Corporate Governance

The man who turned Hitachi around #3 – trimming the three branches

“I don’t really like it myself, but there is an expression in the Hitachi group “Gosanke – the three branches” – meaning Hitachi Metals, Hitachi Cable and Hitachi Chemical” – explains Takashi Kawamura, former President of Hitachi. The expression is historical, referring to the three branches of the Shogun producing Tokugawa clan during Japan’s feudal era.

The Gosanke are the largest, and longest surviving of the listed Hitachi group companies. Kawamura caused a sensation in 2010 when he appointed Hiroaki Nakanishi as President and stayed on as Chairman, by also appointing Nobuo Mochida of Hitachi Metals as Executive Vice President. “These personnel moves are a way of showing to the outside world what my intentions are. It was the first time that someone from one of the other listed Hitachi companies had been appointed as an executive of the main Hitachi organisation. Up until there was not even much exchange of personnel even amongst ordinary employees.”

Then in 2011, Kawamura made Hideaki Takahashi, who had been an executive officer in the main Hitachi company, President of Hitachi Cable. This was also a rare occurence, and was followed by the merger of Hitachi Metals and Hitachi Cable in July of 2013. This was to signify the end of Hitachi’s vertical mindset.

“I was most concerned about reforming the main Hitachi company. As I mentioned before, it was a donburi – good businesses covering up bad…. There was no sense of responsibility to the rest of the company in each division – for example, if some entertainment budget was left towards the end of the year, then the division would try to spend it all in a mad frenzy.” So in 2009 Kawamura set up an internal company system. There are now 6 groups, with around 30 independent companies, some listed, some not, which report into the consolidated accounts. If the internal rating of a division fell, then the mothership would not lend it any more money. Kawamura also started an annual “Hitachi IR Day”. “The president of each internal company suddenly changed their spots when they realised that each year they would be accountable to investors for the targets they had set the previous year,” notes Kawamura.

(Continues – the man who turned Hitachi around – the UK rail business)

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The man who turned around Hitachi part 2 – social innovation and restructuring

The first action Takashi Kawamura undertook on being appointed President of Hitachi in April 2009 was to reform the governance of the company, allowing more independence to the listed companies in the Hitachi group and also the internal companies. Some restructuring and cutting loose of certain business lines also occurred.

“But what was really important” says Kawamura, “was that we had a direction for the future”. The key phrase he devised was “Social Innovation”. Apparently some native English speakers pointed out that such a phrase did not really exist in English in the sense it was used by Hitachi – to connect social infrastructure and information technology. But as it had meaning for Hitachi, Kawamura stuck with it. “Hitachi began with motors and power systems for mining, and is strong in power plants and rail, but also IT. It was often said inside Hitachi that they wanted to be “IBM+Siemens”.

Hitachi’s two biggest independently listed companies, Hitachi Cable and Hitachi Metals, were initially resistant, saying they were not involved in social innovation, but Kawamura managed to persuade them that ultimately they were providing the foundations for social innovation businesses.

Kawamura also followed a policy of focusing on upstream and downstream, and getting rid of “midstream” businesses. For example assembly of digital components- investing in a joint venture with Mitsubishi Electric – Renesas, which then merged with NEC Electronics. The mobile phone business was spun off into a joint venture with NEC. The hard disk drive business was sold to Western Digital.

“In other words, we were taking down our shop sign as a consolidated electricals company” says Kawamura. “Actually, I wish we had done it five years earlier, then we would not have made such big losses.” As the Nikkei points out, actually Hitachi was quicker to restructure than Panasonic or Sharp.

Kawamura believes that the best time to shut down a business line is just after the peak has been attained. But he recognises this is hard to implement – there are many people who joined Hitachi in order to be in that business. But Hitachi has had 100 years of moving from one peak to another, from motors for steel making to nuclear power stations to large scale computing, to hard disk drives.

The worst time for Kawamura was having to raise capital from shareholders in 2009, when Hitachi’s shareholder equity ratio had fallen to 11.2%, Hitachi normally guarantees whatever it sells – power plant efficiency, meeting deadlines etc, but of course dividends and share prices cannot be guaranteed. The share price fell to Y200, but despite everything, our shareholders took up the offering. “This really stiffened my resolve to carry out the reforms needed at Hitachi…. that is what being the manager of a company is about” Kawamura recollects.

(Continues – Part 3 – trimming the three branches)

The man who turned Hitachi around – boiled frog, donburi and battleships

The Hitachi group of companies, estimated to be the second biggest company in Japan in terms of employees after Toyota, and 4th in terms of revenue, has turned itself around considerably since 2009, when it chalked up “the largest loss in Japanese manufacturing history” of around $8bn.

