Corporate Governance

Sumitomo Heavy Industries opens new European HQ in the Netherlands

Sumitomo Heavy Industries employs over 4,300 people across Europe in a variety of sectors including cryogenics, energy, gears, motors and injection moulding machines. It acquired Invertek in the UK in 2019, Lafert in Italy in 2018 and FW Energie in the Netherlands in 2017.

Up until now the subsidiaries had been directly managed by Japan headquarters but from January 2024 they will be managed by a new European headquarters, Sumitomo Heavy Industries Europe, based in the Netherlands. The regional headquarters is intended to provide sales, accounting, and procurement-related support, as well as strengthen governance.

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Outsourcing Inc to undergo Bain backed MBO

According to the Nikkei, Japanese human resources service company Outsourcing aims to take its shares private through a management buyout with Bain Capital, which will likely exceed 200 billion yen ($1.3 billion). It seems that rapid expansion through M&A has made the group difficult to manage. Outsourcing is currently listed on the Tokyo Prime market, and it may be that the increasing demands of maintaining this status have become too onerous.* Several other listed Japanese companies have undergone MBOs recently, such as Benesse, Taisho Pharmaceuticals and Sidax.

The Japanese version of the Nikkei report says that Outsourcing had 230 consolidated subsidiaries as of September 2022. As the number of companies within the group increased, the cost of maintaining the company’s listing increased, including the time-consuming task of preparing consolidated financial statements. In 2021, inappropriate accounting was discovered at 17 group companies. Outsourcing intends to use Bain to proceed with post merger integration, including the consolidation and abolition of group companies and strengthening corporate governance.

Of the 110,000 employees, 58.8% are overseas. We estimate around 1,200 of those employees are in the UK, and 5,000 or more are in the EMEA region. It is hard to estimate accurately as so many employees are despatched employees rather than core administrative and management staff and each country treats the status of outsourced employees differently. Outsourcing has not updated its fact sheets or fact books in English for several years, which is perhaps a reflection of the complexity they now face. The website features rather a lot of photos of the founder, Doi Haruhiko with the late Queen Elizabeth II , due to Outsourcing’s sponsorship of the Royal Windsor polo match.

The board of directors used to reflect two of Outsourcing’s biggest acquisitions in Europe, CPL Resources and Otto Holdings. Irish born Anne Heraty from CPL still seems to be on the board but Franciscus van Gool from Otto seems to have resigned.

*UPDATE

On 20th December 2023, the Tokyo Stock Exchange requested Outsourcing Inc to submit an Improvement Status Report with regard to the status of implementation and operation of the improvement measures, having found that multiple companies in the group made inappropriate applications for employment adjustment subsidies (the Japanese equivalent of the furlough scheme used in various countries during the pandemic) at the same time.

Where’s the pipeline? Tokyo Prime-listed companies goal of 30% female board members

The Japanese government has set a goal for Prime-listed companies on the Tokyo Stock Exchange of each having at least one female board member by 2025. The aim is to have at least 30 percent of board members be women by 2030. By the end of July 2022, only 11.4% of all companies listed on the Prime List of the Tokyo Stock Exchange had women on their boards compared to 45% of equivalent companies in France and 31% in the United States.

This has prompted an outbreak of appointments of women to company boards during this summer’s shareholder meetings, mostly to non-executive directorships. Many of the new women board members do not have direct corporate line management experience, and are lawyers, accountants, academics and journalists. Even then, the scarcity of suitable women has meant a far higher proportion of the women have multiple non-executive directorships, compared to male board directors. Japan’s Financial Services Authority has pointed out that the goal of 30% by 2030 is not to have 30% of board members as external female directors, rather that Japanese companies should be planning now on how to have a pipeline by 2030 of suitable internal female candidates.

Japanese companies are going to struggle with this. One Japanese local bank stated that while 45% of its new graduate entry hires were female, only 6% of its managers were female. Another Japanese business organisation head said “there are no [suitable female] candidates” for the board. But as the Nikkei pointed out, the question is whether there really are none, or that women employees are just not being groomed for the board.

