December 13, 2011

A Delisting for Olympus Puts Japan in a Debate

By HIROKO TABUCHI

TOKYO — Scandal-racked Olympus is set Thursday to clear the first hurdle to avoiding expulsion from the Tokyo Stock Exchange. But a final decision on whether the exchange will carry out its threat to delist Olympus’s shares may still be months away.
The Japanese company said on Wednesday that its assets surpassed liabilities in the seven fiscal years up to March of 2009 as it restated accounts, Reuters reported.
More restatements were expected on Wednesday, as were its second-quarter earnings, Reuters said, which added that auditors approved the new figures with some qualifications. The company appeared to meet its Dec. 14 deadline to submit revised earnings to maintain its listing on the Tokyo exchange.
But Olympus stock will remain in critical condition, exchange officials say, as long as investigators are looking into the company’s decades-long cover-up of more than $1 billion in losses.
The stakes are high. A delisting, if it happened, would be preceded by a one-month warning to investors, during which Olympus’s share price would probably be decimated as shareholders dumped the stock. Few might want to be left holding them because, once delisted, the shares would be difficult for most investors to buy or sell.
Analysts say delisting could also make the company, a producer of cameras and medical scopes, vulnerable to being dismantled and sold for its parts.
But handicapping the eventual fate of Olympus’s stock is hard to do, because of the inconsistent way that Japanese authorities have policed and censured white-collar crime in recent years.
What’s more, the powerful Tokyo Stock Exchange wields considerable discretion in deciding whether to delist, which experts say can make its decisions on such matters seem arbitrary or politically biased.
“Japanese regulators aren’t consistent; they seem to make calls based on political motive,” said Tadashi Kageyama, senior managing director and head of Asia and Japan for Kroll, a global risk consulting company. “These inconsistencies are confusing foreign investors.”
Two cases in the past decade illustrate the discrepancies — or, in critics’ view, the political biases — in the way companies are punished in Japan.
When the Internet start-up Livedoor was accused in 2005 of manipulating its earnings to appear to be more than $40 million, its offices were raided, its stock delisted and its top executives jailed.
But the next year, Nikko Cordial, a prominent Japanese brokerage firm, was accused by financial regulators of padding its books by almost $350 million. Nikko was forced to pay a modest financial penalty. But there was no raid, no delisting and no jail time.
“Japan is still haunted by the Livedoor case; they went after that company like beating up on a drowning puppy in a pond,” said Kenichi Osugi, a professor in corporate governance and restructuring law at Chuo University in central Japan. “It was seen as politics, not justice.”
And so the eventual outcome of the Olympus investigation by police officials, and the company’s treatment by regulators and the Tokyo Stock Exchange, will be seen as the latest indication of which way the corporate winds are blowing in Japan.
Keeping Olympus a listed company would add fuel to accusations that Japan Inc. coddles established players while punishing newcomers like Livedoor, which had dared to rock the boat with a series of ambitious takeover bids before the scandal caused the company to implode. An Olympus delisting, though, would probably incite a furor from those who argue that shareholders should not be unfairly punished for acts by corrupt executives.
Even Michael C. Woodford, Olympus’s ousted president, has said he hopes company shares remain listed for the sake of company investors and employees, even as he calls for a thorough investigation.
“I want no part in selling Olympus or breaking it up,” Reuters quoted Mr. Woodford as saying Wednesday after meeting with local politicians.
It was Mr. Woodford who drew attention to the cover-up, first within the company and then publicly after he was fired on Oct. 14.
Mr. Woodford arrived in Japan on Tuesday, his second visit to the country since his dismissal, where he hopes to persuade investors and employees to support his return to the helm of Olympus. The current Olympus board has said it will step down as early as February, but it has not agreed to welcome back Mr. Woodford.
Though the Tokyo Stock Exchange is independent of the Japanese government, its executives have strong links to both government and industry. And there is plenty of suspicion that it is vulnerable to pressures. Its president is a former Nomura banker who previously led a government-run fund for turning around troubled companies. The chairman of the exchange’s board is a retired finance ministry official.
“Compared to Livedoor, the fraud is tens of times bigger and went on for much longer” at Olympus, Takafumi Horie, Livedoor’s former chief executive, wrote Monday from his Tokyo jail cell through a Twitter account maintained by his staff. “If there’s no delisting, no criminal charges,” Mr. Horie continued, “then it’s like there’s no equality before the law here.”
The question comes down to what purpose delisting should serve, analysts say. Is it mainly a punishment for the company? Or is it meant primarily as a way to keep markets clean?
Advocates of tough punishment argue that if the exchange or financial regulators are seen to be lenient on fraudulent companies, trust in Japanese markets could be hurt in the long run.
“If the Olympus case is not deemed a serious offense, it could become a message that anything goes in Japanese markets,” said Takaaki Hoda, a professor of corporate and venture finance at the Otaru University of Commerce. “Then what would happen to credibility?”
But others argue that delisting is too blunt a measure to deal with many securities law violations. Instead, they say, the Tokyo exchange should rely more on fines — although the current 10 million yen, or around $128,500, ceiling on fines might spark derision if it is applied to a fraud of $1 billion or more at Olympus. (Of course, Japan’s securities watchdog, the Securities and Exchange Surveillance Commission, could choose to issue heftier fines.)
Another risk for investors, meanwhile, is a possible link to organized crime. An internal report prepared by a panel of third-party legal experts, though scathing in language, appeared to clear the Olympus cover-up of that allegation. The head of the panel has conceded, however, that the whereabouts of much of the money is still unclear.
But Japanese police investigators are still pursuing possible criminal links, according to people familiar with the inquiry who were not authorized to speak publicly.
Under Tokyo Stock Exchange rules, a connection with “antisocial forces” — long used as a euphemism for organized crime — makes it unlikely that any company could remain listed, if such connections were proved. In reality, no company has ever been delisted over suspected mob links.
Still, the Japanese government recently has been stepping up its vigilance with robust laws that make it a crime to do business with antisocial forces.
Government guidelines drafted in 2007 on antisocial forces, moreover, adopt a much wider definition of the term to mean any group that uses violence or fraudulent activity for economic gain. That interpretation, analysts say, could cover the obscure brokers that even Olympus’s third-party panel has said aided the company’s cover-up.
The Tokyo exchange, on the other hand, has delisted nine companies for falsifying earnings since 2004. But that sanction has mainly been used against smaller companies like Livedoor, which now exists as only a shell of its former self.
A case that may most closely resemble Olympus is the accounting scandal that came to light at the Toyota auto parts maker Futaba Industrial in October 2008. The stock exchange put Futaba’s shares on watch. But the company quickly appointed an outside investigative panel and reported amended results, while Toyota brought in a new management team.
In June 2010, after Futaba submitted numerous reports detailing ways it would improve its corporate governance, the stock exchange declared that Futaba shares were no longer at risk of delisting.
But last year, the exchange banished two companies for false financial statements. One was Senior Communication, a small nursing care consulting firm, accused of padding profit by a little more than 2.2 billion yen, or a little more than $28 million over six years.
By the end of the one-month warning period, the company’s share price had plunged to near zero. The Tokyo exchange said it had found the fraud at Senior Communication to be “systematic” and “deviant.”
So Olympus’s fate may be difficult to predict.