The full text of Dialogue/Speech/Discussion in the first "Nikkei Global Management Forum"

[KANDA ] Good morning, ladies and gentlemen. My name is Kanda, and I'd like to ask Dr. Inamori to come on the stage.

Dr. Inamori does not need any introduction, but briefly for five, ten seconds, if I may say, Dr. Inamori started the Kyocera Corporation as a new venture, and fostered the company to a very large company. On page 8 you can see his profile. And Dr. Inamori is a world renowned business executive. And also, Dr. Inamori has been a locomotive in promoting deregulation on the Japanese scene, and made very important contributions in various aspects of Japan's business and society. Dr. Inamori, please.

[INAMORI ] Thank you for your kind introduction. I'll be talking about the topic of corporate governance in global management, so with your permission I should like to take some time in expressing some of my views, mostly based on my own opinions, and maybe reflecting some of my prejudices.

First, how is corporate governance exercised in Japan and on the Japanese business scene? I'd like to express some of my observations here. In the case of joint-stock companies in Japan, the cross-shareholding among companies is very high in and with a smaller proportion of individual shareholders. It is said that the proportion of individual shareholders in the stock market in Japan is less than 10 percent. In other words, the system where shareholders check the management is not working properly. As a result of that, executives involved in day-to-day operations have a complete hold on the management of the companies in Japan. Because of that, shareholders are unable to exercise their essential right of corporate governance because of this setup which we see in many Japanese companies.

As an example of what I mean, if shareholders demand the change of incumbent directors due to bad corporate performance or inability of the directors, those share holders are, in fact, criticized in society as being corporate raiders or vicious shareholders. This is the kind of atmosphere we tend to see in this country. And because of this, it is very rare that shareholders demand a vote of non-confidence of the incumbent directors in most Japanese corporate scenes.

Another thing is in the case where the president of the company has been in his position for over 10 years. Then most of the members of the company's board have been appointed by the president himself; in other words, a former subordinate of that president. Therefore, there's virtually no one on the board who can voice an opposing view to the president outright, which enables the president to exercise dictatorial management of the board and the company. So this kind of "despotic", shall I say, management of the company by the president and also the dictatorial control of the board gives rise to major problems. We've seen some examples here and there. Examples of where the president and directors are holding the mainstay of the management and operate the company without being held in check by the shareholders making the decision of retirement allowances for the directors. The retirement allowance for the directors generally would have to be approved at the annual shareholders' meeting in case of a company listed on the stock exchange. However, as you know, what happens at the annual shareholders' meeting is that the proposal reads as follows: "In regards to the method and amount of retirement allowance, this shall be left to the discretion of the board of directors". And that's how the resolution reads. It is presented at the shareholders' meeting. If the proposal is to be approved by the shareholders, then the proposal should be more specific: How much of a retirement allowance would be paid to a retiring director and when. But what happens in actuality is that everything should be left to the board of directors including the amount and the method of payment of the retirement allowance. It is quite a self-centered way of management, centering on the board of directors' own will, where checks by the shareholders does not come into play.

So as such, especially in case of listed companies, management without shareholders' checking, or without shareholders, is being exercised. And that gives rise to, as I said, a very despotic management by the president or the directors. But at present, we do not have a sufficiently effective system to check this or control or contain this kind of problematic way of management.

So from this perspective, the corporate governance of joint-stock companies in Japan is very imperfect, far from being perfect. And there is a growing voice among people knowledgeable about the problems calling for the improvement and reform of this current system.

What's necessary here is to establish a system where the views of shareholders will be duly reflected on the management of the company in terms of the corporate governance. And to that end, recently the appointment of outside directors, non-executive directors without a director relationship of interest with the company, is carried out as the representative of shareholders. And under such a board, the executive officers are appointed to be in charge of the day-to-day operation of the company. So the introduction of an executive officer system is actively being studied now.

In this way, the board of directors sets the policy and strategy of the corporate management, and then the executive officers execute the corporate management based on the board's direction, taking full advantage of the managerial resources -- manpower, material, and money. And the board of directors is there to supervise the result of the executive management.

So this is a kind of board which fulfills its essential role together with the executive officers' meetings. And there is a growing voice that this kind of separate system of corporate governance should be introduced into Japanese companies as quickly as possible. In fact, there are quite a few Japanese companies which have introduced the executive officer system, and I believe that this is a step in the right direction.