The motivation to change should not just be about caving into government pressure. According to JP Morgan Securities, their stock index compiled of companies with a high proportion of female executives started to outperform the TOPIX 500 in 2020, when the COVID pandemic started. Nishihara Rie, chief equity strategist at JPMorgan Securities, said, “During a crisis like the COVID, investors look more closely at the quality of management and the board of directors. Having women on the management team was seen as a factor in positively evaluating the board.”

Having people without mainstream corporate line management experience on the board is of course itself a sign of diversity and inclusion, and brings a fresh perspective to Japanese companies with long traditions of life time employment and seniority based promotion. But of course if only women from outside the company are appointed to the board, then there is a lack of role models for women employees in the company. Also, women from outside the company will not have the power base and influence within the company that internally appointed men have. I’m not sure 7 years is long enough for Japanese companies to fix this.

Telecoms takeover of Japan’s top CSR rankings

Comparing the top ranked Japanese companies for Corporate Social Responsibility (CSR) in Toyo Keizai’s 2022 rankings* with the 2007 rankings shows how the Japanese corporate landscape has changed. The three telecoms companies – NTT, NTT DoCoMo and KDDI – have taken over the top 3 positions. In 2007 the top 3 positions went to the heavy engineering and electronics companies Toshiba, Hitachi and Canon. Sharp, Panasonic. Fujifilm and Sony also made appearances over the years, as did automotive companies such as Denso, Toyota and Nissan.

The woes of Toshiba, Hitachi, Sharp and Nissan over the past 15 years are well documented but although Toshiba and Hitachi are in the 2022 top 50, Nissan and Sharp are at 437 and 179 respectively. Canon, Panasonic, Fujifilm and Sony are still in the top 50 along with other electronics and IT companies such as Fujitsu, NEC, Omron, Mitsubishi Electric and Seiko Epson. Denso and Toyota are all still in the top 50 along with other automotive companies such as Aisin, Bridgestone, Isuzu and Honda. Despite being tobacco or drinks companies, JTI is ranked at 7, down from #4, Suntory is at #8, one down from #7 in 2021, Asahi at 28, up from #33 and Kirin at #31, down from #10.

A Japanese trading company (shosha) has entered the top 10 for the first time. Mitsui has shot up from #64 in 2021 to #4 – all the more remarkable as it used to be seen as one of the more hardcore traditionalists of the 5 big shosha. The second highest ranked shosha is Itochu, up to #22 from #37. Sumitomo Corporation is at #40, down from #26 and Mitsubishi Corporation is at #45 up from #58. Marubeni is somewhat lagging the other shosha at #112, up from #143. Toyo Keizai singled out Mitsui’s distributed power supply project, using solar power and storage batteries for non-electrified areas of India and use of carbon offsets through a company owned forest as contributing to its high ranking.

Some of the companies whose rankings have fallen considerably include Nidec (down from 67 to 174, scoring low on environment) and Recruit, down from #62 to 172, also scoring low on environment and Ricoh, down from #47 to #217, with a lower score in HR.

*500 companies ranked by scores out of 600 for finance (300), HR (100), governance (100) and environment (100).

Hitachi’s new risk management

Up until now, Hitachi’s risk management team was mainly centered on the legal department – which I suspect is probably the case in most Japanese companies. Now Hitachi’s President Keiji Kojima has added the finance department to it, wanting the company to take a more proactive approach to global risks. The aim is to visualize risks – such as the impact of the economic slowdown in Europe due to the Ukraine crisis and soaring component costs due to inflation – and respond quickly.

When Russia invaded Ukraine, GlobalLogic was empowered to act quickly to evacuate 7,200 local employees in the country – and was told that they could put off contacting Japan HQ until later. By the end of April, remote working and overseas bases had been put in place and the operations were back up to 95% level.

Hitachi’s overseas business has expanded recently thanks to the acquisition of US company GlobalLogic and the power grids business of ABB, now Hitachi Energy.

