It is to be hoped that the insurance companies such as Nippon Life which reportedly owns 7 per cent of the shares in Olympus will demand some straight answers from the Olympus board.

There have been other examples of the clash of management culture which have highlighted the Galapagos syndrome (and the myth) of Japanese uniqueness. Japanese management has had many successes, not least in quality control and in persuading work forces to join together in their efforts to improve their company’s performance. Loyalty to one’s employer has rightly been valued, but it has sometimes been misused to cover up ethical mistakes and to undermine individual responsibility.

The Olympus affair is much more than a single company scandal. It has cast doubt on Japanese business ethics and willingness to get to grips with shoddy management practices. This scandal is unlikely to blow over quickly.

Hugh Cortazzi served as ambassador to Japan from 1980-1984.

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