Outsiders Now Insiders as Corporate Japan Casts Off Unprofitable Ways

The management training seminar at Ajinomoto Co. was nothing out of the ordinary until the participants were directed to a tiny house on the food company’s campus here. There they took turns sitting on a tatami mat as a tea master, dressed in a red kimono, served them green tea.

It wasn’t break time. It was a crucial part of the program: to teach foreign managers about Japanese ways and to groom non-Japanese for senior management.

“If we want to be a bigger company, we need to be more global,” said Yasuhiko Koda, a corporate executive officer, as the group gathered for the three-day session here last week. In June, for the first time in its 96-year history, he added, Ajinomoto will name at least two foreigners as corporate officers.

Humbled by 15 years of economic malaise in Japan, major companies are starting to open their corporate suites to outsiders and to adopt Western-style management and corporate governance practices.

The most dramatic example came this month when troubled Sony Corp. -- an icon of Japan’s post-World War II industrialization and emergence as a global powerhouse -- appointed its first foreigner, Welsh-born American Howard Stringer, head of its U.S. operations, as chief executive.

Sony is highly unusual for Japan in that its sales, employees and management have long been internationally oriented. Most leading Japanese companies have no foreigners on their boards, readily acknowledging that they are a long way from taking such a step.

But with U.S. and other foreign investors buying depressed Japanese stocks and real estate, pressure will most likely mount on more of corporate Japan to break with tradition. In any event, even though recent signs suggest that Japan’s economy is on the upswing, many companies here have lingering doubts about their way of doing things in the face of heightened international competition.

“The Chinese and Indians are catching up,” said Atsuo Mihara, an independent economist in Tokyo. “We cannot survive on the basis of assembly-type of industries anymore. We must be very creative.... We have to do something to break through.”

That’s especially so with Japan’s consumer electronics industry, which accounts for a third of the nation’s economic output. Although some Japanese electronics makers such as Sharp Corp. and Canon Inc. have come back from downturns, Sony, Fujitsu Ltd. and NEC Corp. are struggling.

Meanwhile, South Korea’s Samsung Electronics Co., which has the biggest market value of all Asian electronics companies, took the lead in cutting-edge products such as flat-screen televisions. At the same time, emerging Chinese companies are undercutting Japanese rivals on basic electronics, even in Japan’s home market.

Many analysts contend that the problems Sony and other Japanese electronics companies have had in competing reflects a fundamental failure to recognize the emergence of the digital age and make the necessary shift from hardware to software.

In this new environment, experts say, it’s imperative that companies sharpen their focus and move swiftly and with greater efficiency. That’s difficult for corporate Japan because of its generally bureaucratic culture and tendency to have allegiances to the organization rather than to stockholders, said Hajime Yagi, senior portfolio manager at Meiji Dresdner Asset Management in Tokyo.

That often holds back the ability of senior executives to make changes quickly, he said, noting: “More concern about stockholders improves management capability.”

Others say it’s not simply an issue of Japanese or Western management. They cite the example of Matsushita Electric Industrial Co., best known for its Panasonic brand, which used to play second fiddle to Sony and was derided as a copycat. Yet in recent years it has raced ahead of its archrival.

Matsushita has a traditional Japanese corporate structure, not a committee system like Sony’s. It wasn’t until April that Matsushita appointed its first foreign director, a German named Joachim Reinhart, whereas Sony’s board is loaded with non-Japanese. Matsushita has no foreign management in its domestic operation.

In 2003, Matsushita set a profit goal of 5%, but Sony’s then-CEO, Nobuyuki Idei, announced a profit target of 10%, a figure that was widely ridiculed as unrealistic and that damaged Sony’s credibility with investors.

At that time, Sony had several outside directors on its board. If that system was so great, “why didn’t one of them stop Idei?” asked Yoichi Morishita, a former Sony employee and author of five books on the company. He added, however, that without a strong board of outside directors, Idei might have been able to stay as CEO for two more years until Sony’s 60th anniversary.

