To begin with, Corporate America (in light blue) is considerably more profitable than Corporate Japan (in navy), in terms of ROA as measured by operating profits. This is no surprise, and has been known for ages.
A new finding is that for Japanese corporations ROA already peaks out at a little over 10 years old, then falls steadily beyond that point. On the other hand, U.S. corporations ROA keeps rising until after they hit 50. Here’s my take.
1. Japanese corporations are living on one-off great idea of founders, at the inception of their life, and such great ideas’ effectiveness fade over the years. In contrast, U.S. corporations keep reinventing themselves, by adding new businesses while disposing underperforming ones. Speed of Corporate America’s management decisions allow them to keep ‘re-engineering’ themselves. In contrast, it takes to time to make a big move at Corporate Japan, especially once a group of entrepreneurs who started the company is gone and management of the company is handed over to bureaucracy.
2. Corporate Japan is notoriously known for despairingly low white collar productivity with too many generalists and too many sales people. Rigidities in the Job market stand in the way of creating more efficient organizations. Without flexible job markets, it is not easy for the management to let their people go. Corporate Japan has an implicit mandate of feeding effectively redundant workers while they can, a function that is supposed to be assumed by broader society.
3. Corporate Japan still Is not pressed hard enough to compensate shareholders for the risk capital they are providing them. Though the management talks about their shareholder-orientations, they have not gone far enough, whereas Corporate America may have gone too far. Corporate Japan’s management is still more comfortable is stakeholder capitalism than shareholder capitalism. This keeps Corporate Japan from re-engineering themselves. Worse, extremely low interest rates in recent years allow some corporations to be kept on a life support system much, much longer than they once were in the old days. Lower chances of bankruptcy do not press the management drive themselves harder.
(Graphics by Professor Hiroshi Shimizu at Waseda University, on the Nikkei on December 25, 2019).
About the author: Ichiro Suzuki, CFA, is an Advisory Group member at Richard A. Mayo Center for Asset Management of Darden School of Business, University of Virginia. He has retired as Senior Portfolio Manager/ Global Equity Strategist at Nomura Asset Management. Suzuki graduated with B.A. from Waseda University and MBA from UVA's Darden School of Business.
📷