Olympus Corporation, with sales of $10.6 billion for the fiscal year ended March 31, 2011, is a leading manufacturer of endoscopic medical devices as well as cameras and other imaging devices, microscopes, and information and communications equipment. Olympus is listed on the Tokyo Stock Exchange, and American Depository Receipts are traded in the U.S. over-the-counter market and listed on the "Pink Sheets." Thomson Reuters even named Olympus Optical one of the world's 100 most innovative companies.
In April 2011, Olympus named Michael Woodford its first non-Japanese president. A U.K. citizen, Woodford had worked for the company for more than 30 years, including as head of European operations. In a July 5 article in the Financial Times (FT), Woodford noted that part of his mission was to change Olympus's culture, saying, "Harmony and consensus have their place and time but scrutiny and challenging--devil's advocate, whatever you want to call it--leads to better decision making." Whether or not Woodford knew the details at the time, Olympus's stifling ethical culture--where employees were afraid to speak up--appears to be the single most important cause of events that almost took the company down.
In Olympus's fiscal 2011 annual report, Woodford outlined his plans to maintain innovation while cutting costs through changes to a more centralized organizational structure. Under the slogan of "Advancing to the Next Stage of Globalization," the annual report also related specific goals in the strategic plan for the company. Woodford saw his mandate as: "Do what you did in Europe, and do that around the world."
Woodford became CEO of Olympus on October 1, 2011, but was summarily dismissed from the company on October 14. The corporate termination announcement stated the reason for his firing was that he had "largely diverted from the rest of the management team in regard to the management direction and method, and it is now causing problems for decision making by the management team." On the day the news was published, Olympus's share price plunged 18%, followed by a 24% decline on the next trading day.
Woodford's side of the story came out in an October 15 FT story. Since July, he had been strongly questioning members of the board about large payments to "financial advisors" relating to the 2008 purchase of Gyrus Group, a U.K. medical device manufacturer, and about details of the acquisition of three other Japanese companies, some in totally unrelated businesses.
In an October 11 letter to Olympus's chairman, Woodford described "a catalogue of calamitous errors and exceptionally poor judgment which ... has resulted in the destruction of shareholder value of $1.3 billion." Payments of $687 million, about a third of the Gyrus acquisition cost, and estimated to be the largest M&A fee ever paid, were made to a Cayman Islands special purpose investment vehicle that disappeared from view shortly after receiving the final payment. This information was based on an investigation by PricewaterhouseCoopers, which had been hired by Woodford. The recipients of the payments were said to be a U.S. brokerage house and its subsidiary.
The Olympus audit board in 2009 commissioned an investigation about the advisor payments, but its report found no illegality in the transaction. The October 15 FT story said that Olympus had declined to comment further about the Woodford accusations, stating, "We have disclosed everything we are required to disclose." An Olympus press release dated October 19 notes, "By unanimous resolution of the board of corporate auditors, their conclusion is that 'No dishonesty or illegality is found in the transaction itself, nor any breach of obligation to good management or any systematic errors by the directors recognized.'"
Olympus's governance structure regarding auditing is based on Japanese law. According to the 2011 annual report, a Board of …