Japan needs to part ways with “management by collective” says Kazuhiko Toyama, formerly the COO of the Industrial Revitalization Corporation of Japan and now CEO of Industrial Growth Platform Inc. He’s also a Stanford MBA and outside executive director of Omron. In an interview with Nikkei Business magazine, he argues for a complete change in corporate governance for not just Japanese companies, but also other “closed” companies like Volkswagen.
“I’m in favour of a constitutional monarchy” says Toyama, “but Volkswagen was a monarchy without a constitution. That’s dangerous for a public listed company.” “Toshiba is a salaryman collective – where the members are only those who joined as graduate hires and stayed for life.”
He dismisses Toshiba’s pre-scandal corporate governance, which included several external directors, as “cosmetic”. Governance by Toyama’s definition is “how are the most important decisions in the company made. One of the most important decisions is the appointment of the top executives. It should be like a government election”, he says. “If you avoid debate, then it just becomes a game of tag.”
I found his analogy of Japan’s corporate governance to Japanese politics convincing. In previous decades, he points out, the Japanese main bank system provided a form of governance, and this worked in a period of economic growth, because the main financing was through bank loans. But now Japanese companies are more reliant on financing through equity and bonds, this system has lost its efficacy. Since 1990, freed from the leash of the main bank, the salaryman collective system has grown up, whereby Japanese companies pretend to be answerable to the shareholders meeting (as if it was a general election) but in fact the board is like the diet (parliament), where there are factions and parties who are opposing the President’s faction. The company is therefore governed by something similar to a cabinet.
Cross shareholdings were popular, because they sapped the strength of shareholder democracy. Lifetime employment and seniority based promotion are constructs of the post war era according to Toyama (and many other analysts). “It’s only been 50 years since they fully took root. Before the war, Japan was nakedly capitalist, but that ended with the Mitsui Miike mine dispute in the 1960s. If you said something that only dated from then was rooted in Japanese culture, Kabuki actors would laugh at you”
“Japanese companies say they look after their people, but in fact they are only looking after the permanent, life time employees. They won’t fire the lifetime employees – the social hurdles are much higher than the legal hurdles to doing this. So instead they cut back on contract workers or shrink their graduate intake. What was that Japanese management theory about, that said in pursuit of long term growth, it was OK to sacrifice short term profits, in order to protect employees?”
“It also became taboo to dispose of businesses. When I was involved with the restructure of Kanebo (another window dressing scandal), we sold of parts of the business, without having to make people redundant. Disposals need to happen quickly if you want to avoid people losing their jobs. I was criticised at the time by the Kanebo staff who were in the businesses that were disposed of, but afterwards one of them apologised to me for what he had said, and told me that his family is very happy now.”
“Before being an employee, people are above all need to make a living, to have a life. They may cry when they have to leave a company, but the next day, they have to work to live somewhere, somehow. This is what you have to respect, if you are serious about looking after the people.”
“Toshiba will probably have to make radical changes to its PC and TV businesses. It probably will necessitate someone from outside the main Toshiba mothership. Just as Kawamura was able to come back into the main Hitachi company, having run Hitachi group businesses elsewhere, and be able to look at what was needed, objectively (as I have blogged previously) and engage with the vertical – the business units, where the restructuring really needs to happen. “
“The two big waves of globalization and digitization hit businesses in the 1990s. The Japanese IT industry was not able to overcome them, but the automotive companies were able to ignore the digitization wave and overcome the globalization challenge by increasing mass production. But it won’t be so easy from now. Radical changes are going to be necessary in the way companies are structured. Companies need to have a portfolio of business that they can swap and change easily and quickly. They need to be able to attract and retain the best global talent. If you’re a female Chinese university student looking for a first job and you see a Japanese board line up on a potential employer’s website, full of Japanese men in their 50s and 60s, you’re not going to see your future there.”
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