Daiwa Anglo-Japanese Foundation: Challenges of Corporate Leadership - - PDF document

Daiwa Anglo-Japanese Foundation: Challenges of Corporate Leadership Seminar 12 July 2012 Address by Stuart Lyons CBE I feel deeply honoured to take part in the Daiwa Anglo-Japanese Foundation seminar series this evening. It’s an excellent and imaginative programme and I would like to thank Sir John Whitehead and Jason James for inviting me to share my thoughts with so many distinguished guests. The essence of the discussion this evening is what makes for effective business leadership in the current challenging environment, and whether there are useful insights that Japan and the UK can share with one another and with others. It seems to me that the issue of corporate leadership in the 21st century has two aspects. First, how can we ensure that our businesses survive and prosper in a sluggish international economy, providing jobs, goods and services, and economic dynamism? Secondly, how can we restrain ourselves and particularly our financial services sector from the excesses of corporate ambition and personal greed? The UK and Japan both like to see ourselves as punching above our weight in the global

• economy. We think carefully about our strategies and management. Because we are high-

cost countries, we depend on superior design and product development, and on the

• utsourcing and delegation of products, components and services. Our people are skilled,

good at what they do, and generally work hard. But complacency is our enemy. We both risk slipping down the international tables as a result of slow growth, an ageing population and the emergence of China as a global force. We risk political, as well as economic disruption, if we do not work harder, smarter and more effectively. In the UK, the major corporate objective for many years has been the enhancement of shareholder value. That’s because so many companies were accountable to equity markets, and market traders take a short-term view. JCB, which is in the same business sector as Komatsu, was and is an exception because it is family owned. In general, the British industrial tradition is mercantile and entrepreneurial. The leadership role is carried out by an individual who reports to a board, rather than by the board itself. Individualism and ego can override the sense of corporate endeavour. This is quite different from, say, Nissan, where the organisational chart used to show the President sitting in an apex at the bottom

• f the triangle, a figure of dignity and respect, to whom ideas flowed downward from his

team as though by the natural rules of physics. Japanese companies take a longer view that their British counterparts. They are more likely to be financed by banks. The keiretsu system of alliances is still evident. Management is generally consensual. The group, and group loyalties, appear more important than personal ego. Of course, we should not confuse form with substance, for Japan is a formal and gracious society. Personal ambition exists and so, sometimes, does corruption, but it seems to me that the Olympus scandal was about corporate ambition rather than individual greed.

2 You could take these general arguments and assume that they account for the recent differences in performance between, say, the super-brand of Sony and opportunistic

• Vodafone. The Japanese company, despite its tradition of quality and the apparent

visibility of its leadership, seems to have stalled. Vodafone, which originated as a British company, but now has a Dutch chairman and an international board, has cottoned on, through internal debate as a group, to the social and technological changes of the communications era. But this narrative is too selective. You would not arrive at the same conclusions if you looked at Panasonic instead of Sony. Nor is Vodafone typical of what has been happening in British industry. Our national media, being London-based, give an unbalanced picture. They focus on three categories of businesses not because they are typical, but because it is a convenient way of selling newspapers or television commercials. Journalists like to write about businesses quoted on the London Stock Exchange; London- or City-based businesses; and businesses with a high consumer profile or high-society owners. These create good news stories, particularly when things go wrong. However, there is a different story in Britain’s industrial heartlands. In the Midlands and North of England, we have a large number of small and medium-sized enterprises, which have been buffeted by the short-termism of City traders, the high cost of regulatory compliance and the lack of liquidity in their equity shares. Stockbrokers and corporate finance houses can no longer be bothered with businesses turning over less than £500 million a year. During the past twenty years, many smaller companies have moved from stock exchange listing to private ownership with venture capital and private equity

