The company in a post-industrial capitalist economy-II

Primacy of the shareholder: It is interesting to look at the main sources of income of the wealthiest members of society. Before World War II, those with the highest incomes consisted mainly of capitalists who amassed their earnings from dividends.
This was true in countries around the world, including Japan, making this period the age of capitalists. The disparities that began to appear in the 1980s in the United States, though, were not due to higher dividends or other returns on capital, as Piketty and Saez point out.
The age of capitalists is over. In place of dividend income, the very rich are now reporting higher business incomes (as in the case of professionals like physicians and lawyers) and higher salaries (as in the case of corporate executives).
The sudden surge in executive compensation in the United States is based on the fallacy of shareholder primacy. If companies are nothing more than the property of their shareholders, then corporate executives are nothing more than shareholders' agents, whose job is to raise the value of the company's shares.
If executive compensation is linked to share prices, then executives can be expected to do their utmost to boost share prices, thereby boosting the profits of the shareholders. But this is an open invitation to financial impropriety.
This was vividly demonstrated by the bankruptcy of Enron Corp in December 2001. Enron had been regarded as a model of American-style corporate governance, but it was shown to have juggled its books to boost share prices and rake in huge earnings. After the accounting fraud came to light, the company collapsed, and the value of its shares dropped to zero.
Until recently, most Japanese companies emphasised the view of the corporation as a "juridical person" whose overriding goal was to sustain and expand the company as an organisation. Executives were not proxies for the share-holders, but representatives of the corporate body.
Most board members, in fact, were promoted from within the organisation, and this helped prevent the salary differential between management and the rank and file from spiralling out of control, contributing to the achievement of a relatively egalitarian society.
This is not to say that Japanese executives have been free of financial scandals, but for the most part their primary motive was not to achieve personal gain at the ex-pense of the company - as is often the case in the United States - but to preserve the corporate entity, working closely with employees. This is evident from such scandals as those involving Fujiya and Snow Brand Milk Products, which were found to have concealed the use of old milk in their products. The nature of scandals varies according to the nature of the company.
EMERGING BUSINESS MODELS:
The chorus of concern over emerging disparities appears to be fuelled by fears that Japan's society will sooner or later come to resemble that of the United States. I would em-phasize, though, that this is not a foregone conclusion. For one thing, there are signs that the shareholder - first posi-tion is eroding even in the United States.
The Republican Party lost its majority in both houses of Congress in last fall's midterm elections. The biggest cause was the failure of the war in Iraq, but another key factor was American voters' growing skepticism toward the shareholder primacy promoted by President George W. Bush under his "owner-ship society" platform. This represents a new current in US society.
I myself have been voicing my reservations about shareholder primacy, not only for its faulty rationale but also because, practically speaking, it can never become the global standard. Claims that shareholders will come to dominate private enterprises in Japan and other capitalist countries in the twenty-first century are misguided.
Interestingly, companies that do not give primacy to the share-holder have recently been appearing even in the United States - among companies in industries that are considered quintessentially American.
In August 2004, for instance, when the Internet search engine operator Google filed for an initial public offering, it segregated its shares into two different classes.
Class A shares were offered to the investing public, while the founders and other members of the management team held class B stock. Class A sounds more prestigious, but it has just one-tenth the voting rights of class B; this arrangement enables management to make important decisions without interference from ordinary investors. By using this model, Google was able to raise money on the stock mar-ket without subjecting itself to pressure from shareholders to secure short-term profits. This could emerge as a model for corporate operations in post-industrial capitalism.
In Japan, too, there is growing skepticism toward American-style corporate governance that gives primacy to the shareholder. Individuals continue to show interest in investing in shares, to be sure, and the trend toward Americanisation of Japanese corporate management has not been reversed, but the pace of this change has slowed down considerably.
This has been accompanied by a revival of Japanese-style management in new forms since 2005. For example, there has been a string of management buyouts at companies like beverage maker Pokka, restaurant chain Skylark, and materials manufacturer Toshiba Ceramics.
These may appear at first glance to be moves by top management to gain a dominant position as shareowners, but that is not the case, for the buyouts were funded with financing from investment banks. The board members nom-inally became capitalists, but in practice they remained representatives of the corporate entity responsible for the management of their respective companies. This is a throwback to the "main bank" system of indirect financing that most Japanese companies formerly used to secure funds independent of the stock market.
While this approach closes the door to the procurement of capital directly from the equities market and to external discipline as a publicly traded company, it frees management from the need to achieve results in the quarterly profits and enables the company to determine its own future. This is a revival of old-style Japanese management that has been adapted for the post-industrial age. It has yet to be seen, however, whether or not this will turn out to be an effective strategy for survival.
The practice of cross-shareholding is also making a comeback. For example, Hokuetsu Paper Mills, which became the target of a hostile take-over bid by Oji Paper, entered into a technology-sharing agreement with Nippon Paper that included the cross-holding of shares. Following the dissolution of the Saison Group of retailers, two former members announced that they would hold each other's shares.
And Nippon Steel, Sumitomo Metal Industries, and Kobe Steel have exchanged notes promising to allot new shares to each other in the event that any one company becomes a take-over target. The revival of this "old-fashioned" practice is in anticipation of the lifting of the ban on triangular mergers in May 2007, which could open the door to a flood of cross-border take-over bids.
