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2018 New Year Message – About “face”

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Hibiki Message

2018 New Year Message – About “face”

(This is a summarized version of a Japanese message sent out to management and senior officers of companies)

Dear fellow corporate officers, a happy new year to you all. I wish all of those who I had luxury to meet a healthy and a prosperous 2018!

So how was 2017 to all of you? On the one hand, it was truly a mixed bag, a year of chaotic hyperactivity. Shocking miss-conducts were uncovered at a number of well-established corporations, and the failure of governance reforms that consisted of mere lip service seemed to be in sight, but euphoria spread through the stock market, while both market participants and the general public were talking about such brand-new sparkling concepts as Bitcoin, Instagraming and the like. In 2018, market conditions will not be as optimal as they were in 2017, as US interest rates will start to go up and even Europe will scale back on quantitative easing. Corporations, including asset managers like us, are entering a year in which differences in discipline will start to bring some varied results (rather than everybody being happy). Let’s brace ourselves. The in-depth theme of this New Year’s essay is “Face.” I will elaborate on this later.

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The speed of social changes has recently been fast and accelerated. My biggest (personal) area of interest these days is about how organizations, particularly corporations, should behave, and how corporations should relate to individuals (people). Actually, I addressed these themes in my Hibiki Messages of March 2017 (on good companies) and August 2017 (on employee motivation and stock options). I recommend you to take a look at them on our website when you have a chance.

A company is basically a collection of people and things. Although the company possesses goods, contracts, technology and wisdom (patents etc) derived from those things, it is ultimately people who use these things and give them economic ‘life’. In my opinion, as artificial intelligence (AI) and other technologies develop, attention will be focused on how people will realize their true worth, or value, to control and expand on those value-added areas. As a phenomenon, this is linked to such current hot topic in Japan as “work-style reform” led by the government. Allow me to touch on this later.

We can approach this issue from two perspectives. First is the perspective of the individual (person).

The perspective of the individual (person)

Animals, including people, are drawn together by the survival instinct. Even the smallest units, families, instinctively try to increase their safety and efficiency through living together, but their true strength (as one unit) is derived through bonding as a family; emotional and mental connections rather than simple division of functions. In his famous book, Escape from Freedom, Erich Fromm wrote about people’s psychological mechanism about how people who are cut off from information feel alienated and are gripped with anxiety and are driven to form groups so that they can escape from freedom and from themselves. In our short tenure of human history, religions, being the most powerful unit of all, with its superior networking capability, gave people and societies who are gripped with such anxiety a strong power to move forward and improve ourselves.

Let us jump ahead and look at Japan after World War II. The country was in abnormal circumstances. The gross national product had shrunk to one-third of its prewar peak, the zaibatsu conglomerates had been ruthlessly broken up, almost 4,000 business leaders (which amounted to almost all of the executives who headed major corporations before the war) were purged, and people who had been middle managers were suddenly running these companies – under crisis conditions. The state and the military, with which people had relied on during the war, were completely decomposed. Interestingly, company, or more intimately, the “workplace” took over as something people bond together, not just for earning a living (as many companies had no money to pay salary) but to rely on and to move forward. This desire to “go somewhere and combine efforts to do something,” this group energy, became the driving force in Japan’s rapid postwar economic growth.

Moving the calendar ahead, what is the situation now? First, the Internet and then the smartphone have revolutionized people’s lives. This is an age in which we can connect with family and friends anytime 24 hours a day through a small screen. The advent of the super networked society has brought us to an age where it is difficult to feel the alienation or anxiety of former times. In reaction to this, hasn’t there been a weakening of the feelings of organizational identification or connection? The desire for connection with something was a strong driving force in the formation of capitalism, religions, or fanatical political parties during times of uncertainty, but in modern society, being connected seems to have become a given over the past several years. We need to conduct a broad, deep, and objective analysis of the abrupt structural changes that have occurred without our noticing them, of all the changes that have taken place in individuals’ (people’s) behavior. All of life’s and society’s premises have changed.

Stated simply, Youtubers and Instagrammers could not have been imagined in the past. New occupations have emerged in which one individual can attract huge audiences and sometimes obtain an unbelievable amount of advertising revenue. The rapidly growing sharing economy has generated new kinds of jobs, for instance, those people who rent unoccupied rooms, or to engage in freelance writing such as curators. This is an age in which such people can get work because they have developed credibility on the Internet. The reverse phenomenon has already started in China, where the government has started to observe personal information on the Internet as a source of assessment.

