Capitalism and Crises: How to Fix Them

The importance of trust in business

Business undoubtedly represents one of society’s most essential and fundamentally important institutions, consistently providing basic necessities, employment opportunities, and broad-based economic prosperity while, rather unfortunately, simultaneously contributing to concerning environmental degradation, widening inequality, and troubling social exclusion in many communities around the world. According to Edelman’s comprehensive “2024 Trust Barometer” study, trust in business is, quite paradoxically and perhaps surprisingly, at its lowest levels in the most highly developed countries with sophisticated and well-established corporate systems, including both Japan and the United Kingdom, while significantly higher in developing and emerging market economies across various regions. The detailed survey further reveals that people generally tend to trust their own immediate employers considerably more than they trust businesses overall as abstract entities, though Japan notably shows particularly low trust levels in both categories when compared to numerous other nations globally.

Trust varies quite significantly and meaningfully by ownership structure—with family-owned businesses consistently receiving the highest levels of public trust, followed by privately owned firms like private equity firms, then publicly-listed companies on stock exchanges, and finally state-owned corporations at the bottom of the trust hierarchy. This ownership-trust relationship may partly explain Japan’s persistently low trust levels in the business sector, as family ownership of large companies has been notably minimal since the extensive post-World War II dissolution of the powerful zaibatsu conglomerates that once dominated the economic landscape. This substantial trust deficit directly coincides with widespread concerns about Japan’s relatively modest economic performance over recent decades, particularly regarding sluggish growth rates, insufficient business investment, stagnant productivity improvements, and gradually declining international competitiveness in key industries.

Former Prime Minister Abe’s ambitious corporate governance reforms initially focused primarily on board operations and transparency but later expanded to emphasize ownership structure more directly, particularly encouraging the unwinding of extensive cross-shareholdings that were increasingly seen as mechanisms for entrenching management from outside accountability and market discipline. The resulting significant increase in foreign institutional ownership patterns and the emergence of market-based corporate control mechanisms has undeniably improved certain aspects of corporate performance and financial metrics but simultaneously raised legitimate concerns about potential conflicts with Japan’s traditionally high levels of social harmony, employment stability, and environmental protection objectives that have long been valued in Japanese society and business culture. This fundamental tension between economic efficiency and broader societal harmony represents a critical challenge for Japan’s corporate governance evolution going forward.

Japan’s corporate governance reforms: balancing efficiency and social harmony

The profoundly important question of whether Japan can successfully maintain an appropriate balance between economic efficiency and social harmony fundamentally hinges on developing a deeper understanding of what truly lies at the very heart of any capitalist system: the concept of profit itself. While the renowned economist Milton Friedman famously declared in 1960 that the only social responsibility of business was to use its resources and engage in activities specifically designed to increase its profits, it is essential to recognize that the contemporary conception of profit has diverged quite significantly from its original Latin roots which genuinely meant “to advance and progress” in a much broader societal sense.

Conventional profit measurement, typically calculated as the straightforward difference between corporate revenue and narrowly measured costs, fails to account for numerous true business costs that impact society extensively. These unmeasured costs include paying employees below-living wages, offering suppliers in vulnerable regions unfair supply chain pricing, generating substantial environmental pollution across communities, and contributing to devastating biodiversity loss that affects ecosystems and societies for generations to come. When company boards sign off on their financial positions as presenting a “true and fair view” without properly incorporating these significant costs, they fundamentally misrepresent reality in a rather profound way. These widespread impacts should absolutely not be viewed as somehow external or peripheral to the firm but rather recognized as intrinsic elements that are completely fundamental to basic business operations and decision-making processes.

This deeply problematic misconception inevitably leads to counterproductive outcomes in market competition throughout the economy. Companies that responsibly account for their true comprehensive costs and consequently earn genuinely just profits simply cannot effectively compete against competitors that externalize significant costs and thereby report artificially higher profits to investors and markets. This unfortunate dynamic creates a destructive “race to the bottom” where “bad firms” systematically drive out “good firms”—essentially representing a corporate version of Gresham’s law where inferior practices eliminate superior ones from the marketplace. Oftentimes, even when companies have genuinely enlightened leaders who sincerely would like to implement substantial improvements, they are unable to do so due to the immediate negative impact on their short-term competitiveness in highly cost-sensitive markets.

