Corporate G C Governance at Olympus Corp.

MGMT 625 PRESENTATION GROUP 1

Introduction
Olympus Corporation is a Olympus scandal is an example

Japanese fi firm with li i on the i h listing h Tokyo Stock Exchange with large ope at o s operations in Europe and US u ope a d
Manufactures cameras, medical

of what happens in corporate Japan due to lack of CG best practices including:

Lack of board and management separation

and surgical devices, microscopes and scanners

In late 2011, British CEO was

Cozy external auditor relationships CEO compensation Lack of long-term incentive structure

fired two weeks after taking office for revealing scandals hidden by BoD

Corporate Governance in Japan

Companies tend to have boards p p primarily consisting of insiders y g

Insulates management from shareholders Belief th t B li f that managers k know th company b t the best

Low use of stock options to create long-term incentives Companies tend to be overly protective of top management Less responsive to criticism

Leads to larger potential Principal-Agent problems

Lack of Management/Board Separation

A few individuals at

Olympus held all the power

External directors were

elected primarily for optics

Woodford was first to

seriously challenge Chairmans authority

Source: The Daily Yomiuri Online.

External Auditors
Anderson/KPMG/Ernst&Young
1900s-2002 Audited by Arthur Anderson KPMG acquired Anderson Japan

Japan must become more stringent with audit requirements by:

2002

ensuring independence and robust supervision

2008 Feb

Overpaid advisory fee for Gyrus deal Overpaid to acquire 3 firms

facilitating more diversity in the overly concentrated market

2008 Apr

adopting CG best practices, e.g. European Commission guidelines, US PCAOBs examination on audit firms tenure, etc.

2009 Apr 2009 Jun

KPMG questioned KPMG contract terminated, changed t t i t d h d to E&Y

CEO Compensation
Huge discrepancy between pay

level le el compared to US firms

Pay structure does not optimize

g p long-term performance. i.e. little to no options

Globalization of Japanese

companies makes review i k i imperative

Olympus should champion CEO y p p

pay reform, which should lead to goodwill with investors

CEO Succession
THE JAPANESE CULTURE

WOODFORD FIASCO

Truly independent board members are rare in corporate Japan, and foreign ones are even rarer Cozy cross rarer. crossshareholding arrangements typically ensure compliant stockholders who tolerate mediocre management, or look the other way in cases of boardroom impropriety. impropriety The New York Times Times, November 23, 2011

Culture difference given as reason for dismissal

Woodfords W df d 30-year Ol Olympus career and promotion history

Whistle-blowing g Transparency (and lack of it) at Olympus

Management succession planning Boardroom antics and the media

Conclusion
The scandal can act as a catalyst for change in corporate y g p

governance at Olympus and in Japan.

Olympus: focus on regaining trust from investors Companies: restructure compensation to focus on long-term p performance

Investors: organize shareholder activism to clamor for system-wide corporate governance best practices

Regulatory body: legislate (not just recommend) and enforce corporate governance best practices