Reference no: EM131013337

CaSE STuDy

The Olympus Debacle-Western Leader Clashes with Japan's Corporate Leadership Style1

In a public ousting rare in staid corporate Japan, Olympus on Friday demoted its British chief executive, Michael C. Woodford, after only six months in the job, citing a management culture clash with the company's mainly Japanese executive team.2

The success of Japan's Olympus was based largely on the corporate leadership system- consensus driven, government supported, and rife with cronyism-that was successful when Japan was one of the fast-growing economies in the world. The camera maker and medical- imaging company was largely protected in the folds of the keiretsu system in which Japanese corporations had cross-shareholdings and close cooperative ties. But the new CEO, Michael Woodford, a Briton with over 30 years at the company, was determined to expose some problems when he demanded an investigation into the $687 million in advisory fees that Olympus paid to an unknown group of people for the $1.9 billion purchase of the Gyrus Group of Britain. The advisory fee, which was 30 percent of the purchase price of Gyrus, has not since been traced. Woodford had demanded that chairman Tsuyoshi Kikukawa resign over a shameful situation involving $1.3 billion in acquisition writedowns and fees to mysterious advisers. Shortly after his demands, Woodford was ousted as the company's president on October 14, 2011, after barely six months in the job.

Tsuyoshi Kikukawa, the 71-year-old chairman, blasted him for failing to hew to Japa- nese cultural practices. The board voted unanimously at a ten-minute meeting where Mr. Woodford was not allowed to speak. Take a bus to the airport, he was told.3
The outcome was predictable in light of the typical interweaving of boards and compa- nies in Japan. Twelve of the 15 board members are Olympus executives who owe loyalty to Mr. Kikukawa and 60 percent of its shares are held either by Japanese institutions or by other

Japanese companies, none of which is likely to make waves. In fact, most Japanese companies tend to rely on personal intermediaries and relationships in business, thereby avoiding indepen- dent boards willing to raise tough questions.

Of course, Mr. Woodford's Western style of attacking the problem head on no doubt clashed with the typical Japanese implicit leadership style of discreet enquiries rather than exposing par- ticular people. To the Japanese, management consensus means one does not question the big boss. Directors rise through the seniority-based advancement system, thereby ensuring everyone is in the old boys' club-which still rules. Although Chairman Kikukawa initially introduced Mr. Woodford with glowing reports, crediting him with the successful restructuring of European operations, and saying he represented the new global face of the company, Chairman Kikukawa later said that Woodford did not understand the Japanese corporate structure, frequently going around the hierar- chy by going straight to employees with directives. Chairman Kikukawa said of Woodford that he did not understand the Japanese art of "nemawashi" consensus building, and that . . .
he was unable to understand that we need to reflect a management style we have built up in our 92 years as a company, as well as Japanese culture.4

For his part, Woodford later reported that Japan is one of the most impenetrable cultures. He admitted that he has a blunt style, but also said that his proposed restructuring included avoid- ing forced redundancies for cultural reasons. As of March 2011, Olympus's profit had declined 41 percent from the previous year, a situation that had prompted the hiring of Woodford to turn around the company. After his dismissal, Olympus stock dropped 18 percent, the largest drop since 1974, with shareholders concerned that the financial reforms that Woodford had promised would now not happen. Two weeks later Mr. Kikukawa resigned as company chairman after about fifty years with the company, without assuming any responsibility, but using the ritualised apologies that Japanese firms tend to use in order to attempt to close off a subject. Subsequently, in October 2011, the F.B.I. in the United States was investigating the exorbitant advisory fees that the Japanese company Olympus paid to a firm with links to the Cayman Islands, as well as other questionable deals that the audits had revealed regarding the syphoning off of Olympus money into other companies.

The boardroom conflict with Woodford is a rare one in Japan, where only few of the top major corporations, such as Sony Corp. and Nissan Motor Co., are run by expatriates.

And so began a boardroom battle that has now cost both men their jobs, wiped out over half the company's stock-market value-and once again cast a harsh spotlight on seemingly grave lapses of corporate governance at a top-tier Japanese company.5

The Olympus conflict and subsequent scandal were precipitated by a clash of cultural expec- tations from both parties. The situation highlights the problem of conflict between old-school business practices in Japan-where personal relationships sometimes take precedence over ac- cepted accounting practices-and the modern management practices of due diligence expected by Westerners. Subsequently, in February 2012, Tsuyoshi Kikukawa, former chairman and presi- dent of the company, was among seven who were arrested and charged with falsifying financial statements.6 As a result of this scandal involving the cover-up of massive losses, the entire board resigned and Yasuyuki Kimoto, former executive at Sumitomo Mitsui bank, took over as chair- man.7 In September 2012, three of those charged pled guilty to the $1.7 billion accounting fraud and received up to 10 years in jail.8

Case Questions

1. How does the Japanese culture affect their corporate management style?

2. Discuss the differences between the leadership styles of the British and the Japanese.

3. What effect did the corporate governance composition at Olympus have on the company's problems?

4. Discuss how both Woodford and Kikukawa could have acted differently to resolve the prob- lems that Woodford had uncovered.

5. Research what has happened with Olympus since this case was written in late 2012.