A Society that Protects the Individual but not the Company

Senior Fellow, RIETI

The goal of structural reform: ensuring that individuals can realize their potential

In the Basic Policies for Economic and Fiscal Management, also known as the solid policy framework, announced by the Koizumi Administration on June 26, the word "individual" appears more than twenty times. Phrases such as, "support for individual self-help efforts," "a society that doesn't stand in the way of the drive of the individual," and "reviewing systems to respond to the diversifying individual lifestyles," seem to indicate that one of the core points of the Koizumi administration's structural reform program is to reform the systems that stand in the way of individuals realizing their full potential.

RIETI's First Policy Symposium Series examined the design of the social safety net in Japan. Debate focused on how corporations can be freed from their traditional role of acting as safety valves to protect society and be allowed to focus on maximizing the natural pursuit of maximum profit and growth. During the symposium, a case study on the closure of the Mitsui Miike coalmine was presented by RIETI Fellow, Mr. Fumio Kodama. The case study found that despite the closure of the mine in the midst of a recession in the mid-90s, 80% of those employees who lost their jobs and sought reemployment were indeed able to successfully find new jobs in the local area. There is a great deal we can learn from this case in the way incentives were offered, the division of labor between the public and private sectors and the role played by vocational training agencies.

During the post-war period of high economic growth in Japan, a system developed whereby companies ensured the welfare of the individual through benefits, skill training, promotions based on seniority and lifetime employment. In return, the individual made a commitment to the company by forgoing a move to other workplaces, even if better conditions were on offer. The Ministry of Labour's employment policy was also geared to discouraging any rise in unemployment through a system that maintained corporate employment levels. Nominally, there were programs to assist the unemployed, but in reality, by increasing public works projects in areas with an excess labor supply, the actual policy amounted to using the construction sector to maintain employment.

However, this system merely shifts resources from sectors of low productivity to sectors of high productivity without achieving a gain in overall efficiency. The essence of current structural reform is that companies that would be better going bankrupt should be allowed to do so, with those losing their jobs as a result, retraining and moving to areas of growth in the economy. What the government should be doing then, is not preventing these shifts, but creating new systems that encourage the smooth movement of labor and capital resources.

A common phrase in Japan nowadays is that structural reform will be "accompanied by some pain." However, viewed from the perspectives of Americans, being freed from a state in which one is trapped within a corporate environment so that one can move on to a working environment in which one can realize his or her potential is not thought of as something that is "painful," but rather as commonsense. Rather changing one's workplace is regarded as a way of raising one's individual value in the labor market. However, even in the U.S., employees changing jobs three or four times during their working lives has only become commonplace in recent times, with long-term employment at a single company still the norm just 30 years ago.

Where a Japanese employee's resume might list all the divisions he or she had been transferred to in the same company, an American employee's resume will list the different companies he or she had worked at starting with the most recent employer. In fact, resumes in the U.S. take the role of a kind of sales pitch for the individual, beginning with an evaluation of performance at the most recent employer and going on to describe earlier concrete personal achievements and experience. The level of remuneration received at the previous employer is also the most important benchmark on the resume, as an indicator of the individual's value in the labor market when looking for new employment.

Recently in Japan, counseling to help those who want to switch jobs is becoming more commonplace, with the individual's experience and ability thoroughly evaluated and documented at the beginning of the counseling process. American-style career counseling may soon become established in Japan, and in this new labor market, employment placement agencies are becoming more necessary. When a major company collapsed recently, it called on a private firm to provide reemployment-consulting services for its staff. The firm was able to rapidly find jobs for employees that had been laid off, the reason being that the agencies received a commission based on a percentage of the salaries of those employees it placed in new jobs.

Regulations related to the Worker Dispatch Business Law should also be further relaxed. With the arrival of a new labor market, the time has surely come for Hello Work, the job placement offices managed by the Ministry of Health, Labour and Welfare, to be privatized and exposed to competition. The most important asset in the knowledge economy is the individual, and what we need now in Japan are systems that can accurately evaluate the value of, and efficiently distribute, this vital resource.

Necessary corporate reforms: currently corporate culture at large firms does not allow individuals to develop their potential.

So what should companies be doing? In July, RIETI invited Professor Carliss Y. Baldwin of Harvard University to give a seminar on "Modularity." In the seminar the professor described the success of the modular development of the IBM360 family of computers. Although IBM itself triggered the departure from the company of computer engineers working in these design modules, leading to the subsequent decline in IBM's fortunes, the newly independent engineers moved on to help set up numerous computer device-related industries in other areas of the U.S. Professor Baldwin's seminar showed that this crucial development was one of the major reasons for the later growth and prosperity of Silicon Valley. In this lesson, we can identify one reason why there is still no Japanese version of Silicon Valley, as companies here have still not made any moves to specialize, merge or restructure, thereby trapping highly skilled labor resources within conventional corporate structures.