Strengthening the risk management system is one response to this, along with introducing a global standard job description system to the Japanese organisation, aiming to have 30% women and 30% non-Japanese representation ont he board by 2030, aiming for zero carbon by 2050. Five out of the 9 external directors are non-Japanese.

Hitachi has learnt from past failures in overseas expansion, such as the Horizon Nuclear Power project in the UK, and the failure of a joint venture thermal power project in South Africa.

These changes have impacted the way the board operates. Now, when an executive officer reports that a plan has not been achieved, the non-Japanese directors respond “so?” – by which they mean, don’t just report the result, tell me what you are going to do next. A former external director of Hitachi, Harufumi Mochizuki comments in the Nikkei that “thanks to training by foreign directors, the executive officers have acquired a world class management style, and the ability to action, with a sense of speed.”

The next challenge for Hitachi will be to make the best use of the global human resources that it now has thanks to its acquisitions. Only three of Hitachi’s 34 executive officers are non-Japanese. The Nikkei comments that these changes are very much in line with the vision of Mr Nakanishi, the former President and Chairman who died in 2021, for an organisation with world class leaders who can respond quickly to global risks.

The inside story on how Mitsubishi Chemical selected a non-Japanese president

“Many Japanese executives are unable to think critically”, says Hashimoto Takayuki, an external director (ex IBM Japan) and chairman of the nomination committee of Mitsubishi Chemical Holdings, in a recent interview with Diamond Online.

“There is no right answer to how to manage a business now” he adds. The traditional Japanese model of low-cost, high quality, on-time delivery, based on conventional mass production methods is no longer sufficient. “There is a need for management that resolves conflicts, balancing social and economic benefits, such as carbon neutrality.” So it is not enough for a President or CEO to just have the traditional ability to sell as well as a top sales person or have a great track record as a factory manager.

Japanese people are not very good at managing subsidiaries acquired overseas

“Broadly speaking, the president has three duties. The first is the corporate branding of the company – the “purpose” that is attracting so much attention recently. The second is portfolio management – business consolidation. An appropriate business structure has to be built, in line with trends such as ESG. The third is global governance. Japanese people are not very good at managing subsidiaries acquired overseas, but it is an essential skill for a global company.”

“I believe that people who are future presidents/CEOS will need to be educated within a special track in the company, as a profession, much as you would with marketing or sales. They need to have assignments which will stretch them, such as developing an overseas business from scratch, or rebuilding a poorly perfoming subsidiary.

This is why the top person from within was not selected to become the President, because they had not been educated in management. There were many excellent performers heading up business divisions, but whether they can become President is another matter.

We asked a headhunter to produce a long list of candidates to be President – there were more than 30, including people from outside Japan. The shortlist had 4 people from outside the company, outside Japan, and 3 people who were in-house candidates.

Why an external, non-Japanese candidate was selected

“Mr Gilson gave a good impression of deep understanding of Mitsubishi Chemical’s vision of KAITEKI management. Other people wanted to change this vision as soon as possible, but that was not the kind of successor we were seeking. Also, external candidates may want to bring in a team they are familiar with, but Mr Gilson clearly said he would prioritise teamwork with the current management members.”

Furthermore, during the interview, Mr Gilson summarized his business improvement ideas in a proposal of 2 sides of an A4 and presented them. The proposal was accurate, but above all, it showed a passionate intent.

There were some concerns, as Jean Marc Gilson‘s previous company (Roquette Freres) had sales of several hundred billion yen, compared to Mitsubishi Chemical sales of nearly 4 trillion yen.

Avoiding backlash

“I expected a certain amount of backlash within the company, but I’ve heard that actually there was a more welcoming atmosphere amongst the younger employees. After all, the younger the person, the stronger the desire for change.

Having the former chairman of Mitsubishi Chemical (and the person who came up with the KAITEKI vision), Yoshimitsu Kobayashi on the nomination committee was also a big factor. It was the first time Mitsubishi Chemical appointed a president through a nomination committee, so there was a risk that a decision made solely by people with no experience of Mitsubishi Chemical would not be seen as valid.