PEOPLE AS A COMPANY'S MOST VALUABLE ASSETS:
This is not to suggest that the traditional style of Japanese management, which gave priority to corporate survival growth over shareholders' interests, can serve unmodified as a successful model for post-industrial capitalism. In fact, the question is no longer one of choosing US or Japanese standards and practices.
Until now priority in the United States has been given to the shareholder, while the organisation has been the central concern in Japan. Under post-industrial capitalism, though, executives will be free to choose either approach, depending on their industry and corporate orientation. There will be no "correct" answer for differentiation itself will become the source of profits.
Regardless of the type of company, though, capitalisation in a post-industrial economy will come to be measured not in terms of money but in terms of human resources. Investments in plants and equipment will not be enough to secure profits; the key henceforth will be differentiation - creating products and technologies that other companies cannot easily emulate and formulating distinctive marketing strategies.
Economists refer to the ability to beget, sustain, and nurture such differentiation as a company competence. Such competence is gained not by buying or building factories but by developing human resources, which cannot be purchased. No matter how much money is offered, the knowledge and skills possessed by individual employees cannot be completely controlled. Human re-sources are becoming more important than money in the post-industrial economy. Companies must make sure to hold on to employees who are capable of generating unique ideas.
This requires more than paying them generous salaries, since truly creative people do not work just to earn a paycheck. In many cases their primary motive is something that "money can't buy." That something may be the esteem of society, a guarantee of free time, a workplace free of gender discrimination, or a culturally appealing environment. Other important considerations include talented colleagues and respectful treatment of workers. An outstanding workforce in itself acts as a magnet for other talented employees, Google being a good illustration.
Differentiation, as noted earlier, tends to be fleeting, for any novel product or service is likely soon to be emulated by others. So products must be constantly reinvented. Creative human resources must be given ample support, and an organisation must be built around them to carry on their ideas and skills. A reliance on a limited number of creative geniuses may succeed in producing a hit or two, but such an approach is unlikely to generate a string of successes, and the company will soon begin to falter. There have been too many such firms that have simply gone out of existence.
A company's core competence refers to the amalgamation of its knowledge and skills. Japanese companies that post consistently good results, such as Toyota Motor and Canon, have been successful by building up and en-hancing their core competences through their unique corporate organisations. What sets them apart is the distinctive way their workers are grouped; the very structure of these companies makes them conducive to differentiation.
There is no denying that highly original products and technologies and effective marketing strategies are essential to success; but an even bigger factor may be the organisational skills of corporate executives. The type of organisation established will hold the key to the company's fate, and the results will vary depending on whether the executives position themselves as agents for the shareholders or as representatives of the corporation. At the same time, there should be a much stronger focus on managerial skills and responsibilities.
BROADER CHOICES:
What changes are in the offing for the workers? During the "lost decade," the media harped on the downsizing measures at major companies and portrayed the period as the dark ages for corporate workers. Statistically speaking, though, layoffs at Japanese companies were on a surprisingly small scale compared with the steps taken at US and European firms.
Despite the protracted business slump, Japanese companies continued to keep surplus workers on their payrolls, as corroborated by the sharp rise in labour's share of corpo-rate income. This is the reason many companies hesitated to hire additional regular employees even after the economy picked up. It has only been quite recently that the recruitment of permanent, full-time employees has begun to increase, abetted by prospects of mass retirement of the baby-boom generation, and this trend should continue.
But as a long-term trend, a full-fledged return to Japanese-style management of yore, characterised by stable, lifetime employment, is not possible. This is because differentiation - the sole source of profits under post-industrial capitalism - demands flexible employment formats.
This is not to say that the labour market in Tap will be marked by the kind of mobility seen in the United States, as had once been feared. People are the biggest assets in post-industrial capitalism, and companies will seek to retain talented employees on a full-time, long-term basis. Such workers will form the core of organisation building efforts to ensure the continued flow of differentiated products and services.
An unavoidable trend, though, will be the further polarisation of the workforce between regular employees and others. The elite employees forming the core are likely to see their workload increase, as they will be called upon to bear greater responsibilities for developing the proprietary know-how and technologies to generate profits. As ap-plied to this group of elite employees, the "white-collar exemption" bill to lift restrictions on working hours need not necessarily be shunned.
The important thing to keep in mind is that we are currently in a period of transition, as companies adapt to a post-industrial capitalist economy. Companies are being given a broader range of management styles from which to choose, and this should mean that workers, too, will have a wider range of employment-format choices. Companies no longer expect to keep employees tethered for life, as in the past; at the same time, they have a keen interest in re-taining their best workers for as long as possible.
The fate of companies will hinge largely on their organisational merits. Workers, for their part, should probably adopt the idea of taking good advantage of companies as one com-ponent of their thinking. For an individual, working inside a corporate organisation can provide ideal opportunities to acquire specialised knowledge and skills.
To repeat, in the world of post-industrial capitalism there is no such thing as the "correct" answer. Now is the time for both executives and employees to give thought to the nature of business corporations, the reasons they exist, and how they can be improved. Such an endeavour could also help people decide what kind of society they seek to build, without being unnecessarily influenced by fears of emerging social disparities.
-Courtesy Japan Echo
(Concluded)