Chapter 2.1 Governance for Workers

Join us in reading Chapter 2 of the book, The Only Way to Survive for Japan, subtitled "Corporate governance is sure to save our country." This book focuses on corporate governance. In Chapter 2, while how should employees be treated, and what is the role of shareholders? The author abundantly peppers the lessons with real-life examples of successes and failures that also serve as a primer on the rules and cautions of corporate governance.

Find all published chapters at 'The Only Way to Survive for Japan'

Read Chapter 2.1, the 8th segment of the book:

Letters of Resignation: An NHK Case Study

What if a company keeps letters of resignation?

I was astonished at the words and deeds of NHK's President Katsuto Momii.

He expressed his personal yet contentious opinions at his inaugural press conference. Then it was found out that he had collected the letters of resignation from the members of the executive board. What was worse, when he was asked the reason, at first, he refused to explain it saying, "Sorry, it relates to HR [human resources]."

NHK's governance system is stipulated in the Japanese Broadcasting Act and its Articles of Incorporation. It is similar to the monitoring system of a company with committees, which has been adopted by some of the leading companies. That is, supervision and execution are separated.

NHK's board of governors, which is equivalent to the board of directors of a corporation, selects or dismisses NHK's president, who is responsible for the execution of NHK's operations. And the president appoints or dismisses on his/her own executive and senior directors who assist him/her. The executive and senior directors correspond to the operating officers of a company with committees. And the president corresponds to the chief executive. The appointment and dismissal of operating officers are determined by the board of directors. Likewise, in the case of NHK, the appointment and dismissal of executive and senior directors require the consensus of the board of governors.

Overreaching at NHK

And the president of NHK arbitrarily forced the executive and senior directors, his subordinates, to submit their letters of resignation. What should be criticized is President Momii's refusal to explain the reason and the nature of his speech at that time. He boldly said, "It often happens in society at large." President Momii is from the private sector.

But generally, it is inconceivable for the president of a private listed company to force the operating officers including the vice president to hand in their letters of resignation.

It holds true for any company, not to mention a company with committees. In the case of a company with company auditors, which comprises the majority of the listed companies, if the president dared to force all of the directors to submit their letters of resignation, it would be an earth-shaking event because it is the board of directors that oversees the execution by the president of the company's business operations. It is interpreted as a sign that the president holds life or death authority over his own monitors. He would be driven to his own resignation in no time.

Even private companies are managed under such discipline. Public broadcasting should be subject to all the more severe management and governance.

(The Asahi Shimbun dated March 2014)

*The NHK Broadcast Center in Shibuya, Tokyo.*

Why Pay Directors

What is the purpose of paying high compensation to directors?

The highest amount of compensation for a director recorded for the full-year fiscal period ended March 2014 was ¥995 million JPY ($6.75 million USD). That is the compensation received by Mr Carlos Ghosn of Nissan Motor Co, Ltd. There were some people who were paid more than Mr Ghosn, but their remuneration included retirement benefits and so on.

The amount of compensation for Mr Ghosn was four times that of Toyota Motor Corporation President Akio Toyoda. As a side note, Toyota Motor Corporation has recorded more than four times as much profit as Nissan.

The question is, is Mr Ghosn's compensation considered to be too high? Or is the compensation for Mr Toyoda considered to be too low?

Generally, the amount of compensation for directors in Japan is relatively low compared to that of the United States or the United Kingdom. And the proportion of performance-based compensation to fixed compensation is also low. Therefore, there is an argument that a top executive is less incentivized to commit himself/herself to improving his/her company's business performance, which will lead to lower ROE, thus producing a vicious cycle.

Behind this lies the conception that the top executive affects the company's business performance. Short-term shareholders are only interested in an increase in the stock price during the time they are shareholders of a company. Even if the amount of compensation increases along with an increasing stock price, the shareholders would gain little direct benefit from it.

Considering an Alternate Model

I wonder if the board selects the top executive only expecting him/her to achieve a short-term stock price increase?

In Japan, it is common practice for the top executive to be chosen from among the inside directors. And actually, it enables the management to execute the company's business operations based on its long-term perspective. Furthermore, it is considered that good business performance is not always owing solely to the top executive of the company, but the employees and customers also greatly contribute to it.