Mr Hashimoto still thinks that it is best if the President has been developed within the company, but it takes time to reform internal systems and culture. If this is not worked on right now, the company will never change.

Top earning executives in Japan 2022

As in previous years, the top earning executives in Japan over the past year include many non-Japanese people. At number 1 is Shin Jingho, Korean founder of Line (Japanese messaging app), far outstripping all the other big earners, pulling in US$315m to March 2022. He moved to Japan in 2008 to turn around parent company Naver’s websearch business, and somewhat alarmingly, claims to have learnt Japanese by watching gangster movies.

At number 2 is Kurotsuchi Hajime, the 100 year old chairman of Daiichi Koutsu Sangyo, a taxi and real estate firm in Kyushu. He has just announced he is retiring and intending to start a foundation for small to medium sized businesses. Perhaps that is where some of his US$138 million earnings will be going.

Yoshida Kenichiro, CEO of Sony, is the third highest earner, on US$137m. Christophe Weber, French CEO of Takeda Pharma is at #4 with US$135m. Kawai Toshiki, CEO of Tokyo Electron is in 5th place with US$121m.

Nikkei points out that the number of executives earning over Y100m a year (US$728,000) has increased to 652, 105 up on the previous year, the highest number in 3 years. It sees this as proof that Japanese executive compensation is shifting towards Western standards. With the top 5 including two Japanese executives who are not also founders (Yoshida and Kawai), this does seem to show a move away from the usual rule in long standing blue chip companies that the president should only earn around 10 to 20 times the average salary (around US$40,000).

Hitachi has the highest number of executives (18) earning over Y100m a year, then MUFG with 13, Toshiba also with 13 (presumably danger money for being associated with it), Mitsui & Co (9), Daiwa Securities (9), Tokyo Electron (8), Mitsui Real Estate (8) and Bandai Namco (8). Companies with 7 Y100m earners are Daikin, Sompo, Fujifilm, Nissan and Nomura.

Non-Japanese executives resident in Japan in the Y100m club include Simon Segars at SoftBank (British former CEO of ARM), Andrew Plump at Takeda, James Kuffner Chief Digital Officer at Toyota, James Shea at Sompo International, He Xian Han at Ferrotec, Costa Saroukos CFO Takeda Pharma, Stefan Kaufmann, CAO Olympus, Rony Kahan, Recruit (founder of Indeed), Eric Johnson, CEO of semi conductor company JSR, John Marotta former CEO of PHC (was Panasonic Healthcare) holdings and Alistair Dormer, former board director of Hitachi.

People rather than shareholding unite Japan’s conglomerates

I sometimes wonder if I am being a bit “old school” in going into detail on the history and influence of Japan’s keiretsu (conglomerates of companies such as Mitsubishi, Mitsui, Sumitomo) in my training sessions. It’s a legacy of working at Mitsubishi Corporation for nearly 10 years, and also my hobby of researching 19th century Japan-UK relations, in which Mitsubishi, Mitsui and Sumitomo played an important part.

A recent article in Diamond magazine is reassuring to me in that it shows that the deep relationships within the keiretsu endure – pointing out that the interrelationships between the different companies in each keiretsu are still going strong, but through the mechanism of people rather than cross shareholdings.

The Mitsubishi power pyramid

For example, Mitsubishi Motors’ new external directors include Takehiko Kakiuchi – former President, now Chairman of Mitsubishi Corporation. He is taking over from Ken Kobayashi, who had also been President and then Chairman of Mitsubishi Corporation before Kakiuchi. Other candidates are Kanetsugu Mike (that’s MEE-kay, not Mike, as his biographies tetchily point out), formerly President, now Chairman of Mitsubishi UFJ Financial Group who will be joining his predecessor as Chairman of MUFG, Kiyoshi Sono on the Mitsubishi Motors board.

