Steven's Blog

Japan, Rotten to the Core? No.

When you hear of malfeasance in American companies like Equifax, Wells Fargo, Valeant, Countrywide Financial and Washington Mutual of subprime mortgage crisis infamy, and even Enron, no one questions whether or not something is rotten in the whole of American corporate culture.

So, why should we think differently when it comes to corporate malfeasance in Japan?

Kobe Steel’s recent scandal, in which we have learned of falsification of performance data of steel supplied to manufacturers in Japan and around the world, is yet another in a series of Japanese company scandals, which has caused many people to question yet again whether or not something is rotten at the core of Japanese corporate culture. I was asked this very question in a live television interview on Bloomberg Asia-Pacific’s Markets program. You can watch the video right here:

It’s not about Japanese corporate culture that we should be concerned, because there is no such thing as a single “Japanese corporate culture.” There is however something likely very wrong with Kobe Steel’s culture.

Many might argue that Kobe Steel is a Japanese company with a “Japanese” corporate culture. However, a monolithic Japanese corporate culture simply does not exist. Fast Retailing (purveyors of the Uniqlo brand), Cyberdyne, Softbank, Ryohin Keikaku (purveyors of the Muji brand), and Japan Airlines are all companies just as Japanese as Kobe Steel. Yet all have corporate cultures vastly different from that of Kobe Steel. In fact, each of the companies I named has a corporate culture distinct from the others despite all being Japanese, and as far as we know, none have committed malfeasance similar to that of Kobe Steel.

Ascribing blame to Japanese corporate culture for illicit and illegal activities is not just offensive to the vast majority of people in businesses in Japan who operate within the rules and contribute value to the world, it’s dangerous because it ignores root cause. Without understanding root cause, no problem can be remedied. Blaming Japanese corporate culture becomes a scapegoat and an excuse for doing nothing. After all, no one person can single-handedly change Japanese culture. For a business leader to ascribe the cause of malfeasance in his or her own company to Japanese corporate culture is the worst kind of abdication of individual leadership responsibility.

Countries do not make corporate culture. Leaders do, or do so by neglect. Click To Tweet

If you want to understand the root cause of malfeasance at Kobe Steel or at any other company, look to the behavior of managers and staff in the organization from the top on down.

I was once asked to do just that for a different business. The CEO of an engineering company called me in to investigate the root cause for lapses in safety protocols that had led to a number of serious accidents. The CEO was confident I would find fault with frontline staff as forgone conclusion even before I began the investigation. Instead, I found that managers in the business were subtly and at times not so subtly pressuring staff to skirt safety protocols in order to boost business results. The practice had gone on for decades to the extent that the majority of middle managers who had come up through the ranks had never known any other way, and many had even been complicit. The behavior went all the way to the top.

After calling them out, the CEO and other senior executives protested, claiming this kind of malfeasance was “standard practice” in the industry in Japan and a necessary evil to be profitable. However, that reasoning simply didn’t wash. A competitor company in Japan that my client company had recently acquired exhibited no such practices and was profitable.

Though often cited as an excuse, Japan is never the root cause of whatever may ail a business in Japan. It is always something else that is within the realm of control of the business’s leader. No business leader is ever at the whims of whatever he or she may see as the prevailing culture in the country. Any business leader can and should impose the corporate culture he or she wants for his or her company, no matter how culturally unconventional. Rakuten CEO Hiroshi Mikitani imposed a culture of global business, requiring English capability of all staff as a prerequisite to remain employed—unthinkable in Japan with its tradition of lifetime employment and notoriously wide-spread aversion toward foreign language. McDonalds Japan CEO Sarah Casanova, who in four years completely turned around the business and possibly even saved the company, busted entrenched hierarchy and imposed a flat organization when it came to innovation, by putting a junior staffer with a great idea in charge of a reform initiative for coming to her directly after being stymied multiple times by her immediate managers. As Japan Airlines CEO, Kazuo Inamori, also led a remarkable Japanese business turnaround. Inamori imposed a Buddhism-based business philosophy on everyone in the company, down to obligatory education sessions. He was adamant that the staff must be happy, as opposed to the storied self-sacrificing, self-effacing hallmarks of salaryman stoicism. Godiva Japan CEO Jérôme Chouchan imposes a business philosophy based on Kyudo or Japanese archery, in which just hitting the target is not enough to score the point. You also have to have proper form. There is no tolerance for poor form at Godiva Japan, even if you do hit business targets, unlike at Kobe Steel. And what could possibly be more quintessentially Japanese than Kyudo? Godiva Japan doubled its sales in five years in a declining market. None of these leaders paid any heed to concepts of what typical Japanese corporate culture is supposed to be while imposing the culture they wanted for their respective businesses, each with resounding success.

However, imposing a corporate culture to improve business performance, like Mikitani, Casanova, Inamori and Chouchan did, and reforming a culture to eradicate illegal and illicit behavior are not the same thing. In the former, a leader can lead the change. In the latter, a leader has lost the ability to lead reform with any kind of credibility. It is not possible to simply claim you have found religion and start afresh. To achieve real change in the case of malfeasance, leaders must be replaced, and that includes mid-level managers who have been complicit.

