Olympus Board Members in Cover-Up Resign

By Mariko Yasu, Naoko Fujimura and Chris Cooper - Nov 25, 2011 7:37 AM GMT+0700

Olympus Corp. (7733) officials including the former chairman formally resigned from the company’s board, a day before the Japanese camera maker’s directors were due to meet the president they fired. The shares rallied.

Tsuyoshi Kikukawa, former Executive Vice President Hisashi Mori and auditor Hideo Yamada all quit, and other managers are ready to do so once a restructuring plan is in place, Olympus said in two statements to the Tokyo Stock Exchange yesterday. The three executives colluded to hide losses from investors using inflated takeover costs, the company said Nov. 8.

Michael C. Woodford will to attend today’s meeting of the board, which had unanimously voted to dismiss him on Oct. 14 after he questioned the acquisitions. Investors including Southeastern Asset Management Inc. have called for his reinstatement and for all officials involved in the cover-up to go amid criminal probes and a threat the company’s shares may be delisted.

“There are some voices demanding the management be replaced right now,” Shuichi Takayama, the newly installed president, said in one of the statements. “If we change management and can’t take appropriate measures swiftly, then we won’t be able to overcome this imminent crisis.”

Board Members

The departure of the executives gives the company an opportunity to add board members untainted by the scandal or the unanimous decision to fire Woodford on Oct. 14. His subsequent exposure of $687 million in fees paid by Olympus to a now defunct Cayman Islands-based fund rattled investors, wiping out as much as 80 percent of the company’s market capitalization and prompting Prime Minister Yoshihiko Noda to say the payments could damage the country’s international reputation.

The company plans to seek approval for a revival plan and management revamp at its next shareholder meeting, according to Takayama. The next scheduled meeting isn’t due until after the end of the fiscal year on March 31. Southeastern has called for a meeting before then.

Shares of the 92-year-old camera and endoscope maker plunged more than 80 percent in the first four weeks after Woodford was fired on concerns about the scale of the losses, the threat of delisting and continuing criminal investigations. Since Nov. 11, Tokyo-based Olympus has more than doubled as investors bet the problems would be contained. The stock surged 19 percent to 1,210 yen as of 9:26 a.m. in Tokyo trading today.

Corporate Governance

Woodford, who has said he wants to come back and run the company, called for a shake-up in the corporate governance system.

“We should have remuneration committees and appointment committees,” he said at a symposium in Tokyo yesterday. “We should have a majority of non-executive directors.”

The failure of Olympus’s board to stop management from hiding decades of losses may spur new governance rules. Lawmakers are debating increasing oversight by independent directors and auditors.

An average of 19 percent of the board members of Nikkei 225 Stock Average companies are independent or outside directors, compared with 54 percent of the U.K.’s FTSE 350 index and 83 percent of the Standard & Poor’s 500 Index, data compiled by Bloomberg show.

Calpers

“Good corporate governance helps improve company performance and shareowner value,” said Wayne Davis, a spokesman for the California Public Employees’ Retirement System, the largest U.S. public pension fund. Calpers recommends the majority of boards be composed of independent directors and that companies disclose the definition of independence.

Calpers held 1.1 million shares of Olympus at the end of October, he said.

Olympus had three outside directors and “they clearly were not able to function effectively,” said Bruce E. Aronson, a former partner at Hughes Hubbard & Reed LLP in New York. “The lesson may be that investors need to broaden their focus a bit, not solely on the number of independent directors and how independent they are, but on what they need to function effectively.”

Woodford’s return to Japan is the first since his dismissal, when he left the country the same day, saying he felt unsafe following reports that the payments made by Olympus may be linked to organized crime groups. He was escorted by armed police to meetings with investigators yesterday.

Woodford said he’s confident prosecutors will fully investigate Olympus. “I’m very happy with how things went,” he told reporters after visiting police in Tokyo.

Blowing Whistle

Woodford went public with queries he raised with Kikukawa and Mori over $687 million in advisory fees in the $2.1 billion acquisition of U.K. medical company Gyrus Group Plc, as well as writedowns of stakes in three other takeovers.

Olympus said the money may have been rerouted to the company via offshore funds to help cancel out losses on securities investments dating back to the 1990s.

An independent committee set up by Olympus to investigate its accounting said this week that it found no evidence of criminal involvement. Woodford said it wasn’t possible to reach that conclusion without a forensic inspection of accounts.

To contact the reporters on this story: Mariko Yasu in Tokyo at myasu@bloomberg.net; Naoko Fujimura in Tokyo at nfujimura@bloomberg.net; Chris Cooper in Tokyo at Ccooper1@bloomberg.net

To contact the editor responsible for this story: Ben Richardson at brichardson8@bloomberg.net