A story told to me by an acquaintance who manages a "hedge fund for Japanese, run by Japanese" in Singapore, also reminded me of the changes that need to be made to Japanese corporate culture. Occasionally, young employees from leading Japanese financial institutions are sent to him to learn the basics of hedge funds, and after six months of hard graft under his tutelage they can eventually master hedge fund trading techniques. However, these newly acquired skills are of absolutely no use when they return to the head office in Tokyo, as Japanese financial houses do not use a performance-based compensation system. As such, talented young traders tend to hit it big on the markets once and then take it easy and enjoy themselves for the rest of the year without working too hard. Meanwhile, less successful employees are constantly lectured and badgered, creating a widening rift between employees in the company. Consequently, my acquaintance can continue to pass on all the hedge fund techniques he wants to Japanese financial institutions, his possible future competitors, and still have no fears of losing business to them. The point is, Japanese individuals are prevented from using the abundant abilities they patently have because of the constraints put on them by the rigid systems of large Japanese organizations.

Although the 1990s in Japan have often been referred to as the lost decade, the government's industrial policy during the period was centered on supply-side reforms to encourage companies to specialize and restructure-more open holding companies, the Corporate Reorganization Law, the Law on Special Measures for Industrial Revitalization, the Civil Rehabilitation Law, employee stock option ownership plans, international accounting standards, Japanese-style defined-contribution pension schemes (401k); and the list goes on. After studying systems introduced in the U.S. and Europe in the 1980s, the government made substantial progress on creating corporate law and tax systems that encourage companies to implement reforms on their own initiative. In fact, despite the recession, many companies successfully used these new systems to help them achieve the biggest profits in their histories.

Furthermore, the issue of strengthening corporate governance through the introduction of a system of external board members, who are not dominated by the decisions of the company president, has been a key issue in the deliberation on the revision of the commercial code in this year's ordinary session of the Diet.

With the thorough introduction of market-value accounting resulting in the gradual unwinding of cross shareholdings, Japanese companies are becoming the target of M&As financed by foreign capital, which is another incentive for companies to push forward with corporate governance reform. Carlos Ghosn of Nissan Motor Co., Ltd, already a "national hero" for his success in reforming and turning around Nissan, is testament to the fact that if an outsider had not been in charge, the revival at Nissan would not have been possible. This and similar cases are convincing the government of the need to welcome direct inward investment to increase the number of investors in the market and boost competition. This in turn, will reenergize Japanese markets and thereby contribute to a rise in productivity that eventually benefits the consumer. (One criticism by the old guard who resist change because of their vested interests in maintaining the status quo, is that we should not be selling off our most attractive assets at knockdown prices to foreign vulture capitalists.)

Government agencies should not be exempt from restructuring either. RIETI was reformed as an independent administrative institution (IAI), staffed by non-government employees and its performance subjected to constant public examination and assessment. This move will result in closer scrutiny of the quality of institutional analysis and policy proposals by RIETI Fellows, as well as the performance of specialist staff in the institution's data management, administration, publicity, conferencing, information technology (IT) and accounting divisions. Every member of the staff will be treated as a professional and encouraged to perform to the best of their abilities through flexible employment, compensation, and objective management evaluation schemes, translating into maximized performance for the entire institute.

Creating a new business model

The time when people used to say, "If we all stick it out and work together, somehow we'll make it through," illustrated in NHK's popular television series "Project X," is over. We have to grow out of this way of achieving success, reminiscent of post-war Japan, and move on. In this regard, companies have to restructure in a meaningful way, which involves more than simply dismissing employees or cutting salaries. They have to build new business models and introduce new employment, pension and compensation schemes that fully allow individuals to realize their potential, particularly women and the elderly, whose abilities have hitherto been underused. Creating new business models also means organizational reform, by making full use of holding companies, spin-offs and IT. Foreign companies that create employment should also be welcomed.

The essence of the Koizumi Administration's structural reform, which aims to build "a society that protects the individual but not the company," lies in the idea that "the company (management and shareholders) will bear the pain of reform as a result of foreign-backed M&As or bankruptcy, but depending on the extent of their drive and hard work, the individuals forced to change jobs will, in principle, be spared." I wonder if it will really be this easy. Still, if the Japanese people are prepared to see the situation in this light, Prime Minister Koizumi may be able to preserve his current level of popularity.

December 4, 2001

December 4, 2001

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