Systemic Hypocrisies in the Japanese and US Views of Corporate Stakeholders

Two fundamental hypocrisies in the Japanese and the US views of corporate stakeholders must be addressed for the world’s largest economies to continue to prosper and lead in the 21^st century. The US must dedicate itself to protecting and empowering its workers, and Japan must do the same for its shareholders.

Japanese workers have traditionally been expected to remain at the same company from the time they are hired out of college until retirement, working long days and taking little vacation. For their hard work and loyalty to the firm, they receive comprehensive benefits, a generous pension upon retirement, and most importantly, job security. The tradeoff is that they receive on average less compensation than they might receive at a similar position at a US firm.

Compensation in Japan has traditionally been seniority-based, with pay raises given in tandem with age-based promotion, again promoting loyalty and retention. The employees are seen as the company’s most important stakeholders, dedicating their labor and most of their life to the company. They are seen more as members of a corporate family than as individual assets. The Japanese model in this sense is extremely transparent: employees generally understand how their commitment to the company will be rewarded.

In Japan, investing in general and stock investing in particular are widely considered akin to gambling, this aversion probably best exemplified by the fact that Japanese investors account for less than half of the market capitalization of the Japanese equity market, with foreign investors making up around 60%.

Shareholders are seen as short-term speculators, placing bets on the growth of companies and their stock prices and moving their money out the moment they have made a profit. As a result of this perception, little emphasis is placed on paying dividends, with Japanese firms tending to hold on to extra cash instead of redistributing it to shareholders. The average dividend yield, a relative measure of dividend earnings, for all companies making up the Japanese TOPIX was 1.98% in September 2008, compared to 2.62% for companies forming the US S&P 500 during the same month. 0.64% is by no means a nominal difference – compounded annually over ten years on an initial investment of it $1,000 it translates into added dividends of $65.88, or more than 6% of principal.

In the US, employees are also viewed as important assets, but much more as tradable, commoditized assets similar to inventory, physical assets and capital and not in the intimate familial sense of Japanese firms. Employees are only as valuable as their contributions to the company, and while compensation is often linked to these contributions in the form of “meritocratic” compensation schemes, employees may also lose their jobs more easily if they fail to perform or if their services can simply be acquired more cheaply through outsourcing arrangements resulting in downsizing. US employees are also more apt to change companies for better pay if they feel their contributions are not being properly rewarded, making retention in the US model more challenging.

The US shareholder is seen as the company’s most important stakeholder, providing the necessary capital to fuel corporate expansion and directly helping the company to grow. There is a high level of transparency in the way shareholders are compensated for their investment, in the form of publicized dividends and extensive disclosure including quarterly and annual reports, letters to shareholders and a wealth of other publicly available information. Shareholders receive compensation in the form of dividends that is directly proportional to their contribution to the company, namely, a dividend for every share they have purchased.

The US espouses “shareholders rights,” in the common-sense form of return on investment directly proportional to investment, dividends. Shareholders also have the right to vote on a certain level of corporate policy at shareholders meetings and are encouraged to offer their suggestions concerning this policy, another important manifestation of these rights. This is pitched in the US as the translation of the democratic principle of equal rights into corporate governance standards. This is at best only part of the truth.

The reason that “shareholders rights” are championed in the US by corporate executives is simply because corporate executives and other higher-ups profit when shareholders profit. In many cases, a large part of executive compensation at publicly-listed US firms is in the form up stock options. When stock prices and dividends go up, executives profit together with other shareholders. Plus, in many cases, executive bonuses are directly tied to the very rise in share price – not only are executives profiting from increased equity in the shares they hold, they are receiving a bonus for boosting the company’s share price. For them to be “properly” compensated, transparent disclosure is essential: they must demonstrate clearly how their efforts have led to increased share prices to reap the rewards.

But what is the problem with executives and shareholders, who have both made clear contributions to corporate profits and growth, being proportionally rewarded for their efforts? The first is that it is usually only a small percentage of employees aside from executives who are given stock options. While some companies do make SOPs, or “stock ownership programs,” available to employees, these require employees to use their own wages to purchase a stake in the value of the company that they themselves have created – a profoundly counterintuitive concept.

But the larger and more glaring hypocrisy is that the same logic is not applied to the compensation of employees of the company, and in fact often the very opposite logic applies.

