More outside directors sit on sloth, low growth, and decadent corporations
In the second year of graduate program at Georgia Institute of Technology, business school professor, Mr. Robert Broadwater, was a very popular faculty member. Retired from Coca-Cola Headquarters with more than 200 round-trip to Russia, he knew everything about international business of soda giant. The Atlantan operation expanded its business to Asia, including Tokyo. Mr. Broadwater worked in Tokyo for eight years and yet he said in international business class of the engineering school that he couldn’t understand Japanese approach to business.
He cited an actual experience with Japanese managers in the board room. He asked if they could come up three things important for Coca-Cola in Japan. Japanese managers frantically argued before him by raising hands one after another. After a grueling hour, the long consensus unveiled that the first thing was to gain market share, followed by increase in revenue, and maximizing the profits. Mr. Broadwater got frustrated and sighed, “In America, the number one is profits, the number two is profits, and the third and the most important is profits.” Why did Japanese salarymen make the soda business so complicated?
Nearly three decades past, on March 20, 2021, a British magazine published “Japanese business, Analects and abacus”. The story illustrates the resistance of change in stakeholder capitalism in Corporate Japan. Japan is still stubbornly persist to a teaching of a 19th-century industrialist, Shibusawa Eiichi, who is regarded as the “father of Japanese capitalism.” Japanese business remains very complicated, frantically get young Japanese salarymen involved in a broader range of interests. Corporations should create value beyond profits, simply described as sales minus costs, to cover a social purpose. Currently, corporate purpose is a very popular topic for sales pitch of management consultants who often charge $800 per hour for their prophecy.
Japanese business requires long hour of staying in the office. Yet the private sector provides salarymen with the safety net with job security, often for life until the retirement age of 65. When Japanese reaches that age, the pension starts to pay until death. The old system has a drawback. The protection spoils middle layer salarymen aged 45 to 59. A personnel consultant of Man Power Japan wrote a book, “Sloth Middle-Aged Salarymen”. The group of those men comes to office without doing any work and yet gets paid for it. I witnessd a group manager in a large Japanes trade house two decades ago that he came to office and spent an entire day watching You Tube. No group meeting was scheduled for a year. Japanese worker’s productivity has consitently shown at very low level, ranking 33rd for the figure of GDP per capita. In 2019, US figure was $65,000 with 11th in global ranking while that of Japan sank to $40,000.
Japan Inc. still has a lot of cash. Before Covid-19 outbreak, more than half firms of Topix Index had a net cash position. After a year of virus lockdown, cash and equivelently liquid assets held by listed companies exceeded Yen 600trn, more than its GDP with Yen 540trn. A habit of retaining cash derived from risk-averse CEOs. In this practice, middle managers avoid taking risks at office and become time-serving operaters, pushing pen and papers around. They look like working hard but deliverying almost no results, being very quiet in managers’ meeting room. They deliberately avoid engaging in discussion. That is not a good sign for innovation. A survery of Start-Up Tokyo came to my notice a few weeks ago that the venture capital of 2020 recorded down 10% from the previous year to $46bn, 0.1% of GDP for the entire nation. In U.S., Coinbase, digital money platform, floated last month to collect $86bn in Nasdaq. Venture capital remains almost none as drought.
Cross-shareholdings between big firms still account for 32% of Japan’s market capitalization. Japanese corporate management is not worried about the voice of shareholders. In May, big firms host shareholders’ meeitng at headquarters or four-star hotels in Tokyo but mostly for ceremonial act with almost no practical ways for foreign and institutional investors to hold management accountable for misconduct, leading to corporate decadence. There are still fraud and corruptions hidden behind the accounting. Return of equity kept lower than worldwide index for more than four decades.
Japan needs a reform in a clean manner. After a series of scandals, as evidenced by Olympus, Kanebo, and Toshiba, the Central Government made a corporate governance central to its economic reform. A stewardship code in 2014 pushed listed firms to hire outside directors to shake up boards. Up from 22% then, a group of big firms sees more independent directors than before the code introduction. Reforms take some effect. Less than one in five in 2015 has improved its count to three in five today. Still it holds strange that the public sector advocates for the stewardship code to the private sectors which hires outside directors who might vote against risk-averse CEOs for misconduct. It is quite often that external independent directors are expected to urge the internal board to take more reckless risks. Firms, not shareholders, pay for outside directors.
Still fewer women than expected sit on board. Foreign investors ask Japan Inc. to pay attention to diversity with gender equality. Yet women occupy mere 15% of managerial status and 11% in board room in Japan. This discussion started more than three decades ago.
After three decades since graduation, I resume a conversation with late professor Broadwater, the best professor of the year 1992. “Professor, I think Japan finally understands the nature of buisness. You are right to say the purpose of business is to make profits. Japan has recently made some reform with outside directors. Isn’t it great? What would you say?“