EfficiencyCHAPTER 8: JAPANESE BUSINESS SYSTEMS AND MANAGEMENT
outline of topics:
THE JAPANESE BUSINESS ORGANIZATION (KEIRETSU)
JAPANESE MANAGEMENT TRADITIONS
Reform of traditional management culture
In theory, "shareholder capitalism" provides the best form of corporate governance, where shareholders press management toward maximization of shareholder wealth as the prime objective of the firm. Nevertheless, in early stages of development banks are more useful to pool savings to provide sufficient capital for growth. The problem at that early stage is not so much allocating plentiful capital to the most profitable uses, which stockmarkets do best, but simply raising capital in the first place. In more developed economies where capital is relatively abundant, then the emergence of an "equity culture" becomes more important as markets take over the task of allocation from banks.
Japan should be at the latter stage in the evolution of its financial markets but is stuck with a bank-dominated financial system. Bank-financed overinvestment cannot be re-allocated to better uses as quickly as stockmarkets do, and Japanese banks are sitting on a mountain of bad loans. Japanese banks will have to change if markets are to direct capital. In relative terms, bank deposits will decline and be replaced by asset management, and investment banking will displace commercial lending. But the question remains: Will shareholder capitalism emerge successfully in Japan, or will it create more problems than it solves?
Share ownership as a means of control over managers has been the subject of considerable scholarly analysis. One concern has been with the "agency problem", i.e., the difficulty of compelling managers to perform in the best interests of shareholders, for whom they act as agents.
The modern corporation is governed by its major shareholders, who in America are usually professional investors such as pension funds and insurance companies. Boards of directors are appointed by these institutions to control Chief Executive Officers (CEOs) and the management team. And the top management team is increasingly remunerated with stock options to align their interests with their shareholders. Ultimately, managers and boards can become the object of a takeover bid if the current shareholders fail to compel management to perform.
There are fallacies with this theoretical logic. Institutional shareholders are more likely to sell their shares than to invest time and money in trying to improve a company's management. Takeovers may be quite destructive of corporate culture and do more harm than good. Management has many defenses to avoid accountability to shareholders and especially against takeover threats, and thus they often behave to promote their own interests above shareholders' wealth. Above all, bosses manipulate compensation systems to reward themselves far beyond their own contributions to shareholder wealth. This is well illustrated by the spate of corporate scandals in the United States.
Japanese firms have relied on "stakeholder" rather than shareholder capitalism. Management and "insider" directors promote the interests of employees, suppliers and bankers, customers, community and government, thus putting shareholders lower in the pecking order than in America. This is the outcome of the keiretsu system of cross-shareholdings within a family of companies, centered on a "main bank". (The keiretsu will be described in detail later.) They have relied on main-bank financing and "inside" shareholders who are members of a cooperative group of firms. However, today Japan is moving inexorably toward the American model. Bank and other cross-shareholdings are being liquidated and institutional investors are courted. Even takeovers are encouraged, which to a significant extent explains the surge in foreign direct investment into Japan in the late 1990s.
Yet there is a long way to go before Japan becomes a "normal country". It is the purpose of this chapter to set the stage for understanding the evolving principles of Japanese management. To accomplish this purpose, it is necessary to describe where they are now --to examine Japanese stakeholder capitalism.
Since the "lost decade" of the 1990s and well into the new millennium, the Japanese model for business management and finance has been denigrated as the root cause of the Japanese economic malaise, and Japan was being strongly urged toward reform by such exemplars of global standards of capitalism as the International Monetary Fund and Japan's Western allies. However, change has tended to be slow and incomplete. The old ways had provided unprecedented economic growth and progress, and resistance to change was encountered from the old guard of the Liberal Democratic Party, the entrenched bureaucracy, and the business and banking establishment.
Most Japanese are well aware that change is necessary. Understanding the need for change and actually implementing restructuring and installing new institutions and practices are, of course, two very different propositions. Certainly, considerable reform has already taken place: Japanese industry's need for low-cost supplies disrupts the traditional producer-supplier relationships; policymakers undertake deregulation and also put consumer interests ahead of vested political interests; recession encourages Japanese consumers to buy lower-priced imports; and so on.
The extent of change will be briefly mentioned later, but the full nature of any new Japanese institutions and practices is very indefinite at this point. Therefore, in his chapter we are describing how "Japan is different" rather than how Japan is becoming more like the rest of us.
Previous discussion of Japan's political economy (Chapter 4) may suggest that Japanese economic organization and economic behavior represent a very different form of capitalism, and that has in fact been a popular argument, as advanced for example by Lester Thurow and Ronald Dore.1 Here we present their particular characterization of Japanese capitalism (especially citing Thurow).
The Japanese business model seems very different, sufficiently so as to be considered a separate type of capitalism. Japanese society is organized on different values --distinctive principals, understandings, norms of behavior, etc, all of which have had a profound impact on business practices, especially in the early years when Japan was so isolated. This is the "Japan is Different" school of thought ("Turning Point," The Economist 1993).
If significant differences in the organization and practice of business really exist in the world, can such deviations from world standards persist? Arguably, increasing integration of world economies and globalization of markets is leading to more uniformity among hitherto differing national economic institutions. There may be an ongoing convergence toward one dominant model or toward dominant practices from a collection of models. If that is the case, can the Japanese model, or at least some best practices from Japan, survive?
Spelling out actual Japanese differences is the purpose of the subsequent sections in this chapter. The motif of the present section on BUSINESS IDEOLOGY is to suggest some judgments about the relative merits and viability of Japanese Capitalism (called Producer Economics by Thurow) vis-a-vis the world standard, which Dore calls Anglo-Saxon Capitalism. (See endnote 2.)
