The original plan—and, in my opinion, fatal flaw—of Abenomics regarding reform of industry in Japan to make it more profitable was to depreciate the yen in a significant way that would supposedly compel now-more-profitable corporation to invest in expansion.  That would increase the number of employed and boost wages for all.  This would, in turn, generate a positive, self-reinforcing spiral of economic activity.

The depreciation has happened.  The hoped-for wage increases, employment gains and new investment haven’t.  This has been devastating for ordinary Japanese citizens, for whom a sharp decline in the currency has only meant an increase in the cost of living and a tremendous loss of wealth.

Tokyo has recently decided to try to force recalcitrant firms to use the increasing piles of cash that depreciation has brought them.  The vehicle is new legislation that mandates that publicly traded concerns install board members who are not insiders—that is, who have no connection with the firm.

The idea is that these fresh eyes and new voices will somehow compel companies to change their ways.  The initiative has received lots of praise from brokerage firms and the financial press.  For Japan’s sake, I hope they’re right.  Unfortunately for the country, my guess is that this enthusiasm is misplaced.

My son-in-law and I were talking about this the other day.  He immediately said what I have been thinking from the start—“What about Olympus?”

The Olympus in question if Olympus Optical (8831).

Several years ago, the head of that company’s European operations was made CEO of the entire company.  An outsider but an accomplished businessman, the new CEO found that he was not given the full access to corporate information he (justifiably) expected.  His requests for certain data were routinely deflected by the rest of the board.  Through a combination of whistleblower information and forensic accounting he conducted in secret, the CEO discovered a massive accounting fraud Olympus had been perpetrating since the early 1990s.  (The company hit hard times in the late 1980s.  Embarrassed, and unwilling to restructure, Olympus decided to supplement profits with stock market speculation.  The company, of course, experienced massive losses and covered the whole mess up.)  After confronting key board members, he ended up resigning and fleeing the country, saying that he feared for his life.

I’m not contending that the introduction of outside board members it going to create a whole raft of new Olympus-like incidents (although if there were a way to wager a small amount that there would be at least one, I’d be willing to bet).

I am saying that I think the culture of protecting the status quo and of regarding any sort of restructuring as meaning creating/enduring life-shattering shame is still pervasive in Japan–and that simply adding a few outside directors won’t be enough to change that.

To my mind, the obvious thing to do is to dismantle the legislation enacted in the 1990s to protect Japanese companies from potential foreign acquirers–and therefore from activists.  But I don;t see that as on the cards any time soon.