End of a Rebel Culture?

All the elements of scandal were present. Grim-faced prosecutors marching past the television cameras; frantic investors, betrayed believers, exultant enemies. The horror of a suicide. And at the center of it all a crass crusader--a risk-embracing reformer who might also be a crook.

No question about it, Japan has had its share of corporate scandals before. But this past week's story--the latest twist in the colorful career of 33-year-old Takafumi Horie--promises to join the ranks of those select few that end up defining an era. The affair broke upon an unsuspecting Japanese public last Monday night, when Tokyo prosecutors staged a carefully choreographed raid on the headquarters of livedoor, Horie's diversified Internet-services company. In an instant the man whose precipitous corporate rise had transfixed his compatriots, and whose audacious attempt to stage Japan's first true hostile takeover last year changed the country's business culture forever, was yanked unceremoniously off his perch.

Much has been written inside and outside Japan about Horie's prickly hairstyle, his T-shirted defiance of office dress codes, his ostentatious enjoyment of decorative women, expensive food and his Ferrari--all of them vaguely, and inspiringly, sacrilegious in a country where an appearance of modesty and decorum have long been the standard for the corporate elite. But that was precisely what made Horie different--his aspiration to change the way that Japan Inc. does business. The speed and audaciousness of his acquisitions laid the groundwork for an explosive growth story: in a little less than a decade he parlayed a meager $50,000 in start-up capital into a company worth roughly $8 billion at its peak last year.

Livedoor was a symbol of Japan's New Economy promise, until investigators knocked on its doors. Last Wednesday a huge spike in sell orders--mostly tech stocks held by individual investors, including livedoor--practically overwhelmed the Tokyo Stock Exchange (TSE), forcing it to shut down early for the first time in its 60-year history. By the time the market closed on Thursday, livedoor had lost nearly half its value. And seemingly everybody was asking whether this corporate starburst would rob other young Japanese firms of investor favor, sending the improving Japanese economy into yet another tailspin.

A successful investigation could just as well serve as the impetus for a new burst of corporate reform, or signal the beginning of the end for an entire new entrepreneurial culture that has taken root during the Koizumi years. (Both Horie and livedoor have denied any wrongdoing.) At worst, the scandal could threaten Prime Minister Junichiro Koizumi's broad reform program and short-circuit the economic recovery. That's because livedoor was no ordinary firm. In just a few years, Horie had transformed a bankrupt business into one of Japan's most dynamic companies--and along the way declared war on the country's opaque and incestuous corporate culture. "I don't like Horie," says Jeff Kingston, a professor at Temple University in Tokyo. "I think he's an obnoxious twit. But he has been a force for reform. He has forced companies to wake up to their vulnerabilities. He has forced --regulatory changes. And in a sense he has dragged the Japanese business elite kicking and screaming into the 21st century."

Horie has a flair for the dramatic, and he displayed it last year with his hostile takeover bid for Fuji TV, Japan's biggest private television broadcaster. He didn't succeed, but that was almost beside the point. As one, Japanese companies suddenly came to the realization that they should reorganize their operations, strengthen their management and, ultimately, increase shareholder value--or face a similar attack by a corporate raider. Koizumi's team of reformers have been pushing for similar changes at the macroeconomic level for the last few years.

Indeed, if there's any single businessman who can be said to symbolize Koizumi's reign, it's Horie. In its heyday livedoor seemed to embody the new business world that the prime minister was trying to create--one where achievement counted over seniority, and where risk taking was to be embraced. The company also benefited from some of the new administration's liberalization measures, such as a change in the commercial code that allowed companies to engage in large-scale stock splits (an innovation, ironically, that livedoor execs are now accused of twisting to their benefit).

