Successful Japanese organisations will need to embrace change and begin their transformational journey Japan Rebooted A time to embrace change

www.pwc.com.au/asia-practice At a glance

$1.56bn Amount invested (¥160bn) by Japanese venture capital funds in 2013, falling way short of the more ⅓ than $25bn a year invested by Foreign investors US venture capital funds. now own almost one third of the stock of major Japanese 92% corporations. Percentage of Japanese companies yet to put in place plans to promote returning expatriates to executive levels. 20% Percentage of the world’s patents that are filed by % Japan, just behind 50 the 25 per cent The number of Japanese students filed by the US. in American universities has fallen by half in the decade to 2012. 1% Women accounted for just above 1 per cent of executives $140bn at major Japanese The amount of R&D investment by companies in Japan Inc. over the past decade. January 2013.

All monetary amounts shown in this report are denominated in US dollars (unless otherwise stated).

Japan Rebooted: A time to embrace change 2 Embracing change

Corporate Japan is undergoing tremendous change against a backdrop of new government policies designed to stimulate growth in the economy, which as we know has remained stagnant for a considerable period of time. With change comes many challenges. Japan continues to play an important role in helping shape the global economy with its current financial wealth, leading-edge technologies, workforce dedication and standards for quality. These continue to allow Japan Hiroyuki Suzuki to maintain a position that many countries envy. But to sustain our position, the actions of companies and business leaders will be critical to ensure our country can adapt to the increasingly complex and volatile business landscape. The heart of the matter is embracing change. Japanese business leaders need to address strategic and operational challenges by embracing new attitudes towards governance, innovation, talent management and diversity. This transformational journey is imperative to future-proof corporate Japan, and will help us all achieve renewed growth and prosperity for our great nation. Each of us knows that the world needs a healthy and resilient Japan. Jason Hayes

Hiroyuki Suzuki Jason Hayes Territory Senior Partner Partner – Japan Practice Leader PwC Japan PwC Australia

Japan Rebooted: A time to embrace change 3 “The most important area for Japanese companies to modernise is their management. Modernising can mean having the latest technology and up-to-date information. What I mean by modernising is improving the receptiveness and responsiveness of Japanese management to what is going on in the world right now.” Yasuchika Hasegawa, President and Chief Executive Officer, Takeda Pharmaceutical

Japan Rebooted: A time to embrace change 4 Contents

Competitive collaboration Introduction 06 10 Striving to be the best

Management matters Governing principles Ensuring Japan’s future Establishing more leaders can survive in a diverse and accountable global economy 13 16 corporations

The last word from Where to now? 20 Hiroyuki Suzuki 21

Japan Rebooted: A time to embrace change 5 Introduction

Amid the promise of Abenomics – Figure 1: Total R&D expenditure. Past 10 FYs, $bn and the return of stable government and renewed prospects for reform 140 in Japan – it is easy to lose sight of one major development: that Japan’s major corporations have effectively been thrown into a blast furnace of change and will emerge in a substantially different form to what they look like today. That is, if 60 they hope to prosper in a radically different world. 33 It’s not just the changed domestic environment (which we covered in the 17 first Japan Rebooted publication) that Apple Samsung Japan Inc. is fuelling these fires of change: there is the driving need to internationalise, Japan Inc – Panasonic, Sharp, Sony, NEC, Nintendo to harness synergies, and to deal with Source: Thomson demographic change and increasing competition from Korea, China and other industrialised nations. Figure 2: Net profit 2004-2013 $bn

At its core, the challenge for Japan’s corporations in coping with these 40 Apple external factors is to rediscover their “innovation mojo”, and establish more 30 effective and internationally deployable Samsung management and governance models. 20 In the era of big data, connectivity and open-source collaborative solutions, Google many of the products that Japan 10 excels at producing – LCDs, silicon chips and other electronic equipment – have almost become commodities. 00 Japan Inc The true innovation race is in how to build business models and distribution (10) systems around the advantages that these technologies - and the reach of the internet - provide. And then to use this as (20) a path to sustainable profits.

Now that the torch of technological (30) supremacy has passed from Sharp and 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Panasonic to Apple, Google, Samsung and a range of other non-Japanese firms, the need for improvement is clear.

6 Japan Rebooted: A time to embrace change Japan Rebooted: A time to embrace change 6 In the rapidly growing online gaming So far, Japanese companies have not and publishing space, GREE, Line and had a good track record in this area. other new-wave Japanese companies To improve, Japanese companies will are performing strongly, while the giants have to drastically lift the capacity – Sony, Canon and others – remain under of their management and staff to intense pressure. better understand foreign cultures, management styles and decision “Japan’s consumer electronics makers making processes, and develop a are in total breakdown. They need to greater appetite for risk. Or, in lieu compete with ideas not technology,” is of that, coming up with a model that how hedge fund executive Masamitsu allows the parent company to remotely Ohki puts it. monitor and influence the full range Nevertheless, Japan remains an of their subsidiaries’ activities from innovative country. It files 20 per cent balance sheets and expenditure, to of the world’s patents (just behind the recruitment, information technology 25 per cent filed by the US with its much and customer service. larger population). And when it comes to In this third publication in our Japan patents granted it has a significant edge, Rebooted series, we look at how securing 55 per cent more than the US. Japanese companies are tackling these But on the global innovation index imperatives and what more needs – published by the World Intellectual to be done to boost Japan’s global Property Organisation – Japan sits 21st competitiveness and ability to operate in out of the 142 countries, coming in today’s global corporate landscape. behind both Australia and New Zealand, This issue of the series will focus on the and just above Spain and Estonia. battle to recapture innovation, update That may be something of an management styles and philosophies, anomaly, but Japan is finding that in and improve governance structures the information age, the edge is in among Japanese firms. data, usability and in collaborative systems as much as it is in skilfully engineered hardware.

