Big Business Organization
This paper aims to present the essentials of organization and top-management decision-making in Japanese big business. To do so for a foreign audience, it is first necessary to deal with certain misconceptions about Japanese management. Some foreign writers, interested in finding the unique "Japanese pattern of management," have tended to reify certain conceptions based on partial observations. The result has been understatement of the extent of change in Japanese enterprises and the extent to which they are similar to foreign enterprises.
In fact, Japanese enterprises, like enterprises in other advanced countries in the free-world economy, must give priority to economic rationality in order to realize profits. To remain competitive, Japanese management has continuously revised unprofitable practices and systems. The elimination of idiosyncratic practices and systems has been particularly marked in the large enterprises that must compete with foreign enterprises in both international and domestic markets. In the long run, Japanese enterprises have tended to respond to international market forces in ways not totally dissimilar to foreign firms.
Of course, some customs and structural features prevalent in Japanese organizations differ in certain ways from those in foreign countries, but "Japanese uniqueness" has been exaggerated because of the confusion between formal and informal practices. As a result of thousands of years of historical development in isolation from other countries, Japan has developed a society that is decidedly homogeneous in comparison with other countries, especially the United States. This homogeneity in race, language, culture, and life style facilitates establishment of informal ties among individuals. Especially in organizations where individuals work
together continuously for a long time, informal custom has far more power than the formal system in regulating the daily activities of the system's members. The formally established system that has no substantial function is a phenomenon found also in organizations in the United States, but the extent of difference between the formal and informal systems within the Japanese organization is particularly striking. Since both large enterprises and government bureaucracies in Japan are equipped with extensive formal systems, foreigners sometimes mistakenly assume that the "characteristic Japanese features" of these formal systems essentially explain the actual functioning of Japanese firms.
Defining Big Business
In present-day Japan, most enterprises, from very small-scale organizations to big businesses, are officially classified as corporations (kaisha hojin[*] ). There are four types of corporations, but the overwhelming majority are kabushiki kaisha (joint-stock companies). Before World War II, many small- and medium-sized businesses in Japan did not adopt the joint-stock-company form. But with Japan's economic growth since World War II, the joint-stock company acquired obvious business advantages, and even small- and medium-sized enterprises gradually adopted this form of organization. Present-day Japanese enterprises referred to as "big businesses" are without exception joint-stock companies.
Despite wide use of the expression "big business," its definition is less clear than that of small- and medium-sized business (chusho[*] kigyo[*] ). However, it is not difficult to arrive at a working definition based on widely accepted practice. For example, a company that is listed in the first section of the Tokyo Stock Exchange can be considered a big business. There were 970,000 corporations in Japan as of the end of May 1973, but of these, only 820 (850 at the end of 1973) were listed in the first section of the Tokyo Stock Exchange. Since there are many corporations of comparable scale which are not listed, selection of all companies with capitalization over one billion yen (a criterion for being listed) reveals fewer than 1,500 corporations, or 0.07 percent of all companies.
This group of 1,500 Japanese corporations, however, has great importance. They control 60 percent of all capital, 36 percent of all business revenue, and their business revenue of eighty-eight trillion yen comes to about 6.2 times the government's general budget of 1973. But capitalization over one billion yen is more than a quantitative classification. For
example, corporations with less than one billion yen are overwhelmingly family enterprises (dozoku[*] kaisha ), whereas companies with over one billion yen capitalization are mainly nonfamily enterprises. In present-day Japan, a company, regardless of its format, generally outgrows the taint of an individual or family-centered undertaking when it exceeds about one billion yen capitalization. For the purposes of this article, we shall operationally define the big businesses under discussion as those that meet the following two criteria: (1) capitalization over one billion yen, and (2) nonfamily company structure, as reflected in stockholder ratios. Roughly 1,400 companies meet these two criteria—corresponding approximately to the number of companies listed in the first and second sections of the Tokyo Stock Exchange.
Board of Directors and Its Jomukai[*] (Executive Committee)
The Three Legal Organs
Big business, even as defined above, is a broad term which includes hundreds of businesses of many different scales, industrial types, and historical backgrounds. Although it is difficult to generalize about top management organization and the decision-making process for such a diverse group, it is possible, with due caution, to draw some generalizations.
Among the organs defined by the Japanese Commercial Law, the board of directors (torishimariyakukai ) fulfills the role of top management in business organizations. This is an organ created after World War II (in 1950) when the Commercial Law was greatly revised. Under the old Commercial Law, each director held important legal power in various top management operations and as company representative to the outside. When the Commercial Law was revised, management powers were given to the board of directors, which was composed of all directors as regular members. The board of directors came to make decisions on items covering a broad sphere of top management.
The authority of company representative was delegated to the representative director (daihyo[*] torishimariyaku ) chosen by the board of directors. Thus, the board of directors became the decision-maker on a broad range of items determined by company regulations, in addition to the following items designated for exclusive decision under the Commercial Law: (1) decision to convene the general meeting of stockholders; (2) nomination of representative directors; (3) nomination of and dismissal of management;
(4) decision on bond issuance; (5) discretion of turning over nonessential business to outside parties; (6) determination of matters relating to issuance of new stock; (7) approval of the transactions between directors and the company; (8) capital incorporation of the reserve fund; (9) stock split; (10) appointment of representatives in disputes between company and directors.
As defined under the Commercial Law, there are two organs—the general meeting of stockholders and the auditors—which are equal to or above the board of directors. With the revision of the Commercial Law in 1950, the authority of these organs was greatly reduced and in part transferred to the board of directors. In the sense, however, that the right to appoint the directors lies with the general meeting of stockholders, and in the sense that the auditors have the authority to check the business performance of the directors, these respective organs are beyond the jurisdiction of the board of directors. The authority of the three organs (the board of directors, general meeting of stockholders, and auditors) is fixed clearly and entirely by law, with a system of mutual restraints designed to realize profits while preserving the stockholders' rights as owners. However, at least in big businesses, not all organs function in accordance with legal specifications. To overstate the case, neither the general meeting of stockholders nor the auditors fulfill their formally stated functions. Actually, even the power of the board of directors has greatly declined. We shall look first at the actual functions of the board of directors as it in fact replaces the general meeting of stockholders and the auditors.
Separation of Ownership and Control
The general meeting of stockholders is by nature essential to the joint stockholders' company. That the function of the general meeting is undermined as increased scale of enterprise stimulates the "separation of ownership and control" was pointed out with regard to American big businesses fifty years ago. In Japan, the decline of the general meeting of stockholders, already evident prior to World War II, was not connected with the phenomenon of separation of ownership and control until after the war.
The cause lies in the fact that over half of Japan's prewar big businesses were subsidiaries of the so-called zaibatsu capital groups and were always controlled, financially and through personnel, by the head companies (honsha ), which were the stockholding companies. Since the majority of the non-zaibatsu big businesses were family companies or quasi-family companies, even if their stock was listed on the stock market, the number of shares actually traded on the market was in fact restricted. Thus the general meeting of stockholders was a mere formality for the main body of stockholders, and the essential decisions, including appointment and
dismissal of directors, could not help but be dominated by the will of the large stockholders who were the real owners.
In Japan, unlike America, the "separation between ownership and control" in big business did not result from the natural maturation of industrial society. Rather, it was a by-product of defeat in the Pacific War and the policies for economic and societal democratization imposed by the Occupation forces. The striking elimination of large stockholders and marked increase of individual small stockholders formed the background for the rapid separation of ownership and control and the virtual eclipse of the general meeting of stockholders.
Since auditors were created by the Commercial Law enacted in 1896, they have had little real function in most joint-stock companies. Japan's Commercial Law was strongly influenced by German law, but unlike the German case, broad authority was never given to the auditors. And unlike the situation in England, there was little concern over whether auditorial candidates possessed the experience and knowledge that would enable them to carry out basic auditorial tasks. When, as part of the revision of a series of laws at the end of the Pacific War, the Commercial Law was revised, even the putative legal authority of the auditors was reduced. From the viewpoint of top management, the auditors' functions were negligible. Their importance was further weakened by the provisions of the Certified Public Accountant Act and the Securities Exchange Act, which require all companies listed on the stock exchange (with the exception of financial institutions) to have an external audit performed by a certified public accountant, just as in America.
For these reasons, the auditor—as compared with other joint-stock company executives—has long been considered both by those within and outside the company as a mere title with responsibilities much lighter than those of the director.
Naturally, the decline in authority and function of the auditors and the general meeting of stockholders influenced both directly and indirectly the authority and function of the board of directors. The point is quite clear if we consider the following concrete questions: Who in fact nominates the directors if they are not actually nominated by the general meeting of stockholders? Who in fact checks the directors' business performance and methods if they are not actually checked by the auditors?
As the scale of an enterprise increases, the number of stockholders generally increases, and the relative share of each stockholder is decreased by various factors (such as higher dividends, mushokofu[*] , and the climb in
stock value resulting from company growth). With these changes, the majority of the stockholders tend to lose interest in the management of the company as long as their investment desire is satisfied by such means as increase in share value, increased shareholdings, and dividends. Stockholders even fail to exercise their one major right—the nomination of members of the board of directors. Even if one segment of the stockholders endeavors to take an active role, under normal circumstances there is no effective means for rousing the interest of the other stockholders and gaining their timely participation.
Under the provisions of the Commercial Law, the appointment and dismissal of the directors and of the auditors must be determined formally by a decision of the general meeting of stockholders, but we must inquire how this actually works. In fact, it is made possible by a consensus among the members of the board of directors. This is because, except in special cases, the right to convene the general meeting of stockholders lies in the board of directors, and the formulation of the agenda is also a function of the board of directors. The agenda includes such important items as continuance and retirement of present auditors and directors as well as nomination of new auditors and directors. Since it is inconceivable that the general meeting of stockholders will reject the nominations from the board of directors, the de facto right to appoint and dismiss directors and auditors is in the directors' hands.
The next question is how the board of directors makes such basic decisions. The Commercial Law fixes the decision-making method of the board of directors as a majority vote of directors present, but in fact such voting virtually never occurs. This is self-evident if we analyze the structure of directorships in postwar Japanese enterprises.
In large American enterprises, external directors constitute a substantial proportion of all directors, but in postwar Japan, there are very few enterprises with outside directors. The most notable characteristic of the Japanese directorship structure is that most directors hold regular working positions within the company. Senior executives such as vice-presidents (fuku shacho[*] ), executive directors (senmu ), managing directors (jomu[*] ) are, without exception, directors. Recently, it has become common even for division level executives, such as chiefs of major factories and branch offices, and the heads of major functional departments like marketing, manufacturing, accounting, and personnel to also be named as directors. These officials are, in fact, appointed and dismissed by the company president, the highest official within the company hierarchy. Generally,
the company president is a representative director, appointed by the board of directors.
In most big businesses, the members of the board of directors do not interact as full equals because they have different statuses within the company hierarchy. Moreover, they become directors only after they first achieve their positions within the company hierarchy. Appointment by the company president to an essential position within the company hierarchy is tantamount to appointment to a directorship, and there is no reason to expect that these junior and senior directors will have the same informal power as the representative directors who recommended them in the first place. In Japan, unlike America and Western Europe, the traditional seniority-oriented value system is still strong, and an employee is acutely conscious of his rank. Thus, the board of directors as a voting body is virtually nonexistent, and we can safely say that its decisions are not made by majority rule.
Rather than majority-rule decision-making, the most widespread form of decision-making in Japan is "complete consensus." The most common form of traditional decision-making in Japan, complete consensus decision-making is characteristic of groups in which the members all share basic interests and in which they work together daily for a long period. Since the board of directors of a Japanese big business provides a typical example of such a group, it is natural that complete consensus decision-making should be the rule, except in situations where, for some reason, circumstances produce a grave confrontation among directors. In such cases, the functions of the general meeting of stockholders are often restored.
When we speak of complete consensus it does not necessarily mean that a decision was arrived at after thorough debate and formulation by the entire body of members. There are cases in which, pulled along by the ideas of one or a small number of members with great initiative, the remainder of the members express consent. There are also cases in which, after a variety of differing opinions are expressed, the final decision-maker proposes a single plan that all members agree to follow. In short, it is the ultimate show of complete consensus which is essential. Complete consensus decision-making has some shortcomings in comparison with majority rule decision-making, but on the whole it has one decisive advantage for the Japanese.
The advantage is that, when a decision results in failure, responsibility for that failure is not borne by one individual alone; and conversely, when a decision results in success, the glory for that success also does not go to one individual alone. This principle may at first glance seem odd to foreigners, whose value systems and customs differ from those of the Japanese. But for Japanese, it serves more than the simple purpose of emotional satisfaction; it is a practical necessity. From the Japanese point of view, majority rule decision-making often destroys the solidarity of the
group. By obscuring its original significance under the Commercial Law and transforming itself into a "cabinet board" for the company president, who is himself a representative director, the board of directors can, as a rule, avoid the type of decision-making that would mar group solidarity. In this sense, it is a most rational system.
