[00:00:09] Morning folks, and before we go any further, I have one big favour to ask of you. Can you pause the show now and leave a 5 star review, or if you can remember, then do it after the show. It will really help the podcast, so I appreciate it. Anyway, welcome to today's episode. It's called Olympus, A Very Japanese Scandal. And I have a very clear memory of this story because it became public 15 years ago, 2011.
[00:00:40] And I remember watching the news and seeing Michael Woodford, he's the whistleblower, the central character in this story, being mobbed by the media in Tokyo after he had found out and exposed a 20 year,
[00:00:52] another $1.7 billion fraud in Olympus, the company where he had just been promoted to the CEO role. And what I love about this story is that it gives us a great insight into Japanese corporate life, how saving face was and maybe still is prioritised over everything else.
[00:01:16] This story, it has drama, strong characters, and even the hint of organised crime in the form of the yazuka. It is a brilliant story. Enjoy. So Olympus, it was founded in Japan in 1919 with a very simple ambition, to stop the country relying on imported optical equipment.
[00:01:38] And from the very beginning, the idea wasn't just to copy what foreign companies were doing. As its founder, Takeshi Yamashita put it, and I hope I'm pronouncing that right, he said, mere imitations of imported products wouldn't suffice. We need to create something truly original.
[00:01:56] And that became the basic philosophy of Olympus. It started out making microscopes in 1950. It developed the world's first camera that could photograph inside a human stomach. At the same time, its consumer camera business was taken off, especially with the launch of the groundbreaking pen camera. It was this compact, high quality, but very affordable camera. And so it opened up photography to millions of people.
[00:02:25] If your grandfather or grandmother was into photography back in the 50s and 60s, it was probably because of the pen camera. They probably had one of those. So by the time we get to the 1990s, Olympus, on the surface, was doing brilliantly. Its products were sold in more than 100 countries. It had around two-thirds of the global endoscopy market. And it was a major name in cameras and scientific equipment. It employed around 10,000 people, revenues of about $1.5 billion.
[00:02:54] But things weren't going well in the overall Japanese economy. For a bit of context, Japan's economic bubble lasted for about five years in the late 1980s. And it was fuelled by easy credit and low interest rates that sent stock prices and real estate prices soaring. And as a result of the really low interest rates, Japanese companies, like Olympus, borrowed money cheaply and then invested in the booming stock market and property markets.
[00:03:24] But when the central bank stepped in and put up interest rates in 1989 to cool things down, the whole bubble burst. And Olympus was sitting on losses of around $700 million. And because of the culture within Japanese corporations, Olympus didn't own up to its losses. Instead, they started hiding them. So let's just take a step back and let's just have a look at this corporate culture.
[00:03:51] So for decades, big Japanese companies, they were built around stability, loyalty, long-term employment. People joined the company, spent their entire career there and slowly worked their way up. So the people running these companies, they weren't outsiders brought in to shake things up. They'd often been there for 30 years.
[00:04:12] And Olympus, like most big Japanese corporations, had this very insular culture where loyalty and seniority were massively important. Challenging your boss could be seen almost as an act of betrayal. You just didn't rock the boat. And then you had this whole idea of saving face. Or the word they use is mensu. And it goes back centuries in Japanese cultures.
[00:04:41] It's rooted in deeply held traditions of social harmony or WA. WA is how it's spelt. And in a society built on collectivism rather than individualism, public failure, it didn't just embarrass you. It brought shame onto your family, onto your colleagues, onto your entire organisation. So in a corporate setting, admitting that you had made a mistake, it could destroy your reputation.
[00:05:08] As well as bring untold shame to your organisation. Then on top of this, you have the corporate board structure and the relationships that these corporations had with their main banks. This also laid the foundations for scandals like the Olympus one. Because oftentimes, the banks that lent these corporations money, they'd have a seat on the board of the company as well. And companies and banks frequently owned shares in one another.
[00:05:36] So, as a result, companies were partly insulated from outside shareholders. And as long as the loans were being repaid and everything looked fine on paper, combined with the fact that board members tended to defer to the chairman or the president rather than challenge them, there wasn't a huge amount of pressure to start digging around inside the business. So that's an overview of all the structural issues that were happening within Olympus and within corporate Japan.
[00:06:05] Now, in relation to Olympus, two of the central executives in the scheme were the internal auditor, Yamada, and the executive vice president, Mori. Now, there were obviously a lot more people involved. There were outside brokers, bankers involved. But for the sake of not confusing you or me, I'm going to keep the names to a minimum. So Yamada and Mori, they're working together with bankers and brokers, and they come up with this elaborate system known as Japan as Tabashi.