It led to the premature ousting of Kazuo Furukawa as President, replaced by Takashi Kawamura as CEO and Chairman, who at 69 was 8 years older than Furukawa and must have thought his career was in a graceful curve towards retirement, as chairman of Hitachi Maxell and Hitachi Plant Technology.

Kawamura handed over the Presidency to Hiroaki Nakanishi in 2010, and continues as Chairman. A series of articles in the Nikkei Business magazine recently describe how he turned the conglomerate around to profitability in two years.

He describes how he saw Hitachi in 2009 as a “boiled frog” whereby each division was fooled by the cosy feeling of the slowly heating water, unwilling to make radical changes until it was too late. Japanese like to stick with things as they are, he comments.

Corporate governance was not working at Hitachi in 2009 he says. All the group companies were run by an Old Boys network from the Hitachi main company. If a younger President had been appointed, and wanted to change things, it would have been difficult to persuade his seniors. As Kawamura was older than most of the other presidents, he was able to push through reforms.

He describes Hitachi as having a “donburi” style of management [donburi is a rice with toppings dish] whereby the loss making businesses were covered by the profitable ones. “Bad businesses should be brought out into the open and a judgement made as to whether they can be reformed or scrapped”. This was forced upon Hitachi by the Lehman Shock but Kawamura was also more able to do it because he had been in a subsidiary of Hitachi.

Employees used to believe Hitachi was the unsinkable battleship. It survived 2 oil shocks without much impact on its financials. Japan’s big three electrical companies – Hitachi, Toshiba and Mitsubishi Electric used to be known as the wandering samurai, the merchant and the feudal lord respectively. A wandering samurai thrives when times are good, but is not flexible about change when it’s necessary.

There was also something known as “Hitachi Time” – whereby major decisions had to take account of so many people, including Old Boys and therefore were very slow to be reached. In 2009, Hitachi was renamed the sinking battleship. Kawamura uses a story he heard about the British Navy,as a metaphor for what had happened to Hitachi. British battleships were taking on about an inch of water a year, which will caused the ships to lose speed, so in the end, they are rusted up and useless. Hitachi had made losses in 2001, 2006 and 2007 as well as in 2009. Apparently the reason the the battleships took on water is that they had become heavier every year. This was due to an accumulation of personal possessions by the staff on board. So the British Navy is now very strict about what personal items can be brought on board.

(to be continued – what Kawamura did to reform governance)

Japanese companies should try treating foreign acquisitions not as lodgers but adopted sons

There has been a 33% drop in the number of overseas acquisitions by Japanese companies in the first quarter of this year compared to the last year. I view this as a temporary blip because of the weakening yen. However, recently announced corporate reshuffles show that senior executives are being asked to step down early if they are perceived to have been responsible for the failure of major overseas acquisitions. So there may be an element of “once bitten, twice shy”.

The most recent quarterly survey of 148 leading Japanese companies by The Nikkei indicates there is still an appetite for acquisition. Of the executives polled, 42.6% said they wanted to acquire companies both domestically and abroad, with North America and Europe being the favoured overseas destinations.

One way these executives could do a better job of acquiring overseas companies is to be conscious of the fact that Japanese companies behave like traditional Japanese families – and adapt their acquisition and integration processes accordingly. For example, Japanese families, even to this day, adopt son-in-laws, who take on the family name and become the heir, especially if there is a family business at stake.

Japanese companies seem reluctant to use the “adopted son-in-law” model for their overseas acquisitions. Sometimes the acquisition is more like a marriage – a long courtship of holding an equity stake in a large foreign company and then a final consummation some years later. And like a marriage, this approach requires effort and commitment on both sides, through thick and thin, to build a new family, with a new set of values and customs.

A more prevalent model seems to be treating the acquired overseas company like a lodger in the house, rather than a member of the family. So long as the lodger behaves, with no loud music late at night, and pays the rent on time, they are left to their own devices.

Initially North American and European companies may welcome this approach. They are allowed to continue as before, with plenty of autonomy and not much interference. However, like a lodger, they start to feel isolated from the family activities, and wonder whether they should be looking to move out to better lodgings. Or they may hit financial difficulties and stop paying the rent, at which point the Japanese landlord cracks down hard.

When North American and European companies acquire other companies, some attention is at least nominally paid to the cultural aspects, but the main focus is on integration or imposition of systems, structures, policies and targets. The acquired company is usually left in no doubt as to how they are going to have to adapt to the new parent, well before the ink is dry on the purchase agreement.

