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.

Why Marissa Mayer should close down Flickr?

I’ve used Flickr for years and with every passing year I felt the value of my “paid access” diminishing to the extent that this year I decided to give up my account.

I’m sure Flickr is providing some value to a handful of users, but I’m speaking from a common user’s perspective who seeks good service at a good price, with an important option to switch services if a better alternative comes along. So why did I use flickr in the first place. 3 simple reasons:

1. Share photos with my friends and family
2. Backup my photos on the internet so that I can still access them if my house is robbed
3. Access these photos with ease in any part of the world that has internet access

So what has changed since then?

1. Over time I found it easier to share photos with friends and family over social networking sites such as Facebook and Twitter.
2. With cloud computing, there are full blown services that provide back and storage of your entire hard drive, making flickr an invaluable proposition with just its photos and videos.
3. I may not be an expert on this topic but I see accessing photos (or data) from cloud drives is much faster and easier for repetitive use. So for e.g. if I access a set of photos once from dropbox, it downloads on my device making it easier to reuse it while flickr would go back to the server every time I access a file.

Now elucidating a bit more on #2, if a customer rents a storage space, he is a legal owner of the goods stored in that space and should have the freedom to take it out anytime.  But flickr seems to think otherwise and has a one-way policy where once you get in you cannot get out. It is amazing business model but completely illegal is my view. So it kills my objective of using flickr as a backup if I cannot download back my files if for some unfortunate reasons I’m burgled of my hard drives and computers. 

I’m sure there are thousands of customers globally feeling cheated the same way I do, especially the loyal customers who have stuck to flickr over the myriad number of free services.

I’m not even talking about some of the other complaints that customers may have related to picture sizes, file types, mobile access etc which may be point of consideration for moving away from flickr, but I’m talking about the basic premise of a storage and photo-sharing site. So it is time to bid adieu to flickr forever with my farewell words “It was nice meeting you and I just wish you hadn’t ripped me off and we ended this relationship on a better note”

Disclaimer: The opinions expressed are my own.

At least you have a job

The newspapers are filled with headlines “Bank of America to lay off 30000 people”, “HSBC to cut 25000 people”. The bigger the number, the more the gossip on the streets, especially over the evening drinks at LKF; a street full of bankers, ex-bankers and future ex-bankers, drinking and bitching about recent financial crisis. If someone with a job even got a chance to bitch then the unanimous response is “At least you still have a job and get your monthly pay check”

Pondering over this statement makes me throw up because it forces me to be content with mediocrity than chasing growth and success.

The recent financial crisis has forced banks to lay off thousands of people in order to improve their balance sheets and regain shareholders confidence. In many cases, tax-payers money was injected into these banks against a demand to reduce risk taking activities and make their balance sheets sound. This has in fact worked contra to the tax-payer's interest by making companies inefficient and forcing them to operate below excellence levels, thereby putting more pressure on the economy and governments, and creating more unemployment directly and indirectly.

This false illusion is not only making companies, including its leaders and managers, more risk averse but also pushing them to act towards self-preservation rather than growth. This is certainly not the objective of individuals, teams and the companies as a whole. Many of the individuals in banks come out from elite business schools where they are taught that crisis provides opportunity; that their girth is measured by the goals they set and efforts they make to chase those goals, and not by preserving a job.

The desire, reason and way of self-preservation is sometimes obvious but in most cases hidden under many layers of company bureaucracy. Surprisingly in most cases the drive for self-preservation comes from self-realization that they are actually not competent and have been riding on the back of smarter people in the organization. Yes realizing that they are part of 80 and not 20 in the 80:20 rule of most companies. In some cases, employees have got richer by the desire of certain organizations to become bigger without any strategy, pushing them to hire mediocre people with fat packages to drive growth but eventually falling on their faces. 

The most derogating of all is the lifetime employment concept, which promotes the idea of job security rather than performance. For a believer of free capitalism, the concept of guaranteeing life-time job, irrespective of his contribution to the company is as fatuous as it can get. In companies where employees are not rewarded and promoted solely on their performance provides opportunity to incompetents at the cost of another deserving candidates. It is like Sports committee telling Ussain Bolt that he cannot compete in Olympics because they promised a particular individual life time participation in sprinting.

Some of the employees have been successful in preserving their “precious jobs” due to company policy of hiring freeze which is forcing managers to keep under-performers. Anyone who believes in talent management knows that the only way to deal with under-performance is to replace them. 

When employees work towards self-preservation, it increases “workplace politics” which is like playing hunger games where the only way to survive is to kill others.

What we need to hear more from individuals and companies is that “Lets adapt and win”. That statement signals commitment, confidence, drive and ambition. How often have we heard that human capital is the biggest asset of a company and how often have we seen companies and managers brushing that thought aside as one of the “good to have management principles in our mission statement”?