[00:06:34] And I love this. It literally translates as to fly away. And basically, that's what they were doing with the losses. They were making them fly away. And to explain this in simple terms, let's say Olympus bought $100 million worth of particular shares before the bubble burst. The bubble bursts, the stock collapses, and those shares are now worth just $40 million. Normally, a company has to admit that its $100 million investment is now worth only $40 million and take the $60 million loss.
[00:07:04] But instead, Olympus would transfer the shares to an outside fund or shell company for the original $100 million price tag. Now, obviously, this outside fund didn't actually have $100 million sitting around to buy the shares. So loans and other structures were arranged to finance it. Structures that were ultimately supported by Olympus itself. But because these funds were supposedly completely independent,
[00:07:31] they didn't show up on Olympus' balance sheet. As far as anyone looking at Olympus' accounts could see, the company bought an investment for $100 million and later sold it for $100 million. No loss recorded whatsoever. But of course, there was a $60 million loss sitting on the balance sheet of those outside shell companies and offshore funds. And the banks that were helping them do this, they were happy to do it because they were making serious money.
[00:08:01] They were earning commissions of between 20% and 30% of the losses being moved off the balance sheet. So huge money for them. Now, Yamada and Mori were doing all of this with the knowledge of the then president of Olympus at the time, back in the early 90s. But he's not really the main character in this story because he's long gone before the whole thing blows up. The man who eventually becomes the face of this whole scandal, and I really hope I pronounce this right,
[00:08:28] is Toyoshi Kikukawa. And Kikukawa is interesting because he wasn't some old-fashioned executive. I mean, he was quite the opposite in many ways. Kikukawa joined Olympus in 1964 as a graduate and he earned a reputation as a bold innovator. And he is credited with changing Olympus' corporate structure by pushing the company in new directions. He was heavily influenced by Western management style
[00:08:57] because he was sent by Olympus to the US where he worked for several years. And while there, he foresaw the boom in digital photography and it was he who championed Olympus' entry into high-tech digital cameras, which was a huge win for the company. So on the back of this success, Kikukawa comes back to Japan, moves up through the ranks, eventually becoming CEO and chairman in the early 2000s.
[00:09:24] And he'd been involved in the cover-up since the late 90s. And despite all of his Western influences, Kikukawa was still very much tied to the rigid hierarchies, the traditions of Japanese corporate life. So as we move into the 2000s though, Japanese accounting rules were tightening. Regulators were paying much more attention to these offshore schemes.
[00:09:52] So Kikukawa, Mori and Yamada had to change tactics. And they came up with a plan to use acquisitions to hide our losses in two ways. The first was to massively overpay for companies and record the difference between what the company was actually worth and what Olympus paid as something called goodwill. Now, most of us will be familiar with goodwill. It's a pretty standard accounting term. And the way it works is that when you buy a company,
[00:10:21] you're usually paying more than the value of its actual assets because you're also paying for things like its brand, its customers, and the money you expect to make from it in the future. And that extra amount is called goodwill. Now, the problem comes when you've paid all this money for a company and it turns out to be worth nowhere near what you expected. And when that happens, you may have to write off huge amounts of goodwill.
[00:10:48] And there are some great examples of companies that have made really bad mergers or acquisitions and ended up doing exactly that. For example, take the AOL Time Warner merger. So their merger was valued at around $165 billion. And I will be doing a story on this. Just two years later, the combined company had to write down almost $100 billion in goodwill. That's how bad that deal was. Another example is Hewlett-Packard.
[00:11:17] It paid $11 billion for autonomy, the UK tech company founded by the late Mike Lynch. And there's a great story there as well, which I will cover. Now, of that $11 billion purchase, $6.6 billion was recorded as goodwill. And just a year after the deal, HP had to write down $5.7 billion in goodwill. And then they sued Mike Lynch, claiming they were tricked. As I said, great story. So huge goodwill write-downs do happen.
