This month’s topic is a continuation of last month’s discussion about the constant struggle between the “short term” and the “longer term.”
Last summer, there was heavy media coverage of the news that Warren Buffett’s firm Berkshire Hathaway had acquired large amounts of shares in major Japanese trading companies.
Recent news as well reports that one of those trading companies, Itochu (nickname “CI”), ranked among Berkshire Hathaway’s 15 largest stock holdings. Whether this is because Warren Buffet bought up additional shares in CI or whether the stock price has gone up, I’m not sure. One thing for certain, though, is the frequent coverage of how well CI is doing. Not long ago, CI was generally considered to rank 3rd of 4th among the major trading companies, with Mitsubishi holding sway at the top. Recently, however, CI has been moving in on the top two ranking companies, and there appears to be a fierce battle brewing for the top.
One of the factors blamed for the commotion is that natural resources are no longer as lucrative a business as they used to be. As symbolized by “carbon neutrality,” society is growing more environment-conscious, and the pressure for structural change is coming to bear on the resources business. Major trading companies who are heavily reliant on the resources business are thus facing a turning point. Meanwhile, the general perception seems to be that CI, which was never a major presence in the resources business, but generates steady profits in various sectors such as living and food, is gaining the upper hand.
Which brings us to this month’s topic, the constant struggle between the short term and the longer term. The breakthrough by CI was not created by a shift from resources to non-resources business, but more importantly by the organizational structure that created it (which enabled long-term undertakings). That structure has led to the resulting business growth. It may be a somewhat unusual respective, but that’s my take on it anyway. I think business growth is not the “cause” of the breakthrough, but the “result.”
So what is that organizational structure, then? CI’s Chairman and CEO, Masahiro Okafuji, became president in 2010 and then chairman in 2018, but he has been the actual one at the top quite some time. Prior to that, the top spot has changed hands every six years or so, effectively passing the torch to the next generation. In other words, it was customary for the company’s top management to change every six years or so, and we can infer that the consensus basically supported that practice. This is confirmed by the fact that the presidents of all other major trading companies also have changed every six years or so.
However, breaking from this practice, CI’s Chairman Okafuji has been at the top for 12 years. Rather than a raw desire for power, perhaps his goal is to structurally change the company. Last time as well, we pointed out that the challenges that must be undertaken over the longer term are very painful in the short term, and to overcome that pain, leadership must have a high vantage point, magnanimity, a strong power base, and a longer-term timeline. If all goes well, the resource business can be very lucrative, but on the other hand, it also carries a lot of risks. Some resource businesses also have difficulty in responding to the environment-conscious society. Under these circumstances, six years (the tacitly accepted term of office) is too short a timeline to effect fundamental change in business structure and employee consciousness and reach the goal of becoming the top general trading company. This is just my conjecture, but Okafuji was probably lucky that he was able to achieve healthy earnings after taking office as president, which earned him decent approval both internally and externally. This meant he could dispense with discretion or deference, and he was able to build up a stable power base. Thus, the stage was set for accomplishing important efforts over a longer-term timeline, resulting in the flourishing of high-quality business in all kinds of fields. That’s my take on the situation anyway.
To abandon the (highly lucrative) resources business and make even greater profits in other businesses is surely no mean feat. Naturally, I’m sure it was fortunate that CI was originally not heavily dependent on the resources business. That said, if I were the head of a trading company, even if I were aware of the longer-term issues, I doubt I would be able to make dramatic change. The reason is that honest attempts at pursuing structural reform under the customarily limited term of office will entail severe pain (poor earnings) in the short term, which will invite the wrath of your stakeholders and threaten the stability of your power base. As a result, those efforts themselves will be crushed. If that happens, you can say goodbye to your prospects for so-called executive “retirement,” and you will probably be denied the unique Japanese system of guaranteed post-retirement status, such as “chairman,” “advisor,” or “special adviser.” In short, for a “salaryman” manager, medium- to long-term structural reforms are not worth it.
Thus, doing what is necessary for the longer term requires taking our eyes off the comfort of the short term, and that means the short term and the longer term are always in conflict.
So, twice now I have written about difficulty in structurally changing “society” and “companies” based on little more than my own imagination. A fair amount of time has passed since the days of a booming economy when everything went well came to close, which just goes to show that the structure that made up that booming economy is almost passed its sell-by date. That’s when the new challenge of structural transformation will be required, but it is not easy to change the system built during a booming economy. For a dictator of a nation or an owner in a company, structural change can probably be pulled off with sufficient vision and magnanimity (because they already have a power base). So, how can a noble head of state or business executive who acts like an owner be produced?
(On the other hand, as in Ghosn’s case, there is also the risk of the issue that power never fails to corrupt “Not an Issue of Guilty or Not Guilty”, March 2019).
I feel that this is a major issue facing society and large corporations in this country.
Chairman and CEO
Kamakura Shinsho, Ltd.