While US firms pay lip-service to meritocratic compensation, pay scales are rarely if ever made known to employees, and instead of the comprehensive disclosure standards used in information regarding share prices, employee compensation is treated in most cases with ferocious secrecy. The very idea of making compensation standards public to employees would be considered laughable to most executives.

For a true meritocracy to exist, objectivity and transparency are essential, just as they are regarding the compensation of shareholders. In other words: If I make this level of contribution to the company, I can expect this level of compensation; I expect those making similar contributions to receive similar compensation, those contributing less to receive less, and those contributing more to receive more. This is the exact logic employed for shareholders, so why not for the company’s other equally important stakeholders, the employees? The answer is again the same, greed. While the rights of shareholders are aligned with the interests of the executives, they are at odds with the rights of the employees.

US executives rely on their ability to take advantage of employees’ ignorance of fellow employees’ compensation, and where present, the existence of systematized compensation standards, to ensure higher compensation for themselves. Reduced personnel costs translate into increased earnings, which translate into higher dividends and share prices, both of which the executives stand to profit from. But, as individual compensation, pay raise milestones, bonus potential and the like are often made clear to employees in their individual contract agreements, what is the problem?

The problem is that they are not made publicly available to all employees, as equity disclosures are made available to all shareholders. Executives take advantage of certain employees ignorance of their own value and lack of negotiating skills to tamp down costs. This culture of secrecy is exactly what fuels “personnel arbitrage” in the US job market – other companies may be prepared to pay a higher price, in some cases simply the fair market value, for the same commodity, the employee, resulting in higher levels of turnover in the US.

If employees were made aware of company-wide compensation structures and the individual compensation of fellow employees, those employees receiving unfairly low compensation would rightly seek redress. This would mean increased payroll costs, decreased earnings, and difficulty for executives to meet financial targets, leading to reduced compensation for themselves in the short-term. In the long-term, it would lead to increased retention and more motivated employees who took greater pride and passion in their work.

While global cost competition can not be denied as a large factor in the decline of certain US industries, particularly manufacturing, the systematic disenfranchisement of workers also plays a role. Were these same workers provided with equitable, truly meritocratic compensation, perhaps the US could again become a society that takes pride in its work and produces good things. One need look no further than the Japanese and American automobile industries as evidence of the validity of this argument.

There is also a stark double standard in the Japanese view of stakeholders that stands almost in diametric opposition to the US model. While the pay raises accompanying corresponding levels of seniority are often common knowledge among employees at many Japanese firms, disclosure standards and the protection of shareholders rights rank well behind other developed markets. In the World Economic Forum’s Global Competitiveness Report 2008-2009, out of 134 countries surveyed, Japan ranked 44^th in terms of “strength of auditing and reporting standards” and 45^th in terms of “protection of minority shareholders rights,” despite being the world’s second-largest economy with the world’s second-largest stock market.

Traditionally, Japanese firms have sought to marginalize instead of empowering shareholders, particularly so-called activist shareholders who seek to influence or dominate corporate policy by controlling majority blocks of shares and the proxy voting rights accompanying them. This tendency is best evidenced by the 2007 Bull Dog Sauce case, in which the Supreme Court of Japan blocked the attempted takeover of Bull-Dog Sauce Co. by the US hedge fund Steel Partners.

In 2007, Steel Partners tried to acquire a 100% stake in the sauce maker Bull-Dog Sauce. It should be stated here that Steel Partners’ intentions at the time were not considered to be benevolent: many thought it would threaten to sell off Bull-Dog’s individual assets upon acquisition, forcing Bull-Dog to buy back any shares Steel Partners might acquire at a premium to the bid price before the deal was completed, or wait for a “white knight,” a bidder friendly to Bull-Dog who would do the same. Neither of these outcomes would result in any added value for Bull-Dog, while only resulting in profits for Steel Partners.