From the post-war evidence of success until the 1990s, Japanese capitalism would seem to be efficient. The high economic growth and steady increase in the Japanese share of world markets even in the face of a rapidly appreciating currency is prima facie evidence. The competitive vigor, frugality and hard work of the Japanese themselves have contributed.
"Practices such as age-based seniority wages that don't take individual merit into account should make Japanese business firms inefficient, yet when facing American or European competition they always seem to win." (Thurow 1992, p114) This assertion was famously true during the 1970s and 1980s: "Over the past twenty years what has happened in semiconductors and computers has been replicated almost across the board in every high-tech industry. America's trade deficit in office and telecommunication equipment rose sixty-sixfold, a trade surplus in machine tools became a large trade deficit, the deficit in engineering products rose from four billion dollars to sixty-six billion dollars per year. High-tech trade deficits with Japan, but with no other have exploded... No industrial country runs a trade surplus in manufactured products with Japan." (Thurow p116)
Thurow named the Japanese model Producer Economics. "Their goal is market-share maximization (strategic conquest) and value-added maximization (a measure that includes profits and wages), not simple profit maximization." (p118) "The profit-maximizing Anglo-Saxon business firm is derived from the rational utility-maximizing individual where more consumption and more leisure are the sole economic elements of human satisfaction." (p117) In the view of Thurow, Japanese derived satisfaction from production rather than consumption --"empire building".
"The time scale of what the Japanese mean by profit maximizing is so long that it isn't what Anglo-Saxons mean by profit maximizing." (Thurow p131) The shareholder capitalism of America is criticized for making managers overemphasize short-term profits. The source of this problem is that shareholders lack complete information so focus too much only on the information readily available, especially quarterly earnings reports.
The evident orientation of Japanese managers on long-term efficiency was despite certain irrationalities and rigidities which in theory should have made them inefficient. The liberal (Anglo-Saxon) model, which holds that the allocative efficiency of free markets should be most efficient, was long outperformed by Japanese productivity, cooperative work habits, high long-term investment, and employee motivation. The organization-oriented model of Japanese capitalism prevailed over the market-oriented model until the 1990s. However, it was by then evident that the Japanese must improve allocation of capital to divest non-performing assets.
The Japanese model, despite its past success, has some trade-offs, which might lead to the conclusion that the Japanese system has not been better in terms of its rewards to participants. To generate high investment, Japanese consumers --despite their increasing purchasing power during the high growth years-- spent 10% less of their national income than Americans. According to the doctrine of utility maximization, the ultimate purpose of economic activity is to achieve more pleasure, leisure, etc, but the Japanese seem to be differently motivated. Dore and Thurow argue that the Japanese achieve more happiness by producing, rather than consuming --relatively more pleasure of building national economic empires and less desire for leisure or self-gratification.
Japanese are believed to have an unusual willingness to sacrifice individual consumption to increase investment, even at lower rates of return. "Many very successful firms in Japan have in fact made rates of return over the past two decades lower than they could have made by simply investing in government bonds." (Thurow p130) The desire is to stay in business for the benefit of employees and Japanese business development, even if shareholders suffer low returns.
There is a difference in whom the firm exists to serve. Whereas profit-maximizing American managers typically regard their duty as serving shareholders above all other stakeholders, Japanese firms serve "employees first, with customers second, and shareholders third." (p137) Mergers and acquisitions among Japanese firms take on the semblance of buying and selling a group of employees. As put by Thurow (p137): "Differences in the way that workers are viewed can be seen in the takeover and buyout wave in the United States... As in medieval Europe, the employees are chattel serfs who are not consulted on whether they want to have different masters." (137)
Distribution of income in Japan has been less unequal than in Britain or America. For those who value their individual chances to rise to the top of the salary ranks, America should be the preference: "America is the place to go --especially if you are above average in talent, education, and chutzpah." (Dore, p23) The choice seems to involve a trade-off between freedom versus belonging.
The Japanese management priority was to be "social builders" (Thurow p118) --ultimately, to build the nation. Thurow (p122) metaphorically likened Japanese worker motivation to an "economic wolf pack", which he distinguished from "the American mountain lion" (a solitary hunter, hence individualistic). Thus for example: "Inefficient seniority-based wages become effective instruments to promote group solidarity." (p122) "To be fired or laid off is to be tossed out of one's pack... viewed from the perspective of a social builder, security is an important attribute of the firm." (p123) "A community is to be built in Japan. Money is to be made in the United States." (p138)
"The strategic-conquest firm is willing to work for a lower rate of return and can use this ability to force profit-maximizing firms to drop out of an industry." (p149) What allows this sub-optimal (or non-rational) circumstance to prevail is the relatively limited possibility of takeovers by investors who would buy out a Japanese firm and redirect management focus from insider stakeholders (i.e., employees, suppliers, etc) toward shareholder wealth. This relative immunity to takeovers is further explained in the next section on the keiretsu. Most shareholders of Japanese firms are keiretsu members, which constitutes what is called cross-shareholding. "With interlocking ownership, impatient consumption-oriented shareholders can be held at bay." (p134)
Until Japan's economy faltered finally in the 1990s, Japanese business practices were being studied and mimicked even by Americans. The Japanese seemed to have a lot to admire: just-in-time production, teamwork, flexible job definitions, participative decisions, quality control, long-term supplier relationships, effective industrial policy, etc. But even this arsenal of superior (for them) practices raises questions about viability.