Diamond magazine puts the “Gosanke” – three honorable families – of MUFG, Mitsubishi Corporation and Mitsubishi Heavy Industries at the top of the “power pyramid”, then the next tier contains Mitsubishi Trust & Banking, Mitsubishi Material, Mitsubishi Real Estate, Mitsubishi Electric, AGC, NYK, Tokio Marine & Fire, Meiji Yasuda Life, Kirin Holdings.

The tier below that contains Mitsubishi Logistics, ENEOS Holdings, Mitsubishi Chemical Holdings, Mitsubishi Steel, Mitsubishi Paper, Mitsubishi Kakoki, Mitsubishi Gas Chemicals, Nikon, Mitsubishi Motors, Mitsubishi Fuso Truck & Bus, MA Aluminium, PS Mitsubishi, Mitsubishi Research and Mitsubishi UFJ Securities.

The above are all in the Kinyokai – Friday Club – a lunch of the heads of all the member companies – fuel for many conspiracy theorists. These three tiers plus a further fourth tier, containing companies such as Lawson and Mitsubishi HC Capital, form the Mitsubishi Public Affairs Committee, which acts the guardian of the Mitsubishi brand.

Shunichi Miyanaga of Mitsubishi Heavy Industries is an external director of Mitsubishi Corporation, Ken Kobayashi (chairman of Mitsubishi Corporation ) and Nobuyuki Hirano (former chairman of MUFG) are both external directors of Mitsubishi Heavy Industries and Akio Negishi, chairman of Meiji Yasuda and Toshifumi Kitazawa formerly President of Tokio Marine & Fire are both on the board of MUFG. I could go on, and Diamond does.

Mitsui’s loose ties

Diamond magazine show Mitsui’s group interrelations as concentric circles rather than a pyramid. A the heart are Mitsui Real Estate, Mitsui & Co and SMFG. SMFG is a product of the merger of Sumitomo Bank and Mitsui’s Sakura bank, which is one reason why the ties are looser. Their Monday club includes Mitsui Chemical, Mitsui E&S, Toray, Mitsui Kinzoku and Sumitomo Mitsui Trust. The next ring are also members of the public affairs committee with the first two – Denka, Oji, Mitsui Sumitomo Insurance, Mitsui OSK, Sanki, JSW, Mitsui Sumitomo Construction.

Then the outer ring are “companies who keep their distance”, most notably Toyota, who Mitsui love to remind were bailed out by Mitsui in the 1960s, Toshiba, Fujifilm and IHI. It also includes the department store group Mitsukoshi Isetan (who have former Mitsui & Co, Toshiba and SMFG executives on their board). Toyota has a female external director from SMFG on its board and Toyota has its chairman on the board of Mitsui.

Sumitomo’s three peaks

Diamond characterises the Sumitomo group as having three peaks – financial, mining & manufacturing and the postwar group. At the top of each peak is SMBC, Sumitomo Metal & Mining/Sumitomo Chemical and Sumitomo Corporation. Sumitomo Metals used to be the third family, but has recently merged with Nippon Steel, and so is no longer seen as part of the group. Within the mining and manufacturing group are NEC (who have external directors from SMFG and Sumitomo Corporation) and NSG (who has an external director from SMBC).

Reflecting on these lists, I realise that the bulk of my work over the years has come from Mitsubishi group companies, although there have been some notable clients from the Sumitomo group. I don’t think I’ve had a single client from the Mitsui group. That is, apart from Mitsui Sumitomo & Aioi Nissay Dowa, the insurance group who acquire Amlin a while back. Even then it was more via Aioi Nissay Dowa. Aioi Nissay is not mentioned in the three peaks, or the Mitsui rings which makes me wonder whether, despite its partnership with Mitsui Sumitomo, it is not regarded as “outside” both Mitsui and Sumitomo. I wonder also if the Mitsubishi group is more active globally than Mitsui, and with the exception of Sumitomo Electric Industries, the Sumitomo group too, but this could be confirmation bias on my part.

As Diamond says, each group has its individuality, but maintains cohesion through people – the “external” directors who are really not “outside” at all. Can these arrangements survive the corporate governance headwinds?

