I’ve read Prof. Ryohei Yanagi’s book on the problems of Japanese corporates and value creation. There are specific problems because of the low return on equity and the high cash balances (and entrenched governance). These decisions by many Japanese managements are rooted in the country’s culture and history post-war and a herd mentality. The model (pictured above) is Ryo’s reconciliation of intangible capitals (non-financial/extra-financial/ESG) and market values.
Listening to Ryo talk the full weight of the history and culture aspects comes through. The intersection with religion even becomes apparent. Ryo points out that Japan has a history of Shinto-ism. This places the idea of spirits and gods in the water, in the forests - this gives Japanese a deeply rooted respect for the environment, which is different to other countries in the West.
The animated film, Princess Mononoke, or Spirited Away, gives a sense of this. The films by Ghibli are worth noting. (I have a soft spot for Kiki’s Delivery Service)
Thus in many ways the “E” in ESG-speak for Environment (Social Governance) fits naturally into Japanese corporate philosophies and its peoples’ way of life.
I observe this in the bathing etiquette and shoe etiquette in Japan.
On the other hand, Japan has deep hierarchy (and patriarchy) roots and a long tradition of life-time careers. So while social capital is valued, it is constricted. Hence the male dominance, the age dominance, the corporate layer hierachies which you can find roots in, going back 2,000 years.
Part of this manifests in an impulse to act through “fear of shame” rather than wanting to stand out as a “tall poppy”.
If you believe this contention then you can see how an “Index of honour” perhaps an “ESG index” or a “Blossom Index” (an actual index constructed with gender and ESG indicators, link below) might work to drive a policy of social change or corporate culture change. Critics could argue that this is “virtue signalling”. This is a criticism only if the signal is empty of impact and genuine intent.
For Japanese policy makers increasing female workforce participation and increasing return on capital and productive use of cash and capital are vital to enhance productivity (and generate tax) and combat the costs of an ageing population.
Another aspect that comes to light is alignment with management and shareholders. Management teams in Japan typically own little stock (and employees own little stock) so the stock price tends to matter less. Perhaps, you can argue this matters little if employees have safe jobs and society is served. But, when management teams become only accountable to themselves then the second order problems become apparent. Employees and management are no longer “long-term owners or stewards”.
Is long-term stock price the only measure of value creation? Is it even a complete measure?
The same can be said of a nation’s GDP? It is an incomplete measure of a nation’s wealth.
This brings me to another relatively seldom discussed aspect of corporates. Do companies have a clear sense of purpose? Is this important? An academic, like Prof Alex Edmans (full disclosure he sits on my RLAM Committee) might argue a strong company purpose fulfilled well then goes on to achieve society benefit, stock holder benefit, employee benefit etc. (link below)
One notable aspect of Eisai, the company where Prof Yanagi is currently CFO (again bucking the trend in Japan, Ryo has had several jobs - arguably this has grown his expertise and also allowed it to be shared; although it’s likely been at the expense of his pension...) is that it’s corporate purpose was enshrined in its articles of association.
So, if a New York hedge fund girl wanted to argue with that, it could or would have to start an open proxy battle. Effectively it’s been made a “say on purpose”, an idea that The Purposeful Company (that Alex Edmans is part of, and I’ve had discussions with) have also suggested.
Turning back to Japan, it’s challenges are rooted in its history and culture reflected in the actions and governance of its corporates. The challenges have a different tone to the ones in eg the UK or US. But, as I reflect on this week/month/year/40 years it occurs to me that certain underlying elements remain similar. For instance, not understanding the influence of Christianity in the US, or the worries of ordinary British Brexiteers over “English Culture” leads to as incomplete a picture of the conflicting views in the US and UK, as not understanding Japanese history would lead you as to an incomplete causes of the cash on Japanese corporate balance sheets.
Previous Short blog on Yanagi’s book: https://www.thendobetter.com/investing/2018/6/20/the-dawning-of-japanese-corporate-governance
The thinking intersects with the Westlake/Haskel book on Intangibles -
97% for Kiki and Spirited Away on Rotten Tomatoes
Japanese Shoe etiquette
Info on Blossom Index
Purposeful Company Work
The current Arts blog, cross-over, the current Investing blog. Cross fertilise, some thoughts on autism. Discover what the last arts/business mingle was all about (sign up for invites to the next event in the list below).
My Op-Ed in the Financial Times (My Financial Times opinion article) about asking long-term questions surrounding sustainability and ESG.
A thought on how to die well and Mortality
How to live a life, well lived. Thoughts from a dying man. On play and playing games.
A provoking read on how to raise a feminist child.
Some popular posts: the commencement address; by NassimTaleb (Black Swan author, risk management philosopher), Neil Gaiman on making wonderful, fabulous, brilliant mistakes; JK Rowling on the benefits of failure. Charlie Munger on always inverting; Sheryl Sandberg on grief, resilience and gratitude.
Buy my play, Yellow Gentlemen, (amazon link) - all profits to charity