Even if the system could maintain its success, will the Japanese slow down --work less and play more? Dore concluded that the motivation to attain more status and achievement knows no limits. Even the most successful American 'yuppies' keep trying. If the Japanese continue to be driven by their nationalist fervour to build industrial community and engage in "strategic conquest" of global markets (in the argument of Thurow), Japan could recreate their unique kind of competitive advantage.
Dore suggested that Americans will retain their characteristic flaws, or, put another way, they will only perfect their market allocation, not improve their organizational attributes in the ways that the Japanese did to attain high levels of organizational cohesion and growth. For example, investors in America will not invest at returns below the rate of Treasury bills, like the Japanese do just to stay in business. But it is this allocative inefficiency of the Japanese system which must change, not the American model.
Dore (p26) concluded that international influence might gradually overcome Japanese practices. International political influence helps America win most arguments in bilateral relations with Japan. Most importantly, what will in the long run be overwhelming is cultural power: "the Americans' mesmerizing self-confidence in the total rightness and justice of their own institutions" .
In the following sections we attempt to give the Japanese system due respect, but it will become increasingly clear that many unique features have only survived in a closed system, and must change as Japan opens to the forces of globalization.
THE JAPANESE BUSINESS ORGANIZATION (KEIRETSU)3
The predecessor of the modern keiretsu was the zaibatsu, which were pre-war family-owned combines. A central holding company, dominated by the founder family, controlled the group through ownership of a substantial percentage of the core companies. Core companies generally included a bank, a trading company, and a trust and insurance company, as well as a number of manufacturing companies. Each core company in turn owned a further shareholding of each other, amounting in total to a controlling interest of the major members. Core companies often had subsidiaries of their own, resulting in a vast network of companies covering a range of industries. Management was effectively centralized by the shareholding of the founder owners, who also occupied top management positions and directorships in key firms.
The result of such a large combine, with each member doing business internally within the group, was some degree of self-sufficiency and market power. Markets were thus internalized for capital, technology, and personnel --scarce resources in developing countries. The group trading companies initiated outside business for joint entry into new fields, utilizing economies of scale in production and finance, to compete in a kind of 'group capitalism' (Tsurumi 1990:10, in Humes 1993:275). These firms dominated the Japanese economy.
The zaibatsu were dismembered under the American Occupation because of their role in the war and to dissolve the old monopolies, allowing enterprise to develop freely in the new peacetime Japan. Senior executives were purged, which turned the newly independent enterprises over to younger managers for the rebuilding effort in war-torn Japan. The American administrators also imposed an antimonopoly law in 1947 making the holding companies illegal and limiting a bank's ownership in companies to 5%. In December 1947 the dismantling of 1200 companies commenced, but the exercise was abandoned as American Occupation policy shifted from reform to recovery. The post-Occupation Japanese government allowed the former combines to reestablish relations during the 1950s. Nevertheless, the old families never regained their former ownership and control.
During the 1950s and early 1960s, government channeled development funds through a few select commercial banks which were held responsible to evaluate investment projects to conform with government guidelines and to target loans to desired industries. This led to the now-independent firms clustering around those banks. Furthermore, the tying of fiscal incentives to export performance caused a similar clustering of firms around the trading companies. MITI and the Ministry of Finance gave direct orders to firms from 1951-55, controlled allocation of funds tightly during 1955-60, and from 1961 allowed firms to set their own investment plans.
The re-clustering of firms enabled government to allocate funds to targeted industries. By the 1970s six major groupings had emerged and were popularly identified by the name of the group bank: Mitsubishi, Mitsui, Sumitomo, Fuyo (Fuji Bank), Daiichi-Kangyo and Sanwa. The three first-mentioned had the strongest ties with their zaibatsu heritage and today have closer internal linkages than the other three. This is also reflected in the wider use of the common name.
Cross-shareholding cemented the relationships, as before, with a common reliance on the same bank, insurance company, trading company, and other internal business. Individual member firms were among the world's largest firms; thus the groups' size was immense. Member companies coordinate through president's clubs and senior managers' conferences to discuss joint ventures, avoid overlap, etc; there were even more specialized committees for social activities. The major difference from their pre-war progenitors was more independence of members to compete with each other and do outside business. Management is no longer centralized by a holding company.
The special character that has marked Japanese multinationals is the existence of firms within a constellation of other firms, all specialized in particular product or functional areas, but each autonomous. Specialization has kept Japanese multinationals focusing on fewer product lines, with any diversification being reorganized into new autonomous divisions or separate companies. Trading companies have managed international marketing. Finally, Japanese companies have strong company spirit and identity, with the leading companies retaining a very elite management team.
Toshiba and Toyota (albeit only as an observer) are examples of prominent firms associated with one or more of the three tightly knit groups. Others such as Nissan, Canon, Isuzu and Fujitsu, Sharp and Kobe Steel, and Hitachi are associated with the looser groupings. Large firms such as Nippon Steel, Matsushita Electric Industries, Honda and Sony are essentially unassociated with any of the six major groupings. Other groups besides the six form around larger Japanese firms, with numerous subsidiaries.
Groups can have either horizontal or vertical networks. The horizontal type is embodied by Mitsubishi, Mitsui, or Sumitomo, the famous pre-war zaibatsu. The vertical or production type is exemplified by Toyota Motor Corporation or other major Japanese carmakers. Automobile distributors and component manufacturers develop close, continuing relationships. Toyota owns stakes in 30 different group companies that produce car parts. In the 1980s these suppliers followed their leader to the United States and elsewhere overseas to ensure the success of Toyota's 'just in time' management system, resulting in accusations of unfair trade practices involving collusive behavior among Japanese companies to exclude foreign suppliers.
