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Work Reform, Mindset Reform, and Corporate Management

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Hibiki Message

Work Reform, Mindset Reform, and Corporate Management

Dear Management members of Hibiki portfolio companies,

This is Yuya Shimizu of Hibiki. We own your company shares for the long term. Today, I would like to discuss the issue about “Work-reform” that is becoming a hot topic here in Japan, and likely to be the source of many headaches for corporate managers.

I like the concept of historical path dependence. The QWERTY layout on the computer keyboard that we use almost every day and which is still the de facto layout, is a common example used to describe this concept. In the early 1870’s when the typewriters were first invented, the keys would jam if they were pressed in too rapidly. In order to solve this difficult technical problem, the QWERTY layout was designed with the intention to slow down typists’ speed by arranging the keys in a pattern that would prevent typists from pressing the keys too quickly. Consequently, the QWERTY layout, despite not the most efficient layout, has survived until now.1

Every society and the corporations existing in the society rely heavily on historical paths. This is particularly manifested in the Japanese corporate system. Japanese corporations achieved astoundingly rapid development during the period of high economic growth after the Second World War but despite the fact that the era has dramatically changed, they are not inclined to change practices or customs that have become the standards of conduct and the basic ways of thinking. As in the example of QWERTY layout mentioned above, if a conduct is globally recognized and highly universal, there will be no incentive to change the conduct although it might seem like the best solution, and such conduct will continue to exist semi-permanently as the de facto standard. Many things such as good old customs should be passed on to the future generations but this is not the case, in a rapidly changing capitalist society in which corporations and each and every one of us lives in.

Recently, with the global competition and technological innovation getting more intense, there is an urgent need to reform the working style in Japan against the background of the extremely severe labour shortage. The glamorous slogan “One hundred million active people” might be unpleasant to listen to but the decline in labour force is indeed a critical problem faced by the logistics and catering industry. A drastic overhaul of existing mindsets is necessary but what does it mean by “reformation of working style” in the first place? What does this mean for corporate managers? I would like to humbly express my personal opinion on this topic.

There may be a better way of saying this but from my point of view, it is “a way (a good way in that sense) to break free from fixed mindsets and to increase the added value.”

It is a well-known fact that Japan’s labour productivity is not relatively high. In year 2016, Japan’s labour productivity per capita was 81,777 Dollars and was ranked 20th out of 35 OECD member countries. To put it simply and macroscopically, labour productivity is calculated by dividing GDP with labour input (employee x hour). Microscopically, it is calculated by dividing the added value (profit + personnel expenses + amortization expenses) with labour input.

After the collapse of the bubble economy, Japan suffered a slow economic growth and a decrease in added value. Japanese companies tried extremely hard to maintain their profit level by resorting to company restructure and reducing personnel expenses. The lifetime employment—a philosophy believed to be capable of fixing labour costs more easily than the systems adopted by Western countries, and which used to be the main characteristic of the Japanese employment system, began to collapse and replaced by non-regular employment system. In year 2015, 16% of total male workers and 41% of total female workers between 25 to 34 years old, were non-regular employees.

As the field of work varies for even one category of labour force, for the purpose of clarity, I would like to focus on the so-called desk workers. The manufacturing industry, which is the backbone of Japan’s added value, the industrial units and the business units are continuing to make huge efforts to increase non-regular employment and to shift factories to overseas due to the appreciation of Japanese Yen. Nonetheless, a complicated and twist phenomenon is visible among the desk workers where their added value has not increased, their productivity remains stagnant and their level of happiness decreases due to long working hours which is not compensated by a salary increase.

Many hidden problems arise against this background. For example, business is getting more complex and complicated and business overhaul might be necessary. Problems are unavoidable in the process of expanding a business but real problems are becoming harder to identify as various tasks are getting more complicated and routine, and many inefficient business flows will emerge as new business methods are used in conjunction with the old ones.

Although our company (Hibiki) is comprised of only 6 members, we have repeatedly experienced these problems within these two years of our establishment. We have scrap-and-build our business flows and our work volume has increased more than five times compared with the time when the company was first established. Nonetheless, we have never tried to reform the mindsets concerning our employees.

The primary responsibility of the management team of a listed company is to maximize the company’s share price (price per share in the long term). In doing so, it is necessary to increase sales, quantity and price, control expenses, and manage the operational efficiency. In addition, it is important to monitor the financial indicators such as ROA, ROE, EPS, BPS, net asset per share and dividend. Nonetheless, it is indisputable that such financial indicators are made out of numbers that are created through the fine value chains of people working in the company (management team, managerial staff, employees, part-time workers etc).

