Japan’s Stakeholder Capitalism

By Ichiro Suzuki

For Corporate Japan, the final week of June is a time for public corporations’ annual general shareholder meetings. The single largest issue at shareholders meetings is usually election of board of directors, besides approving financial results. Top management is busy, trying to assemble a board that meets the requirements of the regulator. The regulatory authority is vocal about reducing the dominance of executives who are in charge of the company’s operation day in and day out. In order to make the board more independent, the Financial Supervisory Agency (FSA) requires companies to have at least one (yes, just one though hopefully more) outside director who is independent of the executive team. It would be great to have a female board member, as a showcase of diversity. Until relatively recently, election of directors was a very simple matter. The board was dominated by middle aged Japanese men, who rose through the ranks, having entered the company at the age of 22 upon college graduation, spending their entire career at the company. They represented a small universe of intense mono-culture that consisted of like-minded men. Sony is already a 75 year old company, founded right after WWII, but the company has not lost a spirit of a pioneer as opposed to the monoliths that have ruled Japan’s Corporate world since the late 19th century. Sony’s 11 member board includes only two executives, CEO Yoshida and CFO Totoki, 8 independent outsiders and a former Chief Product Officer who is no longer with Sony but cannot be considered as an outsider. CEO and CFO alone are not able to control the company’s direction at their will. Besides the insider/ outsider split, Sony's 11 member board includes four non-Japanese and four women. One of the four women is American. Of the 9 non-executive members, only two are middle-aged Japanese men that continue to represent a bulk of a board for the vast majority of listed Japanese corporations. Put together with CEO and CFO, Japanese middle-aged men represent a distinct minority on Sony's 11 member board. While Sony’s director composition can be commonly found on Wall Street, it is nonetheless a gold standard for Corporate Japan. Compare Sony with Nippon Steel, a bastion of Corporate Japan’s conservatism that has been ruling the country’s business world for over a century. Of the 11 board of directors, 8 of them are male executives, including, chairman, president and 5 executive vice presidents. At least six of these men have worked only for Nippon Steel throughout their career, having entered the company straight out of college. Two other men have worked for the company all but the first few years of their business career. The youngest of the 11 board members still have spent 33 years at Nippon Steel. Nippon Steel’s three independent outside directors consist of a former bureaucrat who is a woman, a former diplomat and a former president of East Japan Railways (JR East). Since JR East was once a core part of Japan National Railways that was wholly owned by the government, it is hardly a bona fide private corporation. Hence, none of the three is representing a genuinely private sector business world. Otto von Bismarck, who unified Germany to create a modern, formidable state in the 19th century, once said “Steel is the state”, stressing the importance of the steel industry in economic development. Nippon Steel’s predecessor Yahata Steel, founded by the government in the late 19th century, literally adopted Bismarck’s remark on steel, and has held onto it for decades. Choice of outside directors appears to represent their core value in the third decade of the 21st century. At the very least, Nippon Steel management has made a great effort to make the board look better than would otherwise have been the case. A woman sits on the board perhaps for a cosmetic effect and there are three outsiders while the stock exchange requires only one. Average age of the Nippon Steel board members is 64.2 at the time of the AGM, several years older than the Sony board that averages at 60.5. Taking a company away from its executive team has long been a governance issue for Corporate Japan. Executives have long thought that a company they run belong to them. From a legal stand point, it is distinctly stipulated that a company is in the hands of shareholders. Executives who own a tiny fraction of shares outstanding are in no position to claim that the company is theirs. Japanese companies have been known for the modesty of executive pay, especially as opposed to American counterparts. While they may look frugal on the surface, Japanese management teams have been notorious in the way they spend what is supposed to be shareholders’ funds. Under weak surveillance by shareholders, funds are often spent in a lax fashion, into projects that don’t meet rigorous return requirements, or into businesses and divisions of weak strategic priorities, or often into perks that compensate their salaries and bonuses. Slowly, shareholder capitalism began to take root in the world of Corporate Japan. In the early years of the 21st century, shareholder value and return on equity became popular buzzwords. Double digit return on equity was rather casually made a management goal by a large number of companies. Then they have found the goal easier said than done, especially in an era of slow economic growth. Embracing shareholders value is not a fashion, they’ve found. In recent years, the downside of relentless and excessive drive toward higher returns for shareholder are brought to light in the West, giving a spotlight on the wellbeing of stakeholders that include employees, suppliers, customers, and communities that surround companies and especially factories. Corporate Japan historically have paid greater attention to these stakeholders than American counterparts. Talks of stakeholder capitalism all of a sudden makes Japan look being ahead of the game. That is an illusion, however. Management has to learn to return sufficiently to those who commit their risk capital into the company's businesses, and then should be able to pay greater attentions to a variety of stakeholders, instead of single-mindedly pursuing higher short-term return at the cost of many important things. Embracing stakeholders should lead to a better long-term wellbeing of a company that improves long-term rerun prospects for shareholders. The rise of stakeholder capitalism shouldn’t be confused with reduced responsibilities for management to enhance value of a company.