The zaibatsu ownership and control structure resembled a pyramidal model (Exhibit 9-1). Family owners presided over a holding company, exercising control over the directly-owned firms, which in turn owned numerous subsidiaries. Management, however, was generally left to professionals.
The re-formed groups (keiretsu) represented a more voluntary association of firms, with a looser organizational structure because the founding families and their holding companies were no longer part of the system. The ownership and control was now decentralized (Exhibit 9-2). The pattern of ownership and control changed from a hierarchical system to an interlocking pattern.
1. Mutual stockholding enhanced the stability of companies. (This was an advantage during the decades of steady growth, but commencing in the 1990s turned into a severe burden as share values declined precipitously and incessantly, pulling all group members down together.)
These cross-shareholdings were seldom sold to outsiders or traded in the stockmarket without consultation of the owned firm. For publicly traded corporations with no one investor holding more than 5% of total shares, 20% of stock ownership can almost guarantee dominant ownership control. In the late 1980s the ratio of cross-shareholdings of stock among the six major groups was around 24%. Over 50% cross-holding was typical for large Japanese firms. (Lathan,1999)
The modern tendency, of course, was toward control by external, professional shareholders, in the American style of corporate governance. However: "In Japan, some cross-shareholdings, so far from being unwound, are actually being increased." (The Economist, May 5th 2001, Survey of Global Equity Markets p31)
Cross-holdings protected group members from hostile external takeover. (Read endnote 4.) The names of the top firms thus remained remarkably stable over the years. (Read endnote 5.) Sustained by special employment relations (described later), Japanese firms value employees and organization continuity. Thurow contrasted this with the culture of firms subject to merger and acquisition, where employees become a property investors can buy or sell as part of an overall portfolio of assets.
Post-war Japan experienced relatively little takeover activity until recent years. Nevertheless, now Japan is attempting to facilitate mergers and acquisitions, and this was manifest since the late 1990s in the increasing inward foreign investment.
2. The cross-holding constitutes an internal business network, though pressure within the system for good performance and professional relations is also implicit. The governing body is the Presidential Club, consisting of the presidents of member companies with mutual ownership of stocks. The President Club of the Mitsubishi group is called Kinyokai or "the Friday meeting", with 29 presidents meeting on the 2nd Friday of each month (over a bottle of Kirin beer made by the group brewer). Mitsubishi Bank and Mitsubishi Heavy Industries are among leading members. The mutual stockholding ratio is around 27%, but Mitshubishi Bank and three financial companies held around 60% of the group's holdings.
Joint business and coordination help cohesiveness, promote sales, and facilitate participation in large projects. As long as the overall group was profitable, employees who were redundant at a core company could be transferred to an affiliate rather than retrenched. Employee transfers can foster better communication, mutual trust, and personnel development. Group loyalty guaranteed to some extent the company's market for its products. Indeed, employees act as consumers as well.
Interfirm transactions are not arms-length, market price bargains; rather they involve long-term, stable relations with considerable technical cooperation. By sharing production plans and technology for mutual benefit, the group synchronizes system-wide production, which allows such famous manufacturing systems as 'just in time manufacturing'. Long-term supplier performance evaluation emphasized quality and timely delivery as more important than unit price. In this way, Japanese managers tended to divide their business relationships between those partners in whom they have a mutual trust and strangers with whom they deal at arms length. Trust takes time to build. Outsiders, especially foreigners, seldom could enter the inside circle; deals with outsiders take longer to negotiate.
Specialization and division of tasks on an organizational basis helps promote common identity and team spirit. Matsushita Electric spun off each new manufacturing division into a new subsidiary; a sales division continued to handle all domestic marketing and the trading company all international marketing. A consequence of such specialization was to focus on managing core manufacturing competence rather than financial management of the investment portfolio as in American companies. Also, specialization combines with interdependence, to focus on related diversification, and diversification overseas or from a well-developed technological core, rather than unrelated conglomerate diversification.
The distinction between major and lesser companies within a group is called yasuda or industrial dualism. This distinction contributed to the prestige that allowed a firm to recruit better graduates, and to develop more loyalty despite promotion and pay policies based principally on seniority. They could retain the best class of 'corporation man'. This enhanced the sense of shared values that was the cohesive force so crucial to the competitive advantage of Japanese firms.
However in the 1990s, dwindling sales, excess capacity, and low profitability tested the conventions of loyalty that attracted the nation's top talent and bound networks together. In-house sources of debt and equity dried up, and dispassionate external investors have more say. To obtain financing in the open market, an enterprise has to make the kind of profits that appeal to outside financiers. Firms are being forced to rethink many traditions of management that made the organizational community the dominant concern ahead of allocative efficiency.
3. The group trading company (sogo shosha) provided not only buying and selling services for the group but also information services and information networks within the group; banks and other financial firms provided financial assistance and low cost capital.
Originally, the trading companies represented the international arm of most Japanese domestic manufacturers. As such, they constituted Japan's first real multinational corporations (MNCs). Their function was to link technology and intermediate products made in Japan to overseas markets. Alternatively, they also located overseas suppliers, etc to fill needs of Japanese manufacturers. Foreign manufacturing subsidiaries might also be set up, jointly owned by Japanese manufacturers, Japanese trading companies, and overseas interests.
