TOKYO Japanese regulators appear to be trying to regain the trust of investors unnerved by a scandal engulfing Olympus Corp, with a formula that would punish the executives responsible harshly but let the once-proud firm stay listed on the stock market.
But the formula requires a tricky balancing act from the regulators as they grapple with one of the nation's biggest corporate scandals and with calls for more lasting reform.
Japan's securities watchdog, police and prosecutors are probing the 92-year-old camera and endoscope maker in a rare joint effort after Olympus admitted last week that it had hid investment losses for decades using funds from M&A deals.
"If there aren't some serious criminal charges, that will be bad for investor confidence ... If the TSE (Tokyo Stock Exchange) delists the company, that will damage confidence," said corporate governance advocate Jamie Allen, summing up the problem facing regulators in calculating their response.
"Investors need to feel that the people in charge are getting to the bottom of the problem and trying to resolve the problem, not just coming up with some convenient solution," said Allen, secretary general of the Asian Corporate Governance Association, whose members include institutional investors managing assets of more than $10 trillion globally.
"I think the jury is still out on whether the Japanese market will recover from this."
In a sign regulators are getting serious after a slow initial response to the Olympus scandal, the Securities Exchange and Surveillance Commission (SESC) is considering recommending criminal charges against those involved in wrongdoing at Olympus, a source familiar with the matter has told Reuters.
The source said the SESC might also urge that Olympus be fined for false financial reports, a move that could provide enough of a deterrent without a delisting of the company.
That outcome would soothe investors who have seen Olympus shares collapse almost 80 percent since the scandal broke on October 14, when the firm's sacked CEO publicly raised the alarm over a series of unusual M&A deals and improper accounting.
"They need to make clear they are putting some teeth (in their response) without using a guillotine," said Martin Schulz, senior research fellow at Fujitsu Research Institute.
TOKYO BOURSE IN A BIND
For more than three weeks after CEO-turned-whistleblower Michael Woodford went public with his concerns, Olympus denied any wrongdoing and said the 30-year company veteran had failed to understand Japanese culture and the firm's management style.
But last week Olympus reversed course, admitted to having used funds linked to M&A deals to hide its decades-old losses and raised the possibility of criminal activity. But it gave few details, saying an independent investigation commissioned by the company had yet to complete its inquiries.
Several experts said criminal charges would be welcome, but it might be difficult to prevent Olympus from being delisted, given past precedents, the Tokyo exchange's own rules and a sense in some quarters in Japan that the company deserves to be brought low for its failings.
"The difficulty in Japan is that the delisting rules are rather rigid and they are rigidly interpreted in situations like this because of social pressure and because the TSE wants to preserve its reputation," said Nicholas Benes, representative director of the Board of Director Training Institute of Japan.
Exchange rules state that a firm will be delisted if it has made "false statements" in its annual or half-year reports and those falsehoods would have a material impact on the shares.
"My concern is that they are in a bit of a corner. If they don't delist Olympus, there is no doubt they are going to get a lot of local criticism. If they do delist, they will get a lot of criticism from investors," Allen said.
"Foreign investors will be very vocal and that will damage the capital market further. There is no question about that."
LAX GOVERNANCE, SCEPTICISM ON CHANGE
More broadly, the Olympus affair has rekindled long-standing concerns about lax corporate governance in Japan -- worries that have finally registered, if belatedly, among regulators and some lawmakers in both ruling and opposition parties.
"There's the unsavory Olympus scandal and the whole corporate governance issue which weighs on the market," said Hajime Nakajima, a wholesale trader at Cosmo Securities.
"There needs to be a drastic change ... we are at a turning point and need the government, market or some entity to make these issues transparent, and release some kind of strategy."
Responding to such concerns, the Financial Services Agency, which oversees the SESC, issued a rare statement in English on Friday urging Olympus to make full disclosure and promising the SESC would do its utmost, including a rigorous investigation.
"I am determined to take every measure necessary, if any issues for improvement were to be identified through the untangling of this case," Financial Services Minister Shozaburo Jimi said in the statement.
Lawmakers in the ruling Democratic Party of Japan and the main opposition Liberal Democratic Party have set up task forces to examine possible legal and regulatory changes.
Advocates of reforms have long urged a bigger role for truly independent directors on company boards, while the Olympus affair has put the role of auditors under the microscope, prompting some to suggest the need for rethink.
But skepticism about how far any proposals will go runs deep. Senior lawmakers have been distracted by other matters, including debate over a U.S.-free trade initiative, and resistance to change is strong in business circles.
"I'll believe it when I see it," Benes said when asked about the prospects for substantial reforms.
(Additional reporting by Mari Saito; Editing by Mark Bendeich)