When Steel Partners initiated its tender offer on May 18, 2007 for all of Bull-Dog’s shares, Bull-Dog responded with a “poison-pill” defense, the legality of which in terms of shareholders rights would form the basis of the Supreme Court case. In a poison-pill defense, the takeover target, in this case Bull-Dog, issues rights to a large number of shares to shareholders other than the bidder, which may be converted into shares should any one bidder, i.e. the initiator of the takeover (Steel Partners), acquire a given percentage of outstanding shares, typically slightly less than a majority. The result is that it becomes more difficult for the initiator of the takeover bid to acquire enough shares to control a majority stake in the target company and in doing so influence or control its corporate policy. The term poison pill, a reference the suicide pills taken by spies at the time of enemy capture to prevent interrogation, refers to the point at which the bidder has acquired enough shares to force the issuance of share rights to other shareholders to block the takeover, in effect “killing” the deal and the bidder.

The issue that would be decided by the Supreme Court was whether the poison-pill defense constituted shareholder discrimination by offering rights to certain shareholders and not others, specifically Steel Partners. Following is an excerpt from the ruling (translated from the Japanese by the author):

Despite having no true intentions of participating in the management of the target company, as so-called abusive acquirers (emphasis added) seek only to inflate share prices of the target company and force members of the target company to then reacquire them at the inflated price etc., in the interest of abusive corporate management or control and without sound management motives, causing a loss in corporate value and negatively affecting the interests of the shareholders of the target company, these abusive acquirers may face shareholder discrimination.

What is most important here is not the specific motives of Steel Partners in its acquisition, be they abusive or otherwise. Rather, it is the fact that, in its definition of “abusive acquirers,” the Supreme Court of Japan has created a subjective standard for the legal institutionalization of shareholder discrimination.

The fact that Steel Partners was also a foreign firm caused the foreign media to view the Bull-Dog case as one of the largest set-backs for foreign investment in Japan’s history and as having the potential to scare off more well-intentioned foreign investors. The Financial Times offered the following on this perceived set-back in a October 2007 article entitled, Poison pills cause upset among foreign investors:

The million-dollar question everyone is asking is whether Japan will ever change.

Many foreign investors, who cannot afford to wait for an answer, have reduced their presence in Japan, if they have not abandoned the Japanese market altogether.

But if shareholders are nothing but fly-by-night vultures seeking quick profits by destroying otherwise good companies, why should they be given an equal voice?

The inherent hypocrisy in this point of view is that, if you have no interest in paying fair dividends, are unconcerned about your share price and take no issue with discriminating against your shareholders, than you have no business being a public company. As a private company you would be free to reinvest earnings instead of disbursing them as dividends, make decisions irrelevant of their effect on your share price, and be much more insulated against takeovers. So why do firms such as these list? The answer is again greed. While not interested in their shareholders interests or opinions, many Japanese firms are still more than happy to take their money.

Japan, together with other highly developed countries such as Italy and South Korea, is facing an unprecedented natural population decline – the secular challenge for both its society and economy. For Japan to have any chance of future economic growth, even more foreign investment is essential. Japan has paid lip-service to enforcing shareholders rights, but we have seen that this is far from the reality.

While foreign investors indeed account for the majority of investment in the Japanese equity market, according to benchmark data from the United Nations Conference on Trade and Development, foreign direct investment into Japan still stands at an amazingly low 3% of GDP. This compares to an average of 27.9% for the world, 27.2% for all developed countries, 15.1% for the US, and is higher than only Iraq, Iran, Nepal, Kuwait and Cuba.

The reality is that personnel and capital are the two most important assets of any company, and an equitable approach to the two most important stakeholders, employees and investors, is key to the success of any company.

The United State’s false homage to shareholders rights in the true interest of boosting executive profits and to the detriment of sound financial decisions and the fair treatment of employees has contributed to producing disastrous consequences for the US market and the entire world economy. Firms that bet big chunks of their balance sheets on non-transparent and at times deceptive loans re-packaged ad infinitum in the form of securitized debt instruments to unsuspecting investors the world over are now at best bankrupt, and at worst under criminal investigation by the FBI. The US investment-banking industry, once the global pinnacle of high finance, no longer exists. 401Ks and retirement funds of hard-working people are being depleted by the second, and entire countries are now facing insolvency. The lessons couldn’t be more clear.

US companies can continue to respect the rights of their shareholders, but when profits become the only factor in decision making, employees and companies as a whole will suffer. The US must make sure that the factory and office workers, those who add true value to companies and form the foundation of the US’s ability to compete globally, are rewarded and venerated together with investors.

