Conditions for the Revival of Japanese Companies in the World Led by China and the U.S. －Extend the president's term in office to at least 10 years; replace the president without any hesitation if he/she is revealed to be unsuitable to achieve its goals.－

1. Awareness of the issue

Many Japanese firms were previously included on lists of the most powerful corporations in the global market. Recently however, they have been replaced by their U.S. or Chinese counterparts.

A look at the Fortune Global 500 list of the world's largest companies for instance, finds that, as noted by Dr. C.H. Kwan of the Nomura Institute of Capital Markets Research, there were 149 Japanese corporations on the list of the top 500 companies in 1995, but that number had decreased to 51 by 2017.

By contrast, the number of Chinese enterprises featured on the list had increased dramatically from three to 105 (115 according to the Chinese government). Although the number of U.S. corporations has dropped from 151 to 132 over the same period, the U.S. continues to maintain its top position in the ranking.

It goes without saying that the criteria that qualifies a company to be considered blue chip is not limited to corporate size measured by sales and profits alone.

Nevertheless, judging from recent moves by large Japanese companies in Chinese domestic markets and Silicon Valley, they seem, even when compared to earlier times, less enthusiastic about making inroads into new markets.

I am not the only one who thinks so. When I conveyed this opinion to current and former managers of large companies and economic experts I had met with face-to-face recently, and asked them how they felt about it, almost all of them said that they felt the same way.

In response to last month's article in which I expressed this view, many readers said that they agreed with me, while some gave me other reasons why large Japanese corporations had lost their vitality.

Taking their opinions and advice into account, I have reviewed and summarized the issue.

I believe that there are pros and cons, and other opinions, which I hope will help me further deepen my understanding on the issue, will be explored below.

2. Reason 1: The president's term in office is too short

Below are possible reasons why large Japanese enterprises have been dropping out of global competition.

Firstly, the president's term in office is too short.

It has been pointed out that the decline in Japanese firms' competitiveness is due to the inability of many Japanese companies to keep up with the rapid changes in market structures caused mainly by economic globalization and the introduction of IT.

In order for Japanese corporations to be revived as companies that come under the spotlight in the front lines of the global market, it is essential that they implement management overhauls from a long-term and fundamental point of view.

They must then implement the management revitalization cycle, i.e. formulating a new business strategy, putting it into practice, reviewing the results, developing a more refined business strategy, putting it into practice, and repeating these actions over and over again.

Since many Japanese firms are unable to do this, they have lost their competitive advantages in a rapidly changing global marketing environment, resulting in a decline in the international presence that they once had.

According to some data (research headed by Professor Noriyoshi Yanase of Tokyo Keizai University conducted between the fiscal year ending in March 2004 to the fiscal year ending in March 2012 covering 12,249 companies listed on the first section of the Tokyo Stock Exchange), the average tenure of presidents at large Japanese companies is currently 5.7 years, with a median tenure of 3 years.

Considering the heavy burden that presidents have to shoulder, and the high business acumen that they are required to have, this tenure is definitely too short.

It is often the case with large Japanese companies that a dyed-in-the-wool corporate person who, joining the company right after graduating from university, and having devoted their lives to the company, is appointed president, and accordingly, has no experience in serving in such an important role.

Although they have at least 30 years of experience working for a large company, it is the first time that they will have assumed the rigors and responsibilities associated with the role of a corporate presidency. In other words, most presidents of large Japanese corporations are actually amateur presidents at the time they take office.

The duties of the president differ significantly from those of vice presidents and other executive officers in lower positions. Let me give you some examples of important duties that the president must take the initiative in performing.

In addition to these, there are a great deal of important duties that the president must be directly responsible for. These are the very duties that the president, when he/she was a vice president or an executive officer in lower position, played a supporting role in executing, but actually never executed while shouldering the burden of ultimate responsibility.

Even the most excellent worker at a large company cannot, without making an enormous effort, perform each of these jobs in an appropriate manner and produce steady results within limited time constraints.

If the president fails to perform any of those important duties, he/she will be criticized harshly by the media and other top company officials. The damage that undoubtedly occurs to his/her psyche as a result of this criticism will have a significant negative impact on ability to effectively perform other important duties.

One to two years is simply too short a period for any president to build up the requisite knowledge, confidence and skill to be able to deal with these demanding jobs competently and efficiently. Generally speaking, before doing so, they would need to have at least three to four years of experience serving as a president.

If a president leaves office in five to six years, they must then start preparing for retirement around the time that they would actually begin to feel comfortable and confident in taking on major business challenges as a president.

In specific terms, it takes for a president about one to two years to successfully complete the establishment of an incoming management system, to prepare for a smooth business handover to their successor, or to facilitate a fast and efficient resolution of serious undisclosed problems, etc. by the time they retire.

Taking these duties into consideration, I do not think that a person with no experience in such a role has, during the average tenure of presidents of large Japanese companies of three to six years, time to tackle major long-term business challenges such as a massive overhaul of management philosophy and basic business strategies and determination of the direction that the company should take, while looking ahead 10-20 years.

It is all the more difficult for them to implement the management revitalization cycle, i.e. putting a new business strategy into practice, reviewing the results, rebuilding a more refined business strategy, putting it into practice, and repeating these actions over and over again.

The global market structure has been changing fundamentally and dramatically on the back of ongoing globalization and rapid advances in IT since the 1990s, the rise of China since the 2000s, and the downturn in European and U.S. markets since the collapse of Lehman Brothers in 2008.

It is crucial for large Japanese corporations to adapt and carry out a fundamental shakeup of their business strategies so that they can survive in a world of cutthroat global competition.

Those incapable of doing so will inevitably be crowded out of the competition as a result. Taking a look back at recent cases, you can find a number of large Japanese firms that have become losers in this global competition precisely because they failed to do so.

In order for leading Japanese companies to confront the difficult situations that they encounter head-on and achieve a successful turnaround, it is essential that they extend the president's term in office to at least 10 years and establish a system in which even a person with no experience as a president, can be developed into a president that is well qualified for the position and competent enough to face stiff global competition.

Of course, it often happens that a person who has assumed the presidency is found to be unqualified for the position. In such a case, we tend to think that if the president's tenure is only three to six years, we should not take the radical step of dismissing him/her while in office, but simply put up with him/her until the next president succeeds him/her in an orthodox fashion.

If the president's tenure is 10 years or longer however, we would have no other alternative but to replace him/her while in office as we would not be able wait for such a long period of time. This is expected to help in expeditiously addressing problems that stem from the appointment of people ineligible for the office.

You may think of this as an idealistic theory that is difficult to put into practice, however, if we continue to comply with these principles in appointing company presidents in an appropriate manner, a mechanism that ensures that a competent president remains in office for a longer period of time, while an incompetent president is made to leave office in a shorter period, will start to take effect.

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(This article was translated from the Japanese transcript of Mr. Seguchi's column published by JBpress on May 23, 2018.)