Japanese Corporate Reform: Global Convergence or Path-Dependent Evolution?
Prof. Dore's Final Remarks on the Debate
Many thanks for all the messages you sent me. I have just got round to looking at them. You clearly had an interesting debate. May I make one or two general comments, and then answer some specific questions directed to me.
First, I am struck by the way that those who discuss failures ofmanagement in large companies (Mr. Terazawa and Professor Okuno in particular) put all their emphasis on failure to cut back. Chop, chop, chop seems to be the recipe. But I thought the current buzzword was innovation. Of course there are structurally declining industries, contracting markets, but I think, first, at the national level, the 1970s strategy of the Rinji Fushin Sangyo Tokubetsu Setchiho or whatever they were called -- i.e., government assistance to run down an industry slowly (waiting for all the moms and pops to die off, Mr. Kondo) has a lot to be said for it -- by my value weightings the social-cost benefit analysis comes out positive. (To be sure the option may not be available for, say, depaato today; gyokai solidarity having too far eroded.) So much for the national level, but at the company level, I would for similar social reasons applaud a similar strategy (the strategy that most managers seem actually to follow in Japan) -- i.e., running down less profitable lines slowly giving yourself time to do the transition job of transferring resources to more profitable lines.(Though I was intrigued by Mr. Terazawa's suggestion that the decision to run down might be delayed out of respect for some sempai ex-CEO. Ariuru koto desu. That greater degree of sentimentality is the flipside of the fellow-feeling among lifetime employees which enhances X-efficiency.)
The dogma that an efficient manager should disgorge shareholder value on to the market because the market most efficiently reallocates resources to their most efficient use is exactly that: it is dogma, blind dogma and how anybody could believe it in the face of the way people pour capital into the IPOs of the most improbable start-ups with no prospect of ever making a profit, I do not know. I believe that reallocation of resources within the firm is likely to be a more efficient means of structural transition from a national standpoint. (From the standpoint of shareholders, doing it through disgorging shareholder value is, of course, much better -- as it is also for managers in America where, these days, the disgorging is done not by paying large dividends but by buying back shares to boost the share price and produce capital gains -- which also helps managers to get fabulous sums when they cash in their share options.)
Secondly, there was a general tendency in the debate to equate efficiency and high profits -- a lack of profit-orientation is the reason for delay in scrapping old product lines, says Mr. Terazawa. I used "profitable lines/unprofitable lines" above in a very loose sense, really meaning "producing high levels of value added per worker (or hour of labour) or per unit of capital". How that value added gets distributed - as between employee remuneration and returns to the owners of capital -- is a different matter. The standard business-school line -- and Mr. Terazawa's line when he talks of profit-orientation and recommends cutting wages as preferable to layoffs -- is that the only criterion of efficiency is the return to the owners of capital. This is, of course, "true capitalism" - in two senses: first in the value sense that maximising the return to capital is the dominant objective and secondly in the reality assumption that employee remuneration is determined (exogenously to the firm) by the market -- the supply and demand for labour -- hence value-added and profits are perfectly correlated.
If you happen to own more capital than labour skills you will, of course, accept the first -- the implicit value system. But the reality assumption is plain wrong even in the United States, and very very wrong when it comes to the Japanese economy. Do you recall that the Doyukai used to do a survey evey few years on managers' objectives, showing (proudly in the 1980s) how Japanese managers made their major objective increasing market share, introducing new products, etc., whereas American managers' major objective was to increase their share price , raise RoE, etc. The last such comparison I have seen was in about 1993 when the recession mood had really taken hold and the average Japanese firm was making a loss. "Increasing market share" had dropped in Japanese managers' order of priority and what had come up instead? "Jugyoin no taigu o yoku shitai".
The point is that the assumption of "exogenously determined cost of labour, therefore profits accurately reflect value added" is just not true about Japanese firms. The division of value added as between the two major stakeholders -- employees and shareholders -- is highly variable and subject to managerial decision. Hence, I would say, from any sort of welfare criterion, that value added (per employee, per unit of capital) is a better measure of efficiency than profits, and a manager who seeks to maximise value added is a better manager than a "profit-oriented" one.
