Japan is unlikely to make sweeping reforms to rules on corporate governance in the wake of the Olympus Corp accounting scandal because of a largely hostile business lobby and a lack of political will to clip the wings of top executives.

The $1.7 billion scheme to hide two decades of investment losses at Olympus is one of Japan's worst accounting frauds and highlights long-standing criticism of lax corporate governance, yet analysts say only minor reform is likely.

They cite the opposition of business, a government weighed down by a mountain of voter-sensitive issues and a divided parliament, as well as an insular corporate culture that makes some wonder if tough new rules would prevent another Olympus anyway.

I think Olympus does reflect many of the problems of corporate governance in Japan that people have been talking about for years, said Jamie Allen, secretary general of the Hong Kong-based Asian Corporate Governance Association, whose members include fund managers with assets of more than $10 trillion globally.

Whilst not every company may be as bad as this, I certainly don't think Olympus is an isolated case in terms of its overall weak corporate governance system.

Critics have long called for more outside scrutiny of Japanese boards, traditionally dominated by executive directors, but the boldest legal reform suggested since the Olympus scandal -- a minimum of one outside director -- would not go much further than existing Tokyo Stock Exchange rules and would be weaker than standards in Britain and the United States.

But this would still be a step too far for Japan's main business lobby, Keidanren.

I do not think there are any problems in terms of the (corporate governance) system, Yasuhisa Abe, director of Keidanren's business infrastructure bureau, told Reuters recently. The issue is really about individual firms.

A Justice Ministry advisory panel proposed last week that listed firms have at least one external director, a rule that compares with an outright majority of independent directors for New York-listed companies and a tome of U.S. laws requiring that independent directors provide genuine scrutiny.

The Tokyo Stock Exchange already requires at least one external director or auditor, but an external auditor does not have a vote on the board, limiting the ability to challenge a chairman or chief executive on matters of strategy and ethics.

Keidanren believes a mandatory outside director would limit management freedom while not guaranteeing good governance, since Olympus had three external directors who still failed to spot a 13-year accounting fraud.

We will smash it, Abe said of the proposal.


Unlike in the United States a decade ago, when a series of major scandals such as at Enron led to sweeping new corporate governance laws known as the Sarbanes-Oxley reforms, the political appetite in Japan for radical change appears lukewarm.

This is despite the ruling Democratic Party of Japan (DPJ) having made better corporate governance part of its agenda when it gained power in 2009, ending more than half a century of almost unbroken rule by the business-friendly Liberal Democratic Party.

The DPJ has set up its own panel to help shape policy and plans to draft an interim report on the topic by end-January, to coincide with the end of a public comment period on revisions proposed by a committee advising the Justice Ministry.

But whether the panel will have much clout is an open question, with some in the party cautious about reforms.

I don't think it would be good to tie companies' hands and feet with tighter regulations, said one senior DPJ lawmaker.

Former Olympus chief executive Michael Woodford, an Englishman who blew the whistle on the company's dubious accounting after his sacking in October, plans to meet the DPJ taskforce in Tokyo this week to lend his weight to reform.

Woodford, who was fired by unanimous vote of the board after he had raised questions internally over the books, has been vocal about the need for genuinely independent directors, and has advocated a U.S.-style system for Olympus.

The U.S. system of outside directors, which fell into disrepute during some major accounting frauds during the dot-com bust a decade ago, was beefed up substantially in 2002 with the Sarbanes-Oxley reforms.

But Japan's government has other pressing issues, including tax and social security reform in a divided parliament where opposition parties can block bills, and the clean-up from a devastating earthquake, tsunami and nuclear crisis.

Some minor reform, though, seems inevitable, especially given Olympus is not the only scandal tainting the Tokyo market.


The ex-chairman of tissue maker Daio Paper Corp was arrested last month on suspicion of using loans from group companies for gambling, and Kyushu Electric Co was caught trying to manipulate public opinion about reactors.

Experts have also blamed a cover-up culture for the failure of Tokyo Electric Power Co, operator of the tsunami-hit Fukushima nuclear power plant, to take steps that might have prevented the world's worst nuclear crisis in 25 years.

The string of scandals coincides with a review of Japan's Companies Act, instigated by the ruling DPJ, and raises the probability revisions will include making at least one outside director mandatory, despite Keidanren's stance.

The opposition Liberal Democratic Party has also set up a taskforce to discuss corporate governance reforms.

There's quite strong opposition from Keidanren to requiring one outside director, but that stance has become difficult to maintain, said Nomura Securities analyst Kengo Nishimura. They keep saying the quality of corporate governance is good, but that argument is breaking down.

Some experts doubt such a change would have any impact.

The outside director would have a vote, but would still be one of 15. It's a useless gesture, said Nicholas Benes, representative director of the Board of Director Training Institute of Japan.

The Justice Ministry panel has also proposed giving firms the option of adopting a single-committee board system, in addition to the two existing options: a Western-style system of main board and three committees, or Japan's more usual kansayaku statutory auditor system.

Under the kansayaku system, three or more auditors -- half of whom must be outsiders -- are elected by shareholders and can attend board meetings and express opinions, but not vote.

The new, third option, likely to be included in a final draft law to be presented to parliament next year, is called the supervisory audit committee style, and would offer fewer restrictions on management than the Western-style system, although a majority of the committee must be outsiders.

Whatever new rules come out, corporate governance experts, foreign investors and Woodford say a sea-change in attitude is needed to rein in executive power.

Changing rules on its own isn't enough, said Allen at the Asian Corporate Governance Association.

You need to change the mindset, the attitudes, the culture.

(Editing by Mark Bendeich and Ian Geoghegan)