Working Style Reform and Productivity Improvement: Compatibility of addressing the issue of long working hours and achieving efficiency

TSURU Kotaro
Faculty Fellow, RIETI

The Nihon Keizai Shimbun group started promoting its Nikkei Smart Work project last year with the aim of encouraging corporations to improve productivity by implementing more diverse and flexible approaches to work and innovation. In part, the project has enlisted the participation of academic experts with respect to conducting corporate fact-finding interviews and carrying out empirical analysis. The efforts have culminated in the June 2018 release of an interim report titled "Criteria for Balancing Working Style Reform and Productivity," published by the Smart Work Practices Study Group which aims to make such knowledge widely available.

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The interim report draws on the results of the Nikkei's smart work practices survey, which acts as the centerpiece of the Nikkei's Smart Work initiative, and accordingly ties together analysis performed in the study to determine how attributes and efforts of corporations correlate with business performance with respect to the 602 participating companies, including listed corporations. As chairman of the Study Group, I took on the task of writing and compiling this report. In what follows, I would like to outline the main sections of the interim report, namely, the first chapter which was overseen by Toyo University Professor Miho Takizawa and myself; the second chapter by Professor Takizawa; and the third chapter by Keio University Professor Isamu Yamamoto.

The first chapter of the report offers a preliminary look at fundamental relations with respect to how the attributes and efforts of the corporations that took part in the smart work practices survey relate to their corporate performance. The survey covers four areas of operations in which companies that engage in smart work practices tend to excel, namely, "human resources utilization," "capacity for innovation," "market development strengths," and "management infrastructure." We scored and tabulated the results in each of the four areas of focus, and created a benchmark with respect to the comprehensive strengths combining the first three of the four areas of focus.

First, with regard to the interrelations of each area of focus, we found that there are particularly significant correlations between combinations of the three respective benchmarks gauging human resources utilization, capacity for innovation, and market development strengths. The results of our study seem to indicate that there are substantial complementary relationships and synergies among those areas of focus.

Moreover, our findings show that the "comprehensive strengths" and "human resources utilization" benchmarks correlate somewhat positively with labor productivity and corporate performance in terms of return on assets (ROA), thereby confirming a positive relationship between those benchmarks and corporate performance. In particular, whereas the benchmarks reflecting strengths more significantly relate to labor productivity when it comes to the grouping of highly profitable companies, those benchmarks tend to relate more significantly to ROA when it comes to low-profit enterprises.

The first chapter also pinpoints attributes and initiatives that clearly vary among companies with high or low productivity, by looking at all survey components under the category of "human resources utilization." However, these results only look into simple correlations between the individual survey components and corporate productivity, and the effect that multiple attributes simultaneously have on productivity is unclear.

Thus, in the second chapter, all of the survey items in addition to those of the human resources utilization category were covered and survey components that might explain the causes of labor productivity variance were studied. Given the extensive range of survey items, conducting a preliminary scrutiny of possible theoretical relationships with respect to productivity is no easy task. Moreover, any attempts to adhere to particular theories could lead to an arbitrary selection of explanatory variables and give rise to concerns regarding the possibility of overlooking potentially significant variables.

The second chapter, therefore, covers the topic without referring to transcending theories, and uses machine learning methodologies common in artificial intelligence, the aim of which is to determine what combinations of sampled data from among the entire dataset would yield the most significant correlations with productivity overall. Excerpts from our analysis in part indicates that companies with the following attributes have high productivity:

  • (1) a high proportion of outside directors and female outside directors;
  • (2) a high level of corporate expenditure earmarked for social engagement activities, calculated on a per-employee basis;
  • (3) certification as a "Health & Productivity Management Organization," and/or extension of family and vacation allowances to same-sex couples through corporate initiatives geared toward the LGBT community;
  • (4) a high proportion of permanent employees with reduced working hours, a high proportion of permanent employees with defined core working hours, and arrangements for permanent employees stipulating defined job duties;
  • (5) low number of total actual working hours with respect to permanent employees; and
  • (6) numerous collaborative research projects in conjunction with overseas universities and other such institutions, high upper limits on research and development (R&D) expenditures which are at the discretion of the general manager-grade workforce, and high levels of advertising expenditure on a per employee basis.