Now, based on this kind of concept of corporate governance, I'd like to turn my eyes and to look at the corporate governance of subsidiaries and affiliate companies, or the surrounding Japanese corporations, on the Japanese business scene.

The relationship between the parent companies and subsidiaries, maybe in the context of corporate governance or the system of corporate governance, could be described as that the parent companies are shareholders -- in other words, playing the role of the board -- and the management of a subsidiary would be the executive officers in charge of day-to-day operation of the company. In that case, the parent companies are there to decide the basic policy and strategy of the management of these subsidiaries, and based on that the executives of the subsidiaries try to manage the company to obtain the best results, taking full advantage of the managerial resources -- manpower, money, and materials. So this is a kind of scheme we can consider.

In that sense, the relationship between parent companies and subsidiaries would be the reflection of a division of work between the board and the executive officers in the context of corporate governance. If that is the case, then to see if the subsidiary management of one's own company goes well or not would serve as a good indicator to see if one company's own corporate governance is functioning properly or not.

So then, what is the typical relationship between parent companies and subsidiaries domestically in Japan? There may be several typical cases of governance we can point to. One method is to try to control the subsidiaries strictly in line with the views of parent companies and the parent companies try to send in not only the top management, but also the majority of executives to their subsidiaries. In such a case, not only the management policy or strategy of subsidiaries, but also the human resources policy or personnel policy of the top executives of subsidiaries are decided by the parent companies, and all the details of management directed by the parent companies are impeded. In such a case, the management of subsidiaries only looks at the parent company's direction and try to follows the directions of the parent companies in minute detail, and you cannot expect any autonomy or initiatives coming from the subsidiaries in this scenario.

But this kind of relationship between parent companies and subsidiaries is not the whole story. There are some other forms, such as not sending the top executive of their parent companies from the parent company, but where the president is selected from among the employees of the subsidiary and leaving the management of the subsidiary entirely to their hands. In such a case, with the exercise of autonomy and initiative of the subsidiaries, a subsidiary may achieve very good progress and may sometimes exceed the parent company itself. But on the other hand, because the management of the subsidiary is left entirely in the hands of the executives, the subsidiary's management may take very arbitrary actions, and result in the downfall of the company itself. So this method may turn out to be successful, but in some cases it fails. In other words, this method of management entails major risks. I have cited two extreme cases, but there are numerous variations and forms or combinations of management in between.

So far, I have talked of the corporate governance exercised by parent companies on their subsidiaries in Japan. But in terms of form, the relationship between parent companies and subsidiaries may be very similar to the corporate governance exercised in the Western countries. In other words, the sharing or division of work and roles between the board and executive officers. But in actuality, it's not always the case that such management is exercised. When both the parent companies and subsidiaries are within Japan, the executives share a common culture, Japanese culture, and the same Japanese mentality. Therefore, unless the parent companies impose something totally outrageous on subsidiaries, the problems often do not surface. But we have to consider that the efforts of managing an overseas subsidiary would be different. So let us turn our eyes to such a case.

We are in the midst of the globalized era, and many Japanese companies are acquiring or holding a number of subsidiaries or affiliate companies or joint ventures overseas. So when we consider the method of governing these overseas subsidiaries, in many cases the Japanese corporations are trying to manage their overseas subsidiaries exactly in same manner as they would manage their domestic subsidiaries.

For instance, just as they do in the case of the domestic management, many Japanese companies send executives overseas, sending their own people as top management executives of their overseas subsidiaries and joint ventures. It may facilitate communication between the parent companies and overseas subsidiaries and serve to build a relationship of trust and it also ensures that the management of the subsidiary is done strictly along the managerial strategy of the parent companies. So this kind of personnel appointment is done with this in mind. And important management decisions are in fact made at the head office, which makes it almost impossible for the management of the local subsidiary to manage the company based on their own accountability.

So this type of control where the Japanese parent companies send expatriate top management and executives from Japan and try to control in detail the day-to-day work -- not only the basic policy or strategy, but all the other details. This kind of control delays the decision making process and hampers speedy decision making and does not give enough autonomy to the local management. Therefore, in many cases the management efficiency is often very low and very bad. But at the same time, when the local management is under the watchful eyes and scrutinizes of the head office in this way , there is little risk of a major loss due to the local management's own arbitrary management.