[00:11:46] But of course, most companies don't set out to use goodwill as a tactic to hide losses. And this is what Olympus was now planning to do. And the second tactic that formed part of Olympus' acquisition plan was to pay huge advisory fees on these acquisitions. And much of that money would then find its way back to Olympus and would be used to pay down the hidden losses. And the scheme, it was put into action between 2006 and 2008,
[00:12:16] when Olympus, first of all, spent $800 million buying three companies involved in things like recycling, food containers, and mail-order cosmetics. I mean, these had nothing to do with Olympus' core business. They were presented as diversification. But all three were also connected to offshore funds linked to people who had previously helped Olympus hide its losses. And within two years of buying these three companies,
[00:12:46] Olympus had written off around $586 million, or 76% of what it had paid for them, using the goodwill tactic. And then we can see the huge advisory fee tactic in 2008, when Olympus bought Gyrus, a British medical device company, for $2.2 billion. Now, unlike the other three companies, like the Gyrus acquisition, it actually made sense, because it produced surgical equipment,
[00:13:13] so it fitted perfectly well with Olympus' medical business. But Olympus paid $687 million to advisors involved in the deal. That's nearly a third of the entire purchase price, and around 30 times what would normally be the expected pay to earn an advisory fee on deals of that size. Now, of course, the advisors, they didn't pocket the $687 million.
[00:13:42] They did earn, though, $45 million for helping facilitate what was essentially a fraud. And the remaining $642 million was circulated back into the offshore funds holding Olympus' losses. And my first thought when I was reading this was like, how did it even get past the board? But, like, the very fact that the Olympus board didn't ask any questions about the three obscure acquisitions that didn't fit in with the company at all,
[00:14:13] that didn't ask any questions about the huge Goodwill write-downs, didn't ask any questions about the massive advisory fees for the Gyrus deals, well, it gives you a very good idea of how passive and pliant the board was. But then you also go, well, okay, but what about their external auditors? Well, in fairness, KPMG, who are their external auditors, they did challenge the company and were demanding answers. So Olympus got rid of them in 2009
[00:14:42] and they switched to Ernest & Young, who also did raise questions about the payments, but ultimately they signed off on the accounts after receiving assurances from the management. I mean, assurances, my ass. Anyway, by early 2011, after almost 20 years, the offshore funds that had been holding Olympus' toxic investments, they were finally wound down and the old losses had effectively disappeared into Olympus' accounts.
[00:15:12] So, mission accomplished. Except, enter stage right, Michael Woodford. So, Woodford was from a working class background. Born in Liverpool in 1960, he joined Olympus' British medical equipment when he was just 20, didn't even go to college, started out as a salesman. He's blunt, down to earth, and a very, very good operator. By 29, he's running the British operation,
[00:15:40] he's promoted to head the European business, which at that time was under huge pressure. He restructures it, cuts costs, profits rise by almost 50%. So, he is very much the rising star within the company. Now, at the same time, the global business hasn't been performing well since the 2008 financial crash, and they need to shake up the business. So, in 2011, Kiku Kawa, he made Woodford president and chief operating officer, telling him,
[00:16:08] I haven't been able to change the company in the way it needs to be changed. I think you can. This is a massive motion for Woodford. His salary is now $8 million a year. And initially, Woodford, he sees Kiku Kawa as an ally. He refers to him as his Japanese umbrella. In other words, the man who can protect him while he pushes through these tough changes. But then, in July 2011, Woodford gets an email telling him about an article
[00:16:38] in a small Japanese investigative magazine. And the article is asking questions about those dodgy acquisitions. Woodford goes into his own office and asks his employees, has anyone read this article? They confirmed that they had read it, but they also said that Kiku Kawa had told them not to talk about it with Woodford. So, Woodford arranges to meet Kiku Kawa and Morrie for lunch to discuss the allegations in the article. And I love this.