Decision-making by consensus is sometimes mistakenly taken to mean that no individual assumes responsibility for a decision or that responsibility is divided among all members. In fact, the final complete consensus is entirely separate from the question of attributing responsibility for success or failure. Even in cases when a decision is made by all members, if the result is a serious failure, the representative director—the company president—either alone or with a small group of senior directors, sometimes takes responsibility for the failure. In other cases, a junior director who has had no actual influence in a final decision may be forced to "commit harakiri" (resign). Of course, it is quite common for responsibility to be shouldered by the persons actually responsible for advancing a given decision. "Responsibility assumption" by Japanese is a complicated subject, but it is sufficient for present purposes to note that decision-making by consensus and responsibility assumption, which leads to praise or blame, are governed by entirely different principles.
A critical condition in complete consensus decision-making is the number of members who comprise a group. When the recovery of the Japanese economy began in the beginning of the 1950s, the number of directors never exceeded ten, even in fairly large-scale enterprises. But after Japan's economic growth began in earnest about 1955, the number of directors in all big businesses suddenly increased, and today a sizable number of companies have twenty to thirty directors. The increase was designed to strengthen top management within each enterprise to ensure that they could cope effectively with the rapid changes in business environment brought about by economic growth. The nucleus of this effort to cope was the establishment of a company organ composed of only senior directors. The name of this organ varies from company to company, but the term jomukai[*] (executive committee of managing directors) is used most frequently.
In addition to the company president (who is usually the chairman), members of the executive committee number five to ten at most and include those holding the positions of company vice-president, executive director, and managing director. Adequate daily communication is easily possible among a group of this size, and on that foundation, it is possible to put into practice the principle of consensus decision-making when it comes to items of serious consequence. When the executive committee system was first introduced, companies were generally in the process of establishing or expanding their general staff department (nomenclature again varies by company, but it is generally called the presidential office [shachoshitsu[*] ] or planning department [kikakushitsu ]). Enlisting the aid of this new depart-
ment, the executive committee is actually able to carry out much greater top-management functions than previously. With the spread of the executive committee system, functions of the full board of directors, which under the Commercial Law was supposed to be the highest decision-making organ, greatly atrophied.
The Rise of Professional Managers
The Purge of Prewar Executives
In analyzing the top management of Japanese big business after the war, we must have a thorough understanding of the completely new breed of leaders who were born from the social and economic fabric during the period of Occupation and the revision of the Commercial Law. For approximately seven years after the Pacific War ended in August 1945, Japan was under military occupation. "Demilitarization" and "democratization" were two pressing objectives of the first Occupation reforms carried out by MacArthur's General Headquarters. The latter objective—democratization—was considered a necessary prerequisite for preservation of the former objective—demilitarization. In hopes of democratization, the Occupation forces took firm leadership of the Japanese government and carried out major legal and structural reforms. The democratization measures had a variety of effects on the economic activities of big business, but zaibatsu dissolution is the single measure most essentially related to our subject here.
At the close of World War II, the total paid-up capital of ten zaibatsu conglomerates amounted to 35.2 percent of the total paid-up capital of all joint-stock companies in Japan. Since twelve hundred companies were listed by the General Headquarters as subsidiaries to the zaibatsu for the purposes of zaibatsu dissolution, it is safe to conclude that before World War II a large proportion of big businesses in Japan were members of zaibatsu groups.
To varying degrees, all main subsidiary companies of the zaibatsu were systematically placed in a pyramid-shaped control structure, and at the apex was the holding company, a family company. The finances and leading personnel of the major subsidiaries were completely under the direction of the head company. This pattern of control was eliminated in one swift strike by zaibatsu dissolution and other democratization measures. Most dramatic was the large-scale purge of top-level executives from zaibatsu holding companies and major subsidiaries, for it instantly transformed the top management of big business.
Immediately after World War II, the government established the
Holding Company Liquidation Commission under the direction of General Headquarters. It collected large amounts of zaibatsu stock from the zaibatsu 's leading families, its holding companies, and the subsidiary companies. As a result of this collection and collection of the stock in outside companies held by nationalized companies, which was taken as payment in kind by the Ministry of Finance (shortly after the property tax was initiated in October 1946), the government controlled an estimated one-third to one-half of the paid-up capital in all Japanese companies. By these measures the government swept away the control network which the zaibatsu holding company had maintained over its subsidiaries.
The zaibatsu dissolution policy was one link in the series of Occupation policies for democratizing the Japanese economic and social systems, but that democratization extended beyond just the zaibatsu and their subsidiaries. Non-zaibatsu big businesses that had contributed in any way to the war effort were dissolved or restructured by the Japanese government according to the design of the Occupation. Among these were government monopolies, national corporations and banks created for colonial management, and private companies created by mergers under the government's powerful wartime administrative guidance.
Like the policy toward zaibatsu , the general democratization policies extended not only to enterprises but also to the individuals responsible for company management. Specifically, the General Headquarters issued directives to the Japanese government, which, through the "Ban from Socially Influential Offices," prohibited large stockholders and upper-echelon executives in 2,500 major wartime companies and banks from holding socially influential offices. The Commercial Law revision prohibited making stock ownership in any form a qualification for appointment within companies. At the same time that the legal powers of the general meeting of stockholders were reduced, those of the directors were increased. Within a few years after World War II, the policy of thorough democratization, including zaibatsu dissolution, had forced most top executives in the financial and industrial world to retire. As a result, although big businesses were allowed to continue in some form, most of their directors were replaced and their capital ties with the head companies were severed.
A certain number of the new postwar directors had served as directors even prior to the removal of the senior directors in the purge, but the vast majority had served as such middle-level managers as bucho (division chief) or kacho (section chief) during the war and became directors to replace those removed from office. During this large-scale replacement, the newly born directors were commonly nicknamed santo[*] juyaku[*] (third-rate directors). There were, of course, some new directors unequal to the tasks
demanded by their new positions, and before long they were in turn replaced. But most of the new directors stood up under the heavy responsibility of their positions and, under these difficult circumstances, succeeded in rebuilding their enterprises. Most were in fact not "third-rate directors" lacking in ability and managerial skills, but rather the most promising young middle-level management. The majority of this new leadership class entered the company as "salarymen" and were promoted because of their knowledge, experience, and managerial ability in business administration. In this respect, they are comparable to professional managers in the U.S. industrial world.
Given the shock of defeat and the uncertain future of big business in Japan, it took not only ability but also considerable self-confidence and decisiveness for these new directors to suddenly assume heavy managerial responsibilities. Whatever else may be said about them, most were extraordinarily able.
In one sense, the massive postwar purge of Japan's business leadership was an opportunity to permit fresh young directors to develop their enterprises along bold new lines. Most of these new leaders continued to hold top spots in large enterprises and to lead their companies even after the general relaxation in Occupation policy.
Around 1950, although purge orders had been lifted one after another, very few former top-level executives were returned to their original posts. We can delineate two major reasons for this phenomenon. The first was that since companies had by then developed a sizable corps of capable professional managers, there was little leeway to reinstate former executives. However, even if former executives wished to be reinstated, the new top-level executives did not wish to circumscribe their own authority by returning the former executives to powerful positions within the organization. A second reason was that, in the period of four or five years after the war, large changes in business climate made prewar management experience and know-how obsolete, especially since the prewar managers had little experience or inclination to cope with new unfavorable conditions like the vicious postwar inflation and frequent labor-management struggles. Thus, despite the depurging, former managers themselves had no desire to return to active service.
In this way, the majority of the big businesses that led Japan's postwar economic recovery and growth placed a new generation of professional managers in the top positions. They contributed greatly to the revival of the Japanese economy, which was accomplished in a short period. The unexpected rapidity of Japan's later growth was inseparable from the growth of big business, and the success of both reinforced the influence and authority of this new generation of managers, both within and outside their enterprises.
Typical Japanese Features of Top Management in "Revised" Big Business Since World War II
To eager entrepreneurs, the remarkable recovery and growth of the postwar Japanese economy seemed to supply unlimited business opportunities; it did, in fact, produce a considerable number of growth enterprises. But for at least ten years after the war—the recovery period—virtually no small enterprises grew rapidly enough to approach the scale of the big businesses. Even Sony and Honda, outstanding postwar growth enterprises, were listed on the Tokyo Stock Exchange only in 1958 and 1957 respectively. For that reason, until Japan's postwar economic growth began to accelerate around 1955, Japanese big businesses were virtually all continuations of prewar big businesses. Since the capital structure and executive personnel of such businesses had been completely swept away by the Occupation's democratization measures, it might be more accurate to call them "revised" prewar big businesses. The six points discussed below summarize the characteristics of the top-management organization and decision-making system in these big businesses.
1. With the collapse of the power of large stockholders and the return of company control to individual company directors, there was also a great change from the prewar and wartime power structure in Japanese society. The new company directors reflected the more diversified power structure created in the process of Japanese economic recovery and growth. It was a situation similar to the one in a country that is newly independent after a long period of colonial control, where leaders suddenly become aware that they are in a complicated economic and political system.
2. Because the board of directors became more powerful and represented more diverse interests, each director had to assume a role as an interest group regulator, who balanced a number of influences. As the company's controlling group, the board of directors required the teamwork of personnel with diverse specialties, experiences, abilities, and attributes to deal with various interests and cope with crises. This team was easier to create and maintain because most directors were colleagues holding important positions within the company itself. But some directors lacked the capacity for fulfilling the new responsibilities of aggregating interests and working together as part of a team.
3. Since the large majority of the directors in big businesses had advanced all at once from middle-management to top-management positions when their superiors were suddenly forced to retire en masse, they were generally younger and possessed more than average managerial ability compared with the former big business leaders. Prewar directors of big business, as typified by the banto[*] (head clerks) of the zaibatsu , had had to
display managerial abilities in representing the interests of the few large stockholders who were in reality the owners of the enterprise. Rewarded with money and advancement, even those head clerks who had originally been mere salarymen gradually came to resemble the owners in outlook. After the war the prototype of the manager in Japanese big business changed from the head clerk to what can be called the professional manager of the postwar era.
4. Despite the provisions of the Commercial Law, decision-making in the board of directors was rarely done on a majority-rule basis. Generally, the board of directors followed the traditional Japanese decision-making procedure of "complete consensus" because, despite the drawbacks associated with this decision-making procedure, it had the advantage of preserving solidarity among team members. Further, it provided a principle for assigning responsibility for the effects of decisions separately from the decision-making system.
5. We might ask whether it was necessary for the board of directors to devote excessive time to laborious consultation in order to achieve complete consensus. This was not and is not the case, because of the parallel and continuing existence of the following practices, which are peculiar features of Japanese organizational decision-making.
a. Ringi. Ringi is a procedure for conducting administrative operations that has been in wide practice from before World War II in large Japanese organizations. In particular, in implementing some plan for which the cooperation of a number of divisions is necessary, or whose results will influence many divisions, a ringi is produced in almost every case. After being created by the responsible division personnel (a kiansha , or plan initiator, generally a section chief), the ringi is approved by each division and climbs the ranks hierarchically from the plan initiators through every position of the upper-occupational structure: division chief, managing director, vice-president, and finally the president.
At this point, since the ringi has already received the approval of every appropriate party, if the president affixes his seal, the ringi is established and its contents are translated into action. (Approval, including that of the president, always takes the form of affixing the seal. For that reason, it is not unusual for the ringi to have more than twenty seals affixed to it by the time it reaches the president's desk.) Since the ringi arrives at the president's desk by the process of passing through many hands, it is safe to say that the president's final approval is a mere formality in all but the most unusual cases.
Ringi is used daily in large Japanese organizations for everything from disposal of trivial matters to decisions on fairly important issues. Even top-level matters are sometimes handled by the ringi system when it was desirable to have formal consensus among all responsible parties, including the middle management in the relevant divisions. Since postwar directors
in Japanese big businesses almost all hold important positions as directors within the company hierarchy, their decision-making function is in great part automatically taken care of by the ringi .
b. Nemawashi. Ringi can be called an established system in the sense that it has certain fixed rules and forms despite variations from company to company. The same cannot be said of nemawashi , which is simply a modal organizational activity pattern. However, nemawashi often has a more important role than ringi in the organizational decision-making process.
We cannot say that nemawashi —a process of prior informal negotiation and persuasion among concerned parties used in decision-making and problem-solving—is unique to Japan. But when the Japanese, historically a homogeneous people, construct lifetime employment groups, the relative weight of such informal activities is far greater than in foreign countries. For example, when a ringi initiator wants to establish a certain ringi , he spares no effort in the prior consultation (nemawashi ) of major concerned parties, especially those whose consent is judged difficult to obtain. Frequently, if the effort in consultation before action is successful, it is tantamount to establishing the ringi . In fact, considering the activities related to the decision-making process, the essential decision is often made by the nemawashi process and the ringi is the formal procedure of writing and detailing the decision.
c. Ato ringi . The custom of consultation before action is one factor making complete consensus decisions possible without excessive expenditure of time. For essential matters on which director consensus seems unlikely, it is usual to have meticulous preliminary consultation among concerned parties. For that reason, long discussion during the formal board of directors meeting itself is rarely necessary to reach a complete consensus.
Not every essential item of business is handled by the ringi approval system. There are instances in which the ringi is sought as a formality in order to authorize a consensus previously reached by all attendants at a board of directors meeting. In such a case, the ringi is clearly a post-facto recognition of the actual decision. Such a ringi is commonly called an ato ringi (after-the-fact ringi ). In such cases, too, the ringi is no more than a formal treatment.