Japanese corporations have so far achieved superior business performance as a whole accumulating internal reserve of as much as ¥300 trillion ($2 trillion-plus).

Despite this result, the fact that the compensation of top executives is often brought up for debate indicates an inexhaustible effort to find a way to make active use of the huge amount of these internal reserves, thereby helping to increase the stock price. Nobody is against that. But even the top executive is nothing more than an ordinary person like a hundred thousand other ordinary people. If he/she sees his/her compensation increase along with a rising stock price, possibly he/she may err in sorting out his/her priorities.

(The Asahi Shimbun dated July 2014)

The Scourge of Shoplifting and Repercussions of Disclosure

There is an expression, an eye for an eye. It comes from the Code of Hammurabi composed 4,000 years ago. On the other hand, if anyone slaps you on the right cheek, turn to them the other cheek, said Christ 2,000 years ago.

"Mandarake Inc," a used goods store, posted on its website a mosaic photo of the shoplifter who stole a Tetsujin 28-go tin toy. The image came with a warning that a clear photo of the shoplifter would be posted unless the item was returned within a week. This toy was worth ¥250,000 ($1,700). Mandarake decided to post the mosaic image upon prior consultation with a lawyer.

The incident prompted arguments for and against the decision.

Beyond Arrest of the Shoplifter

Shoplifting is rampant, and it is well known that many retail stores are at the end of their tether with this problem. It is not confined to old toys. There are some bookstores which were even driven out of business by continuous shoplifting incidents.

Also, there were some lawyers who argued that the disclosure of the shoplifter's face may cause Mandarake to be charged with defamation. As Mandarake is a listed company, some shareholders were concerned about its stock price.

Even after the release of the news by the media, Mandarake still intended to make the photo of the shoplifter known to the public. However, there were more voices of opposition to Mandarake's decision than they had presumed. And furthermore, the Tokyo Metropolitan Police requested that Mandarake not reveal the photo of the shoplifter. In response, the company ultimately decided against publishing the photo.

The incident itself was settled with the arrest of the shoplifter, but this incident holds significant meaning. When delivering information on the Internet, it is necessary not only to confirm even the slightest touch of illegality lying there, but also to duly consider beforehand how such action would affect corporate value and the stakeholders including the shareholders.

Once information is posted on a website, it can instantly go viral through the Internet. The photo of someone concerned will be endlessly searchable in "the criminal records information." A company which is a victim of shoplifting could turn into a perpetrator in an Internet society.

(The Asahi Shimbun dated September 2014)

Intervention in Business Affairs: A Case Study in Whisky

Japanese whisky is said to have reached the international standard. Wine is sure to follow the successful path of whisky. Lovers of alcoholic beverages can hardly wait for that to happen.

Back in the day, governmental authorities would intervene in Japanese automobile manufacturing, insisting that they had better stop manufacturing cars because they were no match for Western automobile manufacturers. After that, they even opposed the plan of motorcycle makers trying to produce four-wheeled cars.

Business, whether good or bad, is moneymaking after all. It is just one basic element constituting human nature, but not the entirety of it. However, there are some people who devote their entire lives to such moneymaking business, and thanks to their efforts, many people have jobs.

On the Front Lines of Business

What is clear is that bureaucrats are blind to what is actually happening in the business world. But somehow, people with power mistakenly believe that they can instruct and guide businessmen.

Unless one has authority, one is innocuous. But capitalism is designed to make laws by majority vote and force people to abide by them. They also bind business affairs.

You need to be discreet. Power does not necessarily consist of only politicians and governmental agencies. It is rather easier to deal with people in such fields because they come under public observation.

The fact is, such power, that is to say, the practical mandatory power acting on people lies even in the media and universities. A part of the people who are active in such fields with power of some sort, when they come into the limelight by chance, get unnecessarily motivated to make a big show of expressing concerns over the circumstances they notice before their eyes. They are themselves quite solemn, which makes it all the harder to deal with them.

For the people on the front lines in the business world, it is their main job not to give lectures to others but to earn money and determine how to utilize such money. To focus on their obligations, they should avoid flies irrationally buzzing around and bothering them.

Unless the businessmen are in touch with the reality of their business circumstances and well-prepared for them, chances are that their business could adversely affect their own country. This would hold true for corporate governance.

(The Asahi Shimbun dated November 2014)

Follow the book from Chapter 1, as it is published.