Japan Inc gingerly embraces more foreigners

Originally posted: The Economist

Big firms are putting non-Japanese on their boards

MICHAEL WOODFORD, the first non-Japanese president of Olympus, likened the camera-maker’s board members who sacked him in 2011 to “children in a classroom”. Mr Woodford had confronted Tsuyoshi Kikukawa, the company’s imperious chairman, over a $1.7bn hole in its finances. Mr Kikukawa responded by orchestrating a show of hands in a boardroom coup that sent the Englishman packing. It all fitted a cliché of Japan’s boardrooms as an all-Japanese, all-male club where wizened bosses ruthlessly enforce wa, or harmony.

Gradually, the serenity is being disrupted. Nearly 15% of companies in the Nikkei 225 stock index now have at least one non-Japanese on their boards. That is still less than half the share in Britain’s FTSE 100, but it is up from 12% in 2013 and the trajectory seems set. Japan’s biggest bank, Mitsubishi UFJ Financial Group, and Takeda, its largest pharmaceuticals company (which in 2015 appointed its first foreign chief executive, a Frenchman) announced the appointment of foreign directors this year. Of the ten directors at SoftBank, a telecoms and internet giant, seven are non-Japanese.

When Japanese firms buy Western competitors, they often absorb foreigners into their higher echelons. Suntory, a drinks company, put the British chief executive of Beam, a spirits-maker, onto its board in 2014 when it acquired the American company. SoftBank’s embrace of foreigners reflects a diverse portfolio that includes ARM, a British chipmaker, and Sprint, an American telecoms firm. Greater outside influence over Japanese firms also stems from more overseas investors, who hold about 30% of Japanese shares, up from 23.5% in 2008.

But more still needs to be done, and quickly, if large Japanese firms are to maintain global relevance, says George Buckley, an outside director of Hitachi, a conglomerate. Many boards continue to be rubber-stampers, not vigilant overseers of the sort that foreigners expect to sit on, agrees William Saito, a venture capitalist who advises the government. Elderly ex-chairmen and chief executives often wield considerable power even after retirement. (And if corporate giants are excluded, the number of foreigners on boards of listed firms has barely inched up, from 0.6% in 2001 to 0.8% last year.)

Livelier boardrooms might help prod Japan’s risk-averse companies to invest more of their ¥214trn ($1.9trn) of cash, and boost the economy. Their foreign operations would also benefit from appointing more non-Japanese as business heads. In the past the easiest way for Japan’s manufacturers to control subsidiaries abroad was to send people they knew. That may not work for services, warns Masahiko Uotani, president of Shiseido, a cosmetics company. “You need people who can really understand local tastes,” he counsels.

Unless Japanese business changes its ways, firms risk staying dangerously out of touch, agrees Christina Ahmadjian, a non-executive director at Mitsubishi Heavy Industries, another conglomerate. The number of Japanese companies in the Fortune Global 500, a scorecard for big business, has dropped from 149 in 1995 to 51. A bit of disharmony can be productive.

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