Olympus: A Very Japanese Scandal

Caemin (0:10)

Morning, folks, and before we go any further, I have one big favor to ask of you. Can you pause the show now and leave a five star review? Or if you can remember, then do it after the show. It will really help the podcast. So I appreciate it. Anyway, welcome to today's episode. It's called Olympus, a very Japanese scandal. And I have a very clear memory of this story because it became public 15 years ago, 2011 And I remember watching the news and seeing Michael Woodford, he's the whistleblower, the central character in this story, being mobbed by the media in Tokyo after he had found out and exposed a 20 year, $1.7 billion fraud in Olympus, the company where he had just been promoted to the CEO role. And what I love about this story is that it gives us a great insight into Japanese corporate life, how saving face was and maybe still is prioritized over everything else. This story, it has drama, strong characters and even the hint of organized crime in the form of the yuzuka. It is a brilliant story. Enjoy. So Olympus, it was founded in Japan in 1919 with a very simple ambition, to stop the country relying on imported optical equipment. And from the very beginning, the idea wasn't just to copy what foreign companies were doing. As its founder, Takeshi Yamashita, put it, and I hope I'm pronouncing that right. He said, mere imitations of imported products wouldn't suffice. We need to create something truly original. And that became the basic philosophy of Olympus. It started out making microscopes in 1950 It developed the world's first camera that could photograph inside a human stomach. At the same time, its consumer camera business was taken off, especially with the launch of the groundbreaking pen camera. It was this compact, high quality, but very affordable camera. And so it opened up photography to millions of people. If your grandfather or grandmother was into photography back in the 50s and 60s, it was probably because of the pen camera. They probably had one of those.

So by the time we get to the 1990s, Olympus, on the surface, was doing brilliantly. Its products were sold in more than 100 countries. It had around two-thirds of the global endoscopy market. And it was a major name in cameras and scientific equipment. It employed around 10,000 people, revenues of about 1.5 billion dollars.

But things weren't going well in the overall Japanese economy. For a bit of context, Japan's economic bubble lasted for about five years in the late 1980s. And it was fueled by easy credits and low interest rates that sent stock prices and real estate prices soaring. And as a result of the really low interest rates, Japanese companies, like Olympus, borrowed money cheaply and then invested in the booming stock market and property markets.

Both when the central bank stepped in and put up interest rates in 1989 to cool things down, the whole bubble burst and Olympus was sitting on losses of around $700 million.

And because of the culture within Japanese corporations, Olympus didn't own up to its losses. Instead, they started hiding them. So let's just take a step back and let's just have a look at this corporate culture. So for decades, big Japanese companies, they were built around stability, loyalty, long-term employment. People joined the company, spent their entire career there, and slowly worked their way up. So the people running these companies, they weren't outsiders brought in to shake things up. They had often been there for 30 years.

And Olympus, like most big Japanese corporations, had this very insular culture, where loyalty and seniority were massively important. Challenging your boss could be seen almost as an act of betrayal.

You just didn't rock the boat.

And then you had this whole idea of saving face, or the word they use is mentsu. And it goes back centuries in Japanese cultures. It's rooted in deeply held traditions of social harmony or WAAA. WAAA is how it's spelt. And in a society built on collectivism rather than individualism, public failure, it didn't just embarrass you, it brought shame onto your family, onto your colleagues, onto your entire organization. So in a corporate setting, admitting that you had made a mistake, it could destroy your reputation as well as bring untold shame to your organization. Then on top of this, you have the corporate board structure and the relationships that these corporations had with their main banks. This also laid the foundations for scandals like the Olympus one, because oftentimes the banks that lent these corporations money, they'd have a seat on the board of the company as well. And companies and banks frequently owned shares in one another. So as a result, companies were partly insulated from outside shareholders. And as long as the loans were being repaid and everything looked fine on paper, combined with the fact that board members tended to defer to the chairman or the president rather than challenge them, there wasn't a huge amount of pressure to start digging around inside the business.