The real question for the Japanese economy is whether the tendency to favour the employee stakeholder over the shareholder stakeholder (as reflected in the low dividend payments, low RoE) which was perfectly viable in the past -- there was no difficulty about getting capital -- can actually continue in the future. This is something I asked earlier in this debate. One can easily see the ideological impetus behind the assertion that in future Japanese firms will have to reward capital more enthusiastically if they are to get investors, but is it true? I'm not convinced by Mr. Terazawa's argument that the variation in stock price levels of major firms in the same industry -- a new phenomenon -- reflects profitability. What's new is that American pension funds and mutuals are the major buyers and sellers of Japanese blue chip stocks and share prices depend greatly on being able to tell a story (like "we are about to cut our labour force by 8,000") which makes you the flavour of the month among their analysts. Which is not to say that the capital-availability environment for the Japanese manager is unchanged, but I would have thought that the crucial change is not the globalization of capital markets but demographic change in Japan and the end of the period of steady asset inflation driven by rising land prices. I just am not a good enough economist to be able to follow through all the implications for the way Japanese firms get capital and how they have to reward it.
Another way of putting the last point about employees and shareholders as stakeholders -- which might be rephrased as "for welfare economics, distribution is important, not just total output or the input/output ratio" -- is as follows. Our debaters talked a lot about efficiency. I don't remember the word "distribution" ever being used. I am grateful to Mr.Kondo for giving me the reference to the McKinsey health study. It was good to see the text and not just newspaper reports. But -- correct me if I didn't look at it carefully enough -- in all its calculations of the global efficiency of the US and Japanese health care industry I did not see a word about distribution. Is it not the case that if you did a study of morbidity and mortality patterns by social class, or by income quintile, there would be a far greater gap in the United States than in Japan. The forty million (or was it forty-five?) Americans who do not have health insurance coverage, surely have much worse access to health care than the poorest 20 percent of Japanese.
The whole debate, if I may say so, was coloured by what I consider to be one of the besetting sins of contemporary Japan -- The Numberone Syndrome. On the one hand, this is revealed in a preoccupation with competitiveness, i.e., with the rank order of nations in the growth rate/GNP per capita/export growth etc.tables, and on the other hand a tendency to believe that everything that is done in the nation that is currently Number One -- i.e., America -- should be imitated. How to achieve a decent society, to make Japan a more comfortable place for Japanese to live in seems to me a preferable starting point.
Two things I learned from this debate: first, from Mr. Horiguchi, that the power generation equipment industry, transportation equipment (railway engines and trucks I take it) and telecommunications systems are not internationally competitive. I'd be interested to know why -- why they are different from ship-building, for instance.
Secondly, I was particularly grateful to Mr. Kondo for guiding me to the McKinsey health care study. I've always been fascinated by health economics and I wish I had time to study it thoroughly. The McKinsey study is clearly an exhaustive statistical analysis, but from a cursory look it did seem to me pretty obviously determined to reach the conclusion that Japanese health care was inefficient. For example, dismissing from the list of reasons why the Japanese need less health care than Americans the fact that by the report's own calculations Japan spends 6% (of doctor/patient contact time was it?) on preventive medicine, but Americans only 1.5%. And all the emphasis on Japanese over-prescribing contrasts with the more cursory treatment of American over-surgerising (both "overs" being subjective anyway.) I'm sure there's a lot wrong with health care in Japan, and the political power of the doctors organisation has certainly distorted the payment system. The "fee for service" method clearly provides perverse incentives. But then so does the American system: the only difference is that the countercheck is in America the patient's -- or his health insurance company's -- pocket whereas in Japan it is the bureaucrat-umpire who stands between the doctor and his patient (who has succeeded, as one of your figures shows, in reducing the cost of major prescription drugs by 31% over 9 years). The British or Canadian system of salaried specialists and GPs paid a capitation fee for patients under their care (giving an incentive to keep patients well rather than to keep them ill) is obviously much better.
I've been rabbiting on much too long and will stop. Nice to meet you and your debaters. RD
Ron Dore normally at Cavanazza Veggio Griazzana, 40030 BO, Italy