If Japanese companies do not feel comfortable with this clinical approach, then a lot more thought needs to go into how exactly their new overseas subsidiary can be a true adopted son and heir – or spouse.

This article by Pernille Rudlin first appeared in the April 22nd 2013 edition of The Nikkei Weekly and also appears in Pernille Rudlin’s new book “Shinrai: Japanese Corporate Integrity in a Disintegrating Europe” which is available as a paperback and Kindle ebook on Amazon.

Europe’s loss of confidence in the food supply chain – can Japan step up?

I used to be able to horrify my British friends by telling them that I have eaten bazashi (horse sashimi) in Japan – they could not believe that I would happily eat horse, and eat it raw. British reactions, however, to the discovery that many readymade burgers and lasagne bought in supermarkets contain horsemeat rather than 100% beef was more about the fear of not knowing what is in our food, rather than disgust at the idea of having inadvertently eaten horse.

Although we don’t eat horsemeat in the UK, we are aware that many of our European neighbours do, and are not as repulsed by the idea as we used to be. What we find really troubling this time is that the supply chains for the food we buy have become so complex that we cannot be sure exactly what the ingredients are and where they have come from.

The British middle classes have become far more interested in good quality, locally sourced food this past decade. Our TV schedules are full of cookery programmes – not quite as many as Japan perhaps – and our restaurants have improved tremendously. Italians and French are famously obsessed by the seasonality and quality of food – but they too have been affected by the horsemeat contamination scandal. In fact the supply chains involved in the scandal seem to go through almost every country in the EU, from the Netherlands to Romania.

Many commentators lay the blame on lower income consumers’ desire to buy food as cheaply as possible, particularly in the current economic climate. The fierce price competition between supermarkets has led to pressures being applied right through the supply chain, and corners being cut in terms of quality checks. Supermarkets have, rightly, refrained from defending themselves by saying they were only trying to provide what consumers want or by blaming suppliers. They realise even the poorest consumer is placing trust in their brand, and does not want to be tricked. So they are taking steps to cut out middlemen between them and the farmers, or to bring meat processing back in house.

Some commentators have pointed out that there are parallels with the US car industry in the 1980s. American car firms were competing on price, so forced their suppliers to cut prices, with a consequent drop in quality. This enabled Japanese car firms, who worked far more collaboratively with their suppliers, to produce high quality vehicles, at reasonable prices, to take market share.

When Japanese car companies entered Europe, they made sure their supply chain followed them in setting up in Europe, or that local suppliers worked as closely with them as their suppliers would in Japan. Japanese car companies have recognised the importance of the brand – it is not just promoting a logo, but whole ethos of responsibility to the customer.

Notably, when there are quality problems, Japanese car firms act as the public face to the customer, apologising and implementing product recalls. The root cause may be a supplier defect, but the supplier is not publicly named. The brand owner takes responsibility for the whole supply chain, and customers do not want to hear the blame being pushed onto someone else.

Japan has had its own food contamination scandals, but on balance, I believe Japanese companies manage their supply chains very well. The test will be how the next wave of Japanese companies in customer facing industries such as retail, airlines and food, who are trying to become global brands, and often buy up European brands in order to do so, will be able to replicate their trusted supply chains successfully in Europe. The beef contamination scandal has put European customers on the alert.

This article by Pernille Rudlin originally appeared in Japanese in the Teikoku Databank News, March 13th, 2013. It also appears in Pernille Rudlin’s new book “Shinrai: Japanese Corporate Integrity in a Disintegrating Europe”, available as a paperback and Kindle ebook on Amazon.

The Emperor of Olympus dies, just before the judgement of Olympus

The instigator of the cover up of Olympus’ losses, Toshiro Shimoyama, died aged 89 of pneumonia, just before a suspended sentence was handed down to his successor, Kikukawa. Kikukawa avoided a prison sentence partly in recognition that he inherited, rather than perpetrated, the fraud which was then uncovered by Michael Woodford.

According to Eiji Furuyama, of the Japan Society for Business Ethics Studies, in his paper “For Whom the Whistle Blows: Olympus Financial Scandal” which I heard him present at the Association of Japanese Business Studies, Shimoyama was known as The Emperor, which gives you some clue as to how difficult it would have been to to expose what he did whilst he was still alive.

Furuyama also predicted that Kikukawa would get at least a partially suspended sentence, as he did not personally benefit from the fraud. Furuyama attended one day of the hearing, and described Kikukawa as surprisingly small in terms of presence, and clearly “a nice guy”. Furuyama has also met Woodford, as have I, and similarly concluded that his motives were good, although Woodford had suspected somebody somewhere was benefitting financially.