The top management of Japanese companies that have adopted the lifetime employment system in the past decades had pointed out a philosophical problem i.e. is it “bad” to only pursue profits and ignore the interests of employees and other stakeholders? In my opinion, it is bad to “only” pursue profits but “only” is hard to define. A business with no profit is not sustainable and it is difficult for a company with no business profit to hire employees for a long period of time. In my opinion, these are not two conflicting concepts. Peter Drucker, in the preface of the Japanese version of his book, “Management: Tasks, Responsibilities, Practices” (1974), stated as follows (excerpt):-

This book explains that a management’s “social responsibility” and “profit” do not conflict in principle. On the contrary, if a management fails to recognize that “securing a profit is the first social responsibility”, it is a crucial misconception to the extent that the qualifications of that management should be questioned….Profit is not just something that corporate management and investors “wish to get”, but it is something that the whole economic society needs. Even a communist society needs profit just like a capitalist society…..About two-fifth of the total companies in a society will make a deficit at some point of time and another one third will maintain their profitability. Therefore, companies that make a profit will have to cover the deficit of other companies which are larger in numbers…..It is irresponsible to think that “profit” is pursued only by investors and corporate managers as Americans have thought so far. Nonetheless, it is also irresponsible for Japanese and European business owners to view the word “profit” as a “dirty term”.

These words carry considerable weight. I am impressed even after 40 years.

Against these backgrounds, I am convinced that “the reformation of working style” called by the government this time will bring a lot of opportunities and “profit from a long-term perspective” to managers and businesses, depending on the implementation methods and ideas. Undeniably, the effects may not be felt in the short term because such reforms will incur expenses and resources but it will maximize the share prices in the long term.

Slightly going off on a tangent, let us look at the example of Singapore where our company’s headquarter is located. Singapore, an independent Chinese-centred island country separated from Malaysia in August 1965, has developed spectacularly under Lee Kuan Yew’s exclusive policy planning and execution capability. While he deserves a lot of praises, it is undeniable that he had his dark side at the same time. It is interesting to learn how a highly respected dictator (in a sense) who ran a country like a business had dealt with labour issues.

Singapore is a small country with no natural resources. With regards on how to maintain the country’s competitiveness with only 1.5 million “human resources” has always been an issue faced by the country since it became independent. Similarly, in Japan, human resources have always been a valuable resource from the post war to the high economic growth period. Most companies have adopted the lifetime employment system and seniority-based pay system to establish employment relationships that can expand the company’s value in a long term. Singapore, on the other hand, has addressed the same issue with the opposite approach. It gives equal opportunities to all people to climb the social ladder, regardless of their age, sex or race. Meritocracy is thoroughly practiced where everyone is allowed the opportunity to succeed based on their abilities. On the contrary, the concept of retirement after lifetime employment does not exist.2

Taking the female labour participation rate in Singapore as an example, (which is also a matter of concern in Japan in recent years), there is almost no gender inequality in the workplace. In year 2017,3 Singapore was ranked 9th in the world in the Gender Inequality Index and Japan was ranked 19th. As for the pay gap, in year 2013, Singapore women who worked full time earned 88.9 percent of what their male counterparts did.4 Singapore had not only implemented the “Foreign Maid Plan” in year 1978 but had created an environment where women were encouraged to participate in the society. Literally, there are many outstanding women managers and executives in Singapore. In year 2017, 36.6% of managers and 26.5% of employers (president and owner)5 in Singapore are women .

The “Equal pay for equal work” principle (higher remuneration for higher value added work) applies not only to women but to the labour market as a whole (intellectual labour, to be exact) regardless of race, religion, age or gender. Nevertheless, this has caused Singapore to suffer a low fertility rate, lower than that of Japan, as society becomes more competitive and highly-educated women are getting even more reluctant to quit their jobs. Singapore is trying to tackle this issue with immigration policies.

It is evident from this example that Singapore’s path to success is different from Japan. Singapore provides an active working environment for people with ambition, vision and talent and makes full use of them at different levels (country, enterprise, individual). Singapore will not become what it is now without the active participation of its human resources.

No drastic issue will probably arise so far in relation to the “reformation of working style” in Japan. In this era where birth rate and aging population are declining, there are ample reasons to abolish the fixed work system, salary system and appraisal system of the generations aged between 20 years old to 60 years old that based on the lifetime employment and retirement system. It is necessary to allow different working styles based on various work values (time/place of work/work from home/side jobs/maternity leave) to maximize sustainable corporate values and to encourage women’s participation and the re-employment of healthy senior citizens. Besides, employees within a company have different motivation levels. Some employees may want to spend more time on their hobbies after a hard day working, some employees may want to devote their time to side jobs and others may be more enthusiastic in expanding their career. There are various types of work as well such as work that requires collective decision making and work that encourages individual ideas and abilities.

