Japanese Companies in Those Years: From One Mistake to a Complete Disaster

Everyone, recently I read a book about Japanese companies called "Drifting with the Tide: Japanese Enterprises and the Lost 30 Years." For some reason, the publisher sent me another copy. I usually don't recommend difficult books, but the content of this one is truly "hardcore," so I'll recommend it anyway. The four characters "drifting with the tide" in the title point directly at the core problem of Japanese companies. Originally, Japanese companies followed a governance model of "long-term stability and enduring peace," emphasizing employee loyalty and corporate stability. But after the bubble burst, they wouldn't listen to advice and wholesale imitated the American-style business model. This "drifting with the tide" mentality is truly exasperating. First, we need to look at the original business model of Japanese companies. At that time there was a seniority-based lifetime employment system, a main bank system and cross-shareholding system, and an insider-dominated governance structure. The core of these institutions was "long-term stability," not short-term shareholder returns. This was a good thing, but it simply could not withstand the impact of the asset bubble collapse in the 1990s. In the 21st century, Japanese companies began to "mend their ways" and shifted to the American-style "maximization of shareholder value." This led to a dramatic change in corporate investment behavior. The ratio of capital investment to stock dividends went from "capital investment far greater than stock dividends" to "stock dividends far greater than capital investment" all at once. Capital investment stagnated, stock dividends soared, rising 7% annually on average, and in 2021 they exceeded capital investment for the first time in history. Dividends and buybacks became the main uses of cash, which is truly ironic. Japanese companies not only failed to invest in themselves, but also restricted overseas investment and talent investment in every way. Once the data came out, it was simply speechless. At first they could still hold on a bit, but at this level, it really makes one want to "abandon ship." The reasons behind this are complex, including distrust of the banking system and the impact of exchange rate fluctuations. The performance of large enterprises and small and medium-sized enterprises is even more different. Although small and medium-sized enterprises pay fewer dividends, they are more willing to accumulate free capital; they would rather let money sit in accounts earning interest than invest. In short, they do not increase investment even when profits rise, turning into a purely risk-avoiding way of operating. To what extent is it restricted? After reading the data, you will feel that at the beginning I didn't even want to follow along anymore. By the way, the United States itself only began doing this in the 1980s, and this mutually reinforced its deindustrialization and economic financialization. More critically, Japanese companies have also continuously strengthened the practice of maximizing shareholder value, leading to a vicious cycle. Companies are pressured to raise dividends, so they have to compress investment to increase dividends, making it difficult to improve productivity. To support stock prices, executives use large amounts of cash flow to buy back common shares, even hollowing out the balance sheet. This kind of operation is not unique to the U.S. stock market either; Apple's buyback amount in 2024 was close to 100 billion U.S. dollars, which can be called an important institutional guarantee for the U.S. economy shifting from the real to the virtual. This reminds me of my colleague Guo Jiezheng, who specializes in the equity structure and governance concepts of U.S.-listed companies. The system of management buybacks pushing up stock prices does indeed deal a blow to industry. The main income of senior management teams comes from equity incentives, and the assessment indicator is total shareholder return, TSR, that is, an assessment indicator formed by comparing ending stock price plus dividends minus beginning stock price with the beginning stock price. In other words, the compensation systems of most U.S.-listed company executives are highly linked to the company's stock price. To support the stock price, they need to use large amounts of cash flow to buy back common shares, which is already commonplace in the U.S. stock market. Japanese companies have abandoned their own business principles and blindly imitated American-style companies; this is truly "a dead end." This business model was once highly praised and regarded as a guideline by many Chinese economists. If they had succeeded in selling it, the consequences would be unimaginable. Another abandoned principle, which the author deeply detests, I think is especially important, though the discussion in the book is somewhat oversimplified, but it is worth a look. Japanese companies used to always try to put employee sovereignty first and shareholder sovereignty second. Now this has changed, and the labor distribution rate and shareholder distribution rate of companies have changed greatly. The author's view is that Japanese companies used to think of many ways to coordinate this contradiction, introducing employee sovereignty under the premise of preserving shareholder sovereignty and letting employees participate in corporate governance. For example, some organizational conventions: most board members needed to come from employees, the president had to have frontline work experience, and cross-shareholding and other methods were used to ease the contradiction. In short, he particularly emphasizes that during the period of rapid Japanese economic development, letting employees participate in governance had its legitimacy, and of course this changed during the lost 30 years. There is too much to say if this point is expanded. One can think about how, after reform and opening up and up to today, China, whether state-owned enterprises or private enterprises, should solve the problem of employee participation in governance and the working class being masters of the country. These are all difficult problems. But one thing I dare say for sure: if you keep frantically learning from the United States, that is a dead end. In summary, this book is based on a large amount of data, is detailed in content, and clear in viewpoint. If interested, everyone can buy it and read it, and see how these data reveal the 30 years that Japanese companies missed. As for me, I still have to continue working on my podcast program and get my colleagues to do it with me. After all, these research results should not remain only in internal publications.