Feelings of alienation and anxiety, that have had a strong positive influence on herding behavior and people’s sense of belonging, have diminished, and lifetime employment and other systems that help increase people’s sense of belonging are already breaking down. In contrast, more people who started freelance work (for fun or for hobby) have experienced phenomenal success. The meaning of life, the meaning of work, and the processes involved in life and work have rapidly and totally decentralized, people can access information on a real-time basis, and this has affected people’s attitudes towards life and work. Here, I would like to focus on the fact that a new phenomenon is taking place that has almost never been experienced in human society before. This is the phenomenon whereby people are really much freer than they were before, and it is hard for them to feel discomfort with that freedom. Not surprisingly, we are thus faced with a different type of stress (of being connected all the time) which also impacts behavior and mindset but we shall discuss in other occasions.

The perspective of the company/enterprise

Next is the perspective of the company, or enterprise. As we have gained more lifestyle freedom, the social structure has become more complex and diverse. The advent of AI, the Internet of Things, and other new technologies are bringing to corporations two new ways of challenges. One is the deconstruction of the value of labour; the other is decentralizated peoples’ minds.

With respect to the deconstruction of the value of labour, many changes occurred in the past due the advent of computers and the advent of the Internet, and these changes replaced unskilled labour with machines. However, the current replacement of labour is a turning point, because this time robots, more sophisticated computers, and more sophisticated information gathering are automating many jobs that had once been considered capable of being performed only by humans. Actually, many tasks that individuals spend time performing as “work” are either creative work that produces value-added or peripheral routine work that is unskilled but necessary. Outsourcing the peripheral routine work (having it done by AI) can greatly improve work efficiency and productivity. “Work Style Reform” and other initiatives strongly advocated by the government will be meaningless unless deconstruction and rebuilding of what is wrapped around in the vague image of `labour` is being scrutinized. There is no time to lose.

With respect to the second point, decentralized peoples’ minds, as I already observed in my discussion of the individual perspective earlier, the problem is how to get employees in general to perceive meaning in or some kind of connection in working together at the same company and how to convert those feelings into more creative individual energy in a climate where it is extremely difficult to foster a sense of belonging. Specifically, when repetitive tasks are relegated to AI and when value-add of individuals becomes so crucial in companies, if, for instance, the creative energy (motivation) of Company A’s employees averages 50, while that of Company B’s employees is 70, after a few years the difference between the two companies will become so great that Company A’s survival will be in jeopardy. At worst, it could be fatal to a company’s future if management decides to protect jobs by not using AI, or be indifferent to such structural changes happening in human behaviour.

It seems to me that these seemingly unnoticeable but structurally occurring changes on the individual side are finally pressuring Japanese companies to finally deal with issues that had been put on the back burner. As the working population shrinks, how should companies demonstrate soft power? How should they harness the energy that goes into output and make it more efficient?

Arriving to a workable solution requires that we deal with both the economic problem and the happiness problem.

First, the economic problem. In a nutshell, this consists of decomposing job duties, measuring them not just quantitatively but also qualitatively, and making the appropriate assessments. This is obvious. But I know that it is very difficult. First, taking impartial measurements is difficult, and linking these measurements to an assessment is even more difficult. But, if we look at the other-end of the spectrum, we already live in an age when feedback on job performance is happening every hour! For instance, Youtubers can measure their audiences in real time, which then links directly with advertising revenue. Regardless of whether this is good or bad, there is no mistaking that work judged by the Internet engenders feelings of being worthwhile. Corporate organizations are going-concerns, of course, so they need to carefully assess and balance the mid-to-long term mandates such as R&Ds and investments, but so it is essential to bundle those agendas and develop a workable and a fair system. Recently, there are many news in Japan where university professors cannot devote enough time for research or teaching due to increased amount of redundant operating paper work to maintain the budget. It is basically the same fundamental problem on work not being properly decomposed and assessed.

For instance, let’s assume that a business unit that has reframed its mix of value-added labour and unskilled labour, and that one department has achieved drastic improvements in quality compared with the previous set-up, even without working overtime. The department head who reduced overtime costs will get a good performance review, but this will be to the detriment of the team members, whose incomes (overtime pay) will go down. Therefore, the workers will come up with new reasons to start working overtime again. As soon as the department head is assigned to another area and replaced by a new department head, the workers will go back to the way they were, to work over-time to earn a better living. In the Japanese corporate model, where everyone used to be treated equally and pay was seldom linked with performance, the more rational the employees, the more they felt no connection with the company’s performance, so value-added labour was minimized (i.e., “fatigue” was minimized) and the work interface became a black box. Clearly, this is not an individual problem. It is a “system” problem.