The core competence of the Japanese trading company must therefore be its capacity as matchmaker, in a sense. In other words, information about overseas business opportunities and Japanese capabilities became its stock-in-trade. A major Japanese sogo shosha, Marubeni, refers to itself as a "world industry coordinator". Another, Mitsubishi, says of itself: "We have become all things: information and market specialist, project organizer, product transporter, natural resources developer, global financier, investing partner, technology interfacer. And more."
Reliance on trading companies was appropriate especially in the early days when Japan did not have easy lines of communication overseas. The sogo shoshas built logistical and sales channels and set up foreign ventures. This core competence was more important to Japanese manufacturers in their export drive, unlike American firms which set up international divisions to manage overseas business that was often of secondary importance to domestic sales.
Today the sogo shosha have evolved into modern logistics firms. Among the Fortune 500 largest global corporations in 2003, Japan’s top 5 were sogo shosha. (Japan had 88 of the Fortune 500, second to the United States for the highest number of firms on the list.)
4. A final competitive feature worthy of note is management succession within the owning family. The Japanese concept of family can have two meanings. One meaning is based on blood relationship, like the Korean concept. Another parallel concept has as its purpose succession of management (though not ownership) to a capable individual rather than only by bloodline, to ensure better responsibility for the wealth passed down. This concept (ie --meaning household or clan), is based not only on blood relation but also on adoption. "A successor in ie can be described as a successor of the role." (Chen,1995:167) In practice this meant that zaibatsu and later keiretsu did not always involve family members participating directly in management. Mitsui for example, established in 1909, was nearly all owned by the Mitsui family, but as the group grew the owning family gradually disassociated itself from direct participation in management.
JAPANESE MANAGEMENT TRADITIONS6
It is generally understood that the larger environment and enterprise interpenetrate each other in shaping the culture that is prevalent in a society's organizations. Thus, societies are composed of institutions and organizations that reflect the dominant values within their culture. Japanese management idiosyncrasies therefore can be attributed to the Japanese culture. To the extent the culture is highly sensitive to loyalty, harmony, etc, their management practices may adapt to this social sensitivity too.
During the halcyon days of Japanese competitive invincibility, a new industry emerged in Western business pedagogical circles to 'learn from Japan' and come to grips with the wonders of Japanese management techniques. Westerners were impressed with Japanese labor productivity growth which averaged 9.3% from 1960-1980 while US productivity was growing at only 2.7%. (Nevertheless, the USA still maintained the lead in productivity in many industries.) Japanese workers were impressive in many other ways, for example their work ethic seemed superior as evidenced by long hours spent on the job, low absentee rates, and low work stoppages from industrial disputes.
The labor class in large Japanese companies enjoyed employment patterns and conditions of service that only extend to the managerial class in Britain or America --or employment patterns and conditions moore like the civil service in those two countries.
Considerable controversy prevails as to the merits of Japanese management, which was seen as an advantage until the 1990s and a hindrance since then. Whether it can be or should be a model for others is doubtful, and even the real nature of the rather esoteric practices is surrounded by myths. Japanese management is an outcome of cultural, historical, and other environmental circumstances that are in a state of flux. To some degree they contribute to corporate integration and productivity, but to an extent even the strong points will undergo modification, especially since traditional practices are now so discredited by the downturn in the Japanese economy since 1990. The seniority system is being supplemented inevitably by considerations of merit; lifetime employment is under pressure both from companies with a bloated workforce and job-hopping employees; labor specialization may take more precedence over general skills in an increasingly interdependent workplace; and decision-making must be more spontaneous to keep pace with the timing of opportunities. The Japanese workplace may even be too stressful --karoshi (sudden death caused by overwork) in Japan is alarmingly connected to some practices discussed here.
"The superiority of the Japanese corporate system is that it keeps managerial autonomy, once the core of capitalism, intact." (Matsumoto 1991:200, in Chen 1995:181)
The role of shareholders in Japanese business is in a way less intrusive. In fact, because of the voluntary nature of business relationships within the keiretsu, the company itself has some influence on who its shareholders will be.
In the Western tradition of corporate governance, the separation of ownership and management is bridged by a board of directors that represents owners. American directors usually come from outside the company, appointed by mutual funds and other large institutional investors. The majority of the directors in the Japanese keiretsu was made up of inside board members, i.e., they were selected from among senior executives. They were appointed from within the company, though some may come from group companies or the bank. These individuals identify with company management rather than shareholders per se. Traditionally, inside directors have not owned substantial shareholdings nor did they receive stock options. Thus, shareholders do not perform the 'checks and balancing' function as in America or Britain; they are not a separate class.
To the extent that external shareholders direct the destiny of a firm, they may be less attached to the firm that is not reflecting quick profits. An oft-cited American tendency was for owners to press for high dividend payout. Managers are given incentives, such as stock options or other profit-related bonus plans, to behave in the interests of shareholders. Investor expectations dictate that American stockmarkets are sensitive to dividends and earnings per share, which compels executives to stress those measures. Top American executives who have their pay and promotions linked to earnings have become by far the world's highest paid bosses. (In 1980, the average pay for the CEOs of America's biggest companies was about 40 times that of the average production worker. In 1990, it was about 85 times. Now this ratio is thought to be about 400. (The Economist, October 9, 2003))
In contrast, Japanese common stockholders resemble preferred stockholders in America. Dividends are paid not as a percent of earnings but as a percent of the par value of the shares. Rates tend to be low compared to share market value, and stable. An advantage of this is that the bulk of earnings can be used for reinvestment in the company. This tends to strengthen successful companies, though unprofitable companies may be put in an unfavorable position because the dividend may be held at the established level.
