Corporate reform the Japanese way
Professor Ronald Dore, Senior Research Fellow, Centre for Economic Performance, LSE

Last month, in this column, we discussed an approach to Japanese economic reform that involved applying some of Silicon Valley’s best practices to the Japanese  market. A key consideration in implementing such measures is corporate structure or more specifically, corporate governance. In other words, how should the corporation be organized and managed such that the company can achieve profitability and its other key goals? According to Professor Ronald Dore, Senior Research Fellow at the Centre for Economic Performance at the London School of Economics, the answer may not be as simple as copying the US model. Professor Dore recently gave a presentation entitled “The Battle for the Japanese Corporate Soul” at Stanford’s Asia Pacific Research Center focused on this very issue.

Professor Dore’s expertise on the Japanese economy and the interaction between social trends and economic trends is exemplified in recent book: “Stock Market Capitalism: Welfare Capitalism: Japan and Germany vs. the Anglo-Saxons”. His book discusses the dominant organizing principles and governance mechanisms of knowledge creation emphasizing the key differences between US and Japanese models. This month's Bridge Builder features highlights from Prof. Dore’s discussion of how corporate structure and governance might develop in Japan.

Professor Dore began his presentation by outlining the history of Japanese corporate development in relation to the US in the post-war era. Prof. Dore noted that while the 60’s showed that there were many American skeptics to Japan’s hastening modernization (leading to the famous Reischauer offensive), the 80’s were abundant with worshippers of Japan’s corporate best practices. During the so-called Japanese bubble, classes on Japanese management techniques were considered critical for business schools as American managers sought to understand the secret to global Japanese corporate success. But in the 90’s the bubble burst, leading to stagnation and deflation of the Japanese economy and the ultimate collapse of several major Japanese financial institutions. Meanwhile, the US had revived its economy, particularly in the technology sector, causing many Japanese companies to wonder the same thing US firms had pondered a decade earlier- how can we learn from our closest rival. Professor Dore mentioned 2 key areas of focus for this interest: “silicon valley dynamism” and “transparency”. In specific, Japanese companies grew intensely interested in how to replicate the Silicon Valley model for innovation and how to make their business dealings and management transparent to encourage investors. Yet just as the 90’s ended with admiration for US technology dominance, the new century began with serious doubts caused by the dotcom crash followed by Enron and Worldcom debacles.

This leads us to the corporate Japan of today which needs to choose between following the US globally standardized model for corporate governance or a unique Japanese model based on its culture. As a society, Japan must assess whether it already has many of the basic cultural elements required for a successful economy. Prof. Dore characterizes these elements as: Productivism (valuing of the engineer over the accountant), Public Service (making public service as important as self sufficiency), Equality (lack of extreme income and power gaps), and Mutual Trust (an understanding that all business dealings will be at arm’s length).

Professor Dore argues that there are two plausible reasons why the Japanese could justifiably reject the “one size fits all” US hegemonic model for corporate governance. The first reason is that the values that underlie the US model may simply be different (not better) than the values sought after in Japan. For example, in the American model return to shareholders is the main objective while in Japan, the security of employees is often a top priority. The second reason is that the difference in cultural resources may simply make the American model unrealistic for Japan. For example, US companies often hire their top executives from outside the company. In Japan, however, there is no real market for CEOs. Key management positions are typically filled from within. Japanese CEOs view themselves as village elders in custody of a community for which they feel responsible and as a result, are much more likely to deal at arm’s length with the world at large.

Prof. Dore concluded his talk with an illustrative example of how Japanese corporations have fundamentally different values than those in the US and even other Asian countries. The Wall Street Journal recently interviewed an executive of a Japanese company on the verge of acquisition by a major Chinese utility. When asked how it felt to be dealing with a Chinese company as a potential acquirer, the executive was quoted as saying that he found it odd that the company should focus so much on “returning profit to shareholders.” For more information on the London School of Economics Centre for Economic Performance, please see their website. For more information on Stanford’s Asia/Pacific Research Center please see their website.

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