Redefining profit: from extraction to advancement

Traditional policy tools have increasingly proven inadequate for addressing the multifaceted challenges related to modern business practices. A truly fundamental rethinking is urgently needed, with companies deliberately redirecting their ambitions from what can be characterized as “entanglement, exploitation, and unjust enrichment” toward the much more positive territory of “initiative, innovation, and inspiration.” This significant paradigm shift enables forward-thinking businesses to earn not just fair and just profits in the conventional sense, but also to generate substantial revenue through creating meaningful social and environmental improvements that benefit society as a whole. Such strategic repositioning produces two remarkably positive outcomes: first and foremost, competition actually drives improvement rather than degradation as innovative companies continuously strive to deliver genuine benefits; second, and perhaps equally important, it naturally fosters productive partnerships between business and government by thoughtfully aligning their fundamental interests in social and environmental progress.

Beyond government relations, this comprehensive approach significantly strengthens connections with all key stakeholders throughout the business ecosystem—effectively creating more loyal and engaged customers, genuinely motivated employees, and truly committed suppliers and community partners. The underlying concept at the very heart of this approach is corporate purpose, which meaningfully expands upon Milton Friedman’s traditionally profit-focused view by deliberately addressing the critical question of where that profit actually originates. Similar in many ways to the ancient Confucian principle of “making money the right way,” businesses should fundamentally “produce profitable solutions for the problems of people and planet, not profit from producing problems” that harm others or the environment.

This perspective genuinely resonates with business leaders for two particularly compelling reasons: it effectively frames purpose around strategic problem-solving which is the very essence of sophisticated business strategy and strongly emphasizes profitable solutions rather than mere charity or corporate social responsibility initiatives. While this holistic approach might be succinctly summarized as “profit without harm,” it’s important to acknowledge that businesses inevitably face difficult tradeoffs in their operations every single day. The key distinction, which cannot be overemphasized, is that companies should absolutely not profit from deliberately imposing foreseeable harm on others or exploiting vulnerabilities in society or the environment.

Current policy initiatives around the world clearly demonstrate the inherent challenges of alternative regulatory approaches. The International Sustainability Standards Board, for instance, primarily focuses on how environmental and social risks affect companies and their investors rather than addressing companies’ impacts on society—essentially approaching the issue from exactly the opposite direction. Meanwhile, the European Union’s ambitious double materiality approach attempts to address company impacts through comprehensive directives requiring detailed sustainability reporting and supply chain due diligence, but the approach unfortunately has been facing significant implementation difficulties, leading to the substantially scaled-back “Omnibus Package” with numerous exemptions and delays. These well-intentioned initiatives ultimately prove overly complex and burdensome, frequently requiring companies to attribute monetary values to social and environmental impacts, which many companies find extremely challenging to implement.

A considerably more straightforward and practical approach measures impacts through transparent key performance indicators and traditional cost accounting principles—simply accounting for the true and complete costs of avoiding harm and the net value of the costs of imposing detriments and defining fair profit accordingly. This creates a natural and sustainable alignment between investor interests in profit and solving pressing societal problems, fundamentally reorienting business from merely adding peripheral objectives to making purpose and profit genuinely complementary and mutually reinforcing. The final result effectively integrates financial interests with broader societal well-being rather than treating them as competing or contradictory priorities, as is so often the case in conventional business thinking. This holistic integration represents perhaps the most promising path forward for addressing the multiple crises facing our world today while simultaneously creating sustainable prosperity for future generations.

Purpose-driven business: creating value through problem-solving

Governance and measurement practices undoubtedly have significant implications for investors and owners of businesses. Indeed, the purpose-driven approach fundamentally requires the presence of dominant, controlling shareholders who consistently maintain a long-term perspective on the company’s mission. In this particular context, Japan’s corporate ownership history offers truly fascinating insights, having undergone several dramatic transformations over time—from the post-WWII dissolution of zaibatsu leading to widely dispersed shareholdings, through the extensive bank ownership during the remarkably high-growth 1980s, to the challenging “lost decade” following the severe banking collapse of the early 1990s.

The early 21st century has witnessed steadily increasing outside ownership, particularly by foreign institutional investors, alongside a corresponding decline in traditional insider ownership patterns. Initially, management responded somewhat defensively through extensive cross-shareholdings, which Prime Minister Abe’s Abenomics reform subsequently sought to dissolve. However, between 2010 and 2020, insider ownership levels actually stabilized rather than continuing to decline. This occurred not because cross-shareholdings necessarily persisted in their traditional form, but rather because they thoughtfully evolved into strategic shareholdings—where company A takes a purposeful stake in company B without the reciprocal ownership that characterized earlier arrangements.

