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Can Japan Inc find its purpose again?
Part 2 - Finding New Compass
In 1997 George Olcott’s employer, UBS AG, tasked him with transforming LTCB Investment Management (the asset management subsidiary of Long-Term Credit Bank of Japan) into a westernized foreign capital company (gaishikei). Then, LTCB Investment Management was a traditional company in Japan employing about 80 Japanese people. He was the firm’s first ever non-Japanese employee.
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Olcott thought he knew what to expect from the assignment, having spent over a decade working as an investment banker in London and Tokyo for S.G. Warburg & Co. He discovered how little he knew and what motivates Japanese employees.
LTCB Investment Management (ultimately renamed UBS Asset Management Japan) was overstaffed with nonperforming workers, some sent by the parent company as a dumping ground. “Japanese subsidiaries of big banks are either places to put rising stars who need wider business exposure,” before returning to the parent, or, “people who have been put out to pasture,” explains Olcott.
He found employees who had joined the firm from the same graduating class still earning exactly the same salary twenty years on, despite manifest differences in capability. “At a foreign firm, the underperformer would already have been fired,” he exclaims.
Olcott set about introducing western corporate practices, including switching the firm’s remuneration from seniority-based pay to pay-for-performance. The nonperforming workers, now earning less than their peers, took note and began searching for other jobs.
Slowly, employee behavior started to change. Those who could speak English gradually did, although many reverted to speaking Japanese at meetings so as not to stand out.
Other behaviors remained typically Japanese. At bonus time, employees did not seek advantage over others, when back-stabbing was the expected norm in London or New York.
Japanese management practices have since evolved. But are they evolving fast enough? Much depends on decisions made in corporate boardrooms.
Prying open boardrooms to foreign influence
Japan corporate boardrooms are slowly opening up to outside influence. “Fifteen years ago, you wouldn't even have thought about discussing who the stakeholders are, let alone (the topic of) corporate purpose,” says Olcott.
Japanese still only use borrowed words to describe ideas like “purpose”, “mission” and even “governance”, rather native language words. By implication, these concepts would not arise naturally in a solely Japanese environment, he suggests.
Corporate governance has improved, under reforms introduced by the late Prime Minister Shinzo Abe, but not by enough.
Greater acceptance of independent directorships enables wider boardroom-level debate and better scrutiny of management. “Boards are no longer just rubber-stamping institutions, but a locus of proper decision making.”
For example, boards discuss corporate purpose in ways inconceivable 15 years ago. DENSO Corporation, a large Japanese car parts manufacturer at which Olcott served as a board member, held genuine discussions about purpose 6 or 7 years ago. Ideas were widely discussed throughout the company, not only at board level. Issues like ESG, carbon neutrality and emissions control are not empty slogans at DENSO, he says.
However, executive boards (lesser so governing boards) still lack diversity. Often, they consist of male-only salarymen who joined the company straight out of university. “Community gets in the way of global competitiveness.”
Firms need more diverse viewpoints, to make better decisions, to become more globally competitive and profitable. That often requires strong outside influence. But, “there are so few foreigners on boards,” to apply outside pressure, he says.
Notably, the Japanese market for corporate control remains largely closed to foreigners.
Richard Solomon is an author, publisher and spokesman on contemporary Japan. He posts Beacon Reports at beaconreports.net