6. Through creation and revision of a large group of laws, including the revision of the Commercial Law, the legal foundations were laid for the group of professional managers to run their companies democratically. There was no reason, however, to expect various Japanese management practices to collapse quickly after the war. However, from the mid-1950s American management formulas and techniques were introduced one after another into almost every sphere of business administration—a phenomenon then known as the "management boom." Under the influence of this boom, most Japanese management practices were
considered premodern and became the object of conscious reform. Naturally, the influence of American business administration on top management and the decision-making system also became noteworthy from 1955 on. The establishment of the executive committee and the strengthening of the general staff division in Japanese companies are typical manifestations of this trend.
Changes in Management Since the Mid-1950s
Since the late 1950s, as the Japanese economy maintained more than 10 percent real growth per year, growth was not confined only to big businesses. Many rapidly growing medium-sized enterprises were in turn added to the ranks of the big businesses. There were no more than six hundred companies listed on the Tokyo Stock Exchange in 1955; now about eight hundred and fifty companies are presently listed on the first section and another five hundred and fifty listed on the second section. Therefore, unlike the situation in 1955, the majority of Japanese big businesses today are essentially new organizations born since the Second World War.
Despite the rapid growth and the adaptation required by the Japanese industrial world of the 1960s, neither the revised prewar big businesses nor the rapidly growing medium-size businesses could afford to adopt radically different management systems. That fact must be considered when we generalize about management and decision-making in Japanese big businesses, since it provides a common element among the more than 1,400 companies that otherwise differ in type, scale, and historical background. We can summarize recent developments in the present-day big businesses as follows.
1. Although with the spread of the executive-committee system power has in fact come into the hands of the senior executives of most companies, one exception is the case of subsidiaries of big businesses that have achieved rapid growth since the mid-1950s. They constitute an increasing number of companies on the stock exchange. Even when these subsidiaries are themselves big businesses, the rights of company control do not necessarily lie with the subsidiary company's senior executives, but in large part with the senior executives of the parent companies, which are the major stockholders.
Subsidiaries use the occasion of being listed on the stock exchange as an opportunity to agitate for greater autonomy for themselves. Listing on the exchange is itself premised on the excellence of the company's record, and if growth and excellence continue, the passage of time strengthens the autonomy of the company's top management. This results from the increased trust of the parent-company top management toward the subsidiary-company top management and the increased freedom of subsidiary-company executives to speak out to the parent-company executives.
As long as the parent company continues to exist as a major stockholder, however, there are natural limits to the autonomy of top management in subsidiaries. Even the most outstanding subsidiary company lacks the autonomy to carry on activities that diverge from the parent company's master strategy. However, the more outstanding the performance of the subsidiary company, the more likely it is to accord with the parent company's master strategy. Furthermore, at least one representative director from the subsidiary company participates as one of the enterprise-group leaders in carrying out the master strategy of the entire enterprise group. In this case, the right of subsidiary company control is held by a group of business leaders that also includes leaders of the subsidiary businesses.
2. Although control of a big business is, in principle, in the hands of the executive committee, the forces directly and indirectly influencing that control have continuously grown and diversified. Interaction between these forces and the directors further complicates the picture. The major forces may be described as follows:
a. Capital groups . It is well known that the high growth rate of Japan's post-1955 economy was induced by the energetic investment of private enterprise, especially big business. Businesses had to obtain this capital for investment as loans from the large banks, and the banks, in an effort to guide the competition of a growing economy and further their own long-range interests, acted as powerful back-ups by permanently financing selected companies in major industries. The result was the creation of capital groups, which had a powerful bank at the center and included a first-rate company in a major industry. The bank sought to make the promising company an exclusive or main customer, and the company sought capital stability by developing patron-client cooperation. Such capital-group formation became very widespread during the 1960s.
When the capital group consisted of only a powerful bank and its important, semipermanently financed client company, the bank could not exercise the degree of influence over company operations exercised by the parent company in the enterprise group described above. However, powerful trading companies sometimes joined the bank as central institutions in the capital group. If these central institutions and the various companies acquired each other's stock, and the precedent was
established for meetings between leaders from the central institutions and the companies in the capital group, then inevitably the capital group acquired both direct and indirect influence over the operations of the various constituent companies.
The old zaibatsu capital groups are typical examples of such capital groups. In the Mitsui, Mitsubishi, and Sumitomo groups, the sense of solidarity is firm among the core institutions, including the banks and member companies. There is close cooperation with regard to both expansionary and routine activities. Stimulated by the activities of these groups, a number of other capital groups with large banks at the center were also created during the 1960s. The most prominent of such groupings are the Fuyo Group (associated with the Fuji Bank) and the Daiichi Group (associated with the Daiichi Bank).
In the 1960s, the expression "zaibatsu revival" became popular among a certain group of scholars and social critics. However, the connection between capital groups or their core banks and individual companies is completely different from that between prewar zaibatsu holding companies and their subsidiaries. Now, as long as the individual companies maintain above-average performance records, they are not in a subservient position to the core banks or capital groups, but more like partners. However, the individual company, because it must maintain and improve its own record, actively uses the core bank or capital group, and in certain cases, must depend heavily on the larger institution. Since certain decisions of the company executives are necessarily influenced by the bank or capital group, there are more than a few companies that have directors who are from the core banks or who are hijokin[*] (holding additional posts in other organizations) directors.
b. Gyokai[*] and Zaikai. Gyokai is an association or circle that includes all companies from a certain industry. Big businesses with a substantial market share in at least one industry are of necessity finely attuned to the interests of that entire industry. These companies sometimes form an association to lead the industry in a way that maximizes their interests, or at least minimizes harm, and to regulate conflict among companies. Big businesses are always the leading members of such associations, and their senior executives become the executive officials of the industry associations. In addition to collecting together the members of an industry, these groups plan daily contact with politicians and bureaucrats, and occasionally engage in active lobbying for the interests of their association.
Zaikai is not as easily defined as gyokai[*] . Originally, it was a circle or association formed by businessmen from all the enterprises in the business world. Today, it signifies to most Japanese a circle formed by a certain
group of elite businessmen and financiers who exercise a strong indirect influence over the political activities of ministers and political parties and the administrative activities of the bureaucracies.
Lobbying directed at politicians and bureaucrats is more effective when carried out by zaikai than by the gyokai[*] . This is because, at present, the contributions that comprise a considerable part of the income of the LDP are made through groups established and backed by the zaikai . Moreover, countless executives of companies and banks are prominently included as "representatives of the zaikai " on most of the review boards that have been founded as administrative advisory organs to the various bureaucracies. For this reason, the majority of big-business executives regard zaikai activity as an essential function of top management. In industries where governmental policy has an especially large effect on company operations, lobbying as a member of the zaikai is on a scale comparable to the operations required for daily management and administration; in some cases, the chairman of the board, president, vice-president, and/or other senior executives may be in charge of zaikai katsudo[*] (lobbying through the zaikai ).
Like the gyokai , the zaikai is actually composed of groups, such as Keidanren (Federation of Economic Organizations), Nippon Shoko[*] Kaigisho (Chamber of Commerce), Nikkeiren (Japanese Federation of Employers' Associations), and Keizai Doyukai (Japanese Committee for Economic Development). Although these four associations have different objectives and different organizational structures, they act as a single unit in carrying out zaikai activities and thus, senior executives in the big businesses hold concurrent positions in these organizations. For these executives, a reciprocal relationship grows up in which their positions as senior executives in big businesses are the source of their status and authority as zaikai members, and their status and authority as members of the zaikai benefit the company.
c. Political parties . There is a close relationship between big business and political parties, in particular the Liberal Democratic Party (LDP), which has continued as the party in power throughout the postwar period of rapid economic growth. In exchange for the continued support of the zaikai , which expresses the consensus of big business and acts as a large pipeline supplying the capital necessary for LDP activities, the LDP has made the utmost effort to reflect the designs of big business in its policy-making. However, there is very little personnel interchange between the LDP and big businesses or the zaikai ; almost no politicians have taken positions in big business, and only a very few members of the zaikai have entered the LDP (and then, with less than splendid results). Moreover, the zaikai has not supported the LDP as a party that shares its own ideology, but as the party that has happened to be in power. The zaikai 's attitude toward the LDP is best reflected by the anti-intervention, wait-and-see attitude it has taken each time the LDP has faced a crisis. In
reverse, the LDP cannot exercise decisive influence over big business activities via the zaikai , nor has it tried to exercise such influence.
d. Government bureaucracies . In contrast to the lack of personnel interchange between big business and political parties, the personnel interchange between big businesses and government bureaucracies—although a one-way street from the bureaucracies to businesses—is fairly active. Since the Meiji Restoration, Japan's major bureaucracies have, because of impartial and fervent nationalism, absorbed the outstanding products of the first-rate universities, and this tendency has changed little in the postwar era. As careermen in the various bureaucracies, the members of this promising group achieve important positions at a young age. They are sifted according to ability and character, and some reach the position of kyoku-cho[*] (bureau chief)—the highest rank in the bureaucratic organization—at an age of about fifty. Administrative vice-ministers (jimu jikan ) are chosen from among these bureau chiefs, but since it is established practice that the tenure of both bureau chiefs and administrative vice-ministers will last only one to three years, outstanding personnel in their early fifties are discharged almost every year from the major government agencies.
Since Japanese big business has had to expand its scale, as well as diversify the content of its activities during the process of intense economic growth, it has always sought outstanding personnel for top management. Big businesses in the heavy and chemical industry sectors, whose operations are directly affected by government policy, have especially extensive connections with the bureaucracies and a particular need for personnel who can easily obtain information from government agencies. It is not surprising that each year an increasing number of former high-level bureaucrats wait the required time period after retirement and then enter the business world.
However, if we look at big business as a whole, companies without former bureaucrats are in the overwhelming majority, and even those that have welcomed former bureaucrats onto their boards of directors have, as a rule, not given more than one directorship to a former bureaucrat. In any Japanese company, there is—among not only the company-bred directors but also the rank-and-file employees—strong emotional resistance to bringing in a large number of full-time directors from the outside. Former bureaucrats are well aware of this resistance and, at least initially, they concentrate on their assigned roles without engaging in overt activities.
For this reason, former bureaucrats who have reached such important company positions as president or vice-president exist as unusual exceptions. No matter how great his powers of leadership were in the bureaucracy as an individual, the former bureaucrat exercises little influence over big-business top management.
e. Labor unions . From the perspective of company management, legal
adjustment of labor union related practices was, among the democratization measures enforced by the Occupation army, equal in importance to zaibatsu dissolution. Under the new legal measure, a startling number of labor unions were born in Japan within a short period of time. Japanese labor unions developed historically on a company-wide rather than an industry-wide or trade-wide basis. The rate of labor unionization was considerably higher in big businesses than in small- and medium-sized businesses, because big businesses more successfully met the variety of economic and societal conditions necessary for labor-union formation.
In the initial stage of labor unionization, labor-management relations were awkward and productive of repeated unnecessary struggles. This was partially because the period of postwar economic confusion was a time of ideological instability during which economic livelihood was still a struggle for workers. Moreover, neither labor nor management yet possessed the knowledge or skill to utilize collective bargaining and other techniques. Around 1955, precedents were established regarding Japanese labor-management practices, and with difficulty at first, individual enterprises drew upon the newly established practices and developed the capacity to deal with labor-management relations as a routine task. Generally, the labor division came to play a larger role within the company organization, and a senior executive was placed in charge of this division.
Company unions are a fundamental and distinctive feature of Japanese labor-management relations. They developed as company unions not so much because of historical factors but because such established Japanese practices as lifetime employment and promotion by seniority produced a strong sense of identification with the company in the union. The Japanese Labor Law is generally interpreted to mean that those in management at the rank of section chief and above do not qualify for union membership, but in all companies the majority of such managers are former union members. In the seniority promotion path, the average age for appointment as section chief is about forty, and it takes another ten to fifteen years to reach the position of director. Thus, it is safe to say that the majority of big-business managers who became directors in the 1960s were former union members. We must bear in mind that it is not rare for managers to have served as officials in the company's union.
These facts, however, do not signify full accord between management and unions within Japanese businesses. In the majority of Japanese businesses, labor unions display opposition backed by strong union demands, and labor-management conflicts, including strikes, are as severe as in other advanced countries. However, Japanese union members never intend that their activities should create marked disadvantages for their company in its competition with other companies at home or overseas. Nor do they desire to undermine company operations. Whenever a group of radical leaders seeks to guide union activities in that direction, they are
destined to isolation and then exclusion from the company-based union.
Viewing the situation in reverse, the decisions of even top management cannot be implemented if they are opposed by the labor union. Since labor union support is necessary for the executives to exercise successful authority in most top-level decision-making, the executive in charge obtains preliminary approval from the union—or at least, requests union cooperation after the decision. That the majority of people in management are former members of the company union is, of course, a distinct advantage in maintaining smooth communications with the labor union.
f. University cliques . Western scholars often emphasize the role of gakubatsu (cliques consisting of graduates of a certain school or university) in company relations. There is no doubt that university cliques exist as a statistical artifact: executives in leading companies are disproportionately graduates of certain universities, and certain companies have reputations as strongholds for graduates of a given university. It is dangerous, however, to infer that because such university cliques are statistically significant, they also play a significant role in company relations. Such statistical data describes an elite that was schooled prior to World War II. At that time, there were only a limited number of universities and a limited number of graduates each year. It is natural that these educated few would be selected by the top companies and government ministries.