We get excited and cheer winners in all facets of life. We celebrate when new world records are set. Why is that? It is because individuals and teams are supposed to excel at everything they do. It is because we are supposed to raise the bar. It is because the objective of working is to reach new heights of success. It is because our action defines the work place, the society and the world.

When companies perform sub-optimally it has a cost not only for its employees, owners, shareholders but for the economy as a whole.

For individuals who are trying to stay content with just a job, let me quote Ayn rand 

“In the name of the best within you, do not sacrifice this world to those who are its worst. In the name of the values that keep you alive, do not let your vision of man be distorted by the ugly, the cowardly, the mindless in those who have never achieved his title. Do not lose your knowledge that man's proper estate is an upright posture, an intransigent mind and a step that travels unlimited roads. Do not let your fire go out, spark by irreplaceable spark, in the hopeless swamps of the approximate, the not-quite, the not-yet, the not-at-all. Do not let the hero in your soul perish, in lonely frustration for the life you deserved, but have never been able to reach. Check your road and the nature of your battle. The world you desired can be won, it exists, it is real, it is possible, it’s yours”

Death of capitalism and return to slavery

The brainchild of US Senators Chuck Schumer and Bob Casey announced a new law known as the Ex-PATRIOT Act, which will no doubt be the dumbest law ever created.

‘Ex-PATRIOT’ stands for “Expatriation Prevention by Abolishing Tax-Related Incentives for Offshore Tenancy”. Kudos to the senate for such a dumb acronym, and even dumber law!! The law proposes three key provisions:

1) Individuals who are deemed, in the sole discretion of the US government, to have renounced US citizenship in order to avoid US taxes, will be permanently barred from re-entering the United States.

2) Such individuals will also be required to pay a 30% capital gains tax to the United States government on ALL future investment gains derived from the US. Currently, non-citizens who do not reside in the US pay no US capital gains tax.

3) These proposals are RETROACTIVE, and, if passed, would apply to anyone who renounced his/her citizenship within the last 10-years.

First, a bit of history lesson. In 1990’s, many wealthy Americans renounced citizenship, renounced American citizenship. President Clinton was furious, and in 1996, he pushed Congress to pass a series of financial penalties for people who renounce citizenship. At the time, a ‘renunciant’ had to continue filing US tax returns for 10-years after renouncing. Effectively, though, this penalty was a tax on worldwide income, not an exit tax on assets.

Fast forward to the 2000s, the Bush regime passed a series of changes to expatriation rules, dropping the income tax filing requirements in lieu of charging a one-time exit tax on assets (why wait every year when you can kill the goose that lays the golden egg). 

In the years since the exit tax on assets was established, the number of Americans renouncing US citizenship has risen steadily and asset bubble has burst, so assets are worth much less than just a few years ago. As such, the government isn’t collecting as much revenue from the exit tax.

Fast forward once again to current decade. Americans renouncing the US citizenship continue to go up.  Eduardo Saverin is the latest example. The Facebook co-founder’s recent renunciation of US citizenship has become a rallying cry for politicians to go back in time and steal money from former citizens retroactively and establish a larger base for future tax revenues.

This is a truly despicable thing to do considering that these former citizens followed the appropriate rules at the time, paid the tax, and moved on with their lives. Now Uncle Sam wants to go back in time to unilaterally change the deal, and expect everyone to abide even though they’re not even citizens anymore. The arrogance is overwhelming.

Obviously the idea behind the law is to discourage Americans to renounce their citizenship.

It is surprising that of all countries America - a country that was once regarded as the freest, most economically enviable in the world, would treat its productive citizens with such hostility.

If America wants to keep people at home, it should try to create an environment similar to Norway and Sweden where people enjoy one of the highest standards of living and are indeed happy to shell out higher taxes for such benefits. 

Warren Buffet once said that to be born in America is nothing short of winning an ovarian lottery but looks like that winning comes with a life long obligation to finance the corrupt misdealing of the political class; and if you chose to abandon the obligation you will be barred from ever entering your homeland again.

In another continent, Europe, we see another insane work in progress. Monsier Hollande is proposing 75% tax on income exceeding 1million euros as part of his plan to fund France’s budget deficit. I guess it is inspired by the Japanese culture where salary man gives away all of his income to his spouse, who would manage the household and give a fixed amount every month back to the husband as pocket money. Naturally such policies are popular among masses but would that really help a nation to overcome its fiscal deficit problems? Would it really get the creative minds build the best companies in that country? Will it really motivate anyone to build something extraordinaire? Or may it will just force people to think ways of evading taxes.

It’s truly extraordinary that the Land of the Free has deteriorated to the point that the government must now resort to threats, coercion, and intimidation in order to keep its most productive citizens inside.

Like the producers in Ayn Rand’s novel Atlas shrugged, many productive members of the society have grown weary of being constantly bashed to pay for political handouts and unending wars of aggression. 

Why kingfisher is one of the worst airlines and Mr.Mallya one of the worst business leader?