There are also some other cases where some of the management executives of overseas subsidiaries or affiliates are sent in by the parent companies, but there is not much interference in the day-to-day operation and the parent companies trust the local management and leave the management of the company entirely in their hands. In such cases, just as in the case of domestic subsidiaries, we can expect to see a major success. But at the same time, the local management may get out of control and fail to cope with problems. Such risks maybe entailed. And we have witnessed both cases of success and of failure, which means that this form of corporate governance entails some major risks.

So far up until now, the tendency has been for Japanese executives and top management to be sent in by parent companies to manage the overseas affiliates and subsidiaries. In other words, the first method described was put into effect whereby they control all details of management of the overseas subsidiaries. In these cases, the Japanese nationals dominate the top positions of the local companies to a large extent. And so naturally they are criticized and it is said that more local executives should be used. As a result of that, many Japanese capital affiliated companies are trying to recruit more local executives. Also, when Japanese companies acquire overseas corporations, all personnel of the acquired entity from the top management down to the employees are local people. So under such circumstances, how to best manage the overseas subsidiaries and how to provide good opportunities to local top management and executives, those are the new challenges being imposed on Japanese business management.

At the present time, what is important is to try to exercise a rational management and governing of subsidiaries such as what is seen in Western corporate governance like in the U.S. or Europe. In other words, the Japanese parent companies, as a kind of board of directors, would determine the policy and strategy of the management, and the local management and executive officers would make the most effective use of the managerial resources -- manpower, material, and money -- and achieve the best possible results. The parent companies will supervise the results and check the process. In other words, a system where overall direction is given, but at the same time, results are followed and checked. This kind of system is absolutely necessary in governing overseas subsidiaries.

Under such a system, it is necessary for the parent companies to direct the overall managerial policy and strategy in a macroscopic manner. But from time to time, when it becomes necessary, further detailed directions might have to be issued. But we Japanese have a tendency that once we decide to leave everything in the hands of local management, we are not used to giving detailed directions. Especially when we try to manage a manufacturing plant in the U.S. or other countries, we have to provide detailed direction and manuals describing the work process and giving clear-cut guidance to the management and to teach and guide the method of production.

In contrast to that, on the Japanese domestic scene, what we are used to is giving only general macroscopic directions and then expecting them to manage the operation in an autonomous manner and to produce the products on their own initiative. When managing a company, you need to fully understand such cultural differences. Thus, from now on, the management policy and strategy, which is decreed by the parent company to the subsidiary, needs to be more detailed in order to be applied in Europe and the United States. At the same time, the method of the parent company in supervising the result of the subsidiary's management needs to be more systematic and detailed, more so than what we do in Japan. By doing this we shall be able to avoid the major mistakes in managing overseas subsidiaries. Doing so, we shall be able to maintain local independence and autonomy. In other words, we shall be able to manage the local companies in an energetic manner.

In the days of globalization, the corporate governance of an overseas subsidiary, first of all, needs to be similar to the system of executive officers in governing the corporations. I believe it is necessary to introduce the American style of systematic management. However, even though you have an excellent system of management in place, is that going to be good enough as the best possible corporate governance? No. Because unlike the domestic situation here in Japan, there are cultural differences between Japan and Europe and the United States when it comes to a parent company in Japan and a subsidiary overseas. Furthermore, there is a difference in mentality between Japanese and European and Americans. Moreover, there are some invisible differences, like differences in languages. Thus, in corporate governance, we need to bear in mind that there are psychological barriers which cannot necessarily be overcome by systems and institution, because this interferes with the mutual trust between the parent company and the subsidiary. Unless we resolve this issue, I believe that we shall not see true corporate governance in the days of globalization.

Corporate governance is governance of the people; in other words, it is essential to grasp the mind and the heart of the people, more so than the institution and the system. There are various methods of governing the people, but what is the most important is for the leaders to be trusted by those whom you are managing. Furthermore, the leaders need to be respected. If power and authority are used to control your subordinates, they will obey you in form only. In other words, if you look at it from a different angle, when the time comes, nobody is going to step out to help the leader.