With the spread of higher education, the eagerness of young people to pursue business careers, and the expansion in hiring during the postwar era, companies have taken graduates from a variety of schools. In utilizing graduates of various schools, Japanese management has learned a valuable lesson: good students are not necessarily good businessmen. During the prewar era, before the separation of ownership from management, the post of head clerk or manager was best performed by a "bureaucratic personality," but postwar company structure requires entrepreneurial talents and innovativeness. It also requires flexibility for dealing with the variety of new tasks. The government ministries, which are less subject to economic pressures, can still afford to emphasize competence in dealing with defined tasks rather than innovation and creativity in their personnel selections, and their young employees are still overwhelmingly from the old national universities. But businesses, under competitive pressure, cannot afford to limit themselves to graduates of certain universities.
3. The seniority principle was gradually institutionalized in the selection and retirement of the directors, except the president, who is a representative director. For a time during the postwar period, after the business leaders had been completely replaced by the democratization measures (including the "purge") of the Occupation army, the seniority principle was somewhat vague. However, with Japan's rapid economic growth and as company expansion stabilized, the seniority system gradually revived. Table 1 shows the results of a 1958 Keizai Doyukai study on top management in 233 Japanese big businesses. Even at that time, we can
already see clear ranking in average age from the chairmen to the ordinary directors.
However, seniority ranking is not—as it is often misinterpreted among foreigners—a practice that ignores or underemphasizes ability, and uses age or tenure with the company as the major criteria for advancement. We should remember that the following three points are basic to any discussion: (1) the authority of Japanese middle management in daily execution of business is very great, and the initiator in the ringi system is always the section chief; (2) among the numerous positions in middle management, authority is especially given to the several key positions that are on the orthodox promotion route to a directorship; and (3) promotion and selection of these key positions is more dependent on a total evaluation of character and ability than on seniority. Thus, the seniority system, over the long run, effectively selects the people with ability. Establishment of the seniority system does not imply a rejection of the new concepts of professional management, but the establishment of a distinctively Japanese pattern of professional management.
4. In principle, the decision-making of the board of directors is carried out by complete consensus, but even in this form the decisions of the directors are still often guided by the opinion or will of a particular member. Such cases usually fall into one of the following two categories:
a. Executive directors in charge of departments . Since almost all Japanese company directors hold positions within the company, even a junior director is also a chief of a main factory or department where he must practice departmental management. Members of the executive committee usually hold additional positions at a higher-level of top management such as president, vice-president, executive director, or managing director. The responsibility and authority of the senior directors other than the president almost invariably extend to areas such as manufacturing and technology, marketing and purchasing, finance and accounting, personnel and labor, and overseas operations. In each of these areas there is a chief with formal responsibility for managing daily departmental affairs. But in each area,
matters that require the judgment of top management generally reach executive committee deliberation through the executive director in charge of that area.
In Japanese big business, the promotion route from talented young employee to director generally includes every major position in the department. In other words, by the time he becomes a director, the employee has the clear stamp of his department. To exaggerate, we could say that every executive director put in charge of a given department has served as the head of that department. He has usually established the close informal ties of senpai (senior) and kohai[*] (junior) with department members, with whom he has worked on shared tasks over a long period.
Executive directors in charge of various departments do not formally give orders to the heads of these departments. The decisions of the executive committee are handed down as the president's orders to the responsible parties in each department, but the executive directors of the departments heavily influence executive committee decision-making on items that concern their departments. Usually the other members of the executive committee, including the president, have less information and professional knowledge for forming opinions on department matters. Therefore, the executive director of a department speaks at the executive committee meeting both as a member with professional knowledge and as a representative of the department interests. The executive committee, which viewed externally is the highest organ of company decision-making, is the organ for regulating major department interests when viewed internally. As long as a matter affects a single department, the complete consensus of the executive committee is in effect dominated by the will or opinion of the executive director responsible for that department. When the scope of the decision extends beyond the concerned department, the executive committee naturally assumes the additional function of regulating interests. Once again, the decision-making process is not directly related to the procedure for assigning responsibility for decisions.
b. President (shacho[*] ) and chairman (kaicho[*] ). The position of the president in a Japanese company is probably more stable than it is in other advanced industrial countries. Since the members of the board of directors and the executive committee were, in actuality, all appointed by the president as his subordinates in the occupational structure, no internal powers influence the president's course of action except in such extreme circumstances as sudden failure in performance, outbreak of a serious problem within the company, or continued and severe factional quarreling among directors. And as long as the company maintains a tolerable record, there is no external force powerful enough to shake the autonomy of the board of directors. Thus, while decision-making in the executive committee takes the form of complete consensus, there is a natural tendency for it to be dominated largely by the opinion or will of the president.
A former president, however, is one force outside the executive committee that can have a major influence on the current president's decision-making. There is a joke among Japanese businessmen that "only the president decides when the president retires," and in fact appointment of the next president is the prerogative of the outgoing president. Except in cases of forced retirement due to unavoidable circumstances, the reasons for presidential retirement are generally old age, a long period in office, or the coming of retirement age in a firm where this is fixed. But there are very few cases of complete retirement, and the former president normally remains a representative director and assumes the position of chairman. This type of chairman is generally referred to as an "active chairman" because, while he engages in a wide range of activities as a leader of the zaikai outside the company, he also exercises hidden power over the important decision-making of the company via his successor.
5. The "management boom"—the movement to modernize existing Japanese management practices on the model of American company management—brought experimentation and reform. The movement made ringi the central object of reform for two reasons: ringi obscured individual responsibility for the effects of a decision, and its process was too time-consuming.
The focus of the reform was summarized by the phrase "clarification of the job and its authority." In short, every company strove to define objectively the scope and content of major administrative jobs within the company structure and to assign to each job an appropriate sphere of authority. The former would clarify responsibility for results of task execution, and the latter would be used in the overall process of decision-making. The intention was to correct the drawbacks in an organizational format so heavily dependent on the ringi . However, it became clear that it was nearly impossible to define objectively the content or scope of administrative jobs. Even when authority was formally assigned insofar as possible, it was unrealistic to expect such changes within the context of the Japanese organizational and personnel practices of lifetime employment, the seniority system, and group decision-making.
During the latter half of the 1960s, there was a general realization of the difficulty of introducing such reforms, and the fever of Japanese big business for modernization of ringi and management on the American model suddenly cooled. Along with this came a trend in the industrial sphere toward new recognition of the merits of Japanese administrative practices. Companies that had quickly taken the radical measure of abolishing the ringi system had no choice but to revive it.
It is clearly a mistake to think that because the "management boom" broke down without attaining its initial objectives, it made no real contribution to Japanese management. Through the struggle to reform, Japanese companies (1) eliminated or amended several clearly irrational Japanese administrative practices affecting Japan's adaptation to its new
economic environment (domestic and international); and (2) wiped out the excessive inferiority complex entertained by most Japanese managers, administrators, and professionals with regard to the American management system and enabled them to evaluate objectively the characteristics, advantages, and weak points of Japanese management practices.
At present the ringi system still exists as a formal system in most Japanese big businesses, and it is widely used together with the process of nemawashi . Formally, the work of top management is carried out through the executive committee, but in fact the work load of senior executives in big business is lightened considerably just by the ringi system. Compared with practices in the 1950s, ringi today is a remarkably more refined system and it is employed in a decidedly more realistic manner. Although the modernization of Japanese management practices failed if "Americanization" is used as the yardstick, it produced tangible results in the correction or elimination of weak spots in existing practices.
6. The executive committee was a new system introduced from the outside and modeled on the (senior) executive committee of American big business. That the general staff was either strengthened or newly established at the same time suggests that the executive committee was intended as more than just the company's highest decision-making organ composed of a limited number of senior executives. In fact, the introduction of the executive committee was premised on some degree of change in the existing Japanese decision-making system.
Prior to the period in which the committee was introduced, Japanese senior executives, both as individuals and as a group, lacked an American-style general staff—and they had little need for one. As managers of their own departments, senior executives had the authority to mobilize personnel for use as general staff whenever necessary. In turn, the president could require the senior executives to serve as a kind of general staff to him.
Why then were the executive committee and general staff introduced? In a word, the objective was to strengthen and develop top management jobs. Competent adaptation to the rapid growth of the national economy and the accompanying changes in internal and external environmental conditions, as well as a quick grasp of those changes in order to execute a superior business strategy were the fundamental conditions for company growth. But Japanese big business in the early 1950s lacked certain of these conditions. The majority of directors, including senior executives, was burdened with the daily tasks of departmental management and could not get a long-range or comprehensive view of company management. For this reason, when the executive committee was introduced, companies generally either eliminated or greatly lightened the task of departmental management for executive-committee members.
Gradually it became common for directors who were members of the executive committee—even senior executives in charge of departments—to
be requested to evaluate and investigate problems. In order to fulfill such demands, the executive committee members needed a staff that could collect and analyze the information required for general management tasks and at times give professional advice. Since the existing organizational structure of Japanese businesses was usually divided vertically, little staff existed to carry out such tasks, and even if a small staff did exist, there were few opportunities to mobilize it. Therefore, in the context of the introduction of the executive committee system, a real general staff was established for the first time. With this change, the practice of general management by senior executives became institutionalized in Japanese big business.
Company Spirit and Administration
In implementing the decisions from higher levels and adapting to the environmental changes, Japanese executives give great attention to problems of morale and human relations. If Japanese executives have a characteristically Japanese approach to management, it is not so much a specific body of practices but an effort to create a company spirit such that members wish to take part. Seen in this light, the slow increase in salaries in the earlier years of an employee's career and the steep salary increases with years of service is a way of ensuring that company employees not only stay with the company but retain a long-range identification of personal interests with company interests. Various company practices like entering-the-company ceremonies, group living during training programs, company trips, company recreation centers, company-sponsored travel, company facilities for private parties, daily ceremonies, and company sports teams are all efforts to maintain a dynamic involvement with the company. Indeed, many Japanese employees are so involved with company activities that they prefer short vacations and even during vacation become restless to return to the daily life of the company.
In most companies, the management makes a very serious effort to look after the long-term interests of the employee, providing personal attention and assistance in dealing with his individual problems. Compared with the American corporation, which tends to be more "dry" and impersonal, Japanese firms do not make such a sharp distinction between business affairs and personal affairs and assume more responsibility for what Americans consider personal affairs.
Japanese executives identify with their employees and take pride in them. When a young executive is traveling or has business with other companies, his superiors make considerable effort to pave his way by contacting appropriate friends elsewhere.
Japanese company executives consider competing for the employee's spare time—against threats of affluence, ownership of automobiles, and shorter working hours—as a key management issue. For this reason they
make every effort to incorporate the spare-time activities of employees within the range of activities provided by the company.
Japanese executives are also constantly concerned about the competition with other companies and make generous use of this sense of competition to inspire employees. Young employees quickly catch this atmosphere of company involvement and sense of competition with rival companies.
Even company ceremonies like anniversaries, commemoratives, welcomings, seeings off, and openings are all consciously designed to reinforce company spirit. The large company expense accounts, which are much larger than in the West, are not only designed to win the favor of people outside the company, but to provide desirable opportunities for those within the company. And company efforts to project lively images are not only for promotional advertising, but also a way of attracting lively, able, devoted employees from among college and high school graduating classes.
The Section as the Company Module
Although there are overwhelmingly similar patterns of administration in Japanese companies and foreign companies, there are some approaches to administration which are perhaps more common in Japan.
In general, it appears that the American executive and his secretary, with possibly some assistants, constitute a kind of module unit within the typical American company. The executive supervises the activities of the somewhat more specialized persons below him, and he is accountable to the rest of the company for everything that is handled within his jurisdiction. In contrast, the basic module of the Japanese company is a section. Personnel are selected for a section in a way that will form a team that can work well together. Team members are matched for temperament and personality as well as capabilities.
The head of the section is always older than the other people working in his section, but he is not necessarily more competent. A section head of moderate ability can be paired with an assistant section head of extraordinary ability. In an American company the second-in-command might feel impatient and frustrated if someone less competent were serving above him, but in Japan the situation works more harmoniously. The Japanese section head, realizing that he possesses moderate abilities, knows that if he does not work well with the abler person under him he will not be able to accomplish the purpose of his section and, hence, will be vulnerable to criticism from superiors. The assistant section head of greater capability will be sufficiently known to superiors that he can be sure he will be rewarded eventually. He also knows that he will eventually rise to higher positions than the person now serving above him, but he also knows that if he hopes to do well in the future, he must get along well with his superior now.
Memos and correspondence in an American office are likely to come from an executive who dictated the letter or memorandum for his secretary to type. In Japan, a more characteristic pattern would be for one, two, or three persons within the section to draw up a document, which is discussed or shown to others for approval and then sent out as a section document. In Japan, there tends to be less of a distinction between secretarial and nonsecretarial personnel, and the duties of various personnel are less sharply defined and differentiated. When one person is out or involved in certain other tasks, it is more likely in the Japanese firm that someone else in the section can draw up the necessary documents in his absence. This pattern places less reliance on any single person and helps ensure that the work of the section will be done even if one or two persons are absent or less than perfectly competent.