Firms, too, must work to implement far more accountable and effective governance models. The Japanese government and the more proactive companies realise that drawing board members solely from executive ranks and operating without external directors hurts accountability as well as corporate performance and value.

And as Japanese companies embark on the looming wave of M&A (which we covered in the second publication of our Japan Rebooted series) it will become ever more important for Japanese companies to control newly acquired foreign subsidiaries and integrate them into their operations, maximising their potential rather than simply living off the rents they provide.

Japan Rebooted: A time to embrace change 7 Interview with Yasuchika Hasegawa of Takeda Pharmaceuticals

As part of this publication in the PwC: How globally competitive are Japan Rebooted series, PwC asked large Japanese companies today? leading businessman Yasuchika Hasegawa: You can see by their results. Hasegawa to share his thoughts Uncompetitive companies do not remain on the environment facing large for long. Canon, Honda, Toyota, and Komatsu are large, globally competitive Japanese companies today and Japanese companies that you will probably what changes need to occur. have heard of. There are a quite a few Takeda, with a market capitalisation of other examples that you will probably about $US35bn, is one of the world’s top not have heard of such as Murata, TDK, and Rohm, because they sell components. Yasuchika Hasegawa pharmaceutical companies and Asia’s largest drug maker. The company is also Then there are large companies like at the forefront of the trends among Shiseido and Nintendo that show Japan President and Chief fast-moving Japanese corporations in can compete in areas such as beauty and Executive Officer, embracing English in the workplace, entertainment. About three quarters Takeda Pharmaceutical drawing in talent from abroad (chief of Japanese people work for small and operating officer Christophe Weber midsize companies. So it’s important for is French, as is the company’s CFO) Japan that small and midsize Japanese and acquiring a string of offshore companies are globally competitive as well. subsidiaries to boost growth. PwC: In what areas is it most Mr Hasegawa, along with steering important for Japanese companies Takeda through this transition towards to modernise? becoming a truly global company, is also Hasegawa: The most important area the head of the Keizai Doyukai, or Japan for Japanese companies to modernise Association of Corporate Executives, is their management. Modernising can and has been a vocal commentator on mean having the latest technology and trade liberalisation, innovation and the up-to-date information. What I mean by future of Japan. modernising is improving the receptiveness He continues to enhance his reputation and responsiveness of Japanese as a fearless and accurate observer and management to what is going on in the participant in Japan’s revival through world right now. Once they realise the his comments for this issue of the Japan balance of power has shifted from the seller Rebooted series. to the buyer, I think the old attitudes of industrial capitalism will fade away. I also foresee a more modern role for women and for non-Japanese people in Japanese companies.

Japan Rebooted: A time to embrace change 8 PwC: How has Takeda moved to PwC: What changes are necessary or integrate foreign subsidiaries important in Japan towards ensuring and staff and create a more there will be innovative, well managed global corporation? and powerful Japanese companies in the future? Hasegawa: We made decisions on how our foreign subsidiaries could best contribute Hasegawa: After years of deflation we to Takeda’s overall business. As a result we need business confidence to rise and integrated some; others we left more or less investment to go up. So in addition to the autonomous. With acquisition of foreign points I made above, lowering corporate subsidiaries came the need for global taxes, freeing up trade, and making leadership and governance from Tokyo. employment laws more flexible. I am For this we brought in non-Japanese pleased that we have a government willing executives because they have experience to make such changes. We need to free up in emerging markets and in other areas resources held by vested interests – they that we lacked. Binding all together is a are playing a losing game. We also need a corporate philosophy called “Takeda-ism” workforce with better English skills. The that has guided the company for 232 problems are well known. How soon we years. Based on integrity, it is as relevant solve them and ensure a prosperous future in today’s global pharmaceutical market for Japanese companies is up to us. as it was in old Japan.

PwC: Can Japan recapture its innovative spirit, and if so, how?

Hasegawa: Japan should not try to recapture anything it might have had before. Too much has changed. Technology, capital and talent are now available everywhere in the world. That was not the case in the 1970s and 1980s. In general Japan must be prepared to accept the risk and failures that go right along with innovating. And it needs to provide the things that bring about innovation: immigrants, risk money, a tax system with the right incentives, and so on. The Abe government has set up special economic zones for this purpose. Japan can be as innovative as it wants to be. We haven’t even scratched the surface of our potential.

Japan Rebooted: A time to embrace change 9 Competitive collaboration Striving to be the best

