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Sunday, Feb. 7, 2010
Different folks, different strokes
CONFLICT AND CHANGE: Foreign Ownership and the Japanese Firm, by George Olcott. Cambridge University Press, 2009, 279 pp., $99 (hardcover)
Can Japan's corporate system withstand globalization? Once considered the source of the nation's competitive strength, traditional practices such as lifetime employment and seniority-based pay have in recent years been increasingly attacked as contributors to poor performance. The postbubble slump eroded an elaborate system of cross-shareholdings, artificially high market valuations and anti-competitive government policies that previously sheltered Japanese companies, leaving them now vulnerable to corporate predators of both domestic and foreign origin. But it has been the incursion of overseas investors that has caused the most consternation in business and government circles, with fears of the pernicious effects of foreign takeover.
Amid speculation over a foreign bailout of Japan Airlines, moves by Mitsubishi Motors to seek a French partner and historically high levels of foreign ownership of Japanese stocks, George Olcott's debut work, "Conflict and Change: Foreign Ownership and the Japanese Firm," could not be more timely. The book probes the impact of foreign takeover on five major Japanese companies, including Nissan Motor, the Long Term Credit Bank of Japan or LTCB (now Shinsei Bank) and Chugai Pharmaceutical.
The result is a detailed study not only of how foreign management is imposing shareholder-oriented practices, but also the impact on the Japanese "community firm" and its recruitment, training, employment and reward systems.
Few are better qualified than Olcott to undertake such a study. The British management executive and academic personally witnessed the clash of cultures while serving as head of UBS Asset Management, Japan, which formed a joint venture with the former LTCB's asset management unit that ultimately became a full takeover.
Despite admiring the unit's cohesiveness, employee loyalty, discipline and dedication along with its long-standing client relationships, Olcott writes that the first instinct of the new management was to make drastic changes and "bring practices into line with what might be considered best practice at a Western firm." Among the changes introduced were an end to job rotation in favor of specialization, with the introduction of specific job descriptions; merit-based rather than seniority-based pay; bonuses that varied widely based on individual and company performance; and a flattening of the corporate hierarchy, including a drastic cut to the size of the board.
However, Olcott fails to reveal whether the changes improved long-term performance at his former firm, and herein lies the source of continued debate over the merits of Japanese versus "global" (read "Western") management practices.
Only three of the five case-study companies — Chugai, Nissan and Shinsei — are considered successes by the author. Yet despite promising starts at the latter two of those companies, both have seen profits tumble recently, with even the messiah-like Nissan CEO Carlos Ghosn losing some of the shine from his halo.
The performance-based pay systems introduced at many Japanese companies in place of seniority pay are deemed to have failed. Olcott cites the example of Fujitsu, where productivity is claimed to have dropped after employees set themselves low benchmarks to avoid pay cuts. He quotes an employee on the impact of the new regime: "Before it was like 'tepid water.' Everyone got along together and we tried not to offend each other; it was quite family like. Now it's much more competitive. That makes it uncomfortable and people try to drag others down."
Arguably, the principles of equality and fairness, continuity, group consciousness and age-grading that are enshrined in traditional Japanese management practices better reflect prevalent social and cultural values, and as such enhance rather than diminish shareholder value. The author admits as much when he writes: "There is no immediate prospect of the Japanese organizational form 'converging' on the Anglo-Saxon model."
Disappointingly, Olcott provides only minor anecdotes of his career in Japan, such as employees bowing before entering and exiting his office. Given the wealth of his experience and the volume of information he likely obtained, the potential exists for more entertaining moments, similar to Niall Murtagh's "The Blue-Eyed Salaryman," only this time with the Westerner calling the shots.
Nevertheless, foreign executives considering investing in Japan would do well to heed Olcott's conclusions, including the need to respect local culture and staff, give the Japanese subsidiary a high degree of autonomy and understand that "learning is a two-way process." Such investors should be welcomed rather than repelled, particularly given government targets for greater foreign investment.
The same principles could be applied by Japanese management to their overseas investments, with companies such as Kirin, FamilyMart and Fast Retailing expanding offshore in search of growth. Like learning, globalization moves in more than one direction and that is the real lesson of "Conflict and Change."