Furuyama concluded in his paper that the biggest fraud was Olympus’ – as a “socially responsible, incorporated firm” – decision to trade in speculative and fraudulent financial products in the first place.

More thoughts on Olympus – the role of the press in Japan and the West

I went to see Michael Woodford, former CEO and President of Olympus Corp, talk at the Daiwa Anglo-Japanese Foundation last month. It was packed out with a mix of Japanese residents and British Japan specialists. Woodford gave a rivetting, very intense and emotional account of his experiences at Olympus, repeatedly emphasising that he loved Japan, and wished no harm to Japan or Olympus by what he did.

I have posted previously on some aspects of this case but what struck me this time – and also now I have read some chapters of his book in English, to add to what I have read in his book in Japanese – was how he was so surprised that the Japanese press stayed silent after the Facta magazine articles originally broke the story. He was almost expecting the media to come to his rescue, by busting open the cover-up and thereby forcing the Japanese executives to account for themselves, without Woodford himself having to confront them.

I suppose this would be the case in the West, but to anyone who knows how the Japanese press works (and I recommend my friend Jochen Legewie’s booklet on this subject if you do want to know more), it was completely unsurprising that they closed ranks and stayed quiet.

After all, Shigeo Abe, the publisher and editor of Facta, is a Nikkei exile (who was banished to the UK by the Nikkei when his attempt to expose Yamaichi Securities’ problems failed), outside of the press club system, and easy to dismiss as just another sokaiya or anti establishment grudge bearer.

Whistle blowing in Japan – some thoughts on the Olympus Case

A significant factor that affects corporate governance in Japanese companies, particularly when it comes to whistle-blowing, is the sempai/kohai (senior/junior) dynamic. These relationships are particularly prevalent in large Japanese companies that retain lifetime employment systems.

Typically, when a Japanese graduate joins a domestic blue-chip firm fresh out of school, he or she will already have acquired a few sempai – literally, “person in front” – who are senior to them in the company hierarchy. There is also an implication, it seems to me, that a kohai comes from or has ended up in the same place as the sempai.

So these sempai may include the person who recruited the graduate on campus, and therefore hails from the same university, or the person who the graduate first shadows in their new team. Or perhaps it could be someone in another part of the company who is linked to the graduate via shared family, friends or neighborhood. Sempai often become mentors, and even more often, strong factions develop among sempai and kohai in a particular department or business unit.

Executive-level appointments are usually negotiated through factional horse-trading and strong sponsorship from sempai. Conversely, it can be very hard to remove someone or shunt them out of the way in the organization, however incompetent, if they have a strong faction backing them.

Strong ties of loyalty and also obligation therefore join sempai and kohai together, cemented over the roughly 30-year career life span of each employee.

It is thus easy to see why it’s so hard for anyone to blow the whistle on corporate malpractice, or even to point out damaging mistakes. In general, Japanese and other Asian cultures avoid causing other people in their group to publicly lose face; causing a sempai to lose face is almost unthinkable. When it does happen, you can be sure there has been irreparable damage to the sempai/kohai relationship and an emotionally explosive situation has developed.

In this world, it’s tough to be a professional services firm – such as a management consultancy, law firm or auditor – advising from the outside. You may diagnose problems that are clearly damaging and need to be fixed according to your professional code of practice, but you will be warned by the client that you are in danger of fraying the delicate web of intra-company relationships with your prescriptions.

I have even heard of one young auditor who was told by a client that if he refused to sign off on an audit because of a long-standing misrepresentation on the books, then he was going against his own sempai in his auditing firm. In the past, the sempai had happily signed off on the discrepancies.

Taking a stand as a matter of principle, or in the pursuit of what you believe to be the truth, is a hugely brave – some would say downright stupid – thing to do when it harms the people you are completely dependent on.

This article originally appeared in the 31st October 2011 edition of the Nikkei Weekly

A fresh look at governance lessons from the Olympus case

The Olympus Corp. trial has started and Tsuyoshi Kikukawa, the former chairman, pleaded guilty to covering up financial losses. Sony Corp. has agreed to take a roughly 11% stake in Olympus, securing the company’s future. So, the worst outcome, which Kikukawa himself feared – that the company would be destroyed, and the livelihoods of many employees lost – has not transpired and it would seem justice is being served.

