Blowing the whistle on Olympus

Former CEO Michael Woodford feared for his life and his family when he exposed a massive fraud at the optics giant.

Would he do it again? Of course he would, says Michael Woodford, the former CEO of Japanese optics group Olympus, who blew the whistle on a ­staggering US$1.7 billion fraud and was then sensationally sacked by the men he accused of covering up the crime.

Yes, he would do it again, despite fearing for his life and that of his wife and two children. Woodford’s wife remains bruised and traumatised, he says, not an outcome any CEO wants for his partner.

“It was like a John Grisham novel, flying off and meeting the FBI, investigative journalists telling you all sorts of issues,” Woodford told INTHEBLACK ­recently. “You just want to go on two weeks’ holiday, go and see your gran on Saturday. You don’t want to be thinking people are trying to kill you.”

Woodford is one of the highest-ranking corporate professionals to turn whistleblower and says he felt much safer once his story was made public. He was the first non-­Japanese to head Olympus when he was appointed president in February and CEO in September last year. A streetwise boy from Liverpool in Britain, Woodford joined a medical equipment unit of Olympus in London as a salesman in 1981, aged 21. He would eventually lead Olympus’ European operations.

Within weeks of taking the top job last year he learned of questionable ­accounting. After querying the board about it, he was sacked on October 14. ­Several board members have since resigned, and in May this year Woodford ­received a multi-million pound payout for unfair dismissal under Britain’s whistle­blower laws.

“What has surprised me most about this whole process has been people’s reactions – ‘Why did you do it?’ Why are people so shocked? I still struggle with that,” he says. He was speaking recently to the US Association of Certified Fraud Examiners after being given its “choosing truth before self” award and was surprised when even its members asked him why he exposed the scandal.

“I’ve always been very black-and-white about right and wrong and I was the president of the company,” he says. “If something’s wrong, I’m in charge; if I don’t deal with it, then I’m compliant. A lot of people think I was silly in those early weeks – I just would always do the same, instinctively.”

Woodford said he first learned of the fraud after he was sent the translation of a story about it that appeared in the Japanese specialist economic journal Facta. “It was substantiated and certainly merited further questions,” he says.

Initially, he says, he couldn’t believe it. He considered Olympus a ­conservative and “sleepy” company. Accustomed to the bulldog ways of the British press, he assumed that if it was in the media then shareholders, the stock exchange and big media companies would be all over it.

“What I learnt in Japan, the media is incredibly passive,” he says. “It’s a cult­ural thing, but it’s also just the rules of the game, which are very different to anywhere else in the world ... Alice in Wonderland. It was only by asking the chairman and the vice-president,” Woodford says (see "The Olympus scandal", below). “When I saw their reactions, I knew something was wrong.”

Olympus sacked its CEO, Michael Woodford, for revealing its dirty linen.

Olympus sacked its CEO, Michael Woodford, for revealing its

dirty linen.

Woodford says he understands how hard it is for a more junior ­employee with a mortgage and family to support to blow the whistle on an employer. That is why he now ardently promotes independent whistleblower phone lines, managed by law firms, which he says should be mandatory for listed companies.

“If you were uncomfortable report­ing something internally you could go to an eminent firm of lawyers whose reputation would be destroyed if they ever leaked,” Woodford says. “A lot of people won’t use internal whistleblower lines because they fear they will eventually report back to the management teams. It’s meaningless in that sense.

“You could certainly have legislation that insists upon whistleblower rights. You will get some malicious abuse, but then you would have to prove the case so I think it would be helpful.”

While a degree of anonymity would work, Woodford doesn’t favour financial incentives for whistleblowers. “You discredit whistleblowing if they’re seen to win the lottery,” he says. “It would undermine your whole sense of being honest.”

Turning to the act of fraud, Woodford says more can be done through shareholder activism, auditor rotation and the threat of legal action. He recognises that human beings are vulnerable and that vulnerability means they are susceptible to wrongdoing. Managers need to be aware of that.

“I’ve had pens in my bag from the office, but if people are stealing £5 or £500 or A$100 million, the psychology is similar,” Woodford says. “You should always manage from a premise of recognising human nature, and question and challenge all the time. Anyone who’s read Animal Farm knows what happens when people get into positions of control or power. They are susceptible.”

Woodford is also an advocate for the compulsory rotation of auditors to minimise the risk from comfortable relationships and complacency. “Which is not necessarily popular,” he says. “We only have four large firms left and relationships do build.”

Woodford also thinks audit needs to have a more prescriptive forensic ­element to it and legislation should be passed to hold ­directors to ­account. “What you can achieve is a fear of being caught, there have been so many cases recently of wrongdoing,” says Woodford. “People are sick to death of it. I would be looking to deliver criminal ­accountability to the officers running those companies, not just large fines. The legislative frameworks for the ­executive and non-executive directors should be tightened, so if there is wrong­doing on your watch then you or the managers within the organisation are more likely to face ­custodial sentences.”

Michael Woodford speaks to the media after his sacking.

Michael Woodford speaks to the media after his sacking.

Woodford also says shareholder activism can be the most powerful governance ­control, making shareholder approval of ­remuneration a sound option.

“In the Olympus case, we had almost all the overseas shareholders demanding within weeks the removal of the board of directors – it was so transparent, yet to this day Japanese shareholders in the Olympus case have not said one word of criticism of the incumbent board that allowed this to happen.”

Woodford says one of his greatest fears now is that fraud is more than just white collar: “There’s the potential involvement of sinister forces.”

When Woodford exposed the scandal at Olympus, local media suggested organised crime could be involved. “It’s a huge amount of money – US$1.7 billion worth of criminality was involved – but is hard to prove, particularly in Japan. But if you’re moving billions around the world and through the Cayman Islands and setting up strange and wonderful edifices to facilitate that, you don’t know who you’re mixing with,” he says.
  

The Olympus scandal

Michael Woodford says that after being alerted to the accounting irregularities he wrote several letters to the board seeking explanation. His final letter demanded the resignations of the chairman and vice-president.

A board meeting was subsequently called, but it was Woodford who was sacked. Within an hour and fearing for his safety, Woodford met with an investigative journalist from the Financial Times and handed over his evidence of the fraud and cover-up, hoping the publicity would protect his safety.
The cover of Michael Woodford's exposé book.

The cover of Michael Woodford's exposé book.

Olympus said Woodford was fired for not understanding its culture and described his public questioning of the company as “aberrant” and “unforgivable”. It eventually admitted hiding loss-making securities in the Cayman Islands and other tax havens since the early 1990s, a time when stock markets fell and the yen strengthened. The transactions were a bid to hide investment losses going back decades. The massive overpayment for assets and lavish fees were a fraudulent attempt to cover up previous bad investments.

The chairman has since resigned along with other board members and police have arrested some key players.

Woodford launched a campaign to be reinstated, but withdrew after failing to win support from Japanese institutional investors.

Shares in Olympus sank 80 per cent in the weeks after the scandal broke and remain 40 per cent below their pre‑scandal level.

Further reading:

Access the following items in the CPA Library:

Can ethics education impact whistleblowing? by T. J. Shawver, Management Accounting Quarterly, 2011
Decision-making process of internal whistleblowing behavior in China, by J. Zhang, R. Chiu & L. Wei, Journal of Business Ethics, 2009
The Corporate Whistleblower’s Survival Guide (eBook)

Contact CPA Library on 1300 737 373 or email [email protected].
 
This article is from the October 2012 issue of INTHEBLACK.


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