%SystemRoot%\system32 is normal. When stored in the registry properly as a REG_EXPAND_SZ value, environment variables in PATH are properly expanded. If adding C:\windows\system32 to PATH fixed the problem, PATH had most likely been updated by a legacy setup/installer not correctly designed for Windows NT. It was a common blunder around the turn of the century. Simply editing and saving PATH without making changes would also have resolved the problem.
Trev