Fraud, Fiduciary Responsibilities, Outsourcing and Other Random Thoughts for Corporate America

On September 25, 2012, Olympus Corporation’s former Chairman Tsuyoshi Kikukawa pleaded guilty to covering up $1.7 billion in losses at the Japanese camera maker in an accounting fraud case that sparked criticism of ineffective corporate governance in Japan.

“The full responsibility lies with me and I feel deeply sorry for letting down our business partners, shareholders and the wider public,” Kikukawa told the Tokyo district court yesterday. “As the president of the company, I take full responsibility for what happened.”

What a breath of fresh air it is when a CEO admits guilt in an accounting fraud rather than blaming others and feigning ignorance. Still, it doesn’t negate the corporate failure on his watch.

Kikukawa, former Olympus Executive Vice President Hisashi Mori and Hideo Yamada, a former auditing officer, all pleaded guilty to using fraudulent takeover transactions to hide losses for 13 years starting in the 1990s. The executives face as much as 10 years in jail and 10 million yen ($128,000) in fines, according to a legal database operated by the government. However, it is common in Japan for white-collar criminals to avoid jail with suspended sentences and just pay the fines.

Olympus President Hiroyuki Sasa also submitted a guilty plea for the company’s role in the fraud. The camera and endoscope maker faces as much as 700 million yen ($9 million) in fines for violating the rules, according to the government database.

The scandal was exposed last year in October by Olympus’s chief executive at the time. The Olympus fraud has a real life whistle-blower – Michael C. Woodford – the newly appointed president and CEO at the time of the fraud. It is quite unusual for the top manager of a major company to blow the whistle on his company’s fraud; kudos to Woodford for doing the right thing. He did suffer the same fate as all-too-many-whistle-blowers – he was fired by the board. However, on May 29, 2012, he settled with the company on what was reported to be a multi-million dollar payout.

I have raised the question before whether whistle-blowing is an ethical practice. On the one hand it can violate the confidentiality obligation of an employee to an employer IF the whistle-blower goes outside the company. There is general agreement that the first step is to take your concerns up the chain of command within the organization starting with your supervisor’s, supervisor, and then all the way to the board of directors if need be. If that doesn’t work then external whistle-blowing should be considered. The motivating factor to do so and make it an ethical action is to “right a wrong” rather than receive an award. Admittedly, the latter may be needed to encourage the reporting of the fraud.

Members of top management such as the Olympus former executives had a fiduciary responsibility to investors and creditors to safeguard company resources and act in their best interests. All too often we have witnessed greed and personal interests getting in the way of these obligations in U.S. companies. Frauds at companies such as Enron, WorldCom, and Tyco all had one common element. The CEOs gained substantial financial benefits in the form of excessive compensation and stock options during the period of the fraud due to falsified earnings and hyped stock prices.

My concern is whether corporate America has learned its lesson. Those on the political left of the spectrum say they haven’t and strict regulations are needed to protect the public (i.e. Dodd-Frank Financial Reform Act). Those on the right claim such regulations stifle economic growth. I believe both sides make valid points.

Corporate America needs to demonstrate to the American people they are not out just to earn a buck regardless of how they have to do it. It’s not just fraudulent practices, which are obviously wrong. There needs to be a renewed effort to manufacture more products in the U.S. and not outsource jobs overseas. My advice to corporations is if we don’t start to make more here at home, and we don’t start to reinvest in America, all the profits in the world won’t stop the growing malaise that inflicts our economy, stifles innovation and growth, and deepens the spirit of so many Americans who are stuck in under-paying jobs; doing work they are over-qualified for; and relying on the government for their mere existence.

Blog posted by Steven Mintz, aka Ethics Sage, on October 2, 2012