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Spitting the dummy

17 October 2011 By Wayne Arnold

Olympus’ embarrassing decision to dump its foreign chief executive two weeks after naming him to the job shows that reform is a slow and fitful process. Michael Woodford was brought in to carry out a house-cleaning at the Japanese camera maker, and became one of the country’s handful of non-Japanese corporate bosses. That the board decided to fire him so soon shows the medicine was distasteful. It also strengthens the case for a bigger dose.

Unlike foreign bosses who came from outside, like Nissan’s Carlos Ghosn and Sony’s Howard Stringer, Woodford spent 30 years working his way up through the ranks. Worryingly, he has alleged in the Wall Street Journal that his dismissal came in response to questions about governance problems raised by a local magazine. One issue seems to be high prices paid for overseas takeover targets. That wouldn’t be unusual: big-name Japanese firms all too often splash out for bolt-ons abroad to raise revenue without having to undertake more painful restructuring at home.

Olympus needs restructuring in spades. It has a roughly 75 percent market share in endoscopes, where operating profit margins are as high as 30 percent, by Goldman Sachs estimates. Yet it has clung to a loss-making business of selling digital cameras, competing with the likes of Nikon and Samsung. Group revenue increased by 80 percent between 2001 and 2008, but earnings fell 37 percent, while net debt to equity increased sharply.

Woodford clearly rubbed someone up the wrong way. But getting rid of him isn’t likely to remove the pressure on Olympus for reform, and may make calls for change even louder. In its most recent annual report, the company promised “drastic structural reforms”. Fear they may not happen could explain why the company’s shares plunged 38 percent in the two days following the chief executive’s ouster.

But it’s too late for Japan Inc to curtail the reformist experiment. Foreigners now hold a fifth of listed Japanese companies. And pension funds, facing growing payouts from Japan’s aging population, are starting to reject low dividend proposals and poorly performing directors. Woodford is gone, but shareholders will invariably demand that others take his place.


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