The scandal engulfing Olympus Corp <7733.T> isn't the only corporate governance hot potato in Japan. Revelations by tissue maker Daio Paper Corp <3880.T> of management that had spun out of control is adding pressure on Olympus to bare all to an investigative panel it has promised to assuage investor angst.

Mototaka Ikawa, 47, who stepped down as chairman on Sept 16, borrowed 10.6 billion yen ($140 million) from seven Daio subsidiaries, diverting the money to his own accounts, the company revealed Friday in an independent report it commissioned in the wake of revelations about the antics of the founder's grandson.

Employees viewed the company as belonging to the Ikawa family. The corporate culture was one of absolute obedience and that was the root of the problem, a panel of three lawyers, an independent auditor and a board member said in their report.

It is a conclusion that echoes allegations made by ousted Olympus CEO Michael Woodford who described the regime at the endoscope and camera maker as an emperor system under former chairman Tsuyoshi Kikukawa, who held sway there for a decade.

Woodford says he was fired for asking too many questions about past M&A deals. Olympus say he was a bad manager who did not understand the culture of the company.

It's not just firms with an owning family, but when the boss has been there for a long time, while there can be some positive aspects, it becomes harder to stop them and mistakes are made, said Kengo Nishiyama, an analyst at Nomura Holdings, who is an expert on corporate governance.

The investigators at Olympus, who may be identified this week, will look into $687 million in payments made to a financial adviser for the $2 billion purchase of British medical equipment maker Gyrus in 2008. The payments are at the core of the furor that has wiped out about half the firm's market value in the past two weeks.

Also under the spotlight is the acquisition of three companies in Japan that Olympus, under Kikukawa, later largely wrote off.

Daio's panel didn't pull its punches. Managers at subsidiaries and the company board bore heavy responsibility for not acting quickly enough, it said. It also criticized a shareholding structure wherein the Ikawa family locked up control of the firm by controlling subsidiaries that owned stakes in Daio that amplified their ownership.

Olympus, says Nishiyama, needs to be equally as frank.

If they don't explain what happened in a clear and logical way, it will not convince investors, he said.

Japan's Prime Minister Yoshihiko Noda has also weighed in, calling for clarification of the payments in an interview with the Financial Times.

Although housecleaning at Daio appears over, questions remain. Its investigation failed to reveal what Ikawa did with the millions he borrowed, more than half of which has yet to be repaid.

During hearings, he told the five investigators he had used it for currency trading, but declined to provide any documentation to back up his claim.

With media reports swirling that he had used a chunk of it gambling in casinos in Macau and Las Vegas, Ikawa failed to turn up for subsequent questioning. Daio's response has been to lodge a criminal complaint, leaving it to the police to unravel how he spent the cash and ensure it will continue to vie with Olympus for the attention of local media outlets.

Reuters was unable to contact Ikawa about the allegations.

For foreign investors, who own almost a third of it, Olympus matters much more than Daio, with only about 3 percent of its stock held by non-Japanese shareholders and Daio's market capitalization now at $1 billion.

The makeup of Olympus's investigation panel and its willingness to conduct a thorough and independent investigation will echo louder through Japan's boardrooms, says Nomura's Nishiyama.

It's not just about Olympus. It has (corporate governance) implications for the rest of corporate Japan, he explained.

($1 = 75.760 Japanese yen)

(Reporting by Tim Kelly; Editing by Matt Driskill)

Japan