Thus, there is less pressure on Japanese managers for steady improvement in earnings; nor are they so concerned with the price of their shares. They therefore do not manifest the well-cited preoccupation of American managers with short-term fluctuations, so they can worry less about short-term earnings and concern themselves with long-term issues such as market share.
As a common practice, most firms that were shareholders as a result of business relationships had a practice of submitting blank proxies at shareholders' meetings and not sending representatives to attend, and they preferred this mutual practice of noninterference. Thus management --less bothered by interference from shareholders-- enjoys more autonomy.
Managerial autonomy lies not only in the freedom from shareholders, but freedom from the risks of the labor market. With lifetime employment, enterprise unionism, and seniority wages, there is less job hopping and more commitment to the company.
Japanese company structure is hierarchical, like Japanese society. At the top of the organization is the kaicho (chairman), then the shacho (president). Within the organization, each department is an independent power centre, led by the bucho (department manager). Under him is the kacho (section manager). These high-ranking executives are seldom drivers of new projects, rather such supervisors are concerned with theme establishment, strategy development, loyalty promotion, and high-level external relations.
The so-called ringi system of decision-making was identified in the 1950s as a unique Japanese process. It has its cultural roots in wa, or harmony, which constitutes the essence of Japanese life. Consensus decision-making can thus be carried out more efficiently.
Two aspects of the ringi system are nemawashi and ringi seido. Nemawashi literally refers to caring for the roots of trees, as part of the famously meticulous Japanese gardening. It has to do with preliminary and informal sounding-out of employees' ideas about a proposed course of action or project --just as careful a process as the preliminary stages of gathering the roots of the tree prior to transplanting. It implies special attention to the nature of consultations below ground-level --ie, they should be anonymous and promote free exchange of ideas.
Ringi seido is the formal circulation of a proposal (ringisho) originating in one section, being forwarded to other relevant sections, and up through section heads and managers to the president. Each section or individual attaches comments. A decision thus involves consensus in advance. The obvious advantage is the democratic, participative process both in originating and in working out plans. No particular individual can easily manipulate a decision. Final implementation will be quick because prior agreement has already been accomplished.
The flaws are equally obvious. Too many meetings and reviews slow down decision-making, involving even sections that might not be concerned. Too many questions and suggestions are difficult to deal with. Japanese meetings anyway tend to be long, as cultural restraints make people less forthcoming with opinions, and all the formalities are carried out. One statistic from the Japanese Management Association cited a figure, that 40% of a Japanese worker's time is spent in meetings. In modern business, many decisions require swift action, to preempt competitors.
Under nemawashi a decision may actually originate at the top and simply be circulated to legitimize it. Thus ringi seido may effectively be "nothing more than a record of a decision already made" (Chen 1995:87). In a society with such sensitivity to authority, much of the process is sensitive to hierarchical relationships; those at the lower level are not really so independent in their thinking.
The major problem with such bottom-up management in the modern era is that the strategic repositioning that is now needed is unlikely to get consensus --obviously retrenchment to shift investmeent and labor to other areas will be resisted. This has fostered the bureaucratic inertia called daikigyobyo, or big-company disease. It is part of "stakeholder capitalism", where shareholders are only one vested interest --and Japanese have traditionally weighted employees well ahead of shareholders as the most important stakeholder in the organizational community.
Several contributing elements combine to bring about career-long, or 'lifetime' employment in one company. First, there is the recruiting system whereby employees are taken directly from school rather than an open job market. Second is the general expectation that employees will stay with the one company, and that company will provide job security. Third, selection criteria for new employees is oriented on general abilities rather than particular technical competence.
Part-time workers, women, and retirees who desire to continue working after mandatory retirement age are not included in the system. Most small companies are also excluded because they cannot afford the practice of lifetime employment, despite pressures that often may compel a company to participate. Companies must be ready, financially and institutionally, to care for employees even during business downturns.
The consequence of a poor selection decision is an employee that the company is compelled to then keep. The selection process must therefore be quite elaborate, including not only school examinations but also investigation of the individual's family background and detailed personal interviews. Company personnel managers rely on the educational system, especially final examinations, as the intellectual measure of general ability. For those 30% of new-hires who are university graduates, universities are ranked according to competitiveness of their entrance requirements and final results. The national educational system thus stratifies employees for their entire careers, to a degree rarely found elsewhere.
The employee, for his part, must be concerned that his acceptance of a job is a lifelong commitment. The long term prospects of the company are important to the candidate. If an employee leaves mid-career or gets fired, chances of finding another job in a large company are not as good as for an American employee. In recent years, however, younger Japanese or those with overseas experience have been more ready to job-hop. Overseas experience is more marketable, in both Japanese and foreign multinationals.
Thus there is a mutual commitment, requiring sacrifice on both sides. The company becomes like the family for its employees. They grow together, in a socialization process. For example, there may be a company dormitory, where employees and their families live as a community. A mentor scheme may be implemented, to provide employees with on-the-job training and role models. If the mentor has good prospects for advancement, this may bode well for the junior member.
It is reasonable in this system for the company to make a larger investment in training. In the American system, in contrast, training enhances skills which an individual can exploit in the outside labor market so companies are less willing to invest in training. Similarly with welfare, leisure facilities, and the like, the Japanese enterprises spend more --and the government less-- than Anglo-American countries at least.
In the initial few years new recruits in Japanese companies are rotated among departments to learn about the company --the company culture, and the different activities that are performed. Each employee learns to identify with the company --he becomes a 'Mitsubishi man', not a carpenter or engineer. This self-identity reinforces other elements of the Japanese system, strengthening the lifetime commitment. It also minimizes labor class consciousness.