Silicon Valley has the rare distinction New-wave Japanese companies Gree of being a place that has actually and DeNA have both made acquisitions It’s not just the become a byword for a whole in Silicon Valley giving them a presence industry, and a very profitable and there, while Softbank – arguably one more avant‑garde powerful one at that. of the most aggressive Japanese major firms – has plans for a new Silicon Valley Japanese Thirty years after the term was coined, office to house Japanese engineers on this part of the San Francisco Bay secondment, as well as key staff from its companies turning Area has become internationally $21bn US acquisition, Sprint. renowned as the epicentre of global to Silicon Valley Car makers Nissan, Honda and Toyota, technological innovation. while they are traditional industrial Even NTT, a former public utility It’s home to thousands of startups as companies (albeit with a strong and one of the world’s largest well as technological giants that, while technological edge) have R&D centres telecommunications companies, they may have begun in a garage, now in Silicon Valley focused on improving has established an institute in Silicon dominate the corporate landscape in the in-vehicle infotainment options, as Valley, complete with a suitably US and throughout the world. well as, in Nissan’s case, autonomous trendy name. vehicle technology. In some instances, the “disruptive” NTT I3 is a wholly owned subsidiary innovations emerging from this crucible Medical device maker Terumo, of NTT Group and will focus of innovation have changed the face of advertising giant Dentsu and old-school on information security, cloud whole industries, such as publishing, electronics giant Panasonic are among computing, and the commercialisation gaming and retailing. the other Japanese firms establishing a of advanced technologies. presence in Silicon Valley. So it’s little wonder that it is to Silicon NTT believes the talent pool in Valley that Japanese companies are At a basic level the idea seems to northern California will drive leading heading en masse to try to rediscover the be about exposure to new ideas edge research and innovation. The energy and innovation of the 70s and and personnel through simple proximity telecom giant plans to send young 80s when they swept all before them to the modern world’s epicentre Japanese researchers on overseas amid heady predictions Japan’s economy of innovation. assignment to Silicon Valley, starting would overshadow that of the US. in 2014. The companies hope that this spawns This flood of Japanese firms wanting to ideas and inventions – and executives – This past summer, NTT announced place themselves alongside the fount of that will come to lead the world. a new CEO for I3 – Srini Koushik – technological progress is a measure of former CEO of Right Brain Systems, “That’s where the talent is – that how much the innovation pendulum in and previously chief development ecosystem produces some amazing talent the technology sector has swung back officer for HP’s Enterprise and business models – and they want towards the US. Services unit. to tap into that,’’ Wei Ku, a US-based , long seen as one of Japan’s PwC partner who is on secondment in most creative and vibrant companies Japan, says. of the modern era, was quick to set up PwC recently studied the success or a development centre in San Francisco otherwise of investments in Silicon to identify new technologies and Valley by Chinese, Japanese, Korean and acquisition targets. Israeli firms.

Japan Rebooted: A time to embrace change 10 Only the Israelis, Ku says, succeeded. to the Bay Area where they toured the “They spoke the language and they headquarters of and a range stuck around and treated the startups as of successful start-ups, influential business partners,’’ he says. venture capital firms and other main stream players in the Silicon Valley “Their cultural upbringing allows them ecosystem, including Mayor Edwin Lee to embrace change and embrace failure. of San Francisco. In Japan, if you fail, you are miserable – therefore risk taking is shunned.” But Japanese firms that set up in Silicon Valley will have to do more than simply The other crucial element in innovation show up with cash. In the frenetic and success is risk tolerance. The premium fast-paced world of technology investing placed in most Japanese firms of in the US, companies that continue to avoiding failure at all costs may be live by the mantra of ishibashi o tataite hurting their ability to innovate. wataru – tapping each stone in the Some argue that Japanese firms need to bridge as you cross – may find they miss embrace the concept of intrapreneurship the best opportunities. – creating a culture or environment And they will have to convince potential within a firm that rewards and partners that they are prepared to encourages risk taking and innovation. embrace risk, and its occasional At the moment, the freewheeling, consequence – failure. fast-talking world of start-ups and their “There’s lots of money in Silicon Valley,’’ upstart leaders is a world away from the Ku says. “They (start-ups) aren’t looking heavily ritualised and formal business for money – they are looking for good world of Japan. business partners. Japan has to compete It’s completely different to the by being the partner of choice. hierarchical, risk-averse management “That means embracing startups as structure of corporate Japan. partners and equals and sharing what A seniority-based promotion system, for you can bring to the table – distribution example, would be mocked as absurd channels, key technology and whatever in Silicon Valley. else you can contribute. Even the major league technological “Once you find the right partner it’s players in California – such as Google about setting up the right guidelines and and Facebook – operate under a metrics as opposed to pouring money in management philosophy that grants staff and saying ‘Report back to me when you much more freedom and responsibility are done’.” to innovate and develop their ideas. PwC’s Global Lead for Innovation The Silicon Valley move may finally Strategy, Rob Shelton agrees. create some pressure for culture to change among Japanese business and it “The winners will be those that can may come from the ground up – those collaborate effectively and become employees that pass through the Bay Area proficient in the way the game is played divisions of the leading Japanese firms. in the Valley – fast moving, high value initiatives to be in the front of the pack,’’ Ku says the current round of Japanese he says. investment in Silicon Valley differs from previous ones in that this time firms are “To be credible in the Valley, companies sending their key staff to the Bay area as need fast, reasoned decision making, well as their cash. solid, high clock-speed implementation, and a clear value proposition. Said “You are seeing a lot more key personnel differently, the best players – venture and technical specialists being situated capitalists, start-ups, big established in Silicon Valley,’’ Ku says. companies, universities – have a clear The rising interest level from Japan brand positioning and a reputation for in Silicon Valley is clear. The Abe delivering value. If you have those you government’s information technology get invited to the party. If not, you get minister, Ichita Yamamoto, recently led to watch.” a large delegation of business leaders

Japan Rebooted: A time to embrace change 11 Venturing abroad

The other upshot of this trend among Figure 3: Venture capital and angel investing $bn Japanese firms to look to Silicon Valley may be to breathe new life $24.8 – Angel into the venture capital industry in $22.5 – Angel Japan, which has a proud history but remains a comparatively minor source of funds. In the US, by contrast, venture capital – along with funds from angel investors – is a mainstream source of capital for companies $29.8 – VC $29.6 – VC and products that have innovation at their core.