On the other hand, if you consider the hearts of the people, it is quite capricious. However, once there is trust, there is nothing that is going to be more solid. Therefore, if the group of companies are to be linked through trust and respect, then there could not be a stronger group. This is equally true between the Japanese parent company and overseas subsidiaries. So long as overseas subsidiaries have trust and respect towards the parent company in Japan, then the subsidiaries would naturally follow the leadership exerted by the parent company. This, I believe, is the ideal corporate governance.

Now then, how can the parent company gain the trust and respect of the top executives and management of the subsidiaries? If you really pursue this matter, it all depends on whether the parent company has a management philosophy that is worthy of respect and, in addition, whether the parent company is executing this with conviction.

So conviction is necessary, as well as execution with conviction is equally necessary. Dr. Welch of GE, as well as Mr. Okuda, chairman of Toyota, have talked about the importance of this trust. In other words, the key to the governance of a subsidiary is for the parent company to have a management philosophy that is worthy of the trust and respect of the subsidiaries and affiliated companies, as well as for the parent company to be managing its own company with vision. When the top management and executives of the subsidiaries feel that their parent company is managed based on an ideal management philosophy and when they equally support that management philosophy, then you will be able to effectively utilize the system of corporate governance that I talked about earlier. And this, of course, results in an ideal management.

There are various cultures, histories, and customs around the world. Especially, there are major differences between the East and the West. If you want to establish links between the hearts of people who have been raised in different cultures and environments, then you need to have a universal management philosophy that is going to be supported by people around the world. Once that kind of management philosophy is shared by your employees worldwide, that is when you will be able to overcome the barriers of culture, and that is when you can promote business as one.

If you think about the global companies, the truly global companies do have universal management philosophy that can be shared by employees around the world. For example, GE, as we heard from Dr. Welch, as well as IBM, and Hewlett-Packard which has management philosophy worthy of trust and respect to share with it's employees. For example, we need to trust each employee and we need to respect the individual. And that needs to be fostered in detail through the training of employees. How do we trust and respect the employees? We need to cite examples so that this is fostered in and understood by all the employees. Furthermore, we need to provide the best possible services to our clients. As Dr. Welch of GE has said earlier, we talk about customer service, but that has to be converted to customer satisfaction, and in respect to optimizing services rendered to clients, we need to cite some concrete examples as to how to satisfy our clients. Furthermore, some companies may say, "sincerity is our slogan". What do we mean by being sincere? You need training. That means the training extended to your employees. Some companies may say, "we pursue perfection", and other companies may cherish teamwork, so that we place importance on the success of the team as a whole. We place importance on teamwork and place importance on the success of teamwork. These are some examples of the philosophy upheld by the companies which is supported in a ubiquitous manner. And these are the successors on the global stage.

I'd like to add something on top of such philosophy. Corporations have a reason to exist: They should contribute to the people of the world. This is a lofty management philosophy, and we need to have a magnificent code of ethics that will generate the morale that governs the employees. This is the kind of corporate philosophy we need, and we need to push and execute this so as to realize corporate governance. And I must say that this is the most important. In other words, the origin is: What is right for mankind? Whatever kind of environment or conditions you may be placed in, I believe it is important to have a corporate philosophy that upholds universal values like justice, fairness, impartiality, humanitarianism, efforts, modesty, and sincerity. This may sound primitive, but these are universal values. And I believe that is basically important as the corporate philosophy.

At Kyocera, based on such universal values, we do place top priority on concrete action guidelines as we manage the company. Let me introduce some of them to you.

There's a guideline that we are to pursue profit in a fair and equitable manner. In this world, there are some unfair players and speculators who pursue excessive profits and dreams of quick money. At our company we are to pursue profit in a proper manner, in a fair and equitable manner. Furthermore, there is a guideline of managing the company in a transparent manner. If you look at the management of the company, we need to have transparency from the top management all the way down to the general employees. This is equally true on the outside of the company as well. We need to have fair disclosure. Through transparent management we will be able to create an environment that would make it difficult to carry on wrongdoings within the companies. Furthermore, the employees would have consciousness that they are the players and they are participating in the management.

Other than this, as I said earlier, the priority rests with the customer. We place importance on creativity. This was introduced in the presentation by the Toyota executive. We are to have high goals, which is another. In the case of our company, sticking to the truth is a part of the criteria, so that we are going to be providing careful thoughts to others. Furthermore, you've got to be serious and do your best. Furthermore, we're going to be fair. Place importance on the delineation between private and public matters. These are the practical management philosophy and code of ethics which are shared from the top management down to the general employees.