By 2050 Japan’s population is expected to decrease from the current 127 million to around 90 million, and a full one third of its population will be made up of people 65 years or older. With only an expected 50 million workers in 2050 and the world’s third highest average life expectancy, its social security system will not be able to care for the countries retirees. While Japan has succeeded so far in talking about history’s largest demographic time bomb, no real action has been taken.

The solution will be multi-faceted: it must include a fundamental change in the way Japan views immigrants; it must provide a legal structure that allows workers, most importantly women, to balance work with the ability to raise a family; and it must facilitate a faster shift from a manufacturing-driven economy to one fueled by true innovation.

It must also encourage investment, both by Japanese individuals who can no longer rely solely on the government and corporate pensions to fund their retirement, and by foreign countries and companies seeking the opportunity to invest in Japan. To do so, it must race to catch up with other developed markets in terms of disclosure and shareholder protection and quickly level the playing field for foreign investors. If it fails to, help will more likely come in the form of ODA than FDI.

The United States and Japan have perhaps more differences than similarities, and here I have addressed some very large differences. But what is encouraging to me as someone who was born in the United States and has lived, been educated and worked in Japan is what I consider their singular similarity: resiliency.

Best exemplified by the Meiji Restoration and post-war reconstruction, Japan has time and again transcended the confines of a small island nation and established itself through determination and hard work. After overcoming an economic crisis dwarfing its current problems in the Great Depression, the US emerged as the world’s preeminent economy and innovator and to many a as global symbol of opportunity. I have no doubt that both countries will rise to meet their individual challenges, but to conquer them, they must both fundamentally rethink the way they do business, and they must do so now.

— James Gregory

Income Inequality in America (Mother Jones Graph)

http://motherjones.com/politics/2011/02/income-inequality-in-america-chart-graph

This has been posted a billion times, as for my measly $0.02...

- The reason for the wealth gap in the US is the difference between those who own and those who labor. As our economy has developed, the value of labor has increased. As layers of labor are multiplied and value succesively added, the eventual wealth of the final owner increases exponentially. The reason the gap continues to increase is that labor is becoming more and more valuable while the proportion of those that labor and own remains mostly unchanged.

- The "problem" is that this paradigm of laboring and owning is dated. Everyone who labors can (should?) be entitled to some ownership of the value they create.

- One way to accomplish this is meritocractic pay scales/bonuses/incentives for all members of corporate organizations, not only upper management. People who aren't getting these have the responsibility of organizing/unionizing to negotiate for them. There should be more strikes in the US. This is one of the few areas in which I feel the French are doing it right.

- The other, more powerful way is by marketing one's individual skills through the internet in whatever way possible. Everyone, everyone, everyone that has any kind of skill that can be sold online has NO excuse not to have a personal business website. NONE. This is the next really great unlocked potential and equalizer presented by the internet. Most people now use it. Most people are actually on it in a small way through social networking. But still a small minority of people market their skills through it. It takes a week's work and a couple hundred bucks. There's really no excuse.

- At the end of the day it's America and nobody owes you shit. But the tools are there with not a lot of intellect and not a lot of work to get what you're worth. If you want to work for it.

Being Well-Informed is Overrated

One of my favorite quotes in the Matrix Trilogy is the following from the Merovingian:

"You see there is only one constant. One universal. It is the only real truth. Causality. Action, reaction. Cause and effect."

I've all but stopped paying attention to political news in the past year, and feel much better off for it. This is partly because all for-profit media is by definition biased and therefore uninformative -- Keith Olberman and Glenn Beck are the same person, they just happen to play for two different teams -- and because I feel like America has already defined itself. There haven't been any major changes in the country since I've been an American nor do I expect there to be. We generally agree on where we fall between socialism and free capitalism, evidenced by the fact that we've had a divided government for around 75% of my life. In other words, the status quo hasn't really moved.

You can get ahead quicker here if you work hard than in other countries. Whether you work hard is a choice. At the same time some people fall off the table. The fact that among these some are needy is a shame, as is the fact that some are lazy. But I believe, for better or worse, this is how we have defined ourselves.

I vote, and occasionally give small amounts of money to campaigns I like. These are the only two things I do in terms of politics that have any real consequence, and "causality." And when I do them, I inform myself so as to make decisions I feel are good.