For Kobe Steel, this will be a hard pill to swallow. We have so far learned that falsification of data goes back at least ten years, and was not isolated to one division. Like the company I had investigated, this implies that many managers who have come up through the ranks have at best been aware of the practice and at worst been complicit, not implausibly including CEO Hiroya Kawasaki. Kobe Steel likely has multiple generations of mid-level managers whose experience in how to succeed in business is based on how to cheat. If you were a cyclist, would you want to be coached by Lance Armstrong? How many staff do you think would look up to and want to be mentored by a complicit manager at Kobe Steel? If you were a CEO, would you want such managers leading staff? If you want to drive away the best people in your business, coddle the mediocre.

Kobe Steel issued a statement that even though their product was not up to spec, it was still sufficiently safe and there have been no accidents. I wonder how many complicit managers rationalized what they were doing in this way. For the current leadership of Kobe Steel to believe that this is an acceptable response to the public indicates not just arrogance, but deliberate myopia. How many accident investigations over the past decade may now need to be reopened to understand cause? Do you believe the current leaders who approved the statement can possibly be part of the reform effort?

The relatively recent raft of Japanese corporate scandals that have come to light—FujiFilm, Toshiba, Takata, Mitsubishi Motors, Nissan—make it appear as if there is something wrong with Japan. Yet have you considered that maybe this is because there something right with Japan? Are we seeing more of these scandals in the news because of increasing transparency, less tolerance for malfeasance, and greater expectations from business leaders and how their companies contribute to the society in which they thrive? And while Japanese governance regulations may lag behind, are we not seeing a convergence of expectations worldwide as to what constitutes the minimum norms of behavior of companies and the people who lead them? When the “high speed” Acela train departs New York’s Penn Station twenty-five minutes late, everyone grumbles but no one takes notice. When a Shinkansen departs Tokyo Station twenty-five minutes late, it makes the national news. Does that mean that there is a problem with high-speed trains in Japan that does not exist in the United States?

So what can be done to prevent or at least reduce corporate malfeasance in the future? Some have argued that the root cause of corporate malfeasance in Japan is lax governance regulations, and that the remedy is in strengthening them. I agree that governance in Japan ought to be improved. However, governance is not the root cause of malfeasance. Rather, it is the last defense against it. Note that the strength of governance regulations in the United States and Germany did nothing to stop malfeasance of Wells Fargo and Volkswagen respectively. No matter how strong governance is, there will always be malfeasance.

It is not the strength of governance that will solve the problem of corporate malfeasance. Rather, it is the strength of leadership, and in particular the strength of character in business leaders. What I mean by character is the resolve to stick to one’s principles even when there is an immediate penalty, no matter how harsh, in doing so. For example, Olympus CEO Michael Woodford called out the malfeasance he discovered despite the immediate hardship it caused him personally. Many of the Wells Fargo employees who refused to fabricate sales to customers or attempted to speak up not only lost their jobs, but were penalized with a black mark on their official records making it impossible for them to get another job in the finance industry. That kind of tenacity to uphold one’s principles demonstrates strength of character.

The only people who can strengthen business leadership capability for the future are business leaders now. Leaders are not trained. They are cultivated over time by the leaders above them. The most successful companies I know have leaders who have imposed a culture that includes two specific aspects that help with the cultivation of the next generation of leaders. First, failure is treated as learning. People are rewarded for good ideas that don’t work so that the right behaviors have just as much importance as good business results. Failure ceases to be seen as something to be avoided at all costs, like say, for example, fabricating performance data to avoid some immediate failure or penalty. Instead, failure is viewed as an inherent part of any successful business.

Second, there is no tolerance for illicit or illegal behavior of any kind, no matter how small the impact. So for example, a top-selling salesperson who cheats on business expense reporting for personal gain must be terminated. That not only roots out illicit behavior in the business, but it forces development of strength of character of the manager to whom the salesperson reports. Managers I know who have had to fire top-performing staff for illicit behavior often worried about loss of sales and disruption in customer relationships. Managers of lesser character balk, give the staff person a pass and move on, signaling to everyone privy to what happened that illicit behaviors are acceptable in the company. What kind of leader do you think that staff person will become when promoted and given his or her own staff to manage?

If you are a business leader now, what are you doing to impose your culture? The quality of future leaders in your business depends on the culture you create now, and may even help avert what happened at Kobe Steel and other companies.

And what of Kobe Steel? Kobe Steel’s board has some tough decisions to make. I’ll go long on Kobe Steel should leaders complicit in malfeasance be removed from the business, all the way to the top, and the new leader imposes a culture that cultivates strength of character. I’ll go short on Kobe Steel for anything less.

Connect with me in Tokyo at this unique live event on Wednesday, November 15th, 2017, with Japan CEO Antony Strianese of global Italian food giant Barilla.

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