From among our massive amount of data on corporate attributes and initiatives, the findings detailed above suggest that companies achieving high productivity particularly tend to be those whose practices involve maintaining corporate governance frameworks, ensuring flexible and diverse working environments, and actively engaging in innovation initiatives.

Chapters one and two of the report focus mainly on labor productivity as a measure of performance, and consider how corporate attributes and initiatives correlate with performance at a certain point in time (FY2016). As such, it is important to note that our study was not able to identify a causal relationship in this regard.

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Meanwhile, the third chapter of the report focuses on the relationships between profit margins and several factors, including data on working hours obtained over multiple years, and considers changes in effects over multiple years, as well as causal relationships drawing on panel data. For instance, our analysis considers changes in the effects of working style reforms over time (spanning the five years from FY2012 to FY2016) to determine how various working style reform initiatives taken by companies subject to the study conceivably affect corporate profit benchmarks such as ROA and return on sales (ROS).

With respect to promoting employee diversity, adopting flexible work arrangements, and overhauling wage structures, the study does not generally show statistically significant correlations in terms of profit margins. However, it does indicate that health management initiatives seem to significantly affect profitability after two years of implementation. As such, the study indicates positive and significant correlations with respect to the effects of all such reforms over time (refer to Figure). Consequently, this seems to suggest that although health management initiatives tend to take a certain period of time to generate results, such initiatives ultimately culminate in higher profit margins, such as ROA and ROS.

Figure: Correlation between Implementation of Health Management Initiatives and Profit Margins (ROA)
Figure: Correlation between Implementation of Health Management Initiatives and Profit Margins (ROA)
Source: "Findings based on data of smart work practices survey, with respect to working style reform and profit margins of listed corporations" (Chapter 3, "Interim Report of the Smart Work Practices Study Group"): Professor Isamu Yamamoto, Keio University (2018)

Whereas there is a need to address the issue of long working hours by carrying out working style reforms, doing so also gives rise to concerns on the prospect of adverse effects that might be had on corporate performance, and as such, our study focused on working hours among permanent employees of companies subject to the study, and examined the notion of whether or not changes in corporate performance have resulted from moves to address the issue of long working hours through working style reforms and other such means.

Knowing that working hours of those employed on a permanent basis by many of the target companies subject to the study have been decreasing since 2014, we observed tabular data and performed regression analysis to determine how such trends might relate to corporate profit margins. Those findings show that the working hours of permanent employees do not have a significant statistical or economic effect on corporate profit margins.

These findings neither indicate that higher corporate profit margins result from moves to address the issue of long working hours of permanent employees by implementing working style reforms, nor that such initiatives would have adverse side effects in terms of causing lower profit margins. Findings of the study show that many companies have managed to maintain prevailing sales and profit levels upon taking on initiatives to address the issue of long working hours, and furthermore have achieved higher levels of efficiency on a per-hour basis.

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As for the interim report overall, it is not easy to readily draw clear and definitive conclusions from the study with respect to specific corporate attributes and initiatives geared toward improving corporate performance, particularly given the variance among the respective chapters of the report and given that findings are based on analytical approaches that are still under development.

On the other hand, findings detailed in the three chapters are consistent in suggesting that initiatives to achieve low and reduced working hours do not necessarily diminish corporate performance, and, on the contrary, correlate positively with high levels of labor productivity. These findings indicate that working style reforms, which particularly involve cutting back on working hours, are not inconsistent with the notion of boosting corporate productivity, and the findings offer key evidence which seemingly indicates that the two aims are compatible.

>> Original text in Japanese

* Translated by RIETI.

July 2, 2018 Nihon Keizai Shimbun

August 24, 2018