Olympus is litmus test on governance The accounting fraud at Olympus has shattered public faith in the Japanese business establishment and prompted anxious calls for better corporate governance in the country. But even as the Japanese authorities last week arrested seven people allegedly involved in the cover-up of more than Y100bn ($1.3bn) in losses, one key group has been conspicuously silent - Japan's large, institutional investors, who are among the biggest shareholders in the Japanese camera and medical equipment maker. Political leaders, including prime minister Yoshihiko Noda, bankers and corporate executives have expressed dismay at the negative image the scandal has cast on Japan's business community and capital markets. However, Olympus's largest Japanese shareholders, Sumitomo Mitsui Bank, Nippon Life and Bank of Tokyo Mitsubishi UFJ, have remained tight-lipped about the affair. The financial groups say they cannot comment on their relationships with particular companies. But their silence masks the close business ties between Japan's financial institutions and the companies they invest in. For example, SMBC is both Olympus's largest shareholder and the company's lead banker. According to Thomson Reuters data, SMBC lead managed the syndicated loan Olympus took out to help pay for the Y2,000bn acquisition of UK medical equipment maker Gyrus, which was one of the deals the company used to hide part of its losses. Traditionally, the close relationship between companies and their banks helped companies to access a stable source of funds, and banks were expected to help their borrowers in times of crises. "If they didn't do anything they could be criticised a lot," said Naoki Kamiyama, chief equity strategist at Deutsche Securities in Tokyo. Thus, when Mazda, the carmaker, fell into financial difficulties in the 1980s, it accepted a president from its main bank, Sumitomo. The situation has changed considerably as Japanese companies have come to rely much more on the capital markets for their funding needs. At the same time, the banks, which were saddled with massive bad debts in the 1990s and went through a period of consolidation, have had to offload much of their so-called "strategic" cross-shareholdings and have become much less able to support their borrowers. The amount of cross-shareholdings between listed companies and financial institutions as a ratio of their market capitalisation has fallen from nearly 50 per cent in the 1990s to 17.7 per cent, according to data compiled by Nomura Research. "It is clear that the role of financial investors has declined," said Kengo Nishiyama, a senior strategist at Nomura Securities. For one thing, the ability of the banks to support their borrowers has declined, so increasingly that role is being played by public financial institutions and other corporations. However, the traditional relationship that kept banks closely involved with their borrowers remains at some companies, particularly those that have kept a high level of cross-shareholdings with their financial institutions. "Olympus, for example, is one of the companies which did not dissolve its cross-shareholdings," Mr Nishiyama said. In such cases, there may be an expectation at the company that the bank will support them in times of crises, by sending in management and so on, though this can create conflicts of interest. "The interests of the bank, which just wants to ensure they get their money back, and that of shareholders, who want the company to grow and generate high returns, aren't exactly aligned," said Toshiaki Oguchi, representative of Governance for Owners in Japan. But the global nature of Japan's capital markets means it will have difficulty justifying the traditional system at a time when foreign investors own 27 per cent of the shares listed on the Tokyo Stock Exchange. The outcome at Olympus will send a strong signal to the outside world about whether Japanese attitudes towards corporate governance have really changed. "Investors hope that the restructuring of Olympus will set an example for corporate governance reform in Japan, and not become a reflection of old ways and old thinking," said Jamie Allen, secretary-general of the Asian Corporate Governance Association.