Performing surgery on the roots of such a system requires a high degree of commitment and will not be simple. However, if the system is not changed, the whole foundation will ultimately sink, and there is the danger that even outstanding, highly motivated employees will be robbed of the opportunity for self-realization and that their sense of belonging will be reduced to the bare minimum. Only the management team is in the position to advocate these tough choices. However, even in a successful rebuilding of the work and assessment systems, for instance, it will take at least one to three years to link improvements in each person’s work level to the actual overall performance of the company. During that period before the results are known, it will likely be very difficult to increase corporate outlays for salaries and bonuses. In such a situation, stock options are a convenient alternative. The days when the stock market was regarded as a market for speculation are in the past. Therefore, stock options must be used skillfully and proactively.

Basically, I think it is more difficult to cope with the happiness problem. These days, definition and way of happiness are diverse. Companies should not try to adjust completely to adhere to these changes. Yet, there should be a ‘mid-point’ where two can collaborate to create more values. If job duties are decomposed and visualized, the company will be able to organize the work force in many ways. Some jobs are most efficient when employees are working on a team with their colleagues and other jobs deliver better performance where employees feverishly exercise their brains by themselves in a quiet space. Unlike former times, this is the age of connection, and increasing individual freedom further will boost the potential for linkage with organic value-added. For example, at Google, many positions in middle management and above are completely free-address. If a Tokyo employee goes to work at U.S. headquarters for a month or to Hong Kong, no one will say anything as long as they are doing their job. Google is even promoting such freedom because it understands that new value-added can be created if employees are freed to create their own task-forces wherever they want combining the initiatives of people working in many locations.

When, after such job recreation, there may require less labour hours by employees. Then, companies can allocate such resource to growth areas, or, maybe allow a flexible working structure to those employees who can shorten their work hour, engage in a ‘second” job to earn other income outside of this current work, or engage in social activities which will bring positive changes to the world. If such a work style is presented as a choice, don’t you think individuals’ happiness will increase? I think it is worth trying. Increase of freedom of choice is, likely, additive.

And that “face” thing

Still, in a society that is becoming so decentralized, companies’ efforts to increase a sense of belonging should become even more critical. What is important when these companies are cognizant of increasing a sense of belonging among the people coexisting within them is that they become closer, or express clear “face” both internally and externally on the part of management or the management team, and even on a micro level. In an age when the focus on individuals is increasing dramatically, management teams and the companies themselves need to possess a “face” (“face” in all of its meanings, including personality, life style, philosophy, passion, etc.) that demonstrates their beliefs, attitudes etc. If not, people will be less interested in working there. Employees will start to pay attention to different things all over the board, and their bonding to the company will deteriorate. Means, as ways of earning a living, are becoming more diverse, and free, and there will be less people who will come to work every day just in order to earn a living because it is starting to sound less relevant to waste 8-9 hours of their precious time every day just to make money (and go through a torture to work with somebody boring!). Companies should try to proactively demonstrate some more emotional reasons so that coming to work means far more than just coming to work. If companies are to retain outstanding people who have “obtained freedom,” it is better to start now.

It is irrelevant for corporate leaders to have kind and benevolent personalities and to always be smiling. However, it is essential to always communicate its personality, its humanity, its passion (passion towards the creating the better future for them and for the world) to people who come together to work. In this age of decentralization, making employees repeatedly aware and be excited of the fact that their company is doing something special, is a totally new quality that is being sought in company management and in the people who occupy key positions. People’s goals vary, and their choices are multiplying. Their sense of distance from the company varies as well. Given these circumstances, having people feel that “going to work every day is a positive factor in my life” is more critical than ever. In his 2003 book, What Will Become of the Corporation?, Professor Katsuhito Iwai refers to this trend as the “conscious differentiation procedure.”

Some of the issues we discussed, such as deconstruction of work, fair assessment, more flexible working arrangements, and granting options to connect rewards to achievements etc, are all very important, but just one of those factors that consists overall happiness of employees. Of course, as an investor, when I talk to you, I strongly emphasize granting stock option to employees – because I believe it is imperative to connect efforts and achievements to rewards. It is level 1 of changes that is required. However, if you truly think about creating a long-lasting, creative, exciting, organization, it is probably equally or more important to think about how management should show their “face” to people. Otherwise, there is a fear that corporate eco-system will die out to those newly created freelance eco-system that is growing so fast globally. If such effort starts to materialize, your company will start to possess some special ‘character’ that is similar to human ‘face’ and will likely be an ‘attractive’ face that employees will feel proud of. It will then be a valuable ‘company’ in this post-industrialized capitalism society with unique differentiated value not only for its customers but for the people who work there.

I look forward to seeing your ‘faces’ in 2018!

Best wishes

3rd January 2018


Chief Investment Officer
Hibiki Path Advisors Pte. Ltd.

Yuya Shimizu