• partners. This is quite a turnabout. Twenty years ago, conglomerates like my old employer

the Pearson group, which owned Royal Doulton, were looked down on. Pearson was persuaded to divest itself of non-core businesses like Lazard’s Bank, Madame Tussaud’s, Royal Doulton and Chateau Latour, with no discernible improvement in its results. Today, the UK’s private equity businesses, such as Apax and Terra Firma, are conglomerates under another name and are now the height of fashion. Private equity is, however, still short-term in its time horizons. The objective is to use the freedom from immediate pressures to remove cost, improve margins and prepare businesses for resale to or with the benefit of a revitalised management. Another significant change has been the successful encouragement of inward investment. In the West Midlands, when I led the Regional Development Agency, we attracted 17 out

• f the world’s 18 leading automotive manufacturers, several of them from Japan. Here in

the capital, Thames Water was German owned and is now mainly owned by the Australian infrastructure fund Macquarie. The French EDF owns London Electricity and British

• Energy. The sovereign wealth fund of Qatar now owns all of Harrods and a large slice of

Sainsburys. In short, flexible ownership can help reduce short-termism and provide a way for mature businesses to survive and prosper. Much, however, continues to depend on leadership, motivation and a sense of mission. I referred a little earlier to Panasonic. It’s instructive to compare the British mercantile approach with that of the Japanese company.

3 Panasonic was founded in 1918 and was originally Matsushita, a light-bulb manufacturer. On 5th May 1932, the fourteenth anniversary of the company’s founding, Konosuke Matsushita assembled his 162 employees and announced a 250-year corporate plan, broken up into ten 25-year segments. Matsushita later added a company creed, seven philosophical precepts and a company song. The creed read: “Through our industrial activities, we strive to foster progress, to promote the general welfare of society, and to devote ourselves to furthering the development of world culture.” The seven precepts, which became known as the “Seven Spirits of Matsushita” were:

• Service through Industry
• Fairness
• Harmony and Co-operation
• Struggle for Progress
• Courtesy and Humility
• Adjustment and Assimilation, and
• Gratitude

By 1968 Matsushita had a 5,000-item product line, compared with 80 items run by Sony. In 1981, there were 100,000 Matsushita employees worldwide celebrating the company’s entrance to the third 25-year phase of its 250-year plan. By 2011, Panasonic had annual sales of nearly 9,000 billion yen and nearly 370,000 employees. There is, of course, an Anglo-American blueprint for meeting the challenges of corporate leadership successfully. Here’s a ten-point list which I derived from the Advanced Management Program at the Wharton Business School in Philadelphia, and used successfully at Royal Doulton in the 1990s. A world-class company, we determined, has:

• 1. A communicated sense of mission, or vision.
• 2. A global perspective.
• 3. A strategically- rather than a tactically-driven business plan.
• 4. A determination to create shareholder value.
• 5. A market and customer orientation.
• 6. An obsession with learning.
• 7. An unshakeable commitment to quality.
• 8. A relentless search for technology and innovation.
• 9. Constant study of competitor activity and competitive threat.
• 10. The ability of the leader to motivate his or her teams with a common purpose.

With hindsight, I should have added an eleventh point which struck me as a result of the King’s Cross fire: commitment to the lives and safety of employees. On coming back to the UK from Wharton, I found that a new fashion was taking hold at my holding company. There were now apparently three criteria for a successful business unit, by which a chief executive was judged:

• 1. a positive cash flow;
• 2. sustainable competitive advantage, and
• 3. relevant management capabilities within the organisation.