Plenty of other questions remain open, too. Late Wednesday night one of Horie's former business associates, who had been interrogated by prosecutor's-office officials earlier in the week, turned up dead in an Okinawa hotel, an apparent suicide. Moreover, so far investigators have yet to officially reveal the offenses livedoor is presumed to have committed. But the media, unsurprisingly, have been gorging on a cascade of ever-escalating revelations. The early stories focused on the 2004 acquisition of a publishing company that may have involved a disinformation campaign by livedoor execs (who allegedly announced the takeover in an attempt to drive up stock prices while failing to disclose that they already owned the target company through a surreptitious investment fund). Should that allegation prove true, the penalties involved would be modest--probably a relatively minor fine. "These sorts of investment funds are used all the time," notes one Tokyo trader. "It's very much a matter of interpretation." But as the week went on, there was talk that livedoor itself might have used cash from affiliates to conceal weaknesses in its books--thereby turning a Yen 1 billion loss in the year that ended in September 2004 into a Yen 1.4 billion profit. Shades of Enron.

Whether the company is ever proved to have skirted the law, the suspicion cast on livedoor has already rattled Japan's surging stock market. While experts remain sanguine--and in fact the market, led by the big players, rebounded by the end of the week--ordinary investors were spooked by the scandal. In part that's because some other tech companies have fast reputations, and seem easy targets for the bureaucrats. In addition, the technical problems at the TSE could have eroded investor confidence in Japan, which is only now developing the kind of equity culture prevalent in the United States. Says Sadakazu Osaki, a securities analyst at Normura Institute of Capital Market Research: "The reality is that the impact of the livedoor fuss on the market was limited. The TSE's computer problem is more serious."

Japan's economic fundamentals remain basically unchanged. Takahide Kiuchi, senior economist at Nomura Securities, says that government monetary policy will hold more sway on the economy in the short term than the fate of Horie. What's more, though symbolically important, livedoor has been a bit player in Japan's recent stock-market surge, which has been powered by more-traditional sectors like banking and manufacturing.

In the best-case scenario, livedoor's decline could even serve as a goad to further reform. For example, Nicholas Benes, a Tokyo-based expert on mergers and acquisitions, says that Japan's still-fuzzy laws governing disclosure in takeover deals, a deficiency highlighted by the livedoor affair, must be improved. But that would imply that livedoor is an outlier, a particularly egregious example of liberties taken, and not everyone is willing to take that at face value. "Is he the only one out there cooking the books and ramping up his stock?" asks Kingston. "Nobody seriously thinks he's the only one."

If other companies become implicated in similar chicanery, the damage could snowball, putting the recovery in doubt. "This kind of scandal is very sensitive," notes Neil Katkov, an analyst at Celent, a financial-services consultancy. "If it turns into a Japanese Enron, it's very embarrassing for the Japanese government." He notes that the Financial Services Agency--until recently headed by star reformer Heizo Takenaka--"bears some responsibility not only for helping to create the environment that led to a company like livedoor getting to this point but also for having very loose oversight over the Tokyo Stock Exchange."

And that raises the question of the threat of a political and bureaucratic backlash. The legacy of the disgraced Horie, Koizumi's onetime electoral ally, could hang ominously over the upcoming contest within the LDP to pick a successor to the prime minister, who says he will be stepping down in September. Opponents of Koizumi's reform course could use Horie as the brush with which to tar anyone promoting further economic liberalization. The conservative daily newspaper Yomiuri Shimbun, traditionally one of Horie's strongest critics, noted that Yoshiaki Murakami, another controversial corporate raider, uses the same sort of investment funds to help finance his acquisitions that livedoor is accused of exploiting. "As a company, livedoor has been very innovative, introducing new M and A techniques," notes Katkov. "And at the same time it's also been attracting a lot of enemies who don't want to see the Japanese corporate world descend into a netherworld of leveraged buyouts. I think it definitely gives them ammunition to argue against any further liberalization of M and A rules."

Most analysts are optimistic that the Koizumi government will shrug off the livedoor scandal as a case of random corporate fraud, nothing more. But there remains the possibility that the entrenched enemies of reform will use Horie's fate as a reason to resist further deregulation, and perhaps lash out at the foreign banks that advised him. The consensus for reform, after all, was hard won the first time round--and could be even harder to win back.