[00:17:07] Woodford describes the lunch as follows. The table for the lunchtime meeting was set out with the most wonderful selection of sushi. But in front of my place was a tuna sandwich. It wasn't just any tuna sandwich. It was a tuna sandwich that would have made British Rail in 1981 proud. It was that manky. The tuna sandwich was to tell me my place in life. In other words, it was a very obvious message. Know your place,
[00:17:36] don't rock the boat. But Woodford's not the type of person who backs down. And when he asked Kiku Kawa about the allegations, he dismisses the article. He calls it sensationalist tabloid stuff. But Woodford, he's not convinced. And then a few days later, the same magazine publishes a second article about the acquisitions. And this one is even more alarming because it raises the possibility that some of the money may have passed through entities
[00:18:06] connected to the Iizuka, Japanese Organized Crime Gangs. Now, just to be clear, none of the subsequent prosecutions produced any evidence that Olympus had been working with organized crime. But the idea that Olympus' activities could have been involved with the Iizuka, it wasn't that far-fetched because during the 90s and early 2000s, Japanese authorities suspected the Iizuka of moving into legitimate
[00:18:36] businesses because the government was cracking down on more traditional criminal activities. And because Olympus' money had been moved through so many offshore funds and intermediaries that from the outside, some of these payments looked like they could have been extortion or money laundering. And for Woodford, the very fact that these questions were even being raised about the potential involvement of the Iizuka, it made the situation much more serious
[00:19:05] and threatening. But it doesn't stop him because he really starts going after Kikuawa now. He writes a series of letters to him which he then also sends to other directors and to the company's auditors, specifically asking, of course, about the three obscure companies that they bought for $800 million and the $687 million in advisory fees on the Gyrus acquisition. And in one of the letters, Woodford writes, It is truly extraordinary
[00:19:35] and frankly unbelievable that a Nikkei-listed company would send nearly $800 million to a Cayman Islands firm with no public profile, no known ownership and no proper documentation. What law firm would even sign off on this? What the hell were we doing paying $800 million for these companies? And Woodford then arranges another meeting with Kikuawa where he demands more authority overboard and tells Kikuawa
[00:20:05] he wants changes at the top of Olympus. In other words, for Kikukawa to resign as CEO and chairman. It turns into a shouting match with Woodford giving Kikuawa the following ultimatum. I will have to resign if I do not receive satisfactory explanations. So, Kikuawa, he understands that if Woodford resigns, then he'll most likely go public with his accusations. So instead, on September 30th, 2011,
[00:20:34] he promotes Woodford to the CEO position, the very first foreigner to run the company and only the fourth at any major Japanese company. But, crucially, Kikuawa remains as chairman. And he very mistakenly believes that Woodford will now, you know, act like a typical Japanese insider, that he won't want to expose the fraud and bring so-called shame to the company. But, of course, he couldn't be more wrong. He's been wrong about Woodford
[00:21:04] from the very beginning. Woodford hires PWC to carry out an independent investigation and on October 11th, their report concludes that improper conduct cannot be ruled out. I mean, that's just accountancy speak for fraud. And that same day, Woodford sends Kikuawa another letter. The honourable way forward, he writes, would be for you to face the consequences of what has taken place, which is a shameful saga
[00:21:33] by any stretch of the imagination. The current situation is untenable. The necessary course of action is for you to tender your resignation. But he gets no reply. Three days later, Woodford walks into an emergency board meeting expecting to discuss the PWC report. Instead, Kikuawa reads out a prepared statement. The board meeting scheduled to discuss concerns relating to the company's merger and acquisition activity
[00:22:02] is cancelled. Instead, we have a new agenda. The first is to discuss the motion to dismiss Mr. Woodford as president and CEO. Mr. Woodford cannot speak because he is an interested party. All those in favour? And every director raises his hand. That's it. Just two weeks after making him CEO, Olympus fires Woodford. And the company publicly says it. It's basically, you know, a culture problem. You know, Woodford doesn't understand
[00:22:31] the consensus-driven way that Olympus operates. And Kikuawa then tells employees that Woodford created wedges and also accused Woodford of having gathered a gang to remove senior directors. So, basically, Kikuawa and the entire Olympus publicity machine are out to blacken Woodford's name. And remember, at this point, there are also allegations floating around about possible organised crime or Yakuza involvement.
[00:23:01] Nothing has been proven, but Woodford is concerned enough that he leaves Japan on the first available flight to London. As he said himself, I find myself in a John Grisham novel. But before he left, he contacted the Financial Times and gave a lengthy interview where he disclosed everything he knew. It was front-page news the following day when he lands in the UK. And, armed with the PwC report and internal documents, Woodford now contacts the authorities in Britain, Japan,
[00:23:31] America, including the Serious Fraud Office and the FBI. Olympus shares lose more than 40% of their value and are more or less forced to announce an independent investigation. And on October 26th, Kikukawa appears before the press, bows and announces that he's resigning as chairman to restore trust. But, he still insists Olympus has done nothing wrong and, he describes Woodford's
[00:24:01] decision to go public as unforgivable and his successor continues to defend the gyrus fees and the other acquisitions before he makes the following comment at a press conference. Like, this is unbelievable. He said, if this secret information had not been leaked, there would have been no change in our corporate value. In other words, if only Woodford hadn't told you all about our big fraud, I mean, as you can guess, that doesn't really fill investors,
[00:24:31] the media, or regulators with much confidence. The whole thing is unravelling. So, finally, on November 8th, 2011, less than a month after Woodford was fired, Olympus finally came clean. The new chairman stands up at this incredibly tense press conference in Tokyo and admits that the acquisitions, the huge advisory fees, they weren't business mistakes, they were a cover for financial fraud. And he names names, he says, Chairman Kikuawa, the Executive
[00:25:01] Vice President Mori, and the Internal Order Yamada were directly responsible, but he does try to soften the blow by saying they didn't enrich themselves, which they didn't, but rather they acted for the sake of the company. In 2013, Kikuawa, Yamada, and Mori plead guilty to a $1.7 billion accounting fraud. But, the judge decided that this was an inherited fraud, not something they invented. Also, they didn't enrich themselves, so they get suspended
[00:25:30] jail sentences. Kikuawa takes full responsibility. In court, he bows his head and says, the entire responsibility lies with me. There is no mistake. And for a guy like Kikuawa, in Japan's shame-based culture, this public fall from grace, it was perhaps the harshest penalty. He basically vanished from public view. He's still alive, as far as I can tell, but it's hard to even find that out because he's just disappeared.