The disadvantages to adopting an uniform appraisal system to all employees even though they have diverse values, motivation levels and tasks may not be obvious in the period of high economic growth. Nonetheless, if we still adopt the same system in the era where economic growth has slowed down and globalized, we will not only be wasting the scarce human resources but human resources with the potentials to develop the company might lose their motivation and quit their jobs. These are the issues that need urgent attention.

There are three important points. Firstly, we need to “completely” and “constantly” implement the KPI (Key Performance Indicator) system even if it is costly, so that employees can pursue diverse values and change their working styles in various situations and in different phases of life. Although it is difficult to completely deny the seniority wage system as working experience is still being valued, we need to make some changes to the system. Employees who seek stability should be given more stable work and treatment while employees with stronger motivation should be put in a more challenging environment and be given a reward that commensurates with their performance. In addition, share options with upside potential can also be given. If detailed assessments are not carried out based on such motivation levels and business directions, it might cause suspicion and jealousy among employees and will adversely affect the business values. Companies with the ability to recognize the diversity in the meaning of workplace happiness and which can instil “prosperity of company” in the differences will undoubtedly become stronger in the future. It is also necessary to have a system that can gather evidence for an objective KPI assessment so that employees who have repeatedly destroyed the harmony within company or undermined the company values can be dismissed in a proper manner. Recent developments in AI technology and IoT will efficiently contribute to such systems implementation.

Secondly, “Mindset reform” as mentioned in the title. Companies and individuals have their own historical path dependence. It is not easy to instantly change anyone’s mindsets even if there is a reasonable basis for change. Every person possesses the tendency to resist and such tendency will become stronger if grouped and become a “force”. There are many instances where “reformations” within an organization are skilfully watered down during the implementation process. The older a person is, the harder it is to change his or her mindset. Therefore, other than fully understanding people’s psychological aspects, it is important that a reformation is done strategically over a longer time span and with full preparedness. “Change” will not happen to organizations where many of their employees radically resist change. Such organizations will gradually be swept away in a tidal wave of progress. I believe your company is not one of them.

Thirdly, decisions to get rid of social norms and to make reforms must be firmly made even if such decisions may face a lot of potential resistive forces internally. The positive awareness that such reforms will improve company’s future prospects must be widely spread. Only the management team who has the “representative right” in the company is capable of spreading such awareness using repeated and varied attempts and to implement such reforms unyieldingly. As with most business decisions, a decision to reform, once made by the top management, will become final, which is why a good management team is truly important to an organization and one of the considerations of private shareholders whether or not to own your company’s shares. Many managers may have already proceeded with major reforms without my knowing. I would be glad that you continue with these reforms.

Lastly, according to a book entitled “The 100 Year Life: Living and Working in an Age of Longevity” written by Lynda Gratton, one of the world’s leading experts on human resource strategy, 50% of children born in developed countries including Japan in year 2007 will live up to at least 104 years old and if the child is born in Japan, the probability that he or she can live to 107 years old is 50%. Based on this surprising projection, the author suggests that it is not feasible to make a life plan as simple as the traditional three-stage life i.e. “Education→ Employment→ Retirement” in the future and women will need to actively explore the options to continue learning and return to work after their children have grown up.

Recently, the market tends to focus solely on quarterly earnings and stock price is up and down busily based on such information. This is sadly quite unfavourable considering the long-term view on corporate values and sustainable development. If your company’s situation is such that the share prices are unreasonably cheap from everyone’s point of view, then now is the time to give opportunities to employees who are likely to create great value to your company in the future. AND, more often than not, a weak stock market is the driving force for companies to make new attempts. Management will have more opportunities to do the right thing from a long-term perspective such as to make reforms, a decision that is usually hard to reach a consensus in a normal state. It is easier said than done but I sincerely hope that you will take advantage of this “short-termism” in the market and ride the wave of this intense change to create value for shareholders and for the society.

October 2018

Chief Investment Officer
Hibiki Path Advisors Pte. Ltd.

Yuya Shimizu

1 In principle, Singapore prohibits retirement by age. Employees aged 62 years old or above may apply for reemployment up to a maximum age of 67 years old if they are healthy. (The government may take legal actions against employers who unjustly force their employees to retire).
2 (website) hdr.undp.org/en/composite/GII
3 Clair Report No. 418 (May 12, 2015)
4 Ministry of Social and Family Development, Singapore