Reading former Olympus President Michael Woodford’s autobiographical account of the whole incident, I can’t help wondering if there might have been a less nerve wracking way of resolving the firm’s problems. A key moment in the book for me is where Kikukawa, Woodford’s sponsor, realizing that Woodford is in effect asking him to resign and accept responsibility for the cover up, asks “do you hate me Michael?”

The question is incomprehensible to Woodford, who does not see his accusations as personal, but part of his fiduciary duty as a director of the company to make transparent what has happened and ensure the guilty take responsibility.

To Kikukawa, I can imagine the cover up was a desperate attempt to save the company, with no personal gain involved. He is unable to disentangle his own fate and duty as a director with the company’s fate and his responsibility for its employees. An attack on his behavior seems like an attack on his person, by someone who does not seem to care whether the company lives or dies.

Woodford makes it very clear that he does indeed care whether Olympus lives or dies, but believes that the process of exposure, punishment and redemption will allow the company to be reborn. Many executives bred in the Anglo Saxon capitalist world are of a similar mindset – able to distance themselves from the company they manage, and to examine it objectively.

There is a less admirable side to this – a tendency to march into a company, believing that a bold reorganization, a sweep with a new broom, brushing out some of the people associated with the past, and putting in your own men (and it always does seem to be men) will get the results needed. So long as the numbers are good, the shareholders are happy. Casualties fall by the wayside, but can pick themselves up and start again elsewhere.

This is still not the case in Japan, and simply marking this down as a case of inadequate corporate governance ignores the fact that Japan does have corporate governance standards, which can and should be enforced. Furthermore, the Japanese corporate environment has become as tricky as that of the US or Europe. There are regulations governing overtime, diversity and “power harassment” that new foreign bosses ignores at their peril.

There have been too many cases of failure of foreign bosses in Japan for it to be wise for Japanese companies to continue to appoint foreign executives in the hope that this will somehow magically globalize the company. Foreign executives need intensive support and guidance, such as training in the workings of Japanese boards and coaching from those experienced in managing Japanese employees, if they are to make a difference without destruction.

This article originally appeared in the October 8th 2012 edition of the Nikkei Weekly

What are companies for?

I mentioned in my previous article on customer service that there were multiple reasons for the differences in customer service between Japan and the UK and that these reasons could be traced back to different features in Japanese and British corporate cultures.

The first aspect I would like to look at is kigyou rinen (the mission of a company) and the historical beginnings of Japanese and British companies. As is well known, the Industrial Revolution started in the UK, but being first has not necessarily meant the UK got the best (London Underground rail would be one example). In fact we often ended up making lots of mistakes that others can then learn from.

An awareness of the social problems that arose from the Industrial Revolution in the UK is still strong in British people’s mentality. We tend to think of company owners as rich “fat cat” capitalists, ruining our green countryside with their “dark satanic mills” (from the famous British hymn, Jerusalem) and exploiting their workers, without any care as to their living conditions and health.

Japan’s later industrial revolution had its social problems too, but there were other strong forces, such as the urge to modernize Japan, and to be equal to Western nations in industrial and military power. The rinen or mission of Japanese companies that matured in the late 19th century reflect the idea that companies should be for the benefit of the nation, and this mission continued through to companies such as Matsushita, founded in the early 20th century, with “national service through industry” in its Seven Principles. Then after the Second World War, there was the amazing “Japanese Economic Miracle” where the whole nation worked so hard to bring Japan back to being a leading industrial nation. Again, companies founded around then, such as Honda, very much emphasised the happiness of its workers and the company’s social obligation.

If you look at the UK’s post-industrial companies and their corporate mission statements, you do not see much about contributing to society or the happiness of workers – until recently, when Corporate Social Responsibility became fashionable. Working class pride collapsed when traditional industries were demolished in the 1970s and 1980s, and people lost any faith in companies as caring employers thanks to the mass redundancies that happened around then. The service sector jobs that were meant to replace the jobs lost in mining, steel and engineering are seen as demeaning “Mc Jobs” and very insecure.

In Anglo Saxon capitalism, companies are meant to be shareholder oriented – profitability and returns to shareholders are the only goal. Unlike Japan’s stakeholder oriented companies, where the stakeholders are employees, customers and society, and shareholders come a low fourth in priority. Consequently, when a customer in the UK is facing a service sector employee, he is usually facing 150 years of class resentment, a loss of pride in manual labour and no sense that the company that person is working for has any care for their well being or duty to the customer or society as a whole. There are some exceptions to this, and I will investigate these in my next article.

This article originally appeared in Japanese in the Eikoku News Digest

Category: Corporate Governance