Everything aside from that, reading or watching daily political news, taking time out of my work day to blog about my political apathy, or pretending to be incensed about some particular topical political issue just to exorcise general frustration is not real action. So why not spend the time on things that do have real consequence in society: doing good work, trying to be a good friend, volunteering, starting businesses, being healthy?

And let the information you consume be about these things? Or be about being fun? Like videos of dogs doing parkour or awesome Europe-themed dance videos?

Cat Abortions and Buddhism

Over the weekend I sent a pregnant cat of mine to be aborted. It was an easy decision.

I have three cats now, Yuki, Louis, and Sparky, all of which came to me somewhat unexpectedly over the course of the past six months. Yuki was starving in the rain; Louis was the kitten of a street cat my neighbors had adopted, and Sparky (“Spartacus” for long, a beautiful name for a female cat, I know…) was also loose on the street. Louis was house kept, but Yuki and Sparky were legitimately suffering on the street, Yuki, close to dying.

By taking the cats in, I felt I was doing a small thing to end suffering. South Philadelphia isn’t a friendly place for street cats – lots of cars, lots of concrete, lots of mean people, the possibility of becoming dog fight bait.

So, what would have happened had I not had Sparky aborted? I suppose no one really knows. But, I know that keeping any more than three cats in the house, in addition to officially stamping me as a cat lady, wouldn’t be kind to the new kittens. There isn’t enough space. It might not be cruel in the form of animal hoarding, but they would suffer – they wouldn’t be happy and free. I could have given the kittens to a shelter or to an adopter, but then who knows what would have happened to them. There was no guarantee they wouldn’t suffer.

So instead I made a simple appointment with the Philadelphia Animal Welfare Society to have Sparky aborted and spayed. She is still a tiny cat, and in retrospect, she must have been pregnant when I brought her in, as Louis is already neutered. When I made the appointment, they were very careful to avoid the word “abort,” instead preferring to use only “spay.”

So now Sparky seems happy. I would certainly imagine the aborted kittens suffered briefly, but I hope their further unnecessary suffering was avoided through their death. And just because it was an easy decision, it doesn’t mean it wasn’t very sad.

The Raw Truth

Lately I've been posting raw-meat and other raw-food related statuses and pics on Facebook, half to be silly and half two draw a reaction (which is the point of Facebook for me at least).

The reactions have been some combination of "Ew gross!" and concern for the potential dangers of eating raw foods: "You'll get worms!"

The first is probably mostly a matter of cultural conditioning. There are plenty of places in the world where people eat raw meat. When I worked as a line cook in college, the French cooks would routinely taste the raw meat they were butchering. Japan culturally exports an entire category of raw food in sushi.

I don't know the Japanese words for most of the food-borne illnesses we worry about in the US even after living in Japan for six years, because they aren't a concern. I ate raw cow, chicken, fish, whale, chicken eggs, quail eggs, horse, liver, live shrimp, etc. etc. in Japan and never got sick from any of them.

The Japanese, and I would guess the French, don't have mechanized agriculture like we have in the US, and eat raw food regularly.

Whether or not people want to eat raw meat is a matter of taste and what they are used to eating. As far as safety goes, anytime you eat any raw meat there is the chance of some food-borne illness. This can be greatly reduced by buying meats from animals that are raised cleanly and humanely, but is always there. There are some that say that some food-borne parasites are actually beneficial for humans, so there may also be an upside.

The flip side of this is that, the more meats are cooked, lots of bad things happen: proteins mutate, natural enzymes are destroyed, free radicals increase, vitamins decrease -- the meat becomes less healthy.

So, if you're inclined to do so, eating raw meat is essentially a risk-reward calculation: the regular increased nutritional benefits of consuming the food in its natural state vs. the rare risk of food-borne illnesses, which is further reduced by buying quality meats.

It's not like all I eat is raw meat. When I cooked, I was taught that medium-rare is ideal temp to at which to serve red meat, and from a culinary perspective of strict taste, I agree. But sometimes, I just like it raw :)

Playing Chopsticks

When I go to Japanese restaurants in the US, I invariably see people grinding the ends of their two separated wooden chopsticks together, some so intensely that I wonder if they are trying to start a fire using the tinder of the nori on their tuna roll.