What makes a great airline; hand-picked stewardess by the CEO of an airline company, red hot glamour image and a top-model to make people believe that they will have good time. What makes a great CEO; imitating the flamboyant lifestyle of another flamboyant but successful leader. That is certainly the mantra of kingfisher airlines and its flamboyant CEO. Even a guy who is rejected from the worst MBA School can tell you that this strategy will just not work.

First the airline – Kingfisher (KFA)

KFA was built on the same concept as Virgin Atlantic and they do compare well side by side

·     Virgin provides top quality experience and service to its customer. KFA does the same except dropping “customers” from its precept.

·     Virgin is profitable from its very inception. KFA has no plans to get there since its inception.

·     Virgin’s market share and profitability has zoomed up. KFA’s debt and losses have zoomed up as well.

In a futile attempt to provide luxury and glamour, KFA has lost focus from the very basics of running an airline, even if we drop the word competitive. Punctuality, basic customer services, attentive and quick response is all but missing from KFA mandate.

I wouldn’t say that other Indian airlines have out-rivaled Kingfisher in terms of the service, but they are at least able to function normally, at least pay the salary to their employees.

Expensive labor contracts, skyrocketing fuel prices and passengers used to cheap cross-country fares are some of the handicaps in the Indian aviation industry, but airline companies in other parts of the world run successfully within similar constraints.

The shareholders and creditors of UB group and KFA have certainly paid the price for vanity management.

Now to the infamous Dr.Vijay Mallya

Mr. Mallya is among the lucky few who are born with a golden spoon, as he inherited the cash-cow from his father, in the form a liquor business, United Breweries - maker of the popular Kingfisher beer.

Mr. Mallya is known to be a person of “high spirits”. Mr. Mallya spends most of his time partying and rubbing shoulders with celebrities and models, cruising around the world in his yachts, burning tyres at F1 races, cheering his cricket team etc.

He has very skillfully made many crap acquisitions, mounted enormous debt and now in the process of annihilating even the healthier business. On one side his airline company is bleeding to death, not able to pay tax dues or even salaries to its staff while on the other side Mr.Mallya is busy picking models for the kingfisher annual calendar.

The guy is a supersonic loss making machine. And he has cloned his super powers in his son as well.

I wish Mr. Mallya had adopted the same principle as Sir Richard Branson of putting a one year limit to succeed in his new ventures or exit the market. In that case he would have had lot lesser things to manage except his father’s inheritance.

Mr.Mallya should also get his biography published like Richard Branson’s “Loosing my virginity”, except his book will be titled “Loosing my sanity”. 

This blog is published by an anonymous author who is not flying good times tomorrow on Kingfisher Airlines. 

Japanese women are super attracted to men who buy government bonds

“What would you like to drink” asked the bartender at one of the most popular night clubs in Roppongi. The 35-something man, dressed sharply in a black suit and tie replied “I’ll have a JGB” looking intimately into the eyes of much younger girl standing next to him, expecting to get lucky tonight. The girl says in a soft husky voice "You have a good taste"

You may be wondering if this is a new cocktail. Indeed it is a cocktail made by Japanese government which has a base of debt, mixed with some security and a dash of low interest rate.

What was the Japanese government thinking when they started an ad campaign to reinvigorate interest in the ever-inflating government debt? Who wants playboys when you can have Jboys? They must have hired some of the best PUA (Pick-Up Artists) or what they called Nanpas in Japan to come up with this brilliant creativity.

They have run the celebrity campaign, the sex appeal focus campaign and more recently gold campaign (where you get a free gold coin on purchase of JGBs). Wonder whats next in the creative kitty of the Japanese Finance ministry.

http://www.theatlantic.com/business/archive/2010/06/japan-men-who-buy-government-bonds-are-super-sexy/58249/

ipad2 vs. galaxy tab

My first blog and i thought I'll keep it simple.


Lately life has been not very exciting. Its already 2 weeks since my last holiday and normally the best way to uplift your dull mood is to go shopping, so i decided to finally buy a tablet. After being a die-hard fan of apple for many years i gave up on apple since they started launching iJunk every month thereby putting themselves in the same position as Microsoft. Yes, the visionary Steve jobs said it "2011 be a year of copycats" and Apple has unknowingly copied the Microsoft model. So i thought i should look at the known copy of iPad, the Samsung galaxy tablet, but couldn't make up my mind.


When confused i use my sixth sense to reach a decision. My sixth sense is all around me in different shapes and sizes. So i asked couple of friends who all gave me their own view on why i should buy one over the other. Some played safe saying Apple is a long term story while some said that galaxy is cool and you can do lots of interesting things. I also got an intelligent piece of advice from my wife "You don't need either"


After all the insights from my sixth sense, I've finally made up my mind that I'll buy Samsung galaxy tablet and I've a strong argument for my decision - for some reason i just don't like apple, especially now that the visionary Steve Jobs won't be able to do anything but watch from above the fate of Apple. Rest in peace Mr.Jobs.


Life is too short to have an apple everyday.