Data released at a recent Japanese venture capital symposium found Japanese venture capital funds invested $0.1 – Angel $1.6 – VC 160bn yen ($1.56bn) in 2013. That falls $1.2 – VC way short of the more than $25bn a year invested by US venture capital funds, US Japan US Japan* which is matched in size by the so-called 2011 2013 angel investing sector.

However, the venture capital sector in *Japan numbers are for FY so 2013 is April 2013 to March 2014. Data not available for Japanese angel investing. Source: PwC/National Venture Capital Association Moneytree™ Report, Thomson Reuters, Center for Japan is at least growing and the Abe Venture Research, Venture Enterprise Center Government has pledged to amend laws to boost tax incentives for venture capital investments.

It is hoped that the changes cause Japan’s cash-rich corporations to allocate more of their vast piles of capital towards creating tomorrow’s innovative technology and to recognise that not all innovation can be done in-house. The Abe government is also introducing changes to make crowd funding – a growing source of capital for both philanthropic and niche entrepreneurial projects – legal in Japan.

Japan Rebooted: A time to embrace change 12 Management matters Ensuring Japan’s future leaders can survive in a global economy

Japan Inc’s acquisitions or modern world, but paralysed by doubt such as those heading to Silicon Valley investments in Silicon Valley – and in an era of economic uncertainty and are often looking abroad for employees elsewhere for that matter – may reluctant to embrace responsibility. capable of running subsidiaries, as well also be about buying talent or more They are especially reluctant to travel as a means to absorb foreign technology specifically, about getting access to or work overseas. or management practices. the kind of employees who can work Figures on younger Japanese working Suntory’s recent $16bn acquisition of effectively in the acquired business, abroad are difficult to obtain, but Beam, the US distiller of the famous or in other subsidiaries around statistics on those studying abroad Jim Beam range of bourbon whiskies, is the world. show a sharp fall in the number of cited as an example of this development. Japanese enrolled in foreign schools As well as creating scale (Suntory has It could be argued that Japanese or universities. management ranks are looking become the third-largest global spirits increasingly threadbare and non- Global language educator Education producer under the deal), the move was competitive, on the global scale at First has found that the number about talent recruitment and retention. of Japanese students in American least. It’s a view backed by Rakuten CEO Nobutada Saji, the grandson of the universities has fallen by half in the chief Hiroshi Mikitani, who set up founder Shinjiro Torii, has steered the decade to 2012, and that drop is his own Japan Association of New company through an ambitious program mirrored elsewhere in the world. Economy after defecting from the of offshore acquisitions, including tradition‑steeped Keidanren, for years These statistics can arguably serve as a the $4 billion takeover of the French Japan’s premier business lobby group. rough proxy for the number of Japanese Orangina Schweppes group, the Beam He believes Japan’s decades of working abroad or seeking to do so. acquisition and the UK-based Lucozade and Ribena brands. stagnation are more to do with the lack A recent Mizuho/Nikkei survey of 100 of quality management personnel than major Japanese companies highlights Suntory has placed its faith in a few any shortage of ideas and innovation. the fact that in many Japanese key foreign executives to handle the On one hand you have the companies, there is little incentive integration of some of these subsidiaries. swashbuckling, baby-boomer generation for staff to work abroad because their Former Danone executive Stanislas of Japanese managers who may have expatriate experience is not valued de Gramont was appointed to run the been confident and capable enough to when they return. European operations (Suntory Beverage and Food Europe), while the CEO and work abroad, but whose skills are losing The survey found 92 per cent of president of Beam, Matthew Shattock, relevance in the information age and are companies were yet to put in place plans was left in place to run Beam Suntory, culturally ill-equipped to run a modern to promote returning expatriates to which the company expects to be pivotal globalised workplace. executive levels. to higher global revenues and profits. Then there is the younger generation of In light of the limited number of globally Japanese, who are more attuned to the capable Japanese employees, companies

Figure 4: Number of Japanese students abroad

83,000 54,506 40,487

2004 2007 2010 Source: Institute of International Education Japan Rebooted: A time to embrace change 13 Parts of the puzzle