The drawback of lifetime employment is clear, that the labor market is not flexible. Japanese companies cannot adjust to an economic downturn by reducing the workforce. This problem was especially felt in the recessionary times commencing in the 1990s. The system was inherited from the high growth era, when such problems were not seriously contemplated. Today, many large firms have redundant workers yet must still recruit to remain competitive.
Nevertheless, the lifetime employment system is surviving to some extent. In early 1996 the top dozen Japanese banks started a retrenchment programme to cut employment by 12% over 2 to 3 years, but banks were not firing people. ("Gentle Downsizing in Japan", International Herald Tribune 24 February 1996) Rather, they planned to reduce the workforce through attrition and internal transfers. Bank stocks dropped 1% in value during January 1996 in response to all the fanfare about layoffs. Less profitable operations, such as departments making low-margin loans to big companies, were to be retained, and the stockmarket was not impressed that bank earnings would be helped by the retrenchment plans. Obviously investors were more nervous than employees. Many firms are thus compelled by capital markets to retrench employees despite traditional expectations of a job for life.
The practice of lifetime employment poses an obvious tradeoff between opportunity and security. Cultural and historical factors may make Japanese value security more, but the younger generation wants the opportunity to move to better jobs. Job hopping has long been on the rise, especially among employees with overseas experience.
Since most employees are recruited from school, promotion based on an employee's age and length of service becomes an appropriate standard of reward. Seniority promotion also is a reward for staying with one company.
Work performance determines who rises fastest and highest, but the margin of advantage for high flyers is limited by seniority, in a pattern similar to government service elsewhere. For top achievers, appointment to the board of directors is the last stage of the career, when individuals are usually in their early fifties.
One advantage of seniority promotion is to minimize inter-personal competition --office politics, at its worst. Individuals who want to set themselves apart from their peers would not be inclined to do so by opportunistic behavior. The best strategy for individual advancement is hard, cooperative work, not cutthroat manoeuvring.
Another advantage is that companies experiencing fast growth can gain a pay advantage because they expand their hiring of new recruits, who are all at the bottom of the pay scale. In contrast, slower-growing companies have the opposite problem, i.e., with slow new hirings their average payroll is biased upward by a top-heavy workforce. Thus today in Japan, slow growth causes the payroll to be a bigger burden. With fewer opportunities and fewer junior managers, there is less pressure for promotion from lower ranks, reducing career prospects for the upcoming generation.
Various experiments are underway to correct the system, including reducing the amount of wage increase for workers in their mid-forties, and early retirements. By the late 1990s, most leading Japanese firms (about three-quarters of 2230 TSE-listed companies surveyed in 1996) already had or were planning pay systems "using a measure of an individual's overall job abilities along with other components that were still clearly seniority-based." (Ornatowski 1998:76) Nevertheless, "evidence shows that while changes are occurring, they are generally limited to seniority-based pay and promotion, whereas lifetime employment remains intact in most large companies." (Ibid p73) Any change challenges the whole system which has led to superior workforce commitment.
A Labor Union Law was enacted during the American Occupation, which initiated Japan's labor movement.
Given the compensation and seniority systems, labor unions would not have much purpose in adopting the American system. American unions unite groups of workers by occupation within a larger labor class, to negotiate its market price with industry management. The implicit formula was 'conflict resolution' which could include strikes or other tests of strength between labor and management as adversaries.
In Japan, unions were appropriately company-based rather than industry-based. With the 'enterprise union' formula, the union and company have an interdependent relationship. The union depends on the company's success for its own rewards, and the company often regards union leadership as valuable management experience for its workers. Company office space is often allocated.
Union membership includes all non-management levels in a company, both blue-collar and white-collar. Some companies' unions include work levels as high as assistant section leaders. Part-time, temporary or contract workers are generally excluded.
Labor unrest generally stops short of any damage to the interests of the company because the fate of the company and its union are linked. Unions negotiate how a particular firm treats its employees, the proportion of revenues it pays in wages and the proportion going to investment, etc. Vocal demonstrations are carried out during lunch break or after office hours. If labor unrest comes to an actual work stoppage, this indicates a serious breakdown in the trust between management and the union.
Union membership in Japan, as elsewhere in the world, is declining. This trend is exacerbated by the shift out of manufacturing to service industries, whose workers are less class-conscious. The Labor Spring Offensive has diminished in recent years. This annual labor demonstration during March and April was designed to get top union federations and management associations to negotiate higher wages, shorter hours, etc.
The disparity between top executive and workforce pay levels is not so great as in the West --especially the USA. In the heyday of Japanese corporate success, Fortune magazine in 1984 cited a pay range for top executives in Japan from $50,000-250,000, while their counterparts in the USA earned million-plus payrolls. Another survey (Hill 2004:527) put average CEO pay in America at $1.4 million in 2000 (not including stock options which would increase the figure considerably). The same figure for Japanese CEOs was $545,000. In contrast, pay for the average manufacturing employee in America was $44,680 whereas the Japanese manufacturing worker was the highest paid in the survey of 26 countries, at $52,000. The ratio of CEO to worker pay in America (including stock options and bonuses) was approaching 500 in 1999, ten times higher than the multiple of approximately 50 in 1980 (Standard & Poors). In late 2003, Paul Krugman remarked on the air that pay for American CEOs in the top 100 corporations was 1000 times greater than for the average worker. (BBC, World Business Review, 25 October 2003)
The more egalitarian nature of Japanese society also contributes to the tendency to maintain a relatively low degree of income distribution inequality. This is often cited as fostering company spirit and togetherness in Japan.
