How Japanese companies are wiping out shareholder value?

Just how many times have we heard that Japanese equity markets have been stagnant for last two decades? Analysts and economists around the world have elucidated various reasons behind it and occasionally suggested solutions on how Japanese companies and its respective management can improve the situation. Many upbeat economists have highlighted that Japanese equities are one of the cheapest in the world and trading below their net asset values, citing fundamental ratios such as Price-to-earning, price-to-book value etc.  Recently Financial Times wrote a big piece on how investors are relinquishing Japanese equities due to equity dilution and lack of focus on shareholders’ value. Shareholders, especially foreign shareholders, have often castigated Japanese companies for not caring about its shareholders and treating them like a third cousin.

We may look at the structural and fundamental problems, but the issue is more chronic. It is like layers of onions and as one peels a layer only to discover yet another layer and then some more. The problem is cultural than structural. The problem is behavioral than benightedness. The problem is about rigidity than ineptness. The problem is about challenging the status quo than lack of creativity. And finally the problem is more about complacency than objectivity.

Any amount of data crunching, reading balance sheets and meeting company management would not explain why the Japanese companies continue to falter. Failure to adapt to the changing world is like a sharp razor blade that is killing profitability and share holders’ value. One would think the problem persists in smaller or newer companies, but surprisingly it is predominant in established, larger firms that are not only unable to create shareholders value but even destroy the century old brand value that was once created on the same principles of strong leadership, efficient operation and maximizing shareholders value.

In next few series, I’ll try to peel some layers of issues within the Japanese financial & services industry. Let’s start with the very top layer - the management layer. I think everyone would agree that having the right leadership and management is a key to success for any company.

Japanese companies work within a very rigid framework, so human resource management, consensus-based-decision making, ineffective communication style etc is impossible to change, irrespective of how grave the company situation is. Naturally only a Japanese manager can adapt to such rigid structural framework, and so Japanese companies do not want to put a foreigner at its helm. Japanese corporations have an inherent distrust for foreign employees and executives. Not surprising that Foreign-to-Japanese executive ratio is very low, and even when a firm occasionally decides to hire foreign executive, it is often viewed as a transient role. The result - only a handful of foreign executives in Japanese corporations compared to companies in any other developed country.

Without any prejudice, Japanese executives are equally competent to their foreign counterpart, so Japanese executives should be evaluated at par with foreign executives equally during the selection process, especially when a company decides to expand its operations beyond its traditional realms, or has been reeling under losses for years.  In such cases it should appoint executives with the deepest experience to turn around. Take for instance, the board of all listed companies in Japan and compare their background with their global counterparts. The result is shocking – almost 95% of the management has no experience of working with any other company outside that specific employer.

Japanese companies strongly believe that employees who have worked in only one company for their life and done his rounds within various departments of the organization have the best knowledge on the company and its problems. Yes, that is true in certain industries such as assembly, manufacturing, industrial design etc but not in a dynamic services industry. Undoubtedly, it is always useful to have an insider who is groomed to take the helm of the company, but if the company does not have an eligible candidate, companies should certainly seek the right candidate externally rather than picking someone just because he belongs to the fraternity.

Companies, especially larger corporations have a profound impact on any economy, so it is critical for the top management to have a deep understanding of the culture, language, political and regulations which a foreigner might not have. In such cases, companies can adopt a Co-CEO policy, clearly defining the responsibilities and boundaries within which each CEO would operate in.

An interesting point to note is that Japanese companies believe that it is crucial for Japanese executives to understand the culture and business style in Japan but that doesn’t hold true for its overseas operations. Almost all Japanese companies put Japanese executives to run its overseas affiliates and subsidiaries irrespective of the country or product. With an exception of extremely few managers, can someone explain on how a person who has never worked outside Japan nor has a track record of building successful businesses can suddenly go and contribute to run its Chinese or Brazilian or Nigerian operations?