Japan’s less equal companies

I often cite in my seminars that one obvious sign of the ethos gap between Japanese listed companies and the top 350 US companies is that Japanese presidents generally earn a multiple of 10-20 of the average salary in their companies, whereas the multiple for American CEOs is 350 or so.

There are exceptions of course, but even the board directors of the company at the top of Toyo Keizai’s income gap ranking (Toshin) earn an average of just under 60 times the average salary in the company. Many of the other companies at the top of Toyo Keizai’s rankings have non-Japanese executive directors, who are usually paid closer to American levels, such as Takeda Pharma (#3), SoftBank (#5) but there are other companies whose executives are all Japanese, such as Toyota (#6), JT (#15), Itochu (#16), Horiba (#17) and Canon (#20). Even so, only the top 10 have multiples of over 30, and only the top 25 have multiples of over 20. So the ethos gap is still holds.

I decided to stop talking about diversity in Japan – Professor Christina Ahmadjian

The new corporate governance code in Japan puts further pressure on Japanese companies to have external, independent directors on their boards. For those companies wanting to be on the new prime market, the code stipulates that a third of directors should be external. Companies are now facing a severe shortage of candidates deemed suitable to fill these roles particularly if companies are also trying try to be as diverse as possible in who is appointed.

The same faces keep popping up, including people such as Professor Christina Ahmadjian of Hitotsubashi University who is currently an external director for four Japanese companies; Japan Exchange Group (the Tokyo and Osaka stock exchanges), Sumitomo Electric Industries, Asahi Group Holdings and NEC . She was also an external director at Mitsubishi Heavy Industries until June of this year.

Her remedy for this shortage of suitable candidates, which she outlined in a recent interview with Nikkei Business, is to hire people from a wider variety of backgrounds. Not just university professors like her, but Japanese women who are working outside Japan, or even having a quota for people under 30 years of age. In her view, even a third may not be enough, because it would mean that the majority are still “salarymen” who have worked their way up the same company all their careers. “The director’s most important role is to appoint and dismiss the CEO. Previously, when I asked a Japanese company what is the difference between the board positions of a managing director (known as joumu in Japan) and a senior managing director (known as senmu), I was told, when a managing director gets older, he becomes a senior managing director. Such a board of directors will not be able to make the top management quit.”

You need people who don’t read the air

External directors need to be able to reject management policies in board discussions. They must also have the mindset that they can quit themselves at any time. You need people who don’t “read the air” the way salarymen directors do.

“Two years ago I decided to stop talking about diversity. I will not give a speech on it and I refuse to be interviewed on it. It doesn’t change no matter how strongly I put the case. If I give a lecture on diversity, people will listen hard and then say “OK, that was good.” I felt it was just entertainment. Japan’s gender diversity is certainly more advanced than before. More companies are introducing maternity leave systems. But why is it so slow. I think “just do it!””

As for diversity in terms of nationality, there are many students who love Japan and want to come to Japan to study and work for a Japanese company. However, after graduating, if they get a job at a Japanese company, after about five years they quit, as they have realised that they can’t sse a future, and their friends at other companies are being promoted faster and have higher salaries. So ofthen they choose to work for a foreign owned company while living in Japan.

1980s uncle management

“Japanese companies are more concerned with their internal talent management than with diversity. So why not hire in Indians and Russians with the necessary IT skills?” Ahmadjian is concerned that what she callls “uncle (ojisan) management” from the 1980s means Japan will not be able to compete globally.

Ahmadjian has lived in Japan for over 20 years, and was herself an office lady at Mitsubishi Electric in the early 1980s. She served tea and wore a uniform. “I really enjoyed it then, but it was a world of old uncles.” “When I asked the top management of a company what is the definition of young, I was told 55 years old. I got them to lower the definition to 50 years’ old.” Japanese-style management may have worked well as a system in the postwar context, but I think it is time to reconsider.”

Last updated by Pernille Rudlin at 2023-12-21.

Category: Corporate Governance