Another mechanism oft-cited about Japanese compensation is the bonus system. The bonus is a flexible addition to pay during good times in the company, withdrawn during bad times. The downward flexibility in the payroll helps avoid layoffs. Bonuses also provide a means to reward junior employees who are held back by the seniority system.
Thus, when a company is experiencing hard times, it can first discharge part-timers or others not under the lifetime employment system; then cut back bonus payments; then negotiate wage reductions through the union. In general, executives will take across-the-board pay cuts before approaching the union.
Dore refers to this pay practice as "organization oriented rather than market oriented" (p15). Pay is not determined by an outside market for labor where supply and demand for workers with particular skills keep wages at some universal (at least national) standard. Because of lack of labor force mobility, pay instead is determined by each company's incremental scale.
The compensation system seems less threatened by modern challenges than other elements of the Japanese management system. Extensive use of other forms of compensation such as family allowances, housing assistance and separation pay contribute to the sense of common destiny, which is the essence of the competitive advantage of Japanese enterprise.
Reform of traditional management culture
Exhibit 9-3 reflects the discussion in this chapter, comparing the Japanese management model with American shareholder capitalism.
Corporate governance in Japan has allowed many ailing companies since the stock market bubble burst in 1989-90 to limp along not making profits and with huge debt problems. As economic malaise gripped Japan during the 1990s and well into the new millennium, considerable soul-searching and attempts at reform were ongoing. However, despite their best efforts the Japanese have not yet really begun to make much progress at modernizing old practices of business and finance. Japanese do accept the notion that there is a drastic need to restructure firms and industries and stimulate new start-ups, yet little changes.
The reforms being adopted by Matsushita illustrate both the direction of future personnel management policies and the limitations of reform. ("Putting the bounce back into Matsushita," The Economist, May 22, 1999) Since March 1998 new recruits at Matsushita have been offered an option to take a traditional employment contract (with company accommodation, free social events, subsidized services such as banking from group companies, and a retirement bonus equal to two years' salary) or to forgo perks in exchange for more money now. Yet, over half of new hires accepted the traditional contract, and Matsushita is bound by its promises of lifetime employment to existing staff. Other reforms have been attempted with some success, such as performance- rather than seniority-based promotions and bonuses, but Matsushita seems unable to change much faster than Japanese society can change.
In September 2001 Japan announced its highest official unemployment rate7 since 1953, at 5%, and major firms announced huge layoffs. Still, there remained doubts that much was really changing. For example, Fujitsu was making 11,400 of its 16,400 job cuts overseas, and other firms were not planning compulsory redundancies in Japan itself. The Economist observed that "firing long-serving workers is still taboo, a principle around which all restructuring plans apparently have to fit." (September 1st 2001, p 52)
REFERENCES
1. Dore, Ronald 1994 "Japanese Capitalism, Anglo-Saxon Capitalism: How will the Darwinian Contest Turn Out?" in Japanese Multinationals: Strategies and Management in the Global Kaisha, Nigel Campbell and Fred Barton (editors), London; New York: Routledge, 9-28
2. The Economist (1999) "A Survey of Business in Japan," November 27th
3. The Economist (1993) Survey of the Japanese Economy, "Turning Point," March 6th
4. Humes, Samuel (1993) "Asian Keiretsu and Chaebol: Globalizing Functional Perspectives", Chapter 8 pp 273-283, Managing the Multinational, New York: Prentice Hall
5. Chen Min (1995) Asian Management Systems, London: Routledge
6. Ornatowski, Gregory K (1998) "The End of Japanese-Style Human Resource Management?" Sloan Management Review, Spring
7. Thurow, Lester (1992) "Japan: The Challenge of Producer Economics," Chapter 4 in Head to Head: The Coming Economic Battle between Japan, Europe, and America, New York: Morrow: 113-151
. Discussion draws on Ronald Dore (1994) and Lester Thurow (1992). . A caveat: Anglo-Saxon practices are not representative of the rest of the world with Japan as the outlier; nor are they superior to some quite unique practices of, for example, continental Europe. German industry uses debt financing relatively more, as do the Japanese, with similar implications. The French attempt industrial policy to a high degree, and many Europeans place a higher value on sharing profits more equitably rather than encouraging such free play of individual profit-maximizing behaviour. "The 'world standards = USA standards' assumption simply reflects the fact that the Anglo-Saxon economies are --ideologically, if not in terms of purchasing power-- the dominant ones." (Dore p12) . Discussion draws on Chen Min (1995: "Comparative Large Japanese and Korean Business Groups," Chapter 12 --pp 166-172) and Humes (1993). . The famous American corporate raider T Boone Pickens acquired 25% control of a Toyota supplier, Koito Manufacturing Company, but failed to gain any say in management. Pickens gave up and left Japan in May 1991 after a 2-year battle with the Toyota keiretsu. . This circumstance is in stark contrast with American firms. Mergers and acquisitions change any list of well-known names in a given industry so much that the top ten in 2000 would be largely unrecognizable to an observer from 1980. . Discussion draws on Chen Min, (1995: "Japanese Management Style" (Chapter 13 --pp 180-196), and Ronald Dore (1994). Also see: The Economist November 27th 1999.
7. It is generally believed that Japan's official unemployment rate is understated. When the official rate was announced at 5%, analysts estimated the actual rate at 10%. Even so, Japanese unemployment is still low by American or especially European norms. The United States had not seen an official rate below 5% for several decades until the late 1990s. The lowest American rate of 4.2% in 1999 does not seem significantly better than Japan's highest of 5%. The American official unemployment rate averaged 6.6% during 1970-96.