Perhaps the most remarkable aspect of this evolution is precisely how Japanese management has actively and deliberately used this to shape the ownership structures of its companies over recent years. The case of Suzuki provides an especially illuminating example: when General Motors decided to sell its substantial stake in 2006, Suzuki promptly repurchased these shares to prevent potentially problematic market dispersion, temporarily holding them as treasury stock. The company then strategically placed approximately 2% with three major Japanese firms (Nippon Steel, JFE Steel, and Mizuho Bank) and later a substantial 20% block with European automotive manufacturer Volkswagen. Such deliberate management of ownership blocks frequently involves companies creating entirely new concentrated shareholdings by systematically repurchasing market shares and carefully placing them with strategic investors. Notably, unlike traditional cross-shareholdings that were often viewed with skepticism, the market generally responds quite positively to these more purposeful arrangements, effectively recognizing that they create valuable long-term partnerships that genuinely help companies deliver on their fundamental purpose and strategic objectives.

The importance of committed shareholders

The case of Danish pharmaceutical company Novo Nordisk illustrates how purpose-driven business creates sustainable value. The company transformed its purpose from simply selling insulin at maximum profit to helping prevent and treat diabetes globally, especially for the 80% of type 2 diabetes patients in low and middle-income countries who were unable to afford their products. Indeed, by partnering with healthcare institutions, governments, and experts worldwide to promote preventative approaches and nutritional solutions, Novo Nordisk paradoxically became more profitable through enhanced trust relationships that expanded their business well beyond merely producing and selling insulin.

This example highlights three key insights: First, purpose must be absolutely core to business strategy and not merely a cosmetic addition or marketing tool. Second, solving major problems necessarily requires partnerships across sectors, much like Japan’s strategic corporate investments. Third, genuine commitment to meaningful problem-solving builds trust—perhaps a company’s most valuable commercial asset in today’s economy.

In terms of ownership, Novo Nordisk’s distinctive ownership structure enables this long-term focus. While approximately 70% of its capital is held by dispersed shareholders trading on Danish and New York markets, the Novo Nordisk Foundation—a registered charity—holds just 30% of equity in the company but controls nearly 80% of voting rights through a dual-class share structure. This thoughtful arrangement effectively maintains unwavering commitment to purpose despite potentially disruptive short-term market pressures.

Japan currently stands at a critical juncture regarding corporate ownership. The reforms of former Prime Minister Abe have successfully improved economic performance, but considerable caution is warranted before pushing further toward fully dispersed ownership. The UK presents a particularly sobering cautionary example—despite having highly diversified shareholding and strong minority shareholder protections, it has experienced consistently poor economic performance characterized by chronic underinvestment due to the fundamental absence of truly committed shareholders.

In stark contrast, Denmark, with the world’s highest proportion of foundation-owned enterprises like Novo Nordisk, boasts impressively high GDP per capita, remarkably low inequality, excellent employee relations, and exceptional happiness metrics across society. This strongly suggests a significant correlation between ownership structures that enable genuine long-term purpose and overall economic and social performance.

Comment

Professor Mayer’s insightful ideas are, without question, extremely timely and particularly relevant for Japan’s current economic and corporate situation. The fundamental concept of corporate purpose as “producing solutions for problems of people and planet, not profiting from producing problems” quite naturally aligns with traditional Japanese business philosophy, which has historically emphasized harmony and balance among various stakeholders. Indeed, several historical principles dating back approximately 200-300 years ago continue to exert considerable influence on Japanese corporate thinking even today: most notably, the deeply-rooted concept of goho-yoshi (which essentially advocates benefiting five key stakeholders: employees, customers, business partners, shareholders, and broader society) and the renowned academic Sontoku Ninomiya’s profound maxim that “profit without ethics is a crime, and ethics without profit is nonsense.” These traditional Japanese principles, while certainly valuable, undoubtedly are in need of thoughtful updating to address the complex challenges of the modern global economy.