In the case of Japanese, there is a tendency to pursue the European and American management style in format alone. However, if your corporate governance is based on this kind of management philosophy, then you will be able to bring the corporate governance system to life. We believe that globalization trends will continue in the 21st century. In this era, Japanese companies need to have a corporate philosophy worthy of trust and respect. And we need to share this with the subsidiaries and affiliated companies we govern around the world. If we can do so, then we can accelerate globalization -- true globalization, that is -- of the Japanese company. And I believe that we will make further contributions on the world stage.

We are now facing megacompetition in the global market. In order to survive in this environment of tough competition, it is going to become ever more important to form strategic corporate alliances. Before closing, I'd like to speak somewhat about mergers and acquisitions within the framework of the strategic alliance.

Through merger and acquisition, you would want to strengthen the international competitiveness of the corporation, thus we are seeing mergers and integration of major companies that would have been unthinkable in the past. And I believe we are going to see more and more examples of this in the days to come.

Let me speak about how the corporate governance should be in a scenario like this. Furthermore, let us look back at the history of merger and acquisition of Japanese companies. The more sound these companies are, it was almost like a cliche to speak of merging on equal footing. However, as a result of merger and acquisition based on equal footing, you're going to have organizations, people, and systems remaining in place, so that without integration, they are going to be left in peril. Let's look at personnel management after the merger. You're going to have double-track promotions and transfers.

If two companies are to merge, there must be greater efficiency as a result of the merger, so that one plus one does not sum up to two, but rather three or four. And that should have been the purpose. But, as I have said earlier, if you ignore rationality of management, be it organization or function, you're going to have redundancy, which is useless. If that is true, you can not expect efficiency as a result of merger, and you're going to have create additional useless work of coordinating the two former organization, which means that you are left with an inefficient organization. As a result of M&A, you're not going to have one plus one being two, but one plus one being merely 1.3 or 1.4, which means that the merger is going to result in negative efficiency. Rather than enhancing efficiency through M&A you're going to compromise international competitiveness.

Therefore, for Japanese companies to survive in the era of the global competition, we need to have M&A of companies where one plus one results in three or four. We should not merely follow the past practices, and Japanese management would need to reconsider how they are going to merge with others. In order to make the merged company stronger than the original two, I believe it is essential for the stronger organization to merge and integrate the other. In other words, it is without doubt that the stronger company has a better system. And if the weaker company is integrated into the stronger one, then the merged company is going to be stronger in the bottom line. But, as I have said earlier, in Japanese society we have a mentality that harmony needs to be respected, and we are a people who do not like to specify who are the winners and who are the losers, because we are afraid that the winners might become too arrogant. This seems to be a social sentiment that we do not want to be specific as to who the winners are. As a result, in an economic action of M&A, we brag about merger on equal footing in spirit without saying who is the winner nor the loser.

Furthermore, we would be concerned that true harmony and collaboration would be compromised if we have one who is going to be merged or one who is going to occupy and another who is going to be occupied, or in other words, one who is stronger and the other who is weaker. So we talk about merging on equal footing in spirit. If you carry out M&A in this kind of format, dual systems will remain for many years, resulting in inefficiency. There are few examples in which two companies have merged on an equal footing and have succeeded. This can be observed by anyone, and if we're going to have mergers and acquisition only of this kind, then I would be concerned that Japanese companies will see further difficulty in the days of megacompetition.

In the 21st century, if Japanese companies are going to play an active role in the global arena, this is one of the problems that needs to be resolved. Furthermore, I believe it is also essential for foreign companies who are interested in starting businesses here in Japan. As I said at the outset, I've talked about how I view corporate governance in the days of globalization. The milestone, or the first milestone, for Japanese companies to survive is to modify past practices when they merge and integrate with other companies.

I do thank you for giving me so much time to share my thoughts with you. I thank you very much for your kind attention.

[KANDA ] Thank you, Dr. Inamori. His presentation was a very good lead for the session titled Corporate Governance and Global Management.

