Something is rotten in Japan

October 1, 2012, 4:56 PM UTC

By Michael Fitzpatrick, contributor

FORTUNE — With Sony’s rescue of Olympus and the scandal-racked company’s former Japanese boss pleading guilty last week to cooking the Olympian books for 14 years, there appears to be a line drawn under Olympus’s troubles. But, for some, the end to one of the country’s biggest public relations disasters meant for Japan Inc. it was merely a return to business as usual.

Root and branch reorganization of Olympus as called for by foreign investors has been eschewed. In its place is a more Japanese solution where ciphers reliant on informal arrangements and shadowy deals, and perhaps who hide the real power, have quietly made the Olympus problem go away. If they failed, was the fear, a chunk of Japanese high-tech might be prey to foreign takeovers. “Olympus has made some improvements to its corporate governance, but continues to show serious weaknesses that interfere with its ability to balance the powers of its managers,” GMI Ratings, an expert on global corporate governance, recently reported.

The message is as long as Japanese institutions are run more like bureaucracies then, as the Japanese saying has it, if something stinks, just “keep a lid on it” (kusai mono ni futa).

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It was the motto Olympus’s British former CEO turned whistleblower on his own company failed to learn. Appointed president in April 2011 Michael Woodford was the first Western salaryman to rise through the ranks to the top of a Japanese megacorp. Two weeks later he was dismissed after querying inexplicable payments approaching $2 billion. Confronting Olympus’s management with this knowledge of its questionable mergers and acquisitions — that led eventually to uncovering the firm’s hidden $1.5 billion (117.7 billion yen) investment losses since the 90s — he met with silence.

Days later when Woodford demanded to see the books he was fired and told he could walk to the airport for a plane home. Suggestions that the Yakuza were also involved in the Olympus coverup made him desperate to get back to London and spill his story to the foreign press. “I thought I was going to run a health-care and consumer electronics company, but found I had walked into a John Grisham novel,” says Woodford referring to the American thriller writer in his soon-to-be-released book “Exposure.”

Despite a slow take up by the Japanese media — “Advertising buys silence,” points out one PR — Olympus’s share price halved. Meanwhile Woodford asked the UK for police protection while Olympus management struggled to keep the lid on an increasingly pungent stinks.

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Ironically, Olympus executives then stated Woodford, who had been with the company for 30 years, was fired because he “failed to understand [Olympus’s] management style and Japanese culture.” The problem it seems was that the Liverpudlian whistle-blower had come to comprehend some aspects of Japanese corporate governance too well. Months later the Olympus board was forced to concede the payments were part of a $1.7 billion accounting fraud to hide losses on failed investments. Woodford became a hero to some shareholders and even to the Japanese public.

But he had transgressed some powerful Japanese business culture taboos explains sociologist Shaun O’Dwyer, a professor at Meiji University, Tokyo. “There was a clash of assumptions,” he says. “Olympus thought he would be a yes man. After all he was long with the company, which assumes a great deal of loyalty and obligation in Japan. The Japanese executives all felt they did the right thing by putting off the day of reckoning. So Woodford’s sniffing around created a sense of outrage among them.”

By November the lid was decidedly off. But Japanese business could rely on a closing of ranks (thanks in large to domestic commerce-friendly media and bureaucrats) to shield them from financial meltdown and criminal prosecution was the bet. The foreign media had splashed with the story, but historically the majority of foreign media reports count for very little in Japan. According to Tokyo-based PR consultant Jochen Legewie, Olympus had judged this still to be the case but was mistaken.

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“These days Japanese mainstream media do follow reports by their peers such as the FT much more than in the past. Back 10-20 years ago, they might not have even taken up this topic at all,” he says. “Now the impact of foreign media on Japan is steadily improving and is a major factor for improving corporate governance here.”

But massive differences in governance still remain. In another problem for shareholders, says one analyst, Olympus still suffers from minimal disclosure about its activities to non-Japanese readers for example. With Japan’s domestic market shrinking rapidly that might change as Japan Inc. looks increasingly outside the county for a crust. But agonizing as it might be, unquestioning obligation and loyalty to the company, right or wrong, remains a powerful ideology to overcome.