COMPARATIVE PERSPECTIVES 10

Japanese Systems 3: Contemporary Challenges to Traditional Japanese Management

Dr Leo McCann

Today’s session

What was the bubble economy? Details on contemporary changes to

Japan ‘post-bubble’, and now, post sub-prime crisis and post-earthquate/tsunami catastrophe

A reminder of theoretical concepts

The bubble economy

Explained well in both of Fiona Graham’s books. Huge growth rates of Japan had slowed in 1986-7 as the

price of the Yen rose. Japan’s central bank responded by lowering interest rates, sparking a huge transfer of investment into higher performing stocks and shares and into property.

These investments were financed by using land and stocks as collateral for loans, meaning that both land and stock prices skyrocketed.

The highest point was 31 December 1989, and then the value of the stocks crashed down, until it reached 70% of its 1989 level by 1999.

The bursting of the bubblesource – Rugman & Hodgetts, International Business p.484

1990 2000 Change

Motor vehicle production

13.5 million units/year

10.1 million units/year

down 25%

Annual cost of membership of Koganei Golf Club

440 million yen 61 million yen down 86%

Residential land prices in Tokyo (average per sq metre)

514,200 yen 232,400 yen down 55%

Current literature on Japan Many new pieces of work on Japan now emphasising

considerable changes, e.g. Jacoby The Embedded Corporation. He argues there is evidence both for convergence and divergence:Japanese reforms have taken place in a gradual fashion and

there are some substantial continuitiesOn the other hand, the combination of these slow changes

amounts to substantial transformation. See also Matanle and Wim (2006) Perspectives on

Work, Employment, and Society in Japan S.Vogel, (2006) Japan Remodelled Katz, R., (2003) Japanese Phoenix

Unwinding cross shareholdings?

1990

1992

1994

1996

1998

2000

2002

2004

2006

0

10

20

30

40

50

60

Cross-shareholdings as % of market capi-talisation

Source: The Economist December 1 2007

Radical reform comes to Japan?

Reforms in Japan post-bubble are often described as slow and conservative; Japanese political and business leaders understood to be highly cautious

On the other hand, some major changes have taken place, and in Japanese context are radical, even shocking Collapse of Long Term Credit Bank and takeover by Ripplewood (USA) –

creating of Shinsei Bank (2000) Near-collapse of Nissan (2000), rescued by alliance with Renault and

installation of new, overseas CEO, Carlos Ghosn Merger of Tokyo Mitsubishi Bank with UFJ, creates largest bank in

Japan, 2nd largest in world (2001) Nippon Sheet Glass takeover of Pilkington (UK), and installation of

British CEO of NSG (2006) Proposed merger of Kirin and Suntory brewing companies to create 5th

biggest food/drink group in the world (2009) Widespread changes to corporate law (see Dore 2000; Vogel 2006)

What is the impact of the recession on Japanese firms and white-collar employees?

Research project between 2002-4, building on qualitative interviews from 10 case study companies in US, UK and Japan

Group interviews with senior HR managers to get an overview of change

Followed by one-to-one interviews with up to ten middle managers on their life and work histories

Findings from this study available on Blackboard. Article by McCann et al (2006), book chapter by Hassard et al 2009 Managing in the Modern Corporation, chapter 5

Challenges to the seniority-based pay system, (from Auto Supplier firm)

‘Group leader could be kakaricho, kacho, or bucho. … not the position, just the title… Pay is based on last year’s performance…Sometimes a kacho is higher than a bucho, depending on last year’s performance. … about 35-40 percent of the annual salary comes from the bonus.’More individualized pay systems

Challenges to the seniority-based pay system, (Heavy manufacturing firm) ‘In order to promote the able ones… faster

promotion times. There is the chance for the good ones. They should be promoted earlier. If the person can satisfy the competency guideline, then he can jump more than three places. There is no seniority system for promotion. It depends on the work, not the length of time.’

Some significant change, but all nine other Japanese firms retained their 10, 12 year minimum times before promotion can be considered

Challenges to lifetime employment (electronics manufacturing firm)

‘The loyalty to the company has declined actually for a while, when we had lifetime employment system people used to stick to the company rather than to get jobs or particular skills or professions. But that has changed. Instead of being loyal to the company people nowadays are becoming more loyal to their jobs or skills or occupations that they choose…. In the past people tend to stick to big name brands and so people thought that their life was assured once they get into a big company.’

A tough challenge for employees, the tendency is now towards considerably shorter job tenures, and greater flexibility. Similar rhetoric to Anglo-Saxon style labour markets

Summary of changes Increase of mid-career hiring Reduction of length in contracts Reduction of managerial layers (average would be from

about 8 to 4) Cost-cutting (early retirements, secondments, recruitment

freezes) Work intensification – cutting of managerial posts means

more work to do by survivors Stigma associated with moving jobs appears to be fading,

particularly amongst younger Japanese (see also Graham and Matanle)

Old job titles appear less relevant than before in the face of group work and flattening of hierarchies

Summary of continuities

Strong corporate cultures remain. Maintenance of strong OJT (On the Job Training) and ILM (Internal Labour Market)

Still a considerable reluctance for staff to voluntarily change jobs (perhaps because of company-specific skills and higher unemployment 5.1%, see Matanle)

Long hours for white collar staff remain (got longer, in fact) Views of others in the business groups still appear to be relevant

to firm decision-making, e.g. many parent companies in the keiretsu instruct suppliers to cut costs

Little change to overall corporate governance – e.g. maintenance of old-style boards of directors. Some highly internationalised firms have shrunk their boards (e.g. Sony). But the vast majority of Japanese firms are less eye-catching, and have done little to reform their internal governance structures.