Japanese management have diluted its equity on many occasions in its quest for expansion and acquisitions, only to pay extremely high premium for targets and wiping off the value of the target company and its own shareholders; just by one simple act - replacing the management of the target company with its own employees.

Life-time employment and low compensation is another double-edged sword that Japanese companies dangle on its management. When one knows that one will not be penalized for under-performance or mistakes, nor will be rewarded for its achievement then there is no real motivation to grow shareholder value. The only motivation remains is self-preservation and getting the right role within the right department and office that provides highest perquisites. One reason for such behavior is Japanese executives are paid in cash rather than stocks, and therefore worry less about stock prices and shareholder value.

Surprisingly this is the same country where we had visionary leaders such as Konosuke Matsushita, Akio Morita, Sakichi Toyoda and Soichiro Honda, who not only laid a strong foundation and transformed their respective companies but the whole industry and nation.

It’s about time for Japanese companies to realize that it takes a lot more than knowing its company and Japanese culture to bring true value to a company, shareholders and the nation as a whole. The world has changed and Japanese domestic business is shrinking, so it is better to change than to be forced out. The statement may sound radical and extreme, but if you give it a time horizon of 15-20 years, the reality will slap your face harder than you know.

Sedate your time at Can Dao, Vietnam

Cities I dwell in surrounded by friends
Friends who fill my loneliness
Only to cast away from friends into remoteness
Isolated and desolated islands with sand in my hand and wind on my face
Peace in mind and no more the chase

When I look at the globe, Hong Kong is marked with a small dot, but yet home to almost seven million people. In this vertical city, like many other metros people eat, sleep and breathe chaos. Not surprising that very often I feel like running away from the claustrophobic trains, crowded markets and smelly taxis; run away to far far away islands where all I’ve is Mother Nature.


This time, we decided to once again explore Vietnam and took a trip to of Con Dao, a cluster of 16 island at the southern tip of Vietnam. Islands that served as prison cells during the French Colonial era and later Saigon regime imprisoned the opponents of the regime in its infamous cells known as “tiger cages”.

That was past, but now it serves as life cell to boost life into people like me, searching for isolation and seclusion. The islands have got everything that one can ask for and one could very well live “Eat, love and pray” life on these islands.

Like every other emerging country, there is some chaos in this country but it is good chaos; chaos that makes your trip memorable. Before we even started the trip I got a notification that Vietnam Airlines has canceled the flight from Con Dao to Saigon, forcing me to stay additional day/s on that island. Unfortunately I could get a seat on another airline – Air Mekong, only to cut my stay short by a day.


Ninety percent of tourists in Con Dao are local Vietnamese people who visit the island for its interesting and rich history, and many to visit the graves of 20000 or so prisoners who died here during imprisonment. This means that the island is not spoiled by a splurge of hotels catering to the rich Chinese and Russians. But that was true only until recently when the first luxury resort was opened by Six Senses. And there you go; the island will now be on a fast track to becoming a booming tourist destination filled with McDonalds, bars filled with loud sub-whoppers and “happy ending” massage places. But I shouldn’t be complaining, at least not yet.

Like most foreign ignorant tourists, we booked ourselves at the luxurious Six Senses resort. The resort which is built on a beautiful beach has all water-front villas and most of the all wood villas have private infinity pool. The staff is very friendly and service impeccable. All this naturally comes at a price, but with cheap money funneled by central banks around the world, money is a problem for another day.

The island is also a breeding ground for turtles that come on the island to lay eggs from June to September every year. It is something not to be missed, so I have heard. I was so busy that I didn’t find time to do any activity. My days were packed with beach, pool, nap and beach again. I had to top all of that with good food and beer. Yes indeed, it was tough but I somehow managed to fight it for few days.

With very few tourists the beaches, forests and lagoons are unspoilt and untouched. Mostly you will have the whole beach and ocean to yourself. It’s a natural paradise, at least for now.

“Ja jee le apni zindagi” (Go, live your life) as famously said in a Bollywood movie.