Ethics @ Work: Whistle-blower at Olympus did it right way

The decision to “blow the whistle” involves complex interactions of worker’s ethical obligations to the public, employer and to himself.

November 17, 2011 22:52
3 minute read.
Asher Meir.

58_asher meir. (photo credit: Courtesy)

Whistle-blowing is one of the most fascinating topics in business ethics. The decision to “blow the whistle” on perceived misconduct involves complex interactions of the worker’s ethical obligations to the public, to the employer and to himself. The potential whistle-blower can be a low-level or high-level employee.

In most cases, whistle-blowers first disclose the problem internally and are driven to disclose to the public – news media, government agencies and so on – when they feel that management has taken insufficient steps to investigate or deal with the wrongdoing.

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In a virtually unprecedented scenario, the latest whistle-blower scandal at Japan’s venerable Olympus corporation involves no less than a CEO. In October, Michael Woodford, who is British and a long-time Olympus veteran, was named CEO of the company. He was the first non-Japanese ever to head the nonagenarian optical company. But within two weeks he was fired from the post.

At first, the company claimed the discharge had been due to divergent management styles: that Woodford’s Western management style didn’t suit the company’s Japanese heritage. (No matter that Woodford was a familiar 30-year veteran of the company.) The company cited various “arbitrary actions” by Woodford.

It turned out that among these “arbitrary actions” was ordering an external audit of some shady financial transactions at Olympus that had been raising eyebrows for decades. These involved acquisitions with multiple question marks: outside of Olympus’s core business; seemingly excessive amounts paid; unprecedented shares for middlemen; and unusual payment scheme including littleknown offshore companies.

What Woodford evidently verified was that these payments for “acquisitions” were in fact being used to cover huge trading losses from the 1990s that had never been acknowledged or properly accounted for. In a variant of a Japanese accounting scam known as tobashi, trading losses were juggled for decades by a series of accounting tricks until the money was found to cover the losses.

Woodford’s action was unusual because of his high position; Wikipedia describes him as “one of the most highly placed executives to turn whistle-blower.” But Woodford’s actions were well-scripted according to the usual advice given prospective whistleblowers, based on years of experience on what kinds of disclosures are successful in improving the situation and in avoiding personal ruin.

First of all, through the external audit, Woodford made sure that the allegations were substantiated. This is necessary to justify the disclosure.

Secondly, he made sure the allegations were documented. This is necessary for credibility and for protection from allegations by the company that the disclosures are false, criminal, self-serving and so on. When he was fired, he was able to produce the report to back his claims.

Thirdly, Woodford resorted first to internal whistle-blowing. He reported his findings to the board (to whom even the CEO is accountable) rather than to the press or regulators. Only when the board responded with denial and retribution, as so often happens, did he turn to the press.

Woodford acted courageously but also prudently. The disclosures brought about necessary changes at Olympus, which is the desired benefit to the public, while Woodford is being shielded from attacks and is even being considered as a candidate to return to help the firm that just fired him. By following the appropriate script – verification, documentation and exhausting internal procedures before going outside – Woodford was able to “blow the whistle” in a way that did right by himself, his employer and, most importantly, the public.

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Asher Meir is research director at the Business Ethics Center of Jerusalem, an independent institute in the Jerusalem College of Technology (Machon Lev).

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