Although there has been some discussion in the West on the importance of cliques, no cliques within the Japanese firm are as important for daily activities as is the membership in a given section. The members of a section tend to have close personal as well as work relations, and the superiors in a section, who are almost invariably older, are likely to be supportive and personally helpful to the other members of their sections.
Because companies intend to keep their employees from school graduation until retirement at age fifty-five or so, they are extremely careful in selection procedures. They want to ensure not only that an employee is capable and reliable, but that he has a special commitment to the firm and that he is likely to remain there. For this reason, in addition to difficult entrance examinations, they provide opportunities for a prospective employee to get acquainted with a number of people inside the firm, and they prefer personal introductions, since this increases the commitment of the individual to the firm.
All those entering a company in a given year start on the same day and spend more time with one another than with others as a way of building solidarity. The time of entry into the firm becomes the basic point of ascription for promotion. Time of entry is much more important than age and even ability in determining the basic relationships between superiors and inferiors. Those who entered in earlier classes are superiors, and those who entered later, inferiors.
Members of an entering class generally all receive the same wages. In the first several years there are almost no title and pay distinctions. Newcomers take part in a wide variety of activities in various parts of the company. Thus, before anyone has moved up the ladder to an important position he will have had broad contacts and experience with all parts of a company. As a result, he will be able to understand the complexities of company activities and have a personal basis for effective cooperation
throughout the firm that could not be duplicated by anyone brought in from the outside.
After the incoming group has been in the company for a few years, minor pay differentials may appear, but only after employees have been in the company long enough for their fellows and superiors to have a high degree of consensus about who is more promising. By this time, the incoming class has developed a basic spirit of equality even while recognizing that some among them are more promising. Even after these several years, the initial differentials of pay and position are, in fact, minor, although they may have great symbolic and psychological significance. The abler employees who have been in the company for several years may be assigned to more important sections with more difficult and complicated tasks, but their title and pay may be almost the same as that of their peers who entered with them. A very able young man may become an assistant section head of a very important section at about the same time that a mediocre classmate may become the assistant section head of a less important section. Their pay and titles may be essentially the same, but people within the company are aware of the difference and its significance for prestige and eventual position.
Although emoluments of title and salary are thus based on seniority, the actual task within a section is more closely related to the individual's capacity. The very able young man will be given considerable responsibility despite low pay and title. He will have the informal praise and respect of people around him, which is more than adequate to provide him with the kind of motivation for working hard and doing his best. His role as a promising young man provides terrific motivation. Even though an able young man does not get financial rewards, he expects that he will in the long-run. Although there is no direct short-run relationship between work on the one hand and title and pay on the other, they do mesh in the long-run. Expectations about the future play a very important role in the motivation of individuals at any given time.
The greatest morale problem is among those who are defined as not particularly promising and not promoted to the better sections. Such a young person's superiors generally try to encourage him, communicating that while his performance was not outstanding for the last round of assignments, he still has opportunities. He is then assigned to a new section with entirely different people who were not involved in defining him as a less promising person. In this new section, he thus begins again on his own, and the expectation is that he has a new chance to prove himself, and if he does extraordinarily well, his prospects will brighten. A person is likely to serve in this new position for another period of two or three years, during which the same process may be repeated, and he may then be given a slightly more favorable assignment in the next round.
Although the competition for advancement within a company is strong, the long incubation period prior to the introduction of differentials
provides a basis for solidarity, which—with the reinforcement from company spirit and identification with the company—provides personal support even from the least able and prevents competition from completely disrupting the bonds of solidarity.
Since it does not work well for a person to supervise subordinates who are his age and older, the top executives in the company—the president, the vice-president, and the board of directors—assume their positions only after the peers who entered with them have retired. Thus most employees of a company will be retired at about age fifty-five, and only a small group of top executives, selected from the most promising of their age group, will remain on past this age.
The employees who retire at about age fifty-five to sixty are often placed in "child companies," smaller affiliates, or in other companies somehow related to the main company. Although a person may receive less salary on his postretirement job, he is usually pleased to continue working. Sometimes these smaller companies are created in large part to provide employment opportunities for former executives.
The president, vice-president, and other members of the board of directors who remain in the large enterprise were selected from the very ablest of their age group, and they had long looked forward to the prospect of reaching this pinnacle. When they advance to these high positions, they have unquestioned authority based on superior talent, experience, and seniority. The long period of gestation has given them an opportunity to think through what they would do in office. Although they ordinarily do not hold office for more than a few years, the timing of their period of responsibility was quite predictable by seniority rules, and they are prepared to make the most of their brief term.
Japanese firms prefer to reach a consensus supported by all, but the top executives are capable of making tough decisions when necessary. When they have made reasonable efforts to obtain consensus but there remain two options of about equal weight on which there is no widespread consensus, the executives will generally come down firmly on one side or the other. They prefer to do this, however, only after long debate and discussion and after they have thoroughly explored all the options and all the opinions within the company.
The top executives in a Japanese company prefer to avoid the cool rational presentation of options where advocates neatly present all the arguments for each option. They prefer that an obvious solution emerge from these long discussions with a broad range of company employees so that, when a decision is finally made, the overwhelming majority in the company can see why such a decision is desirable and necessary. In the meantime, the leadership makes every effort to explore all options, sending
employees everywhere to acquire the kind of knowledge and skills that will be required to make the decisions. Oftentimes the leaders will go over and over possible solutions before finally arriving at a decision.
This process can be excessively long, especially if the top leadership is wishy-washy. With weak leadership, it may be difficult for the company to reach any decision if clear-cut choices do not emerge from down below. With active leadership, however, the top people in the firm do not simply respond to people under them, but take the initiative in selecting which problems to work on.
In short, some foreigners who have noticed certain specific practices within Japanese firms have tended to ascribe too much to tradition and to "Japanese characteristics." Decision-making in Japan is, in fact, an active, conscious process, and leadership is much more vigorous and adaptable than many accounts of "Japanese traditions" would indicate.
Emerging Japanese Multinational Enterprises
M. Y. Yoshino
One of the most significant developments in the business scene in the last two decades has been the emergence of the multinational corporations. Until quite recently, this has been primarily an American phenomenon, but now a number of non-American firms, notably European and Japanese, are aspiring to join the ranks. Particularly, the pressures are mounting on major Japanese corporations, both on the domestic and international fronts, to increase their direct foreign investments, which up to this point have been negligible. For one thing, leading Japanese corporations are now confronted with the need to undertake defensive investments to meet the requirements of import substitution policies promoted by a number of developing countries. At the same time, with the rapid increase in the domestic wage level, a growing number of manufacturing firms with labor-intensive production processes are seeking to shift their manufacturing bases to certain developing countries in order to maintain their competitive viability in the world market. The apparel and electronics industries provide a good case in point.
There is another area in which Japanese foreign direct investment is growing. Japan's high dependence on foreign sources for critical raw materials is well known, but until recently the Japanese resource industries had relied primarily on straight purchase agreements with foreign suppliers without equity participation. With the rapid growth of demand for essential raw materials in recent years, it has become increasingly apparent that exclusive reliance on this method is indeed vulnerable; and with their eyes toward attaining a greater degree of stability and possibly
lower cost, major Japanese corporations in resource industries are undertaking investments in exploration and development of critical natural resources. While Japan's total foreign direct investment at the current level is no more than $3.5 billion, only a small fraction of that of the United States, it is nevertheless growing at a rapid rate, and according to a recent forecast prepared by the Ministry of International Trade and Industry (MITI), it will reach the level of $26 billion by the end of this decade. Indeed, there is a widespread view in the Japanese business community that transformation into multinational corporations will represent a major thrust for corporate growth in this decade.
American experience has amply demonstrated that transformation of a domestic firm into a multinational one requires major adjustments in the firm's organizational structure, strategies, and management styles. I have recently undertaken a study of how major Japanese corporations are making their initial efforts toward evolution into multinational corporations. The data for the study were gathered through intensive investigations of the thirty-five large Japanese manufacturing firms that have been most active in developing manufacturing abroad. These firms in total operated nearly two hundred foreign manufacturing subsidiaries in twenty-three countries. While the study has probed several critical aspects, this article will examine changes and adaptations that have been introduced in two important aspects of managerial functions—organizational structure and the decision-making process—as the major Japanese corporations have undertaken international expansion through direct investment.
The demands made on management by the establishment and maintenance of manufacturing bases abroad are different from and far greater than the demands of export operations. Comparatively, exporting is little more than the extension of domestic sales activities, requiring a minimum of adjustment in the organizational structure and management processes at the corporate level. This easy adjustment is particularly pronounced in a typical Japanese manufacturing firm because of the common practice of depending almost exclusively on trading companies for export operations. When, however, the firm establishes its manufacturing base abroad, it is, in effect, creating a microcosm of the domestic organization. Once the manufacturing subsidiaries are created, they must be supported, managed, and coordinated by the parent company. Moreover, those charged with the task of managing a foreign subsidiary abroad must, in essence, assume responsibilities for virtually all basic managerial functions, and furthermore, they face an environment substantially different from that facing managers of domestic operations. Indeed, this is the first time that Japanese management is compelled to leave the comfortable sanctuary of
a familiar and hospitable environment supported by a highly cohesive and homogeneous culture.
The Impact on Corporate Organizational Structure
In a recent study of 187 U.S.-based multinational corporations, Stopford has demonstrated the existence of three clearly identifiable phases in the evolution of organizational structure as a firm expands its international operations. In the first phase, when the international investment is still small, foreign subsidiaries enjoy a considerable degree of autonomy. The second is the phase of organizational consolidation, ushered in by the creation of a specialized unit in the parent company generally known as the international division to serve specifically the needs of international business. The international division is considered an independent part of the enterprise, not subject to the same strategic planning that guides the domestic divisions. According to Stopford, the continued growth of international business becomes so important to the corporation that it can no longer tolerate control solely in the hands of the international division. Pressures mount toward its dissolution, and eventually the international business is integrated into the mainstream of the corporate activities.
My study reveals that at least in terms of structural development, the Japanese corporations have followed a close parallel up to a certain point. Among the thirty-five firms in the sample, five were in the first phase of organizational development, and the remaining thirty were in the second phase; none was found to have reached the third phase. The fact that Japanese corporations are still in the very early phase in their development of international business through direct investment has afforded an excellent opportunity for firsthand observation and analysis of the forces leading to the creation of the international division, and of how, once created, it evolves and seeks legitimacy.
Forces Leading to the Creation of the International Division
In the initial stage of development, the motive for direct investment in most cases is a response to the import substitution program of the host countries. It is an ad hoc and often a reluctant response to a specific threat. As in the case of American corporations, the initial move overseas by Japanese corporations was not made as a part of a grand corporate design or strategy, but was based on an effort to counter a real or potential threat. By the time the third or fourth manufacturing subsidiary is established
abroad, however, pressure begins to build up within the organization which eventually leads to the creation of a group specializing in the company's international activities. Such pressure comes from several different sources.
In the initial stage, the responsibility for international business is assumed, usually tacitly, by the export department. This is reasonable because at this point foreign investment is no more than a mere extension of export activities, and, moreover, the export department is considered to have the necessary skills. If, for some reason, the export department is deemed inappropriate for this function, a popular alternative is the corporate planning group. The assignment is given to this group not because of strategic implications that foreign direct investment may have for the corporation, but mainly because in a number of companies studied, this is the group that is given an unusual and generally nonrecurring assignment that does not fit into any other existing department.
Under either of these arrangements, foreign investment activities are considered rather marginal and are typically carried out on a purely ad hoc basis as the need arises. But by the time a firm develops three or four manufacturing subsidiaries overseas, however small and insignificant they may be, it tends to generate new investment opportunities. Somehow the company becomes recognized in the business community as an organization interested in international business. Some of the new investment opportunities that come to the company's attention can be ignored completely, others may be dismissed with casual investigation, but there are always a few that must be given serious attention. This requires expertise, specialized knowledge, and, most important of all, management time and attention.
As the work load increases, the department to which international business is tacitly assigned begins to search for ways to rid itself of this evaluation responsibility. The group is likely to be already overloaded, and it is not anxious to divert its energy to an activity perceived as marginal. In addition to the evaluation of new investment opportunities, the established foreign subsidiaries, however small, need some support and attention from the corporate headquarters from time to time. Even at the minimal level this can become a burdensome task.
The second source of pressure lies in the established foreign subsidiaries themselves. At the very early stage, they typically enjoy a considerable degree of autonomy, granted not by conscious design, but as a result of indifference and lack of knowledge on the part of the parent company. It is autonomy implicitly granted by default. The relationship between the subsidiary and the parent company is likely to be ill-structured and, to the extent that the relationship exists, it places a heavy reliance on personal ties. In the course of day-to-day operations, however, the management of the subsidiary invariably faces a variety of problems for which it needs assistance, instruction, and support from the parent company. These needs
tend to be tactical in nature, but usually the response must be immediate if it is to be useful. To the great dismay and frustration of the subsidiary management, the parent company is not always responsive to its requests. Sometimes they are totally ignored, but at best the assistance may be delayed or perfunctory. After repeatedly experiencing these disappointments and annoyances, the managements of foreign subsidiaries come to feel a need for an organizational unit at the corporation that will serve as a communication link and a "friend at court" and that will lend sympathetic ears to their needs.
