Michael Woodford doesn’t have much faith in the future of corporate Japan. You can see why.
But the essence of it is this. He took a job as chief executive of Olympus. In the first few weeks he discovered extreme financial irregularities – in the form of bizarre mergers and acquisitions to the tune of $1.7bn – at the company. But then when he tried to discuss them with the rest of the board, instead of listening, they fired him. Just like that. It was, as he puts it in his book on the matter, “an eight-minute corporate execution”.
I meet him at the Daiwa Foundation where I am a trustee (if you are interested in Japan, do visit our website www.dajf.org.uk) and he was having a book launch at the end of last month. The first thing he wants to make clear is that he is “deeply pessimistic on Japan”.
That’s not because of the shocking fraud he discovered at Olympus. Instead, it is because of the reaction to that fraud. A month after his dismissal the company’s share price was down 80%; $7bn had disappeared into the ether of the market; and the overseas shareholders were furiously calling for action. They wanted the chairman and his deputy gone and they wanted Woodford back.
Not so the domestic institutional shareholders. They would “not utter one word of criticism of the incumbent board and not one word of support” for Woodford. They knew what had happened. All the information pointing to criminal activity was out there. But still not one of them would “break ranks”.
This kind of thing matters. In the UK, says Woodford, this would be unimaginable: no shareholder would want to be “contaminated” by being complicit in something such as this. The fact is: anyone who thinks that Japan complies with the same rules of capitalism as other capitalistic developed markets? “He’s wrong”.
Woodford had been working in Japan for a long time when all this happened. I ask him if, given his previous experience, the whole thing surprised him. It shocked him, obviously. But was it surprising? Again, it was the reaction that was. He knew Japan was “cosy”, but with the full glare of the international media on Olympus, and him with a new slate of directors ready to go – including “some of Japan’s most famous businessmen” – he really thought the company would find it “intolerable” not to bow to outside pressure and to reinstate him. That they didn’t, tells you that in this regard at least “Japan is unique”.
He also remains stunned by the behaviour of his fellow directors. There were 14 other directors on the board, including three non-execs. They must have surely known what was going on. They claim not to have, but “you could be a child” and still see that you “don’t pay $1bn for three companies with no turnover”. The “blind deference” of the board to the chairman in the face of all this is extraordinary.
But the worst of it is that, while Olympus is an extreme case, this isn’t just about a few companies. It’s about Japan as a whole. Look at the report out on Fukushima (the post tsunami nuclear disaster last year). It made it clear that this was a “disaster made in Japan” – made from “blind obedience, hierarchy, unwillingness to challenge”. This is a country “sleepwalking to oblivion”, says Woodford. “The country is f**ked.”
You really think that, I say? “Hmmmm.” What about outside large corporate Japan and the government? Anything good going on there? Woodford concedes that there are some good small and middle-sized family companies in the likes of “ceramics, materials and components”, but that just isn’t enough. The big companies are vital, but thanks to the fact that there are so rarely any mergers or acquisitions in Japan, they are being allowed to slowly go bad. In a normal capitalist set up, if “I’m running a bad company and you’re running a big company… you’ll come and buy me and make me a good company”. In Japan, that doesn’t happen.
Corporate Japan needs new blood – “women, Western blood, Chinese blood… the whole bloody lot”. They need to be less insular, to have hostile takeovers, to have change, to do something about their management class of mediocre bureaucrats. Right now it is impossible to get to the top in Japan if you are “opinionated and strong minded”. Only the mediocre make it.
It isn’t often that an interviewee manages to be quite this much more pessimistic than I am but Woodford is depressing me. Our interview happened before the most recent election (see this week’s MoneyWeek magazine for more on this) but I ask him if he thinks there is a political route out. He does not. No group is “powerful enough” to get through the legislation needed to change things.
Instead his guess is that “the Japanese will continue to plod on in the way they’ve always done”. Then they will have to use inflation to get rid of the debt, and eventually they will see a “massive deterioration in standard of living.” Only a “French-style revolution” would stop the rot. And that just isn’t the Japanese way.
I ask if he would ever take a big job in Japan again. He might. But as he points out “they’d have to be quite brave to ask me.” For the moment he is probably safer in Bournemouth with his nice wife and children, watching his book sales rise (it has been out for a while but is still number 200 on the UK Amazon list) and advising investors in Japan (presumably not to invest). My own – rather more optimistic – thoughts on the political change in Japan last weekend are here.