25 Apr 2015

Japan Society Hosts Yoshihiko Miyauchi, Senior Chairman of ORIX Corporation

Recently, staff had the opportunity to hear a famed Japanese company executive talk about the changes that are occurring in Japanese management styles. This talk was timely, coming as it did after one by a senior manager at Ajinomoto about selling Japanese products overseas.

Mr. Miyauchi, like most company executives from that time period, in 1960, went to work straight out of college. At that time, Japan was going through an economic renaissance. Just a few years after regaining its sovereignty and beginning to rebuild after World War II, Japan was everything about risk-taking. Companies made huge bets on the future and for the most part they paid off – cars, electronics and steel to name just a few. Representing that risk-taking, Yoshihiko Miyauchi left his company after just four years to form his own financial firm, in 1964. And that showed up in the economic miracle that was Japan in the 1960s, 1970s and 1980s. Gross Domestic Product (GDP) of Japan grew annually at a 9.2 per cent rate from 1955 to 1973. Then came the oil embargo, which dampened economic activity. But even then, between 1974 and 1990, GDP growth was a robust 4.1 per cent. This was the year when the asset bubble burst (at that time, the Nikkei index reached 40,000). Since 1991, GDP growth has been a poor 1.1 per cent annually.

What, according to Mr. Miyauchi, was the problem? Companies became risk-averse. Understandably, after such a deflation of asset prices, companies were afraid to bet large on new ventures. But, as Mr. Miyauchi pointed out, this risk-averse behaviour became central to business decision-making. The losses that occurred in 1990 were large enough to make companies fear losing much more. As a result, companies began to underperform, even stop taking any risks. Management developed a habit of second-guessing decision-making – deflation being the symptom. Indeed, Japan’s GDP Deflator has being going down since 1995. Growth year on year has been almost zero. A whole generation of employees has grown up with this risk-averse mentality, when one considers how long it has been since the bubble burst of 1990.

Three attributes of management style show how disastrous risk-averse behaviour can be: Cost cutting; a drive for efficiency by shedding underperforming units; and a lack of funds for research and development. None of these has anything to do with innovation, which is at the heart of risk-taking. But, two years into Abenomics, there are signs that risk-taking is coming back. The Nikkei is up 60 per cent, compared to the Dow’s 20 per cent.

Mr. Miyauchi then went on to explain how his firm has become the poster-child for risk-taking. Starting in 1964 with just 13 employees, the company has now exploded to over 30,000. Shareholder equity has likewise risen exponentially from a mere $0.8 million to over $17 billion. The company is now in over 36 countries. Once again mergers and acquisitions were used to gain experience and know-how in its business model. In the Lehman Brothers melt down, there was a significant impact on Japanese businesses too. ORIX felt it but did not need government support. Mr. Miyauchi explained that difficult economic circumstances should never be an impediment to opportunities for business development. It is always about innovation and every situation brings with it limitless opportunities.

During the question and answer discussion, Mr. Miyauchi made some interesting points. In Japan today, lifetime employment is being shunned by the young. Now, thirty per cent of new recruits will leave their employment within three years. There is a shortage of labour in Japan and the country needs to bring more skilled people in – there is no appetite to bring in cheap labour. More important is the need to increase productivity in the service sector. In Japan, it is only about 60 per cent of the level in the United States. There is a big move to demand stronger corporate governance, particularly as now companies are required to increase their independent directors. In comparing the management style of Japanese companies with those of the United States, the focus in Japan has been too much on the long term and on the multiplicity of interests to be considered – customers, employees, shareholders, suppliers and so on. In the United States, the shareholders seem to be the prime and only interest of concern to management. Mr. Miyauchi thought that somewhere in between these two extremes would be ideal. A fascinating talk.