These forces converge in a climate already sympathetic to organizational fragmentation. The permanent employment system and senioritybased promotion practices commonly observed in large Japanese corporations require that individuals be given appropriate status and recognition commensurate with their seniority. Such practices exert strong pressures toward the creation of new sections and departments. During the past few years, however, this tendency toward new sections has been suppressed, though not always successfully, in the name of corporate rationalization; other means devised to accommodate the need for promotion possibilities have been far from satisfactory. Thus, when there is a well-justified cause for creating a new department, such as international activities, the opportunity becomes almost irresistible.
The foregoing represent pressures of a defensive kind. More positive motives are not entirely absent. One such powerful force is an explicit recognition that international business represents a major thrust for corporate growth in the future and that, in order to capitalize on such opportunities, it is essential to create a separate unit to formulate policies and strategies in this area and to coordinate the company's international business activities. Furthermore, more progressive management is well aware that international business needs specialized training, expertise, and knowledge, which, given the Japanese peculiar employment practices, must be nurtured internally. Most commonly, it is observed that the defensive forces exert a strong initial impetus toward the creation of the new unit, the implementation of which is facilitated considerably by the sympathetic organizational climate, with the last factor providing formal justification. Once created, how does the international division evolve with the growth of international business? How does it seek legitimacy?
Evolution of the International Division
Getting Established .—At its inception, an international division is likely to be small, with limited expertise, and its existence is overshadowed by the export department. The freshly assembled staff will have to learn to work as a team and must enhance its limited expertise in the new field. At the same time, the new unit must establish a close working relationship with other organizational units within the corporation.
The initial efforts of the newly created international division to establish itself in the corporate structure are complicated by several factors. For one thing, with the importance which a Japanese organization attaches to informal relationships for task performance, it becomes necessary for the new division to build appropriate relationships with other departments and divisions, and this is usually a slow process requiring painstaking efforts. Another complicating factor is the gap that exists in expertise and experience possessed by the established subsidiaries on the one hand and the new international division on the other. Clearly, the management of foreign subsidiaries view themselves as having knowledge, expertise, and experience in the international field superior to the newly assembled international division staff. The men in charge of foreign subsidiaries are, in a sense, the pioneers and are likely to have little confidence in the ability and judgment of the international division, and, generally, the staff of the newly established division is painfully aware of its own inadequacies. Moreover, established subsidiaries are obviously reluctant to give up the autonomy they have been enjoying prior to the creation of the international division, and resist any actions by the international division that might be interpreted as contributing to the erosion of their power.
For these reasons, the managers of foreign subsidiaries typically expect little from the international division. They view the functions of the new unit as no more than providing a communication link with the parent corporation and performing strictly routine service activities. Certainly, they do not expect policy guidelines in managing their operations. Under these circumstances, the international division has only a limited range of options. It is not in a position to assert itself to dominate the established subsidiaries. It would be sheer folly to do so. The most likely course of action by which the newly created division may win acceptance is maintaining a low posture, avoiding conflicts at all cost, and somehow in the process gaining a minimum of legitimacy to assure its survival. The major thrust of its activities tends to be service oriented. It eagerly processes routine requests coming from the subsidiaries, and attempts to provide whatever assistance in its view the subsidiaries might need. The relationship between the international division and the subsidiaries at this stage tends to be ill-structured and static, since the former has no power to impose an orderly relationship, and the latter, of course, feel no compelling need to establish a formal and exclusive relationship with the division. The initiative for interaction at this stage rests clearly with the foreign subsidiary. It will use the international division only to enhance its own goal, and as it sees fit.
One of the common initial tasks given the international division is to prepare reports on the company's international activities at regular intervals for corporate top management. This requires the collection of certain basic data from the foreign subsidiaries. At the very early stage of development, the international division is so weak that it often has
difficulty obtaining even the most routine data from the subsidiaries in the form required and by the deadline established.
The managers of foreign subsidiaries are likely to continue to communicate with various departments in the parent company through informal networks they had developed prior to the creation of the international division. Naturally, the latter is anxious to become the channel for all communications with the corporate headquarters, but it lacks power to instigate, let alone enforce, such a policy. Moreover, from the viewpoint of the subsidiaries, the circumstances are such that direct communication with relevant groups is more desirable. At this stage, the foreign subsidiaries themselves are likely to be still in an early phase of development as a mere extension and integral part of the firm's export activities. They perform only a minimum of manufacturing activities and naturally they receive almost all necessary component parts and raw materials from the parent company in Japan. Frequent communications are required to facilitate the flow of these materials, and they are likely to be channeled directly between the foreign subsidiary and a relevant group in the parent company, usually the export department. Likewise, in key dealings with the parent company such as negotiations on transfer prices for items supplied by the parent company, it is natural for the subsidiary to take up the matter directly with the export department. Thus, the existing informal communication links are likely to persist with the reluctant acquiescence of the international division.
Let us now examine how the international division attempts to establish its relationship with other corporate staff and line groups. The international division by its very nature must depend heavily on other groups in performing its functions since it possesses few technical capabilities of its own. For example, in evaluating a new investment opportunity, it must rely on the expertise available in several different groups, such as finance, marketing, planning, engineering, construction, and personnel. This high degree of dependence complicates its relationship with other groups, particularly at the initial stage, when the expertise and experience of the international division is limited and close cooperation from other groups is needed. But at this stage, the international business is so small and marginal that the international division cannot provide tangible incentives to those whose assistance is so critically needed. Thus, it must rely largely on their good will and personal relationships, or on their sense of organizational loyalty.
A common strategy followed by the international division in its effort to establish itself within corporate groups is quite similar to the pattern already observed—that is, to emphasize its service functions. It stresses its role as an agent to facilitate smoother flow of information between various corporate groups and the subsidiaries without usurping what may be considered their vested interests or prerogatives. It also attempts to assume much of the time-consuming and less rewarding activities that were
previously performed, albeit reluctantly, by corporate groups. For example, until quite recently, the proposal for a new investment had to be screened by the Japanese government, a time-consuming and frustrating process which no department or individual would relish. This is one of the first tasks that the international division takes over. An emphasis on service orientation avoids conflicts and reduces resistance from well-entrenched and powerful corporate groups, particularly the export department, which may look on the creation of an international division with a certain ambivalence.
Thus, at the initial stage, the international division is strongly service oriented, maintaining a low profile. Certainly at this stage, it plays a very limited role in the areas of policy and strategy formulation.
Quest for Power .—Entry into the second stage is predicated on the continued growth of international business. As it grows, the international division becomes increasingly dissatisfied with its secondary status. Once achieving a cohesive and well-functioning team, the division begins to search for opportunities to extend its control over the foreign subsidiaries. At this stage, there are usually two or three subsidiaries that were organized after the international division came into being, and it is likely that the international division is able to exert greater influence over them. But even with the older subsidiaries, the international division can seize on certain opportunities, such as a change in the management, to increase its control. New managers, if their experience in international business is limited, are likely to look to the international division for information, guidance, and support.
More subtle means of gaining influence are available. One is to lobby for desirable assignments for managers returning from abroad. The Japanese managers overseas, like their American counterparts, often experience certain career dislocations on their return. While continued employment is assured by the very nature of Japanese employment practices, reentry into the mainstream of the corporation may pose weighty problems, particularly for senior managers. Some are fortunate enough to have former associates or superiors in influential positions who have looked after their career interests during their absence, but not all can expect such benefits. The international division, though it may be limited in its power, can perform this career-watching function. In the best Japanese tradition, the demonstration of concern and effort is often as important as the results achieved.
The power of an international division is further enhanced as its capabilities to provide meaningful services and support for the subsidiaries increase. By this time, the core of the international staff has gained substantial expertise and experience in the field. They have been exposed to a wide variety of problems encountered by different subsidiaries. They have also had opportunities to gain firsthand experience by frequent field visits. They can anticipate problems that a subsidiary is likely to face
rather than merely reacting to the requests from the field. Also, by this time the division has enough internal competence to handle many of the recurring problems without referring them to other corporate groups. Even in those cases where outside assistance is needed, the international division can interpret the requests from the subsidiaries in terms that are meaningful to other groups to elicit a more relevant response. Moreover, it has developed sufficient organizational knowledge and personal contacts to be able to tap the right sources of information in the parent organization.
By this time also there emerges the increasing need for greater involvement of the international division in the management of foreign subsidiaries. As the subsidiary grows, it is likely from time to time to face such strategic problems as major expansion of production facilities, diversification into new products, friction with joint-venture partners, or pressures of various sorts applied by the local governments. These problems go beyond routine management, and certainly their solutions call for a competence not generally available in the export department. Also at this point, the once strong relationship between the subsidiary and the export department is becoming weakened or even strained. For a variety of reasons—including growing uneasiness felt by the local government or local partners concerning the subsidiary's continued dependence on the parent company for parts, components, or raw materials—pressures are exerted to reduce imports from the parent company. In addition, local management, including personnel sent from the Japanese parent company, becomes less satisfied with being a mere appendage to the export department and begins to seek its own identity. These developments will lead to a subtle shift in the subsidiary's organizational identification away from the export department and toward the international division. In this process, an informal coalition emerges between the international division and the subsidiaries against the export department.
These forces tend to facilitate consolidation of the international division's power, which has grown out of the secondary role of performing merely routine service functions. The international division now has standardized procedures whereby operating data are regularly reported to it by subsidiaries, and it can openly discourage direct communications between the subsidiary and other parts of the parent company. Persons sent overseas must first be transferred to the international division, from which they are then assigned abroad.
In this stage, however, the international division has not yet been totally successful in gaining a dominant position vis-à-vis the foreign subsidiaries. It has not been able to cast itself in the role of forming policy and setting strategy for international business. New investments are still made without specific policy guidelines and evaluation criteria, and the relationship between the subsidiary and the international division, though closer than that existing in the first stage, still is not well defined. Informal coalition
between the international division and foreign subsidiaries is of limited scope, applying chiefly in relation to the export department. The division's attempt to gain greater self-assertion is likely to introduce elements of conflict in its relationships with the subsidiaries, leading to jockeying for power. The subsidiaries, perceiving threats to their autonomy, become defensive. Also, another type of conflict is likely to appear. In acting as an intermediary, not infrequently the international division is caught in a position of having to arbitrate conflicting interest between the corporate groups and a subsidiary. When the division finds itself in the crossfire, its initial response is naturally to work out a compromise, but failing in this effort, it must take a stand. In this difficult position, the natural inclination for the international division, which is still searching for a greater degree of acceptance in the eyes of powerful corporate groups and operating divisions, is to apply pressure on the subsidiary to conform to the parent company's point of view. Under these circumstances, the foreign subsidiary, already uneasy over the growing power of the international division, is reinforced in its suspicion of the emerging role and organizational allegiance of the division. Thus, the relationship between the division and the foreign subsidiary at this stage can be characterized as fluid, unstable, and ambivalent.
Attaining Maturity .—Only at a third stage of its development, with the attainment of maturity, does the international division finally achieve its long-sought acceptance. Its relationship with subsidiaries as well as with other departments in the corporate headquarters has gained a considerable degree of stability. For the first time, it can exert a major voice in determining international policies and strategies of the company and play a central role in coordinating the activities of foreign subsidiaries. It has become much less vulnerable to pressures from the influential subsidiaries or from powerful corporate units and freer to take its own position toward either group without being overly concerned about the possible impact of its action on its relationship with other units.
To achieve this stage, the company's international business must have developed to a point where the following conditions at least are present. First, the firm's international business activities must have achieved a significant importance. The definition of "significant importance" is elusive. The relative importance of foreign subsidiaries in total company sales and profits is certainly a key consideration, but by no means the elusive one. The phrase implies that, however it is measured in the perception of corporate management, the international business does have a measurable impact on the performance of the corporation as a whole, and the corporate resources committed to international business have become considerable. With the growth of the international business, not only does the number of potential investment opportunities increase, but they tend to become more significant in size, necessitating formal systems of evaluation and screening.
Second, at least some of the subsidiaries have reached a state of maturity and have gone a long way toward achieving self-sufficiency. Their dependence on imported materials and components diminishes, and as a result their relationship with the export department approaches termination; conversely, their dependence on the international division increases substantially. By this time a subtle change in the parent company's point of view also takes place. No longer does it view foreign units as mere extensions of export activities, but as full-fledged enterprises that must be profitable on their own.
The third important development is the growing opportunity as well as the need for coordination and integration of activities among foreign subsidiaries. As the subsidiaries expand and mature, the potential benefits of such practices as product specialization and the crosshauling of certain products among several countries become increasingly apparent. The appeal of these benefits encourages the corporation to move away from a fragmented single-country approach and attempt some semblance of integration, at least among the more mature subsidiaries. Sometimes, such integration is forced on the subsidiaries by pressures from the host countries to export a part of their output. As the subsidiary becomes well established and begins to fill much of the local need, it is likely to come under increasing pressure from the local government to export its products to other countries. Since the overwhelming number of Japanese manufacturing subsidiaries are located in developing countries, such pressures indeed have serious implications for the operations. Here, the international division can perform a variety of useful functions from identifying promising markets, soliciting the assistance of the export department, and setting policies and programs for crosshauling of products, to actually coordinating and managing an integrated production system among several subsidiaries. Building and maintaining an elaborate logistic network does indeed require careful central planning and coordination.