Internal pressures to reform Japanese corporate governance – not only external• Scandals bred by insider control

• Managers making illegal payments to yakuza to disrupt AGMs, and other scandals such as Mitsubishi-Fuso

• Indecisive management• E.g. Failure to close unprofitable branches for fear of disrupting LTE

• Lack of innovativeness in the face of US resurgence• Low returns to shareholders

• Shareholders have complained more and more given the poor performance of stocks in 1990-1999. Complaints also voiced by Western institutional investors such as CalPERS, which post-bubble owned more of Japanese equity.

• No means of curbing oneman-shacho• Widespread calls for reform, in the direction of greater decision-making

transparency, a loosening of company group ties, and greater employment flexibility

• Recovery seemed on the cards 2003-7 (see for example Katz, R. Japanese Phoenix) then sub-prime hit Japan harder than anyone seemed to expect

• Economy once again in deep trouble 2008-• Political turmoil. Resignation of Prime Ministers, LDP defeated 2009

Current direction of reforms

• Path of change seems to be clearly away from traditional Japanese employment systems and business groups

• Law changed in 1994 to allow shareholders to bring lawsuits against top management of firms at little expense

• Growth of market analysts, from 1000 in mid 1980s to over 20,000 now. More reporting of Moody’s, Standard & Poor’s in press. Highly favourable press coverage of Nissan-Renault and Carlos Ghosn (after initial hostility)

• Holding companies made legal for the first time since zaibatsu era

• Strengthening of auditing role. Kansayaku given more power and is less of a ritual than in the past. (Was introduced after US occupation – like German supervisory board - but was largely ignored)

• Privatization of Japan Post (aimed to complete by 2017)

The Deification of Carlos Ghosn? – A celebrity CEO in Japan?

But not even Ghosn-san has all the answers: (Jan 2009: 20,000 job cuts announced)

A major, prolonged crisis of confidence 1990s labelled ‘the lost decade’

Post-bubble stagnation and lack of ideas 20004-8 recovery, then 2008-9 subprime financial crash,

• Although Japanese banks did not invest heavily in bad debt (e.g. US/UK/Iceland), its export-led model has suffered as orders from west (and from China) have dried up. All exports down 45.7% in Jan 2009 (from Jan 2008). Car exports down 69%

then March 2011 earthquake catastrophe Tohoku earthquake and tsunami – over 15,000 killed, estimated insurance losses of US$

30billion Political crises, failure of governance (collapse of confidence in succession of

governments, PMs). Huge public sector budget deficits Wave of highly pessimistic literature, films, culture from Japan. Yuji Genda: ‘A Nagging Sense of Job Insecurity’ (2006); His current research finds that

1/3 of Japanese aged 20-59 ‘Feel their hopes are unattainable’ or ‘have no hope for the future’

Shrinking population, ageing population, youth unemployment, shrinking regions see Matanle and Sato (2010) ‘Coming soon to a city near you’, in Social Science Japan

Journal, vol 13, no 2 ‘Galapagos syndrome’; e.g. Japanese particularistic culture can affect export trades,

such as failure of minidisc format and mobile phones not selling well overseas

But – there is hope Technologically-advanced, very well-educated

society Life expectancy of 83 Balance of payments surplus – a creditor nation World class health, education, transport systems,

infrastructure World class manufacturing

(see Toyota’s rapid recovery from pedals scandal of 2009) Sony Playstation & blu-ray format enormous global

successes Rise of ‘J-cool’: fashion, manga, anime, films, video

games

Paper on Manga / Cultural definition of salaryman and organizational change

Matanle, McCann and Ashmore (2008), in Organization, volume 15, number 5 Salaryman Kintaro

Originally a biker gang leader, rescues Shacho of ‘Yamato Construction’ during fishing accident.

Learns to become salaryman, to submit to authority, but never does so fully Protects Yamato (and Japan) from:

○ (First series) corrupt Japanese bosses○ (Second series) US hedge funds & investor capitalism

Obviously fictional / fantasized, but hugely detailedStrong sympathy for ethics and traditions of

Japanese businessBut also shows its limitations:

○ Sexism, bullying, resistance to change

Kintaro’s redemption Episode 20, parts 2-3

Chairman Yamato:

“A company is part of a society and can only survive with the support of that society.

A human being is like a company in that way. It may appear easier to abandon them than to look after a fellow human. But that’s only if you abandon the moral position of an adult that requires you to protect the young.

I'm going to help him with his load and we'll carry it together.”

In the midst of crisis there is hope, there is something salvageable from the Japanese model. USA does not have all the answers.

A reminder of theoretical concepts

Whitley; Lane; Hall & Soskice – They argue for the continuation of traditional national business systems, including: Financial systems Education and labour systems Innovation systems

Dore (more recent work), Jacoby, and other more ‘globalist’ literature instead suggest considerable changes taking place to all business systems

Fundamental purpose of this course is to develop your own position on these issues, such as – How much change is occurring, and why? What are the impacts of change on firms and their employees, and on wider

competitiveness of nations? Is the Anglo-Saxon system really the ‘best’ model? Are these abstract theoretical models of Anglo-Saxon / Coordinated sensible

any more? Especially after sub-prime? Possibly the case that VoC / institutional forces are powerful in normal times,

but sub-prime is an extraordinary event, affecting all countries?