Suntory is already taking the first They are also finding, according to “When they accept the international steps down the track of grappling Sasaki, that the old ways of governing standard they are worried about with how to meld these culturally subsidiaries – relying on personal Japanese corporate values being diluted. and linguistically different parts relationships between managers as the The presence of headquarters is being key linkage – was not working and new minimised. Some mid-sized companies into one properly functioning whole guidelines and systems had to be put have shifted the global headquarters that responds and reports to the in place. to Singapore or the Netherlands. This parent. Or, alternatively put, how is a big issue in terms of identity for The current situation “creates a cultural to integrate the distinctive business the company.” cultures of Paris, London and the issue where others don’t understand why United States, and then incorporate a person is promoted when it is linked to Rakuten, Fast Retailing and Softbank seniority”, he says. are among those Japanese firms that are the most desirable elements of them leading the internationalisation race, “The same thing happens with into the global organisation. according to Sasaki, and have created expatriates, whether they are Australian workplaces that largely march to the Ryosuke Sasaki, a specialist in talent or another nationality, it is not clear to beat of the global drum with merit-based retention and director of People and them why they aren’t promoted faster. So promotion, no job for life, higher staff Change for PwC Japan, said this was many non-Japanese managers become turnover and Western language and a process Japanese companies had demotivated and leave the company. struggled with in the past, perhaps management practices. “That’s why Japanese companies are because the changes needed often had “Those are really obvious ones that have trying to set clear standards and make uncomfortable ramifications for the started internationalising and a younger their operations at head office more organisation, such as lay-offs, a transfer generation are working at headquarters. internationalised. Otherwise they can’t of power from head office, or policies They have a very different culture,” accept talent from outside Japan.” to force the headquarters to become he says. more international. Sasaki says some firms are trying to They are the minority though. Others devise their own globally compatible Sasaki believes that almost all Japanese appear to see empowerment of regional standards and procedures from out of companies now believe in the need to headquarters as their preferred route head office, while others were prepared become more internationalised, but less to becoming more international. to take the existing standards and than 10 per cent are moving purposely Companies are recognising that it procedures from their subsidiaries and towards a solution. might take significant time to make the implement them across the company. While the ‘job for life’ compact has environment in the Tokyo headquarters disappeared, Japanese human resources “These flexible companies think there fully internationalised, but it is a lot practices remain unique, and firms is no need to reinvent the wheel. To me, easier in Singapore or the US or Europe, continue to be reluctant to reduce this approach seems reasonable but Sasaki says. there are some issues around corporate headcount in the Japanese operations Once that is achieved, then the regional values,’’ he says. even when they know it’s needed to headquarters becomes the take up point remain competitive, he says. to draw in talent from outside Japan.

Japan Rebooted: A time to embrace change 14 English matters

Paramount to the ability of For companies, the situation is a These companies are often also the Japanese firms to integrate paradox, according to the EPI 2013. ones that have made more radical foreign subsidiaries will be While they recognise they need to steps towards embracing English in boost the English levels of their staff, the workplace. the English proficiency of some remain wary of hiring returning Rakuten and Fast Retailing are the their management. expatriates or graduates who have most prominent of this small group, studied abroad for cultural reasons. Like it or not – and in Japan it’s fair to but Nissan, Bridgestone, Sharp, Takeda say that’s a not – English is increasing its “Instead of seeing the economic value Pharmaceutical and a few other major grip as the global language of business, of ambitious, bilingual graduates, some Japanese companies have followed suit while Japan’s grasp of it is getting worse. Japanese companies hesitate to hire in embracing English in the workplace. culturally diverse junior staff who may Research from Education First says These companies are reaping the benefits not be inclined to adopt traditional Japanese adults have failed to boost of attracting and retaining a globally corporate roles,’’ the report says. their English ability in the past six years. savvy workforce while their rivals persist Instead, their skills have declined as “A survey of 1,000 Japanese companies with the slower and less successful China, Indonesia, Vietnam and other in 2011 found that less than a quarter route of trying to make their existing Asian countries have logged significant planned to hire any Japanese applicants employees more internationally capable. increases in proficiency. who had studied abroad.

“Despite being a far wealthier and more “We’re cautious because we emphasise “When I announced my developed country, Japan is struggling continuity and long-term commitment to to teach its students English for use in a the company,” Keiichi Hotta, a recruiter plan to make English the competitive global economy,’’ Education for the giant Japanese financial bank official language of my First noted in the latest edition of its Tokyo-Mitsubishi, told The New York Tokyo-based company, a lot English Proficiency Index. Times in 2012. of people said I was crazy. The report of the index – which is based This prejudice, in turn, reduces the At least one fellow Japanese on hundreds of thousands of test results incentive for young Japanese to study businessman said I was from students across the world – makes abroad, even if they have the desire. stupid. But three years grim reading when it comes to Japan. Ryosuke Sasaki, PwC Japan’s People later, it’s clear to me that It criticises Japanese schools and and Change director, says the more ‘Englishnisation’ works.” teachers for failing to properly conservative Japanese companies Hiroshi Mikitani, CEO, Rakuten instruct pupils in spoken English while preferred to try to make their existing obsessing with grammar, and it attacks staff more international through English corporations for discriminating against training and other measures, rather than The Abe government – as part of its expatriate staff returning home. hire graduates who have studied abroad. growth strategy – has pledged to try to double the number of Japanese students “The most common English exam in But Sasaki says new-breed companies, studying abroad from 60,000 to 120,000 Japan is the Eiken, taken by 2.3 million such as online auction giant Rakuten, by 2020 as well as improving the people in 2011. Although it includes a the rapidly growing Fast Retailing standard of English education in schools. speaking section, only more advanced (the parent company of Uniqlo) and students take it, and they must first pass Softbank, are completely different, It has mooted the idea of “global” high a grammar test in order to be tested on preferring to hire globally savvy schools to cater for outward-looking spoken English. In all cases, the majority graduates even if means their staff students and pledged to review the of a candidate’s score is determined by turnover is higher. underperforming system of English grammar, vocabulary, and translation education in schools. The government questions,’’ the 2013 EPI notes. also wants to introduce an English- language entrance exam for the public service next year and wants universities to take similar steps.