Another element, though sometimes elusive, tends to increase a subsidiary's dependence on the parent company. The great majority of Japanese manufacturing investments are joint ventures in which at least one partner is a Japanese trading company. During the initial stage of development, partnership between the manufacturing firm and the trading company is mutually satisfactory, but as the subsidiary gains sufficient experience and expertise, and increases its self-sufficiency, the trading company's value to the joint venture diminishes substantially. Moreover, given the very ad hoc manner in which the partnership is formed in most companies at the time of market entry, a manufacturing firm is likely to have several trading companies as its partners in different joint ventures. Such arrangements tend to complicate any effort toward integration. Understandably, this changing relationship leads to strains and tensions between the two partners. Many of these conflicts can be resolved, or at least compromises can be reached at the local level, but
more serious ones must be negotiated through the parent company, and in these discussions the international division serves as a focal point.
By this time the international division's capacity to provide meaningful assistance to the subsidiaries is further enhanced by the wider experience of its personnel. For one thing, a number of the staff members in the international division have had at least one foreign assignment, giving them greater insight into problems of local subsidiaries. This increases the division's credibility with the subsidiaries as well as with other corporate groups. Moreover, the managements of foreign subsidiaries are partly staffed by personnel from the international division. Such interchanges of personnel contribute to improved communications.
Only when this third stage is reached does the international division achieve a position whereby it can exert strong influence in shaping policies and decisions in the evaluation of new investment opportunities and the management of established subsidiaries. The division can now openly claim to be the focal point of communication between the subsidiary and the parent company. It can establish and enforce a system of planning that reflects the views of both the division and the subsidiaries. Its suggestions to the foreign subsidiaries for possible improvement are now relevant and respected. And it can now claim to be the main transfer agent of corporate resources and experiences.
Of the thirty companies with an international division, only three such divisions were observed to have reached the third stage of maturity. The international divisions in the remaining twenty-seven companies were believed to be at various points of development in the second stage, which is telling evidence that international operations are still a comparatively recent phenomenon even in leading Japanese manufacturing firms.
The classifications we have proposed here are obviously crude and tentative, and the line of demarcation between stages is much less clear-cut than implied. Nevertheless, it gives a picture of how a new organizational unit evolves in the search for legitimacy. The international division is ostensibly created to manage and coordinate the firm's international activities and to serve as the focal point in the company for its international business, but the study has clearly demonstrated that only in the last stage of development can the division really fulfill this function.
The American experience has shown that even this stability is transitory. As international business gains in its relative importance, it becomes vulnerable to pressures from other interest groups in the corporation, which will finally be resolved in favor of some form of integration into the total corporate activities. As we shall see in the ensuing section, given the peculiarities of the decision-making process in large Japanese corporations, the international division in Japanese corporations is not likely to be as autonomous as its American counterpart even at the very mature stage. It would be interesting to speculate on the impact that the de facto integration achieved through the peculiar pattern
of decision-making will have on the viability of the international division. For example, an intriguing question to be examined by further research is whether or not such built-in integration implicit in the ringi system of decision-making would have a delaying effect on the dissolution of the international division.
Adaptations in the Decision-Making Process
Having examined structural adaptation of corporate organization to the growth of international business activities, let us now examine the extent to which development of international business activities has altered the traditional decision-making method in large Japanese corporations. During the past two decades, Western, particularly American, management concepts have been selectively adapted into Japanese corporations. But it is generally recognized that the very core of Japanese managerial practices, such as the decision-making process, has remained virtually unchanged. This is an area that is strongly culturally bound.
The Japanese decision-making process commonly followed in a large bureaucratic organization is known as the ringi system. The system is often described as the approval-seeking process where a proposal (ringi-sho ) prepared by a lower functionary works itself up through the organizational hierarchy in a highly circuitous, snail-paced manner; at each step it is examined by the proper officials, whose approval is indicated by affixing a seal, and somehow a decision emerges from the process. Such a description, while partially true, does not capture the essence of the system. It represents only a procedural aspect whereby the decision already reached is formally approved. The substance of the ringi system is far more dynamic, and this is the aspect that is relevant to the present consideration.
Indeed, the ringi system defies a neat and clear definition. It is characterized as a bottom-up, group-oriented, and consensus-seeking process. True, the ringi system possesses all of these elements, but its essence is found in the dynamic interaction of all of them. It operates in the climate of the traditional Japanese concept of organization, characterized by ambiguity and elusiveness, where the group rather than individuals constitutes the basic unit of organization, where the task is assigned to groups, and where the functions and the role of each individual member of the organization is virtually undifferentiated. The ringi system is also intricately related to the strong emphasis the Japanese have traditionally placed on implicit understanding. One such consequence is an aversion to explicit definition of organizational goals and policies, and their strong preference for dealing with each major decision on an individual basis as the need arises, evaluating it on its own merits. It is bottom-up in the sense that the need for decision is first recognized by those at the operating level,
typically the middle management. It is group oriented and consensus seeking in the sense that the various interest groups that may be affected by a decision as well as those that must implement it, all participate in the decision-making. A final decision emerges in this process of group interactions rather than being made explicitly by an individual who occupies the formal leadership role. This consensus-building process is carried out through informal means. Discussions, consultations, persuasions, bargaining, or arm-twisting are all carried on through rather subtle, informal, interpersonal interactions.
These dynamic but informal interactions, which characterize every stage of decision-making, are the very essence of the ringi system. From the very early stage during which a decision itself is being shaped, different ideas, and various alternatives, are explored, albeit very informally. Different interests are accommodated, and compromises are sought. At the same time, the process of education, persuasion, and coordination among various groups takes place. Thus, by the time the final decision is made, virtually all the major elements of decision-making except implementation have been completed. Another elusive element in the ringi system is the role of the formal leader. In this system the formal leader is not a decision-maker in the classical sense. In the Japanese organization, while the status of a leader is meticulously defined, his role in the decision-making process is little differentiated from that of other members of the organization. The leader participates with his subordinates in the decision-making process. Thus, the degree to which the leader's view is incorporated into a decision depends largely on how well he is accepted and respected by his subordinates and on the kind of relationships he enjoys with them.
For the ringi system to operate effectively, certain conditions must prevail. First, heavy reliance is placed on informal personal relations. Much of the discussion, negotiation, bargaining, and persuasion are performed through mobilization of personal networks. To make this possible, organizational and physical setting must be such as to encourage regular and frequent face-to-face interaction. Moreover, not only are such opportunities necessary for the process of making a specific decision, but more importantly they are essential to building in the first place and maintaining the personal relations on which the system is based. The need for frequent and close contacts is further reinforced by the very nature of interpersonal relationship in the Japanese cultural setting. Chie Nakane, an authority on Japanese social structure, characterizes the nature of the interpersonal relationship in the Japanese setting as local and tangible. She goes on to note that in order to build and maintain interpersonal relationships in such a system, frequent face-to-face interaction is essential.
Another basic condition to make the ringi system effective is a strong pressure of shared understanding and values among participants. Moreover, they are expected to be totally familiar with the climate of an organization and to have unswerving loyalty to it. Since anything important is not likely to be explicitly defined, the participants in the system are expected to have a good feel for what is acceptable and possible within a given organizational context—how a decision is to be presented, who must be consulted, and how each must be approached. Moreover, communications often take the most subtle forms. In a system where individuals are bound to an organization for their entire working career, disagreements and conflicts on a particular issue must be managed in such a way as not to disturb any subsequent relationship. Communications under these circumstances must be subtle, discreet, and indirect. Participants are required to understand the implication of the most oblique cues. They must be able to read a real meaning into what for outsiders may seem to be a most casual comment. To be able to do so requires a strong sense of shared understanding and common interest.
In large Japanese corporate organizations, shared understanding and organizational commitment are developed in a most elaborate manner. It begins with the recruiting system and is reinforced through subsequent personnel practices. Young men are carefully selected from among the graduates of outstanding universities who have survived a series of rigorous screening processes, and who are already highly homogeneous in their ability, training, background, and values. On joining the company, from the very first day they go through the most intensive socialization process, during which they are indoctrinated with the value orientation of the particular firm. After a number of years, as they go through the well-structured advancement system, they develop a high degree of shared understanding and commitment. In the ringi system, there is no explicit control mechanism whereby the outcome of a particular decision is closely monitored and measured. The eventual outcome of a particular decision becomes known to virtually everyone concerned with that decision, and such knowledge becomes, no doubt, an important input in subsequent decisions proposed by the particular group. Through the presence of a shared understanding and organizational commitment, the participants can be reasonably certain that the decision, once made, will be implemented in the best interest of the organization.
My study reveals that virtually no change has been introduced in the decision-making practice in the international operations of Japan's leading corporations. The basic concepts and practices of the ringi system prevail, in spite of the fact that distance and physical isolation make the workings of the ringi system difficult and less effective. The relative absence of the essential prerequisites have not been explicitly taken into account, and no conscious attempts have been made to devise a different decision-making process for international operations. The authority and
functions of the management of foreign subsidiaries are no more clearly defined than are those of a domestic division. Given this ambiguity, the management of a subsidiary must have almost intuitive understanding of what types of decisions can be made at its discretion, and what must be referred to the parent company. A good criterion, of course, is that if a particular decision requires any significant commitment of the parent-company resources, it must be decided by the parent company, but in practice the question is infinitely more subtle. The subsidiary management must exercise considerable judgment, which, in turn, requires close knowledge of the climate of the parent company.
As is typical in domestic operations, the consideration of a decision in the international sphere almost always originates at the subsidiary level and follows a similar process. The subsidiary managers who are physically isolated and lack ready access to those who could affect the decision at the parent company are seriously handicapped in their participation in the process. Particularly difficult is the initial stage of exploration, perhaps the most critical phase in the entire process, during which views and reactions concerning a tentative idea are informally elicited from relevant groups. Given the very local and tangible nature of human relations in Japan, personal ties, painstakingly cultivated prior to a separation, are bound to suffer during a long absence, and their effectiveness is considerably reduced.
An important task of the subsidiary management is to arrest serious deterioration in personal relationships with relevant members of the parent company. This requires considerable attention and effort. For example, the renewal of personal ties becomes a central concern on trips to the parent company. Moreover, the subsidiary management devotes a considerable amount of time to private correspondence with former associates at the parent company to keep abreast of the climate of the parent company. The effectiveness of these efforts varies considerably among individuals, but they are at best only a poor substitute for frequent and regular face-to-face interaction. Thus, the subsidiary management is much less familiar with the prevailing climate of the parent company, its power relations, and any pending proposals that may have direct relevance to a particular decision soon to be proposed by the subsidiary. Also, it is understandably difficult to participate from a distance in the discussion, negotiations and bargaining necessary for the building of a consensus. Because of these factors, a longer lead time is necessary for the foreign subsidiaries to achieve this purpose. The exploratory stage is particularly difficult and time-consuming, since the subsidiary management has only limited opportunities for face-to-face discussions to assess the feasibility of a proposal, to size up the proper way of structuring and presenting a proposal to increase its chances of acceptance, and above all to obtain implicit commitment of support from relevant groups.
An intriguing question in this connection is the extent to which the
international division can serve as a surrogate for a foreign subsidiary in performing these functions. Here, the patterns vary. If the international division is perceived as weak (stage I), the subsidiary has little choice but to undertake much of the exploration itself directly with the relevant groups in the parent company. Under these circumstances, the division plays only a very limited role. In addition, at this stage, because of the general unfamiliarity with the foreign environment among the headquarters personnel, considerable educational effort is required, and the foreign subsidiary is in a much better position to perform this task.
If the international division is in the second stage of development, the situation can be more complicated since the relationship between the division and the subsidiary is fluid and even strained at times. The subsidiary may insist on assuming many of the functions itself, because it lacks confidence in the division's ability to serve as its surrogate. Also, the subsidiary managers, anxious to minimize their dependence on the international division, may wish to maintain their own ties with various departments in the company. At this stage also, the subsidiary is far from certain as to how much support it can obtain from the international division if conflict in points of view should arise between the subsidiary and a powerful corporate group, and therefore it is anxious to protect itself through direct participation. The international division, however, may resent the subsidiary's direct communication with the parent company and may have gained sufficient power to apply pressures to discourage such a practice. Against these considerations, some form of compromise emerges. Typically the subsidiary and the international division reach an agreement to "cooperate" jointly in the initial exploration. But there are likely to exist unnecessary duplications of efforts, both parties often working at cross purposes, giving rise to considerable tension and confusion.
In the third stage, the international division has attained sufficient power that its support becomes a critical factor in the decision process. Thus, one of the first essential steps for the subsidiary is to assess the views of the international division concerning a given proposal, and only after having received its support, and with its implicit understanding, can it approach other departments. The subsidiary management must also compete for higher priorities and for greater support within the international division among various proposals submitted by other foreign subsidiaries.