In terms of set-up, the system being introduced in Japan is where there is a division of execution of business and management as the board of governors and executive officer, and that is effective not only for the corporate governance of companies listed on the stock exchange but also to govern the relationship between the parent company and overseas subsidiaries. Also, not only in terms of set-up, what is needed in terms of spirit is to have universal values and instill those in the corporate set-up, and also make it transparent both from within and from outside.

And in conclusion, Dr. Inamori talked about M&A and the strategic alliance from the corporate governance point of view, the points to be looked into, examined, and reviewed.

So now we'd like to go into the discussion session. And if I may as a moderator, I'd like to pose the first question.

Although I'm in a university, from a theoretical point of view, I have looked into various aspects you talked about, such as the universal management philosophy which could be applied on a universal basis and implementing that managerial philosophy in a transparent manner. That, I think, is very important. Also the aspect you talked about of a very strong power exercised by the president on the Japanese corporate scene. How could these be reconciled with each other?

Well, for a company to have a universal management philosophy, the president is expected to exercise strong leadership, or perhaps that is for the better.

In connection with the introduction of an executive officer system, you talk about the separation of management and the execution of business. The management side or the board would provide the management policy and direction with detailed guidance. In other words, the president should step out of the role of being the top executive of the management, and rather become the leader of the management. And that may be the better way on the Japanese scene, as far as the president is concerned.

[INAMORI ] Well, I agree with the purport of what you said. When we talk about the universal management philosophy, well, on the Japanese corporate scene, without the separation of the board and executive officers, what I'm afraid of is that, in our case and also for a joint-stock company, there may be a risk that the president may exercise a very dictatorial management of his or her company. There have been some cases of failure under despotic management. So if the board and the executive officer meeting are separated, that would provide a good system of checks. But without that, in most Japanese businesses, what we have in effect would be the executive officers system under the president. If they have a good universal philosophical management, then they would give due heed to the shareholders. Shareholders in essence should have the corporate governance right, but executive officers or a management with good universal philosophy can exercise such good management. And so in order to control a despotic president, shall I say, such a good universal management philosophy is needed.

[KANDA ] Thank you. We'd like to entertain question from the floor.

[QUESTION] Nitta of NEC speaking. You've talked about the governance of overseas subsidiaries in your presentation. There's one thing that you didn't refer to. For example, if you look at American companies as a representation of the stock-option method, they make the local people work really hard because it is a good incentive for them to work hard by having stock-option in place. But if you look at Japanese subsidiaries in the United States, they don't have a stock-option system. As a result, when you look at the quality of local employees, you don't necessarily get the cream of the crop of people working for those Japanese subsidiaries, especially at the management level.

A good example is the Chinese and Indian software industry. I believe Japanese were in India and China earlier. However, Japanese companies have resorted to inexpensive labor in China and India for creating software. The Americans were latecomers, but they decided that they wanted to have the best management and high-quality human resources as well. So the Americans have used their brains in order for India and China to become the center of their R&D. That is the reason why we have so much of a gap between our presence and the presence of the Americans. I'd like to hear Dr. Inamori's comments, please.

[INAMORI ] If you look at Japanese and Western companies, you said that there's a difference in the existence of the stock-option to motivate the employees. And you said that the stock-option is hardly in use by Japanese companies. And that is the reason why the best management is not recruited by the Japanese subsidiaries. I believe that was the gist of your question.

There's a social system in place in Japan that we feel a bit odd, sort of, in the way that it's evil for those who do best to have so much money. That's the reason why the stock-option has not flourished in Japan as of yet. However, with the revision of the commercial code and the tax system, the stock-option is now available for board members in Japan as well. Of course we need to change the legal system to introduce the stock-option in Japan. If you want to work overseas, I think we need to resort to the stock-option when we do business in the United States and Europe. In the case of our company, we've listed our subsidiary on the NYSE, and the stocks are held by the employees and the top executives by means of stock-option. Even for non-listed companies, Kyocera's stocks are listed in NYSE, so that the employees and the top executives would have a small a portion of the parent company's stocks. This is something you can't avoid. It's true that I didn't mention that in my presentation, but in the era of globalization, and if you think about corporate governance, you need to give due regard to how to introduce the stock-option. And I believe it is an important issue for all of us.

[KANDA ] Thank you very much. Unfortunately, it's past the scheduled time, thus we need to close at this time. I'd like to thank Dr. Inamori, the chairman emeritus of Kyocera Corporation.