4 What was missing from this analysis was vision. Vision is a difficult thing to put into words, but without vision, as Matsushita recognised, you cannot arrive at a sensible strategy, and without a strategy you end up with opportunism, confusion and collapse. For a corporate vision to be robust, it has to arise from a rigorous understanding of social, technological and economic factors as they will affect the organisation. At Airsprung, well

• ver half our mattress sales are through catalogue and internet retailers; last year, despite

the economic environment, we outperformed the sector and sold the company for a good price, while keeping our management team intact. At Royal Doulton, we understood that the company was essentially about international brand management. The rest, including high-quality design and product specification, allied with efficient colour chemistry and ceramic manufacturing, were facilitators for the international marketing effort. Japan was one of Royal Doulton’s most successful overseas markets, particularly for the products made by our Minton and Royal Albert factories. There are two tips I would give to any would-be exporter of consumer products. First, you must learn to see things in a Japanese way. We designed delicately fluted cups and saucers in pure white bone china, immaculately glazed and with detailed floral decoration. These appealed to the heightened visual sense of a people who love nature, who honour the finest cabinet makers with the designation of “national treasure”, and who read the ideograms of kanji rather than scan across a page or paragraph. Secondly, you don’t do deals in Japan, you build relationships. In fact, we Brits found it easier than some Americans to be patient and courteous. While a Japanese will shake hands in England to respect our customs, in Japan we are better appreciated if we use soft voices, bow politely and avoid physical contact. Both countries have educational challenges, particularly at secondary level. When I talked to a member of the imperial family some years ago, he felt that in Japan there was too much learning by rote and too little emphasis on creativity, while I believed that in England there was too much free expression and too little basic numeracy and grammar. To meet the challenges of corporate leadership both societies need education and intellect. Companies with good management but poorly conceived strategies do not survive. Companies with clear thinkers and appropriate strategies can prosper. Japanese business students study The Art of War, attributed to the Chinese general Sun Tzu who lived over 2,000 years ago. I particularly like this quotation, because of its relevance to business leadership in the marketplace: To win one hundred victories in one hundred battles is not the high point of

• achievement. To subdue the enemy without fighting is the high point of

achievement. To summarise, the success of business is mainly in the hands of business and business

• leaders. The task of government is to provide the environment and the encouragement for

business and international trade to prosper. Usually, this implies regulation with a light

• touch. But how are we to react to the recent series of scandals in Britain, which have

sullied the political, banking and media communities?

5 The “big bang” of British deregulation took place in an atmosphere of optimism, but has led to shocking abuses, the collapse of two major Scottish banks and a stain on the City of London’s reputation. A few greedy and foolish individuals have treated customers, employees, shareholders and the public as their prey, on their ride to the high hills of self- esteem and disproportionate reward. They may be a guilty few, but there is something rotten in any culture that allows and sometimes encourages arrogant young men of low moral worth to damage society in this

• way. If Britain is to remain at the forefront of global financial services, we have to be

deserving of international trust. If I may speak from my recent experience as chairman of an investment trust in the City, the motivation and attitudes of people who deal solely in money and financial products is different from those in manufacturing and retail businesses. The City is a hothouse of pressure for the quick return and the high bonus. I find the quality and timeliness of internal audit and compliance procedures in the City is not as good as in industry. The managers I come across are no more impressive than those in industry, or deserving of higher pay packets. In industry, we habitually cap bonuses at 50% of basic salary. I think this proposal by the European Commission is a reasonable step, but in itself it will not achieve a great deal. In the overheated environment of financial services, self-regulation does not work. We will have to revert to a tougher regulatory regime and I think the Government should strengthen our existing criminal sanctions through an Act of Parliament, under which corporations would be criminally liable for serious breaches of their duty of care which led to financial losses in the community. Corporate leadership means knowing when to step down from office. In Eastern cultures, you save face both for the corporation and yourself, if you acknowledge shortcomings of leadership and make way for new faces. In England, we don’t talk about “face”, we talk about reputational damage. I worry about these modern terms, which militate against clear

• thinking. At Barclays Bank, before the recent outcry, reputational damage was taken by its

leaders to imply that the damage was only to the organisation and that the corporate leader was somehow insulated from the harm for which he should be accountable. Stepping down before you are pushed is the appropriate end to all executive careers. It is time now for me to step down, and I thank you for listening to me.

SRL 12/07/12