Japan Rebooted: A time to embrace change 15 Governing principles Establishing more diverse and accountable corporations

For Japanese companies, the “The perception is that they are giving up Figure 5: Independent directors as a pressure to become global is not just control in bringing in external directors,’’ percentage of Board of Directors occurring at the managerial level, he says. “I think, for the most part, one of US S&P 500 84% but also when it comes to how the the most important things to look at is how the board can add value to the company.” UK FTSE 150 67% board is configured. HK Hang Seng 42% “With some insider boards you don’t Japan Topix 9% The Olympus issue thrust the necessarily have directors who have shortcomings of Japanese corporate had the experience of sitting on other governance into the global spotlight, boards-directors who have served across highlighting the prevalence of different industries and in companies of companies run by veteran insiders with different sizes.” close personal links to each other and no independent directors on their boards. As a complement to recruiting the right skills to a company’s board, he says the With non-executive directors scarce benefits of gender diversity and ethnic in Japan (only 1.1 per cent of TOPIX diversity in board composition have members have a majority of independent been proven. directors versus 65 per cent for MSCI Source: Bloomberg developed world shares based on “There have been a number of studies in Bloomberg data), boards struggle to the US that show that with the presence fulfil the function of watching over of three or more women on corporate “The advisory board concept is a clever, management and contributing fresh boards there is a relationship with yet highly effective, interim solution ideas. Independent directors made up better performance.’’ he says. for Japanese companies to implement just 8.8 per cent of board members following the acquisition of foreign of Topix companies according to “Studies also show something similar for businesses as it helps to form a bridge Bloomberg, compared with 84 per cent boards when it comes to ethnic diversity. between head office and subsidiary management teams, particularly given for the S&P 500 and 42 per cent for “People have begun to realise that the disparate business cultures that exist Hong Kong’s Hang Seng. diversity of perspective can help protect in such situations,’’ he says. Paul DeNicola, director at the Centre stakeholders and ultimately results in for Board Governance at PwC in the US, greater shareholder value.” The benefits of more robust and diverse boards have also been borne out in says governance is critical because good DeNicola says he recognises that firms studies of Japanese companies. governance structures can help attract in Asia have been slower to change investors if the firm is moving towards an corporate governance practices, but the Japan passed laws in 2003 allowing IPO and provide improved performance advisory board model that some firms firms to institute a Western-style model and protected shareholder value for had adopted could be used as an arena to of board governance and by 2009 those already listed. trial board candidates from more diverse more than 100 listed firms, including He says family firms, or private firms backgrounds and particular skills, with Sony, Nomura and Hitachi, had taken that retained influence from their a view to them eventually joining the this opportunity. main board. founding family members, (an example The two-track governance approach analogous to many Japanese public that emerged has given researchers an companies) are those that often need a opportunity to study the performance of closer look at their governance, yet are the two groups. the most resistant to change.

Japan Rebooted: A time to embrace change 16 Stanford academic Robert Eberhart found in a January 2011 paper that Japanese firms that adopted the Western-style model of outside One Mizuho directors (known as the iinkai system in Japanese) were actually valued more highly than those sticking with Corporate governance the system of directors sourced from within the company and the accounts approved by a statutory auditor (the in Japan’s financial kansayaku system). “We find that the iinkai corporate sector governance system produces higher corporate value than the traditional kansayaku governance,’’ the paper finds. With the exception of The move comes under the umbrella “These results provide empirical evidence Nomura, Japan’s financial of the firm’s One Mizuho policy aimed of the economic efficiency, in terms of sector has largely failed at establishing common policies and investor value, of the iinkai system with practices across its group operations. to embrace Western-style implications for the corporate governance Keisuke Yorihiro, the leader of PwC convergence debate.” governance practices. Japan’s financial services regulatory This perhaps explains why the Japanese But that is beginning to change with practice, says since the Olympus stock market has historically traded Mizuho, reeling from a scandal in scandal, governance has been a at a discount to asset value. Prior to which a consumer loans subsidiary big issue in Japan, but Mizuho Abenomics and the related bounce in was found to have lent money to was the first major firm to make the Nikkei, some 70 per cent of firms yakuza (mafia) criminals, unveiling significant changes. traded at a discount to book value. That’s a board with an independent chair “As far as the financial sector is an indictment on the management and and five external directors, as well as concerned, Mizuho’s model is boards of these companies – they are a committee structure to complement quite advanced. Maybe not by essentially a drag on the ticket. it. In April this year, Mizuho named Western standards, but certainly by Hiroko Ota, a female academic Japanese standards,” he says. and former politician, as the new Figure 6: Average return on chair of the board of directors and Mr Yorihiro says “Some firms are still equity 2003–2013 as an external director (subject to coming to terms with establishing shareholder approval). robust internal audit teams and Japanese companies are a long way President and CEO Nobuhide Japan from setting up the kind of global 6.5% Topix Hayashi made no bones about compliance structures that existed linking the changes to the scandal in in J.P. Morgan, HSBC Citigroup recent comments. and others.” US “We are prioritising opinions from 13.6% S&P 500 third parties,” he said. “From now on our decision-making process has to be transparent and reasonable, and Europe also has to bear in mind the response 13% Stoxx 600 from the public. Our brand image was damaged and must be restored.”

