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An analysis of Olympus's corporate Governance

An analysis of Olympus's corporate Governance

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An essay for the 2012 Undergraduate Awards Competition by Sarah Green. Originally submitted for Business Studies at Jordanstown, with lecturer Gary Martin in the category of Business & Economics
An essay for the 2012 Undergraduate Awards Competition by Sarah Green. Originally submitted for Business Studies at Jordanstown, with lecturer Gary Martin in the category of Business & Economics

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Published by: Undergraduate Awards on Aug 30, 2012
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Corporate Governance ReportSarah Green(B00440670)
Bob Tricker (2008) states that Corporate governance is “an internal system that encompasses
polices, processes, people, and which makes sure the needs of shareholders and other stakeholders are met in full. This will be accomplished by directing and controlling managingactivities using good business practices, objectivity, accountability and, of course, inte
(Tricker, 2003, pp65). From this definition it is clear that Corporate Governance is a complexissue for businesses to consider. In this report I will examine the academic theory on corporategovernance and link it to the multinational electronics organisation, Olympus.The development of corporate governance in the UK was initially driven by corporate collapses
and financial scandals. The UK’s Combined Code (1998) embodied the findings of a trilogy
codes: the Cadbury report (1992), the Greenburg Report (1995), and the Hamper Report(1998). When examining the current academic theory of corporate governance it is clear thatmuch of the topics discussion has been centered on various legislation policies, to preventfraudulent activities and the need to remain transparent in all dealings. The development of Corporate Governance is described by Mallin (2004) as a global occurrence, and as such is acomplex area including legal, cultural, ownership, and other structural differences. Thereforesome theories may be more appropriate and relevant to some countries than others, dependingon what stage an individual country, or group of countries is at.Effective corporate governance relies on certain laws to be passed, as well as a certaincommitment from the marketplace, and also a healthy board culture, as this will make surepolicies and processes remain constant. Corporate governance must have safeguards in placeto ensure it is always being carried out at optimum levels. (Mallin, 2004) The company itself must view the governance as that of quality or else there can be very serious implications for abusiness and its value including a drop the companies share price and revenue.It is clear that this is an issue which needs to be considered across all industries but can beconsidered as crucial in a high value and dynamic market such as the photographic industrywhich according to the Keynote website highlights estimates that the UK consumer photographic market was valued at £1.84bn in 1998, an increase of 12.5% on the previousyear. Sales have improved in recent years, following a period of decline during the recession inthe early 1990s, and growth has been driven primarily by an increase in sales of films and filmprocessing. Technological improvements have also boosted sales, although the effects of many of these developments have still to translate to increased sales in the marketplace. As aresult of this, the photographic market has become a rapidly growing and competitive marketwith the likes of Olympus, Canon and Kodak fighting it out to maintain their spot in the market.There are often times when companies become so focused on achieving competitiveadvantage that they often fail to follow the key Corporate Governance Codes set in place, andtherefore this can result in accusations of fraudulent activities which can have major effect on
companies’ credibility and profit margins.
One of the more recent defamations to affect the photographic market steamed from one of themarket leaders
Olympus, a well known Japan-based manufacturer of cameras, optics andrear ography products. In November 2011, Reuters reported the company has finally revealedthat for twenty years they had been hiding their losses on security investments, and the factthat their company shares had fallen to as low as 30%. The M&A payments included anexcessive $687 million advisory fee paid mostly to a now-defunct Cayman Islands firm (Philips.J, 2011) An independent panel issued a report to the newspaper the Record, how Olympus
executives were responsible for the cover-up of $1.7 billion and how they tried to keep it quietby firing and replacing key board members. Shuichi Takayama, its president, faced the press aday after publication and has stated that "Our corporate governance was severely criticised, asthe representative of the company, I apologise, "We deeply regret that we have given a verynegative impression to Japan and possibly the world.In a race against time to file a set of company accounts before 14 December; otherwise bedelisted from the Tokyo Stock Exchange after 62 years. Therefore it has been called for anoverhaul of the board and the company has said: "Olympus should remove its malignanttumour and literally renew itself."(Clarke, 2011) This however has already started to take placeas the consisting key members of the board have began to fully realise the extent of their scandalous action and have began to resign. Including the resignation of former presidentTsuyoshi Kikukawa, the Vice
president Hisashi Mori and auditor Hideo Yamada just some the
main players that were responsible . However, Olympus’s president Shuichi Takayama is
claiming that he was unaware of the transactions that took place and is blaming former president Tsuyoshi and vice president Hisashi Mori for the fraudulent activities that have takenplace.The discovery that Olympus Corp. covered up losses for 20 years shows that the major opticalinstrument maker's corporate governance malfunctioned, with its former president and a fewother executives exercising overwhelming power over its management. On the surface,Olympus appeared to have appropriate management checks in place. For example, it hireddirectors and auditors from outside the company, as well as a British president who was nottied to corporate insiders. In reality, however, the company's management was ruled by former Chairman Tsuyoshi Kikukawa and a few other executives who came from its financial sections. According to internal documents obtained by The Yomiuri Shimbun, auditing corporation KPMG AZSA LLC ( Klynveld, Peat, Main and Goerdeler) raised questions over the huge paymentsOlympus made for its acquisitions when the firm checked Olympus' financial statements for thebusiness year ending March 2009. Olympus paid a total of about 140 billion yen to acquireBritish medical equipment maker Gyrus Group PLC and three Japanese firms. Among other things, KPMG AZSA LLC found the consulting fees Olympus paid to its investment advisers inthe Gyrus acquisition were significantly higher than standard and asked Olympus' board of auditors to set up an outside panel to look into the acquisitions. The panel, however,investigated for only one week and reported to the board of auditors it could not find anythingthat could be considered illicit. In June 2009, Olympus replaced KPMG AZSA LLC with Ernst &Young ShinNihon LLC, saying its contract with the former had expired. An external director issupposed to give advice on management from an outsider's viewpoint. Olympus currently hasthree such directors on its 15-member executive board. However, external director YasuoHayashida said he did not know much about corporate management. "I've just given advice toOlympus' medical business as a doctor," he said.The company's management is believed to have been effectively controlled by severalexecutives who have a background in financial affairs, including Kikukawa and former VicePresident Hisashi Mori, both of whom were involved in the cover-up of past losses. Olympus'board of auditors, which is supposed to supervise the board of directors, includes full-timeauditor Hideo Yamada, who also has financial expertise. He has expressed his intention toresign over the scandal. A report by Tomaskova (2011) showed that All three of the executiveshave served as head of the company's Corporate Centre, which supervises the accounting and

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