It’s not just the electronics industry that’s facing pressures to be more global. Ajinomoto, for example, counted on domestic sales for 75% of its $9.8 billion in revenue last year. But exports accounted for about half of the company’s profit. In recent years Ajinomoto, which makes amino acids and food seasonings and products, also has seen the number of employees working overseas (about 18,000) dwarf those working in Japan (12,000), as demand grows in places such as China and Southeast Asia.

Japan’s experiment with foreign management began in earnest after the success of Carlos Ghosn. French automaker Renault installed the Brazilian-born executive to revive Nissan Motor Co. after taking a controlling interest in Nissan in 1999. Ghosn slashed costs, reduced debt and showed that a foreign leader could work wonders for a Japanese firm. (Ghosn joined Sony’s board two years ago.)

More recently, L. Todd Budge has achieved near-celebrity status since taking the helm of a troubled financial institution two years ago, becoming the first foreign CEO of a Japanese bank. He was recruited to Tokyo Star Bank after U.S. private equity firm Lone Star bought the nearly collapsed bank, then called Tokyo Sowa, in early 2001.

Tall, with reddish-brown hair and blue eyes, the 45-year-old Bay Area native couldn’t look any less Japanese. Budge had learned to speak Japanese during his Mormon missionary years in the late 1970s.

In an interview in his central Tokyo office, above the bank’s bright-orange-and-blue branch, Budge said there were clear advantages to coming in as a foreigner. He said he wasn’t bound by shigarami -- a term used to describe obligations or connections, such as a manager might have to subordinates or colleagues.

Budge, who worked previously at Citibank and GE Capital in Tokyo, eliminated the bureaucratic organizational structure, replacing divisions and sections with teams and groups. He essentially discarded stacks of company rules and work functions, simplifying job descriptions and giving floor managers in particular more latitude to work with customers. Budge told everybody to stop addressing one another, including top managers, by honorifics.

And he remodeled bank branches, eliminating walls between employees and customers and posting greeters at the door.

Budge concedes that his plans weren’t universally liked. About 500 employees left, he said. But the company, which operates 34 branches, last year recorded the industry’s highest return on equity.

“I don’t believe you have to have foreign management,” said Budge, dressed in a casual American style: felt jacket and dark blue shirt, with no tie. But at large banks especially, “it’s going to take leaders to step up ... to break from the past.”

For foreigners, crises at Japanese companies mean more opportunities to reach top management. The traditional climb up the ranks is long, arduous and, in the view of many, riddled with senseless rules.

In the last few years, Osaka-based Sanyo Electric Co. has started to do something about that. It changed from a centralized headquarters-style organization to a company model. It speeded up decision making, installed a pay-per-performance system and gave business unit leaders as long as three years to meet certain goals. Two years ago, Sanyo appointed its second foreign outside director, Louis Lataif, dean of Boston University’s business school.

Still, in Sanyo’s 460 business units around the world, only five or six are headed by non- Japanese -- even though about half of the company’s total sales of $23.7 billion are overseas and half of its approximately 80,000 employees are based abroad.

Three years ago, Sanyo launched global internships to groom executives, said Akihiko Oiwa, manager of the company’s media relations team in Tokyo.

Oiwa sat in a small conference room that was filled with Sanyo products: TV, VCR, fax, vacuum cleaner, electric clock. Like many Japanese executives, Oiwa viewed Sony’s bold management move with Stringer as positive. “But Sony is different,” he said. Although Sanyo and others are heading in that direction, he said, it will take time.

Oiwa, 42, said he had been working for Sanyo for 19 years. To attain his current managerial job, he took a test two years ago. The test, part of the company’s tradition for years, was spread out over several months and required readings, case studies and presentations. Oiwa said he studied on his own time after work and failed twice before passing.

“I think it’s a crazy, crazy test,” he said, joking that if it were required for managers in the United States, their spouses might divorce them because of the time it takes to prepare for the exam. Yet he said everybody had to take it to move up. All of the materials are in Japanese.

“Sanyo is an international enterprise,” said Oiwa, noting that the firm’s name means “three oceans,” signifying its global heritage. “But the company is located in Osaka,” he said, “and the language is Japanese.”

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Hisako Ueno of the Times’ Tokyo Bureau contributed to this report.