Japan’s corporate governance landscape is currently facing three significant challenges that require careful consideration and strategic response. First and foremost, despite ambitiously implementing dual regulatory codes—specifically the Stewardship Code for institutional investors and the Corporate Governance Code for companies—approximately a decade ago, Japan has unfortunately failed to fully achieve the ultimate intended goals of substantially increased innovation, enhanced growth investment, and meaningfully improved returns for employees and business partners. The governance reform was explicitly designed as a means rather than an end, yet the desired outcomes remain largely unrealized despite considerable effort and regulatory attention.

Second, perhaps equally concerning, has been the steady decline of insider shareholders, particularly traditional business partner shareholders who historically considered broader Japanese societal interests in their decision-making processes. This structural shift has substantially reduced the proportion of shareholders motivated by both profit considerations and genuine social concerns, potentially creating an imbalance in corporate priorities. The growing influence of foreign institutional investors, while bringing certain advantages, has simultaneously diminished the presence of shareholders with deep connections to Japanese society and its distinctive values, which is why the foundation-driven social approach raised in the presentation is particularly relevant for Japan today.

Third, Japan faces several unique structural issues within its corporate legal framework: specifically, exceptionally the first one is strong shareholder legal rights compared to many other developed economies, the second one is particularly severe restrictions on dual-class share structures (adhering quite strictly to the one-share-one-vote principle without the flexibility seen in other markets), and the third one is a problematic lack of transparency regarding shareholder identities and intentions. These structural characteristics create significant challenges for implementing a more purpose-driven approach to business.

On a more positive note, Japan has made substantial progress from its pre-reform system, which essentially recognized only shareholders and management without a properly functional board structure. Over the past decade, considerable effort has been devoted toward clarifying board roles and functions, establishing proper oversight mechanisms, and creating more balanced corporate power structures. Going forward, however, Japan must thoughtfully address the fundamental questions of what shareholders can and should legitimately do, as well as what they cannot and should not do within this continuously evolving corporate governance framework. Resolving these complex issues will be absolutely essential for creating a corporate environment that genuinely balances economic efficiency with social harmony in the distinctive Japanese context.

Q&A

Q:
The challenge facing the suggested framework of making companies pursue just profit is the question of how to keep these companies sustainable. It was suggested that the government needs to support them, perhaps through subsidization. The point is, how can the government choose which companies are suitable for receiving such support and decide how much support to provide to said companies?

Q:
How do you differentiate a good strategic corporate partnership from cross-shareholding that merely defends corporate executives, which is strongly criticized? Regarding the Danish company Novo Nordisk, how were minority shareholders persuaded to accept a corporate structure where they hold more than 70% of shares but have less than 25% voting power? How were these shareholders convinced to accept a structure that appears unfair from their perspective?

Colin MAYER:
Government intervention should not be the standard approach to achieving just profits. Instead, companies themselves should innovate to solve problems. For example, the “Magnificent 7”—the trillion-dollar companies of Alphabet, Amazon, Apple, Microsoft, Nvidia, Facebook, Tesla—all had visionary leaders focused on solving major challenges. Google’s founders, for example, aimed to connect people worldwide to knowledge, requiring both technological and commercial innovation. This approach encourages business leaders to develop innovative solutions rather than creating problems.

While companies create a continuous cycle of solving problems and addressing new ones that emerge in this process of “progress and advancement,” certain externalities cannot be internalized by companies or the private sector alone. In these cases, government can help through two specific mechanisms: public procurement and licensing. For public procurement, governments could require contractors to demonstrate purpose-driven approaches that align with public interest. For licensing, particularly with privatized utilities, government should stipulate in charters that companies must not profit from harmful practices. One negative example is the case of the privatization of British water companies which used their monopoly position as private companies to earn substantial revenues for themselves, their executives, and their investors, which were paid out as dividends, while failing to invest in infrastructure, resulting in the current significant pollution of waterways.

Regarding the distinction between strategic corporate partnerships and defensive cross-shareholdings, two key indicators are market reaction and pricing mechanisms. Cross-shareholdings typically receive negative market responses when announced, while strategic investments are viewed positively. Additionally, strategic investments are not made at market prices but at a discount, reflecting the strategic investor’s special contribution beyond capital.

On the dual class share structure of Novo Nordisk, such arrangements are typically established at a company’s foundation stage rather than implemented later. The Novo Nordisk Foundation was created before the company went public, with subsequent public offerings structured to preserve the foundation’s control while allowing public investment.