Sony Corp.’s curt dismissal of a foreigner’s advice last week didn’t shock Michael Woodford, the former chief executive officer of Olympus Corp.
“The club, meaning corporate Japan, will do everything it can to mask and hide what’s wrong. That’s what’s most important,” said Woodford, a Briton who was fired in late 2011 after he exposed a $1.7 billion accounting fraud in his own company.
Woodford’s tale is worth revisiting as Sony rebuffs a proposal from hedge-fund investor Daniel Loeb for the company to sell off its entertainment divisions and focus on hardware. Far from being rewarded for trying to clean up the 93-year-old Olympus, Woodford was ousted by his board, which criticized him for being culturally insensitive. Clearly the non-Japanese CEO didn’t understand the clubby, docile ways of Japan Inc.
Now Loeb is running into a similar wall of disdain. Sony CEO Kazuo Hirai has 100 billion reasons -- the market value in dollars the company has lost since 2000 -- to consider the American’s plea to bring more focus to Sony’s disjointed businesses. Yet Hirai is unmoved. Why? Even though Loeb holds a sizable $1.1 billion stake in the company, Hirai knows a critical mass of domestic investors, the ones who really matter, are certain to support him against any brash outsider.
A willful blindness seems to have infected all too many of Japan’s leaders, both corporate and political. Toru Hashimoto, the 43-year-old Osaka mayor who’s often touted as a future prime minister, enraged China and South Korea last week by saying women forced into Japanese military brothels during World War II were needed to provide relief for battle-crazed soldiers. Shockingly, Hashimoto has paid hardly any political price for effectively endorsing rape and sexual enslavement.
Prime Minister Shinzo Abe has been similarly blithe about offending Japan’s neighbors -- a strange attitude for the man who is supposed to revive Japan’s export-focused economy. Abe has brushed aside visits that his subordinates made to the Yasukuni Shrine, which honors Japan’s war dead, including several convicted war criminals. Last week he posed inside the cockpit of a training jet with the number “731” prominently painted in the side. (The Imperial Japanese Army’s Unit 731 tested chemical and biological weapons on human prisoners during World War II.)
The prime minister’s hubris is as short-sighted as Sony’s. Markets are hailing Abe as a turnaround expert for injecting new vitality into the long-moribund Japanese economy. Yet all he’s done so far is pressure the Bank of Japan to open its wallet. “Abenomics” really amounts to a hope that radical monetary easing will boost asset prices, which in turn will encourage companies to expand, pay workers more and hire new ones.
Yet how can that happen when companies are unrepentant about their mistakes? The flood of cash hasn’t opened executives to new ways of thinking, ushered more outsiders into the boardroom or women into the workforce, or prompted companies to get out of unprofitable businesses. Companies still hoard cash they should be passing along to shareholders and workers through dividends and higher wages.
“Printing money is easy,” said Woodford, whose 2012 memoir is titled “Exposure.” “But it won’t change the fundamentals of how Japanese companies work.”
Japan Inc. seems unable to shed fully the hubris of its boom years. Executives haven’t eased up on the 1980s-era takeover defenses that thwart pesky foreigners such as T. Boone Pickens or Warren Lichtenstein of Steel Partners. The practice of cross-shareholding, whereby companies load up on stocks of friendly businesses, thrives. Courts and lenders are more prone to circle the wagons than to let the creative destruction emphasized by economist Joseph Schumpeter play out.
Japan’s refusal to look in the mirror is all the more surprising given the country’s history. It was the first Asian nation to catch up to the West precisely because its Meiji-era leaders admitted how far behind they’d fallen. Postwar Japan similarly recognized its flaws and strove to emulate and outdo its conquerors.
Today, scant accountability breeds a lack of business focus, murky corporate dealings and little regard for returns on investment. This corporate-governance environment produced something even worse than Olympus (7733)’s fraud: the incompetence at Tokyo Electric Power Co. that led to the worst nuclear crisis since Chernobyl. Thanks to Tepco’s negligence, the world almost lost Tokyo, home to 30 million people and the second-biggest stock market, to radiation.
Japan’s Topix Index is extending a 4 1/2-year high this week. But all those investors now loading up on Japanese stocks should ask themselves this: How do you modernize an economy when your corporate sector is anchored in the past? All the hype surrounding Abenomics will probably confirm Japan’s dinosaurs in their ways. It could also embolden Abe himself to lean forward in relations with China and South Korea -- an even more dangerous prospect.
The prime minister and his corporate cheerleaders need to understand that a weaker yen will do little good if Japan’s neighbors boycott its goods. In politics as well as business, the best way to accomplish a true turnaround is to admit past faults, learn from them, and only then to move forward.
(William Pesek is a Bloomberg View columnist. The opinions expressed are his own.)
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