What do these people think they are doing, if they are, in fact, thinking at all? In Japan, you may rub the end of the chopsticks together briefly and without calling obvious attention to yourself, if there are large splinters which you actually think will get in your food. But excessive rubbing is considered just poor table manners. It is akin to wiping your tableware on your shirt in the US.

I imagine the reason most people get crazy with the chopsticks has little or nothing to do with the functionality of not eating processed wood, and more with the desire to say: "hey, look at me, I think I know something about eating in Asian restaurants, and am going to go way out of my way to broadcast it to the rest of the restaurant through a behavior I myself only vaguely understand." There is a word for this: "Orientalism."

Not only are these people missing the point of the chopstick rubbing in the first place, they are going out of their way to call attention to themselves, which is one of the most foreign things to do in Japan, a society that gives gold stars for conformity, manners and humility.

So if you are going to rub your wooden chopsticks together: do it only if there are big splinters, and be as inconspicuous as possible. Do not hold them in front of your face and go crazy like it is some kind of interpretive dance or sacrificial sushi rite.

Other chopsticks manners to follow if you really want to appear "in the know:" 1) It's ok to pass things with chopsticks, but never chopsticks to chopsticks, and 2) Never stab the chopsticks directly in the rice to rest them -- these mimic the passing of cremated bones and placement of chopsticks in the ashes of the deceased at a Japanese funeral ceremony, and as such are big no no's.

3) When you want to rest the chopsticks, use the small chopstick rest if there is one, rest the business ends on one of your individual serving plates, or lay them flat across a rice bowl. 4) When you are done, you can place wooden chopsticks back into their paper package if you want to be extra fancy.

But when you do these things, do them calmly, subtly and out of cultural respect, and never as a self-conscious braggart, because then you're only showing off what you don't know.

Leave it on the Floor

Watching the amazing NCAA tournament final game, I was annoyed at how the announcers so often went out of their way to mention all the wonderful things the "student athletes were doing off the court."

This young man -- everyone is a "young man" and not a "player" -- is an Academic All American. This young man is active in the community. This young man has a charity fund in his name. It's as if the players need to be doing good things off the court to validate their pursuit of sports. I am sure that, like any group of people, some of them are probably good people, some not so good, some with good grades, some with not so good grades.

NCAA sports exist to foster competition in many of America's great team sports, and equally as sources of funding and prestige for schools that are able to field quality programs. The ostensible balance between these goals and the academic/off-the-court performance of the "student athletes" is one more instance of hypocrisy mislabeled as debate in the US.

When I sit down to watch an NCAA basketball game, I am almost 100% interested in seeing a good basketball game and quality play by talented players (perhaps I am 1-5% interested in the cheerleaders). If I were interested in the players academic performance, I would instead audit their American Lit. class and take notes on their thoughts on Thoreau's concept of solitude as expressed in Walden Pond.

But I am not. I want to see intense, highly organized play, upsets and buzzer beaters. And the NCAA, individual schools and everyone else profiting from the quality of the game knows this (including perhaps Puff Daddy given the pre-game performance...).

I also think this is a perfectly fine objective. The contribution competitive athletes including unpaid college players make to society should never be undervalued. They provide a very, very large group of people with happiness and relaxation through performance arts which I believe will be historically remembered as America's singular popular culture.

At the same time, becoming a professional athlete is one of the most statistically improbable pursuits you can pick, and you have to be a student to be on the team. In other words, most of the time it is in everyone's best interest that the athletes graduate. Is it crucial that they have a 4.0, feed 500 homeless children every weekend and have never drunk a beer to step on a court or field? I don't think so.

Can there be a double standard if the athletes at top-flight academic programs don't have the same grades as their peers? Of course there can be, and there shouldn't be anything wrong with that, as it exists for the non-athletes also. The mechanical engineering student on academic scholarship isn't expected to create millions of dollars in revenue for the school, its sports and academic programs with no compensation, or to entertain the entire student body with hours a week of diligent practice and performance.

Again, there are certainly plenty of athletes who perform well in class also. I certainly know plenty of jocks who are nerds and nerds who are jocks. But the reason they are at the school is often because they are on the team, and this is great. They are doing something wonderful on the team that you and I appreciate. Why can't we just accept it for that?