South Korea 12.5% KOSPI

MSCI 12.6% World

Source: Bloomberg, FT

Japan Rebooted: A time to embrace change 17 The recent lift in the Nikkei has eroded Act. The ruling Liberal Democratic Party majority of directors on the board be this deficit and Japan’s TOPIX index now will soon present a plan to improve independent and it is common for the trades just above book value, but returns governance and appears serious about CEO to be among only one or two non- on equity remain poor: 6.5 per cent driving change as part of its structural independent directors. versus Korea’s 12.5 per cent over the past reform agenda. A 2012 report from the National decade, according to figures published “Corporate governance (change) has to Association of Corporate directors in in the Financial Times. That return was work. Otherwise companies won’t boost the US shows that 73 per cent of US second worst in the world beating only competitiveness,” Yasuhisa Shiozaki, companies have at least one woman on the returns in debt-hobbled Greece. the LDP’s deputy policy chief said in a the board, and 48 per cent have at least The recent rally in Japanese stocks has recent interview. one minority director. The percentages been driven strongly by foreign investors, are even higher for companies with A key aspect to the changes is a proposed who now own almost one third of the the highest market capitalisation stewardship code governing institutional stock of major Japanese corporations. (more than $10bn), according to the investors and prodding them into closer They will be expecting changes to the same report. engagement with, and oversight of, the management and governance practices companies in which they invest their According to the latest Governance of the firms in which they invest. clients’ money. Metrics International rankings for As the government progresses its corporate governance, Japan trails The changes to the Companies Act are changes, the Tokyo stock exchange countries such as the UK, Canada and likely to go further than that. Draft is promoting a new JPX-Nikkei index the US by an embarrassing margin, legislation published on the Ministry of of 400 companies, chosen for their rating just 3.3 out of 10 compared to Justice website suggests firms will be higher returns on equity and relatively the league leader UK on 7.6 out of 10. directed to either appoint at least one strong governance. Japan ranked 35th of the 38 countries independent director or be forced to included, sandwiched between China A number of established Japanese explain why they didn’t. and Indonesia. companies have bowed to the pressure And under a proposed code on for more modern governance models Compliance with codes is one thing, company behaviour, companies will be with Canon, Toyota and Nippon Steel but the follow-up challenge for firms encouraged to have a separate chair now appointing some outside directors prepared to modernise is finding the and CEO, and firms that are large or to their boards. right talent to fill these vacancies. It medium-sized should have a majority of won’t necessarily be easy, initially at The Abe government has also moved independent directors. The move would least, to look beyond the management’s to tackle this issue with lawmakers bring Japan into line with most of the immediate circle of contacts and find beginning in April this year a process developed world where such guidelines talented, ethical and ambitious people to push for more outside directors and are in force. to fill these slots adequately. Yet it must the introduction of audit committees Both the New York Stock Exchange be done. more typical of Western companies via and the NASDAQ require that a proposed changes to the Companies

Figure 7: Governance Rating 2010

8

7

6

5

4

3

2

1

- Japan UK Canada US Australia Italy France India Brazil Russia China Rank* 35 1 2 4 6 14 19 20 30 31 34

*Out of 38 markets Source: GMI Ratings Japan Rebooted: A time to embrace change 18 Womenomics at work

The other area in which Japanese cent participation gap between men and companies, like society as a whole, women, according to OECD figures. will have to change is in female Not surprisingly, the country fares poorly participation in the executive ranks, in PwC’s Women in Work Index, which as well as in the makeup of the ranks countries in the OECD according to general workforce. labour market data including the share of women in full-time employment, pay According to research company GMI gaps between men and women and the Ratings, women accounted for just female workforce participation rate. The above 1 per cent of executives at major latest version of the index ranks Japan Japanese companies in January 2013, a 24th out of 27, beating only Italy, Greece ratio dwarfed by the figures from almost and Korea. all other industrialised countries. More than 15 per cent of executives in the US Scoring just over 40 in the index, Japan’s are female. In Sweden, that figure is tally is about half of Norway’s and two- Goldman Sachs’ Chief Japan equity more than 25 per cent, and in Norway, thirds of the United States’ score. strategist Kathy Matsui is one of a 35 per cent. handful of senior women in her sector Clearly the country has a long way to go and is the author of several reports on The Abe government has called on all in reaching Prime Minister Abe’s goal addressing gender equity in Japan under listed companies to appoint at least of having women filling 30 per cent of the banner of Womenomics. one female director, and signs from all senior positions in Japanese society the financial sector – where a flurry of by 2030. She was cited directly by Mr Abe in one recent female executive hirings have of his early speeches as Prime Minister But 16 years may not be long enough been announced – suggest the call is about boosting female participation in to break down the many cultural and being heeded. the workforce and recently published a structural factors that prevent women in new report titled Womenomics 4.0: Time But Japan also lags the world on female Japan from continuing their careers after to Walk the Talk, on how to break down workforce participation with a 20 per they have children. the barriers.

