By Tim Kelly and Chris Gallagher
TOKYO (Reuters) - Japan's Olympus Corp proposed a new board of directors on Monday in an effort to recover from a $1.7 billion accounting fraud, but the line-up could face a hostile reception from foreign investors when it goes to a shareholder vote.
The maker of cameras and medical equipment said it had nominated an insider, executive officer Hiroyuki Sasa, to become president and former banker Yasuyuki Kimoto as chairman, subject to approval at its April 20 shareholders' meeting.
Kimoto was formerly an executive of Sumitomo Mitsui Banking Corp, Olympus's main lender and a unit of Sumitomo Mitsui Financial Group Inc (SMFG). He is now president of Japan Research Institute, an SMFG think-tank.
That falls short of major foreign shareholders' demands for fresh, outside talent in these two key positions and could also stoke fears among some investors that Olympus' creditors will use the chairman's role to call the shots in the boardroom.
"We are extremely disappointed with the composition of the proposed board," Josh Shores, senior analyst and principal at Southeastern Asset Management, one of the largest foreign investors in Olympus, said.
"While suggestions that the board be entirely new individuals, with a split chairman and CEO role have been taken into account, the clear creditor orientation of the board is unacceptable," he said in a statement.
Olympus also nominated as a board member Hideaki Fujizuka, a former executive of Bank of Tokyo-Mitsubishi UFJ, which is another Olympus creditor and a unit of Mitsubishi UFJ Financial Group Inc.
Current Olympus President Shuichi Takayama told a news conference that shareholders, including foreign investors, had not proposed alternative board candidates.
Olympus noted that the new 11-person board would include six outside directors, more than the current three. None of the existing board members have been re-nominated.
Olympus itself is suing for mismanagement five of its eight internal directors, including Takayama, and one of its three external directors, leaving it in a vacuum until the new board takes over after the April shareholders meeting.
The company has not nominated a CEO and declined to say whether Sasa or Kimoto would take on the position. The CEO's role is usually held by either the president or the chairman.
"According to Japanese tradition, you must have strong support from your main bank, and I think they needed (Kimoto) to be able to ask for the continuous support of Mitsui Sumitomo," said Yuuki Sakurai, head of fund manager Fukoku Capital.
"We know that some foreign investors are not in line with those ideas, but having said that, they have one man that is from Olympus and one who is from the supporting financial side, so to the Japanese point of view that is a good balance."
Foreign shareholder Indus Capital has said creditors such as Sumitomo Mitsui Banking could push Olympus into a big, dilutive sale of new equity, which would be a comfort for lenders but not necessarily for existing shareholders.
Indus and Southeastern Asset Management, both U.S.-based, are the two largest non-Japanese investors in Olympus.
"Looking at capital raising, to have a representative of the bank there as the chairman will only frustrate and alienate any independent foreign shareholder, and I'm sure shareholders in Japan," said former Chief Executive Michael Woodford, who was fired in October after he raised concerns about the firm's dubious book-keeping.
"It's completely and utterly wrong," he told Reuters by telephone from London.
Olympus's balance sheet has been weakened by the fraud, used to hide investment losses from its investors for 13 years before it was uncovered in October. But Indus and a few others believe it can recover without a big new share issue.
Sasa had worked as head of development as well as marketing at Olympus Medical Systems Corp, the group's medical equipment business which accounts for most of its profits. Olympus dominates the global market for diagnostic endoscopes.
By contrast, its ailing camera business as well as tax asset writedowns have dragged Olympus into the red, with the company forecasting a 32 billion yen ($397 million) net loss in the financial year ending March 31.
"We will carry out a thorough restructuring and tackle loss-making businesses," Sasa told the news conference. "We will look at our business portfolio and investment including possible sales of businesses ... I want to put Olympus back on a sound financial footing."
The new team's views on equity tie-ups will be in focus.
Olympus has been considering alliance offers to shore up its finances, with the likes of Japanese electronics firms Sony and Fujifilm believed to be among suitors.
But Takayama reiterated this month that any tie-up decisions must wait until after the April shareholder meeting. He has also suggested that going it alone without seeking outside capital was an option.
Sasa said the company would come up with a business strategy before considering capital tie-ups, and that its project team was still mulling a restructuring plan.
He added that he was unaware of any proposals from other companies for capital tie-ups.
Shares of Olympus, which have lost nearly half their value since Woodford blew the whistle on the scandal, closed down 3.3 percent at 1,373 yen ahead of the announcement. ($1 = 80.6850 Japanese yen)
(Additional reporting by Mayumi Negishi and James Topham; Editing by Mark Bendeich and Alex Richardson)