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Olympus Coverup Spooks Investors

Written by Jay Saffran
Edited Gregory Bartolomei

The danger about relying on cooking the books, so to speak, in an attempt to keep investors is that it ignores how important ethics is for a business firm.  Without a certain level of business ethics companies can’t meet the demands of its stakeholders and suffers widespread disinvestments.  This is happening in the case of Olympus Co., and as Yuta Ishinoda, an analyst at Tokyo-based Rating & Investment information Inc., said, “’The possibility can’t be denied’ that Olympus could collapse (WSJ 11/09/11).

174812-file-photo-of-logo-of-japanese-cameraThe start of the problem was in the 1990s when Olympus failed to disclose investment losses and tried to cover up losses with four acquisitions made later, in 2008. Even the majority of those investments, three, were overpriced – “with much of their value written off as a loss a year later- and the fourth included vastly inflated payments to advisory firms” (WSJ 11/09/11).  The company itself is a maker of camera and medical-imaging equipment.  A majority of the blame has been placed on the managers of the company: former chairman, vice president, and auditor.  The company may not survive independently as many expect more write-offs of highly inflated assets, one even “put the figure at up to $1 billion” (WSJ 11/09/11).

As could be expected from any reasonable investor seeing information like this, once a company has revealed unethical behavior the investors trust is shattered.  This proved true as ever since the crisis becoming public shares have fallen 70%.  The interconnectedness of the economy is again proven with Japan’s largest brokerage firm, Nomura Holdings Inc,, experiencing a 14% drop in shares on Tuesday, November 1st.  It’s two largest shareholders, Southeastern Asset Management, and Nippon Life Insurance Co., have called for explanations and a principal at Southeastern Asset Management Inc. stated, “’I’m not ruling anything out’” (WSJ 11/09/11).  This mirrors earlier instances of similar actions by broker Yamaichi Securities in 1997 and Livedoor Co. in 2006.  Olympus is continuing investigations into the matter, which results in even more anxiety, as there are questions as to whether “there could be more questionable transactions in the wings” (WSJ 11/09/11).

The three executives blamed are “former Chairman Tsuyoshi Kikukawa, auditor Hideo Yamada and Vice President Hisashi Mori” among the most powerful men in the company (WSJ 11/09/11).  Mr. Mori was the man to come clear to President Takayama about the scandal stating that he was “’extremely sorry’” (WSJ 11/09/11).

The company should have considered John Mill’s theory of Utilitarianism before attempting to cover up losses.  He stated that we should attempt to maximize the quality and quantity of happiness.  As an economic theory, this would attempt to consider the greatest good of the greatest number of individuals.  Companies like Olympus need to realize it’s not in their best interest to dig themselves a hole for investor confidence.  Eventually, with continuing losses, there can be no attempt to downsize as they must make enough money to cover up previous losses.  When scandals like this are revealed they not only lose all of their investors but also lose senior members of management – many times.  For a 92 year old company with the amount of money they were dealing with there is some reason, as Mr, Takayama believes, that the senior members “were carrying on a plan that had been started by other people” (WSJ 11/09/11).  Many men like Mori and Kikukawa simply want to keep their job in the glory it was given to them, believing their management can dig their ways out of shores of debt.

Though the company has lost a lot, embracing a more utilitarian approach could bring it back to some level of economic stability. They need to continue the panel’s attempt to uncover the breadth of this cover up first, to bring back investor confidence.  Second, they need to make their finances and investments more transparent, including possibly hiring a number of company auditors.  The need to repay investors means the company is going to need to be more conservative in what it decides to invest in, maybe downsizing some facilities to make small repayments to investors.  An ethical relationship that realizes the interplay between investors and a company is a good place to start.

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**Due to technical difficulties we recently had to switch domains and transfer all of our website content.  Please keep in mind that while we have been publishing articles for two years, the published dates shown may not reflect the initial publish date.

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Dvorak, Phred and Wakabayashi, Daisuke. “Olympus Coverup Spooks Investors.” The Wall Street Journal. 9 Nov. 2011. Web

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