Figure 8: Percentage of women in the boardroom 2013 2009 2013 Ranking

Japan 44

Norway 1

Germany 10

Australia 11

US 15

UK 15

China 25

Singapore 29

Brazil 36

South 43 Korea 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

*Out of 45 countries, US ranking based on 2012 number. Source: GMI Rating

Japan Rebooted: A time to embrace change 19 The last word from Hiroyuki Suzuki

Matsui calls for the deregulation of As we have highlighted PwC recognises that the path ahead both the daycare and the nursing throughout the Japan Rebooted is difficult, and that any reform care industries, dramatic reforms series, and particularly in process naturally involves winners to immigration laws and changes to and losers. To sustain Japan’s make both the tax and social security this third publication, Japan position, the actions of companies regulations gender neutral, as well as a has many challenges to and business leaders will be critical campaign to promote gender equality in overcome; they are linked to to ensure our country can adapt to Japanese households. its demography, its geography, the increasingly complex and volatile business landscape. She calls on the private sector to press and its history and culture. for more flexible and diverse work The solution for individual companies In today’s world, there is so much environments, establish gender-neutral will vary, and will require careful interconnectivity and competition employee evaluation schemes and consideration and external input, but that it seems right in this issue of the consider diversity targets. in general, the way forward for many Japan Rebooted series that we have firms requires risk-taking, flexibility Vanessa Wallace, a specialist in held Japan up against international and adaptability, embedding change workplace diversity and chair of PwC’s best practice, even if some of these into strategies, and creating a new set newly acquired Strategy& (formerly comparisons have proved unflattering. of behaviours in the workforce. Booz & Company) in Tokyo, says Japan This report was prepared with input has entered a new era of opportunity, The heart of the matter is embracing from both Japanese partners and and addressing organisational and change. Japanese business leaders foreign partners so PwC could present workplace rigidities must be one need to adopt new attitudes towards an “inside-out” view and an “outside- of the top priorities for successful governance, innovation, talent in” view of corporate Japan. Why? management teams. management and diversity. They need Because we wanted to bring the to be prepared to explore, challenge, “Leaders must proactively address the debate out into the open, and start innovate and listen. And they must formal and informal work practices a conversation in Japan and beyond then drive changes in attitude that stifle the potential of the current about the transformational journey throughout their organisations. workforce, restrict innovation and inhibit to restore the country’s position as a change from happening,’’ she says. global powerhouse. This journey is imperative to future- proof corporate Japan, and helps “Diversity and workplace flexibility is By grasping the nettle of change us all achieve renewed growth and just good business. Companies that and reform, Japan can capitalize on prosperity for our great nation. act now could fuel their prosperity for the green shoots of recovery that decades; those that don’t may stall.” Abenomics and its fiscal and monetary As much as Japanese companies stimulus have generated. If companies need a more modern, globalised and The proverb “Japan is a land where and the government are prepared to innovative structure to go forward, dawn doesn’t break without a woman” embrace change, the rewards may be the world needs a Japan that fits those has been around for centuries, but it is amplified as the recovery in US and characteristics too. not until now that the first genuine signs Europe takes hold and supplements have emerged that this might one day the growth being achieved in A rejuvenated Japan that not just be true. emerging markets. matches world’s best practice, but exceeds it in key areas will again provide a path for others to follow.

Hiroyuki Suzuki

Japan Rebooted: A time to embrace change 20 Where to now?

We recognise there is no one-size-fits-all solution for many of these current day challenges as each organisation is different and the issues faced are complex. We help clients respond to the strategic and operational challenges including:

Innovation People & Change Governance Generating top-line Getting the best from Any organisation that and bottom-line growth people at every level wants to survive, let lies at the heart of when there is constant alone succeed, will any organisation’s ability to deliver change is the key to sustainable have to manage new risks, embrace shareholder value. Leading companies competitive advantage. Solid strategies, new regulations and technologies, today recognise that innovation is processes and technology alone do not and prepare for the future with robust critical to delivering consistent business deliver results. It takes people to accept, succession planning. That means many results in all economic conditions. The adopt, drive, and sustain the change private companies and public institutions speed of change in the new economy to realise tangible impact. Success in will need new governance models. We has reinforced the value of innovation. business hinges on strategic agility and can help our clients: We can help our clients: the ability to execute. We can help you: • Design and implement a best practice, • Define paths to more profitable • Structure your organisation with the strategic corporate governance growth, from core product right capabilities and leadership to framework that integrates advanced development to radical execute the business strategy. risk management techniques and business innovation. • Develop effective strategies for people controls with your mission, vision • Establish the resources, organisation, development and growth. and stakeholder expectations, using processes, metrics and other flexible, scalable solutions to address • Support change by involving the your unique needs. elements to create incremental and people impacted and enabling them to breakthrough innovations. drive and sustain the business change. • Design and implement governance • Define winning innovation and and compliance programmes to • Position the organisation’s culture to ensure that the company continues product strategies, optimise portfolios be a competitive advantage. and balance roadmaps. to operate within the boundaries of • Design and support training relevant legislation and regulations. • Increase new product profit growth by programmes covering a wide variety • Engage in a dialogue with your increasing development productivity, of topics. managing complexity and reducing stakeholders and give them a clearer • Benchmark the efficiency and time to market. understanding of your business, effectiveness of HR. whether that’s through traditional • Optimise innovation and R&D • Establish the control and coordination reporting or more forward-thinking footprint for access to markets, ideas, required to manage projects and ways of communicating. talent, and for cost and tax efficiency. programs successfully, achieving the • Protect and strengthen every aspect • Select and implement optimal product right business results. of your business, from people lifecycle management systems and • Optimise the engagement and to performance, systems to strategy, realise rapid ROI. motivation of a diverse workforce to business plans to business resilience, focus on the right things and strive and help you to build confidence for excellence. in transformation. • Support the alignment of risk, strategy, performance management and reward, and ultimately, provide a greater likelihood of strategy being executed.

For more information on today’s issues, log onto www.pwc.com/gx/en/issues Japan Rebooted: A time to embrace change 21 Contacts

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Jason Hayes Andrew Parker PwC Australia Partner – Japan Practice Leader Partner – Asia Deals Leader +81 80 3445 0854 +61 2 8266 0218 [email protected] [email protected] PwC Australia

Tsuyoshi Yoshino Steve Billingham Director – Japan Desk Leader Partner – Asia Consulting Leader +61 2 8266 3032 +61 (2) 8266 3417 [email protected] [email protected]

Peter Gerendasi, Partner, leads PwC Australia’s Asia Practice. For more information on our Asia Practice, please contact Peter ([email protected]) or visit our website www.pwc.com.au/asia-practice.

Japan Rebooted: A time to embrace change 22 www.pwc.com.au/asia-practice

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