[00:26:00] One former acquaintance said he was deeply humiliated and saddened and just spent his time quietly with family. As for the company, Olympus gets a $7 million fine but was also a $92 million civil settlement with shareholders, while in a 2017 civil case, Kikuawa and five others were found to be personal liable for $529 million. Now, as for Woodford, he sued Olympus and in 2012 he settled for $16 million.
[00:26:30] And that same year, he wrote a book called Exposure Inside the Olympus Scandal. I haven't read it, but I did read the reviews. It gets great views. Might be a real page turner. And since the scandal, he's run a very, very successful and high-profile consultancy service that specialises in corporate governance and whistleblower protections. Of course, Olympus itself, it had to rebuild. No surprises that they got rid of the entire board. Sony had to come in with a $640 million
[00:26:59] lifeline for an 11% stake. Olympus had to cut 2,700 jobs and eventually they even sold off their legendary consumer camera business and they now focus purely on medical technology. And that pivot has paid off in a way. I mean, they're no longer one of the most important companies in Japan, but they've survived the scandal and by 2025 revenues hit $6.5 billion, profits of $1.5 billion. Now, Olympus,
[00:27:29] it wasn't the only Japanese company where top executives got up to all kinds of shenanigans. Major institutions like Yamachi Securities and Kniebo, they spent years fabricating financial reports to hide their own losses that they incurred during the bubble. And these scandals, they also raise a much bigger question. How many other companies had similar frauds going on? Like, if it hadn't been for Woodford, Olympus
[00:27:58] probably would have gotten away with it. And there weren't many Woodfords in Japanese corporations back then. Now, to be fair, as a result of the Olympus and other scandals, things have changed in corporate Japan. For example, the percentage of Japanese companies that have at least a third of their board made up of independent directors has gone from 6% in 2014 to 73% today. Whistleblower protections have also been strengthened. So, like, on paper,
[00:28:28] yeah, Japanese companies have become more accountable, but changing a corporate culture that goes back to hundreds of years of cultural traditions within Japan, and a culture where employees are reluctant to question their bosses, that's way more deep rooted, and far more difficult to change. And there have been numerous scandals in Japan over the last decade alone, in Toshiba, Daihatsu, Big Motor, to name but a few, that suggests that this culture of
[00:28:57] fear, where employees are afraid to challenge their bosses or speak up when something is wrong, it's still very much a problem. And look, just to be clear, similar scandals happen in companies worldwide, and there are plenty of examples in nearly every country in the world where whistleblowers war and continue to be treated really, really poorly. But, I do think there is something that is very particular to Japan, this idea of mensu, saving face, avoiding embarrassment,
[00:29:27] which makes it that much harder to get people to call out something wrong when they see it. Which brings me back to Michael Woodford, because you have to admire the guy, he called out something wrong, he could have said absolutely nothing. Because remember, by the time he became COO and president, and found out about the scheme, Olympus had already successfully whitewashed their losses. He could have enjoyed his $8 million salary,
[00:29:57] and his position at the top of one of Japan's most famous companies, and left the whole thing alone. But, he didn't. He saw something wrong, and he called it out, regardless of the ramifications. That takes a lot of guts and integrity. So, big, big, massive kudos to him. And of course, I'm grateful to him as well, because if he hadn't called it out, we wouldn't have this great story. And before
[00:30:27] I get to listeners' emails, again, if you haven't already done so, can you leave a five-star review after the show? It'll really help the podcast, and I appreciate it. Anyway, that brings us to listeners' emails, and this one comes from Peter, who would love me to do an episode on Silicon Valley Bank. That's the bank that collapsed in 2023, and it was the bank of choice for thousands of Silicon Valley startups and venture capital firms. It's a fantastic suggestion, Peter, and thanks so much for listening. And remember,
[00:30:57] if you have any comments, any corrections, or any story you'd like me to cover, email me at info at gbspod.com. All the best, folks.