The Corporate Gotcha Game Hits Japan


By Brian Bremner If Japan has a poster child for good corporate governance, Orix Corp. is it. The $4.9 billion financial-services sprawl, which listed on the New York Stock Exchange in 1998, abides by U.S. generally accepted accounting principles and breaks out its numbers on a group basis, a rarity in Japan. It has three outside directors on its board. And Orix Chairman and Chief Executive Officer Yoshihiko Miyauchi is one of the most respected executives in the country.

So when Deutsche Bank analyst Masamitsu Ohki issued a June 4 report that accused Orix of massaging its numbers in a misleading way and withholding other key data, investors freaked out. After Enron, Worldcom, and other outrages, U.S. accounting standards are no longer considered bulletproof. And get this: Orix' auditor is none other than Arthur Andersen. Ouch!

AGGRESSIVE DEFENSE. Not surprisingly, Orix' stock has been hammered. It's off 32% since early June, and on July 24 it hit a 52-week low of $63 a share. Orix has been in crisis-management mode every since. Management posted a six-point rebuttal on its Web site on June 26, and Miyauchi personally led an Orix investment seminar for analysts and institutional investors on July 15, disclosing a lot more details about its books. "They have been really aggressive," says an impressed Futoshi Sasaki, an analyst at Morgan Stanley Dean Witter.

Did Ohki collar another corporate rogue? Not a chance. Orix is no Enron, which masked its debt and doctored its earnings with a series of off-balance-sheet transactions. But he did land a few blows, particularly regarding the company's disclosure and dividend policies. "The volume of information disclosed by the company is small in comparison to consumer-finance companies," the analyst argued in early June.

The supreme irony here is that a year ago, Orix probably would have thumbed its nose at Ohki, and nobody would have cared. Now, it's open season on any outfit with the slightest whiff of scandal. The whole gotcha game that's roiling the U.S. stock market has migrated across the Pacific.

DIVERSE BUSINESSES. Miyauchi concedes in the latest annual report that Orix is quite a tough outfit to get your arms around. Its business lines span all sorts of financial services, including equipment leasing, installment loans, real-estate lending, life-insurance banking, consumer finance, and securities brokering. It even owns a Japanese baseball team, the Orix BlueWave, the former home of Seattle Mariners slugger Ichiro Suzuki.

This portfolio approach at Orix has produced seven straight years of earnings growth, something unheard of in stagnation-plagued Japan. Its pretax income jumped 23%, to $548 million, in the fiscal year that ended in March. And though its return on equity is all of 8.4%, vs. 15% to 20% for top-flight U.S. companies, Orix is a must-buy for any mutual fund with exposure to Japan. Some 40% of its shareholders are foreigners.

Then what's the problem? Orix accounts for leases and calculates its earnings and dividends using U.S. accounting rules when it reports to the Securities & Exchange Commission, but it uses Japanese rules for local tax authorities. In some cases, such as accounting for consumer loans or fee-based services such as brokering, there's little difference between the two.

ALARM BELLS. Things get trickier, though, when you come to direct-financing leases, in which Orix buys, say, office equipment for a customer and then leases it to the customer for a defined period of time. Under Japanese rules, the cost to Orix of the desks, personal computers, or whatever is accounted for up-front, so the recorded profits start small and expand over the life of the lease. Conversely, the U.S. approach reflects those costs (or depreciation) over time, so profits tend to start out big and then shrink.

Normally, the U.S. numbers of Orix' direct-financing leases are higher than the Japanese ones. But not in 2001, which set off alarm bells for Ohki. It suggested to him a big dropoff in its leasing business.

Orix says: So what? It's consciously pulling out of this low-margin niche and points out that such transactions reflect only 30% of its $2.24 billion in assets. Other analysts are pretty much shrugging, too. "This accounting debate isn't much of a debate," sighs HSBC analyst Rie Ota.

RECONSIDERING. Ohki did draw blood on another point. Orix calculates its dividends using the more stingy Japanese rules, which tend to depress profits, rather than the more generous U.S. standards. So, instead of paying out a 12-cent-per-share dividend, it really should be four or five times that much, Ohki charges.

Miyauchi says Orix will reconsider that policy, and on July 15, he did disclose to analysts a lot of new financial data related to overheads and its portfolio of securities. Overall, Orix has done a pretty credible job of addressing questions about the quality of its numbers, though that has scarcely helped its stock price.

For now, Orix finds itself caught in a market-shredding machine, and it's arguably one of the best-run companies in Japan. Such are the times in which we live. And Miyauchi can thank those American executives at Enron, World Com, and elsewhere for all of his current grief. Bremner, Tokyo bureau chief for BusinessWeek, offers his views every week in Eye on Japan, only for BusinessWeek Online


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