Advantages not Lightly to be Thrown Away

Ronald Dore (Professor, University of London)

Japanese and Americans have an equal reputation for diligent industriousness, But I was recently prompted to reflect once again on the rather different world views, basic value systems which makes them so.

The occasion was a conference on corporate governance at Bocconi University in Milan. There was, of course, a great deal of talk of Enron and World Com, but some of the liveliest discussion was aroused by a paper by a pair of Swiss organisational theorists, (Margit Osterloh and Bruno Frey) entitled "Corporate Governance for Crooks?: The case for Corporate Virtue".

The general gist was roughly as follows. Surely there is something wrong with the current approach to corporate governance. You set up organisational systems which maximise the temptation for corporate executives to feather their own nest while claiming to be doing their best for the firm, and then when they succumb to that temptation you seek to punish them. And when too many people are being discovered to be cheating you can only think about increasing the punishments and finding better ways of detecting fraud.

They advocate three ways of doing better
1. Better selection of executives with the emphasis on the capacity for intrinsic rather than extrinsic motivation.
2. More use of fixed salaries rather than stock options or performance bonuses.
3. Greater participation of employees and stronger corporate self-governance.

The key to their argument lies in the distinction psychologists studying motivation make between extrinsic and intrinsic rewards, exemplified in the difference between working primarily for the carrots and to avoid the sticks which come form some outside agency, as opposed to working for the pleasure derived from the work itself or for the sense of satisfaction in fulfilling obligations. The stock option, designed to align the interests of the executive with those of the shareholder owners is a good example of an extrinsic reward. Its introduction reveals the assumption that men and women are basically self-interested and giving them the prospect of money and other benefits is the best way of making them work. By contrast, the system of fixing pay annually, as in the Japanese nenko system, on the basis of seniority (the nen) and some assessment of how well the individual has worked over the past year (the ko) is based on the assumption that, provided the merit/performance assessment system is generally believed to be fair, people will be well enough motivated to do a good job by the satisfaction they get out of the work and out of the feeling that they have done what is expected of them by their colleagues.

A corollary is that there can be no universal generalisations about "the nature of Man". People who are brought up in a society in which the former assumptions – the Original Sin assumptions -- are dominant, will grow up to become people who respond to that kind of incentive, people who are raised in a society where the contrary , Original Virtue, assumptions rule, will be capable of intrinsic motivation.

The paper attracted a lot of criticism in the discussion. Unrealistically idealistic. Ignores the importance of competitive striving as the fuel that makes modern economies work, etc. "Suppose a firm were converted to your view and carried out through the intrinsic revolution.. The chances are that it would lose in the competition to a firm which uses extrinsic incentives and you'd be back where you started." To which the obvious answer was: "But have you ever thought of the possibility that it wouldn't lose? Think for a moment of how many more American firms have been taken over by Japanese firms than the other way round."

But there was general agreement on one thing. In a society in which the extrinsic reward system is the norm, a firm which relies on intrinsic rewards and a fixed salary system, is likely to have some of its best people poached by the offer of much higher salaries. It is difficult for a single firm to defy the dominant norms of the market. And how do you change the dominant norms? By what kind of social engineering? By education? By revivalist religion?

The reflection that passed through my mind was that the defence of a system in which the dominant norm is already one which stresses intrinsic motivation is equally problematic. In Japan's financial sector today, the proportion of the labour force working for foreign firms has now reached 11 percent. Even the high prestige Bank of Japan complains that the some of its brightest young men are being lured away by the offer of salaries which are double or triple what they could hope to get by the time they are 40.

There is a strong trend in Japanese corporations today to move increasingly to seika-shugi -- performance-related pay. One might think of this as a defensive move to make it easier to resist such poaching by foreign firms. But unfortunately that doesn't seem to be the case at all. It seems to be more often feebly justified just as "the trend of the times" or following "global standards".

Greenspan's predecessor at the Fed, Paul Volcker, recently said in a radio interview, commenting on America's corporate scandals, that stock options were a major source of the problem, and in his view they should be made illegal except for smaller entrepreneurial start-ups where there was a genuine pooling of risks. That reminded me of an incident in 1997 when Japan passed the law which made stock options – which had, as Volcker recommended, until then been legal only for venture start-ups – legal for all firms. Almost as soon as the law was passed Toyota put a resolution to its annual shareholders meeting to introduce stock options for directors.

I had some reason for going to Toyota at the time and asked a senior executive why they had done it. "It was to give incentives to our directors". "So were you afraid they would be getting lazy otherwise?" (It never occurred to me, of course, to ask whether in this lifetime employment firm they were likely to hive off and work for somebody else.) "Good heavens no! It was.. well, you know that our Chairman is also Chairman of Keidanren, the Employers Federation. We thought that we should do our bit to help the new system to get established."

Was this the simplistic idea that whatever is done in America must be the thing to do? Or was it a much more careful judgement that, with foreign, mostly American, institutions now responsible for some fifty percent of the daily trades on the Tokyo stock market, doing things which would please and attract foreign investors had now become a necessity? I have no idea which it was, but if it was the latter, it did not prevent Standard and Poors downgrading Toyota a couple of years later on the grounds that is was not serious about cutting its payroll.

I recall that at the time the current Toyota Chairman, Mr. Okuda, who has made no secret of his intention to keep what he considers to be the good features of "Japanese-style management", was extremely angry at Standard and Poors' decision. I wonder if he has by now decided that there is no future in copying American styles of corporate governance and is thinking of getting rid of stock options at Toyota?

If one asks what there is about Japanese-style management which it would be a shame to give up, I would say, the Original Virtue assumption, the assumption that provided people are paid what – in the light of what other people doing much the same job are being paid -- what the Japanese call sekensoba – counts as a fair wage, they will be willing, sometimes alone, sometimes in a team together with their colleagues, to "do a good job", to "do something the customers appreciate" --. and get some satisfaction out of doing so.

That attitude, those assumptions about human motivation are closely linked to other features of the "quasi-community-like" Japanese firm. The fact, for instance, that when firms get into severe difficulties, it is the top executives whose wages are cut first – and for less money they are more likely to work not less but harder, to save the firm. Or the fact that when cutting the headcount becomes really necessary, it is done in consultation with the firm's union, through voluntary early retirement and with efforts to find other jobs for the people who have to go. Or the fact that, even in the absence of external directors, top executives are generally kept honest by the social pressures within the firm, the constraints on their actions imposed by their juniors as well as their peers, by the thought that if they retired in disgrace, none of those who had been colleagues for the whole of their working lives would want to talk to them in their old age.

It is easy to say "a pity to lose" these characteristics. But how to stop them disappearing? An especially pertinent question when, as already noted, in the economy's most prestigious industry, namely finance, already 11 percent of employees are working in environments in which the necessity of extrinsic rewards is taken for granted. And when the economic advisors who surround Prime Minister Koizumi have been trained – brain-washed -- in American graduate schools where game theory and the self-interest maximisation assumptions of neo-classical economics hold sway.

Fred Hirsch, in his 1977 Social Limits to Growth wrote of the "depleting moral legacy of capitalism". The "Protestant" virtues which Weber ascribed to the early capitalists – self-restraint, thrift, a social conscience -- were inexorably being eroded by greed. The fact that the CEOs of the top 100 American companies paid themselves 39 times average salaries in 1970 and now pay themselves a multiple of over 1000 may be seen as evidence of that process.

That "moral legacy" had not been wholly depleted in Japan. People who believe in the virtues of the Japanese system of management, rather than repeating meaningless slogans about reform, would do better to acknowledge clearly this dependence on its moral basis, and thereby help to defend it.