Another intriguing aspect of decision-making in international operations is that when an important decision is involved, all the available personnel resources of the subsidiary are mobilized to lobby for that decision. As the senior management of the subsidiary begins its discussion with relevant individuals and groups in the parent company, various staff groups of the subsidiary are also likely to begin their own informal exploratory discussions regarding the particular aspect for which each is
responsible. Typically, these men still enjoy personal contacts with their former departments in the parent company, and they are in a position to engage in informal educational efforts and lobbying for the project. No doubt, informal feedback from the respective units will be reflected in the proposal to assure their approval when it is formally presented. Informal lobbying, negotiations, and discussions will also help fill the informational gap as well as create a sympathetic climate in each group for the decision under consideration prior to its formal presentation. These activities supplement in important ways the efforts made by senior management. Given the cohesive and powerful ties that bind those who have had common experiences and similar organizational affiliations, the personnel of various units in the parent company, whether in a plant, product division, or staff department, are likely to demonstrate a special sense of allegiance to those in the foreign subsidiary they consider their counter-parts. Thus, the plea for support coming from these men tends to be much more effective in mobilizing support than a request routed from the international division or even from the head of the subsidiary. Since in the ringi system, every relevant department participates in the decision-making process and can support the decision with varying degrees of enthusiasm, it is vital to build a sympathetic climate within every unit concerned with a given decision.
As in the domestic situation, the process is gradually formalized only after considerable informal exploration, discussion, and negotiation, during which the tone of the decision is shaped. At this stage, teams may be sent to evaluate the proposal, formal meetings will be called, and technical advice is officially sought. While the inputs from these processes are vital to the refinement of a decision, they seldom alter the nature of the decision itself. Finally, a formal proposal is prepared and circulated for approval and confirmation.
Thus, Japanese management has extended the ringi system of decision-making to international operations with virtually no alterations. It was simply a matter of extending abroad a management practice found effective domestically. In fact, the ringi system is so ingrained a part of the Japanese managerial system that it is highly questionable whether even the slightest doubt has occurred to the Japanese managers concerning the desirability of extending it to their international operations. Surely, it has not occurred to them to examine the basic premises that made the ringi system effective in Japan. Moreover, it is impractical and inconceivable to devise another decision-making system just for the foreign subsidiaries when the major part of the organization is still managed by the ringi system.
The extension of the ringi system to management of foreign subsidiaries has, however, had several immediate as well as long-range implications. Looking first at immediate ones, it has created some practical difficulties for the managements of foreign subsidiaries, because it is they who must
somehow bridge the gap that is created by their physical separation and isolation from the parent company. This diverts their attention from the pressing needs of management of the local enterprise and is often a great source of frustration for them. Furthermore, the decision process can be extremely time-consuming when circumstances require rapid responses. This may result in serious competitive disadvantages for the subsidiary.
Perhaps the single most serious long-term implication of extending the ringi system to international operations is that it makes the participation of non-Japanese nationals in the decision-making process extremely difficult, if not impossible. For one thing, most of them lack skills in communication sufficient to enable them to engage in these rather subtle interactions. Even more basic is the absence of a shared understanding and credibility. Significantly, the Japanese nationals who are recruited in foreign countries are almost as seriously handicapped in this regard, and they are almost invariably relegated to secondary roles in the Japanese corporations abroad. Japanese management is a closed, local, exclusive, and highly culture-bound system, and the ringi system epitomizes it. Only those who have gone through the most intensive socialization process at the corporation headquarters for a sufficient period of time can meaningfully participate in the ringi system.
A closely related and fundamental implication is that the ringi system requires the management of the subsidiary to be heavily staffed by Japanese nationals from the parent company. Indeed, my research reveals that the Japanese subsidiary tends to have a far greater number of personnel from the parent company than similar subsidiaries of American or European corporations. Not infrequently, virtually all line and staff positions down to the middle-management level are filled by Japanese nationals from the parent company. The ringi system is not the only reason, but no doubt it is an important one. For one thing, the senior managers sent from the parent company are products of the ringi system and unfamiliar with any other system of management. The concept of formal delegation of authority is foreign to the Japanese managers, for they are the product of an organizational climate in which authority and responsibility are ill-defined and often implicitly assumed by subordinates in the traditional manner. Where authority cannot be delegated with any degree of explicitness, the participation of local nationals in the management process is extremely difficult.
A large complement of Japanese are also required for effective participation in the corporate-wide ringi system. The presence of representatives of key functional areas is highly desirable, if not essential, for effective communication and lobbying. The performance of such tasks by local nationals would be all but impossible.
The foregoing factors make Japanese foreign subsidiaries extremely vulnerable. For one thing, they are already under serious attack in a number of countries for their heavy dependence on Japanese nationals.
Continued reliance on this practice prevents Japanese corporations from having ready access to high-talent manpower resources in the host countries, and it will obviously place a heavy strain on the managerial resources of the parent corporation. This strain places an inherent restriction on the growth of Japanese corporations in the international field. Serious efforts are now being made in a number of Japanese corporations to replace Japanese managers with local nationals, but unless rather fundamental changes are made at the very core of the Japanese managerial practices—not only in the foreign subsidiaries, but also in the parent company—local nationals will always be relegated to a secondary status.
A bold forecast now predicts the rapid growth of Japanese foreign direct investment in the next decades, but the feasibility of attaining this growth depends, among other things, on one critical development: that the Japanese depart from their highly culture-bound managerial practices and evolve a system more relevant to other cultures. Is Japanese management capable of achieving such a basic adaptation?
The Japanese ability to adapt foreign concepts, institutions, or technology to the Japanese setting on a selective basis with a minimum of social disruption has been well demonstrated throughout the nation's history. This ability has been credited as a major factor responsible for the remarkable results achieved during the past century in Japan's rapid modernization and industrialization. Those who are familiar with Japanese practices in this regard are aware of the fact that the process goes far beyond stereotyped imitation. It is much more dynamic. What is now demanded of Japanese management is just the reverse of their time-tested practices. Can the Japanese achieve a similar success in adapting their system to accommodate heterogeneous cultural elements and make it relevant to diverse environmental settings?
The Japanese management system has evolved in a homogeneous, cohesive, and insulated environment and it is therefore strongly culture-bound. As a means for organizing and motivating people, it relies more heavily on culturally induced values and less on explicitly defined formal organizational mechanisms. This presents a striking contrast to the American pattern where, among other things, the need to cope with rather heterogeneous and diverse values gave rise to a management system which relies heavily on formal and explicitly defined organizational structures and control systems. Compared with the Japanese, the American system is less culture-bound, has greater flexibility, and has a considerable degree of tolerance for heterogeneous elements. It is not unreasonable to suspect that this has been a factor in facilitating the international expansion of American corporations. In contrast, the Japanese management system, which has been so effective within Japan, has only very limited tolerance for heterogeneous elements. Since the very strength of the Japanese system derives from the highly homogeneous and strongly shared values, the
introduction of heterogeneous elements to any significant degree is likely to be disruptive and disintegrative.
Japanese management faces a serious dilemma. In order to undertake major expansion internationally, the Japanese must bring about basic changes in their management system. The extent to which they can achieve such a feat is by no means certain. But, more important, in the process they may well lose those very elements which have made their system so effective internally. The optimist would cite the remarkable ability of the Japanese to achieve what appears impossible through their ingenuity and diligence; he would also point to the great success of the Japanese in selective assimilation of foreign institutions and technology. Clearly, however, what is demanded now of Japanese management is fundamentally different from the adoption of certain elements of foreign cultures into the tight and homogeneous cultural setting. The past offers no assurance in this regard, and the outcome is by no means certain.
Decision-Making in the Japanese Labor Unions
Japanese Union Organization
Two fundamental factors determine patterns of decision-making in Japanese labor unions. First, Japanese unions have a short history compared with those of other advanced industrial nations. Second, Japanese labor unions are generally organized on an enterprise-wide basis rather than according to trade or industry as in the United States.
Labor unions were not free to organize in prewar Japan. Even in 1936, at the apex of prewar union organization, union membership totaled only four hundred and twenty thousand, constituting only 7 percent of all employed workers. This low rate of unionization resulted not only from pressure exerted by government and employers, but also from instability caused by ideological controversy within the unions. On the whole, these prewar organizations lacked the capability to engage effectively in collective bargaining.
Under the protective policy of the early stages of the American Occupation, the Japanese union movement progressed rapidly. As democratic thought—imposed by the Occupation authorities—was a concept alien to Japanese workers and employers, industrial democracy as an overall system of thought and behavior is still not firmly established. However, both workers and employers in postwar Japan adjusted rapidly and, for the most part, successfully to the concepts and institutions associated with union legitimacy and collective bargaining.
Japan's labor unions have continued to expand since World War II,
particularly under the conditions of rapid economic growth since 1960. In June 1971, union membership stood at 11,684,000, a figure second in the Free World to that of the United States. The present rate of organization in Japan is 35 percent, exceeding the rate in the U.S. and equaling that in West Germany. Peculiar to the Japanese situation, however, is the dispersion of this great industrial power among thirty thousand separate union organizations. More than 90 percent of Japan's organized workers are in so-called enterprise unions. Unions conforming to the Western concept of craft and industrial organizations are rare exceptions.
Enterprise unions have several distinctive characteristics. In the first place, eligible members are limited to workers and staff with regular employee status in a specific enterprise. Second, an enterprise union, in principle, excludes those who represent the interests of management, and it exists as the sole representative of all regular enterprise employees; workers are not organized separately for different crafts or occupations. With few exceptions, both blue-collar and white-collar employees are grouped in the same organization, and this practice certainly has some merits: unionization of white-collar workers in Japan has been easier than in other industrialized countries where the tradition of blue-collar unionism is strong; and the enterprise union can utilize the knowledge of white-collar workers to formulate union policies and to strengthen its position in the negotiation with management.
The same feature, however, may give rise to internal conflict between the two groups, which, as is often the case, may develop into a split in the union with white-collar workers taking the lead in forming breakaway unions. In Japanese unionism the idea and practice of sectional representation and separate bargaining units are almost nonexistent. The practice of decision-making through majority vote is coupled with the concept of egalitarianism, which is pervasive among union members; in the unions, much as in other Japanese organizations, "democracy" is synonymous with "egalitarianism." Some white-collar workers, particularly knowledge workers in the higher professional, technical, and administrative categories, tend to be dissatisfied with the union and its policies. They tend to become more committed to the management side than to the union side.
Third, enterprise-union officers are elected from the employee list of a particular enterprise. Accordingly, professional union leaders are comparatively rare in Japan. Fourth, an enterprise union is an autonomous organization whose sovereignty is recognized within the whole union power structure. Enterprise unions generally affiliate to form federations on an industry-wide or regional basis, and these bodies in turn affiliate to form national centers. Although national centers and industrial federations are becoming increasingly significant, they seldom have the power to control or sanction the policies, activities, or management of individual enterprise unions.
Although Japanese enterprise unions are generally organized on a
relatively small scale, this does not mean that there are no large unions in Japan. Of all Japanese labor unions, 60 percent are in enterprises of more than one thousand employees, and some enterprise unions have more than fifty thousand members. Industry-wide federations with more than twenty or thirty thousand members are not unusual. Bureaucratization is inevitable in organizations of such size.
Despite the relatively short history of Japanese labor unions, their activities are more diverse than those of American "business unions" in the sense that Japanese unions are more heavily committed to political activities such as national and local elections, legislative action, the socialist party, and peace movements than their American counterparts. The influence of the Japanese Communist Party (JCP) is also quite strong in the unions, often resulting in severe internecine ideological warfare.
Procedures and Mechanisms of Decision-Making
In order to understand the processes involved in union decision-making, it is first necessary to identify the types of institutions involved in union government and their peculiar characteristics. Generally, institutions of union government and administration can be divided into legislative and executive bodies. There is little difference between Japanese and American unions with regard to the types of institutions that exist and the formal[*]
and functional relationships between them. Several differences are apparent, however, in their operational styles and in the distribution of power among the various organizational levels. On the whole, in Japan these differences reflect the ascendancy of legislative organs over executive councils and the predominance of collective decision-making. This means that the scope of decisions left to the discretion of the Japanese union leaders is relatively narrow. Popular control takes precedence over administrative efficiency.
The Union Convention
As in the United States, the highest authority in the Japanese union power structure rests with the union convention. The convention has sole power to revise the union platform and constitution, ratify activity reports, set action programs and administration policy, elect officers, perform budgeting and accounting tasks, decide on strikes, ratify collective agreements, and take disciplinary action against officers or members. There is little difference between Japanese and American unions with regard to the formal and constitutional requirements governing the role of the convention in union government. Nevertheless, the management and procedures of the convention are unique in Japanese unions.
In the first place, Japanese unions have more frequent conventions. Union organizations on all levels convene at least once a year. In fact, Japan's labor union law specifies that in order to qualify as a registered union, an organization's constitution or bylaws must provide for annual conventions. This law was promulgated in order to ensure democratic administration, but legal prescriptions aside, annual conventions are a minimum prerequisite for the smooth operation of a Japanese labor union. Most unions find it necessary to have several extraordinary conventions each year in addition to the plenary meeting. This is because conventions offer union executives an opportunity to forge a membership consensus through debate among their own membership or among affiliated unions, and to test the balance between status quo supporters and opposition forces.
Hence the habit of frequent conventions is not based on such ideological or ethical considerations as respect for democracy or the principle of decision through mass participation and debate. Rather, it is due to organizational weakness caused by the internal contradictions pervading Japanese enterprise unionism. On the enterprise level, various employee interest groups form coalitions and conflicts with other groups: white-
collar versus blue-collar, young versus old, well-educated versus poorly-educated, those who are intensely loyal to the firm versus the disloyal, those with higher seniority versus those with lower seniority, and so on. In addition, there are divisions based on ideology and political factionalism.
At the industrial-federation and national-center levels, splits frequently occur over such factors as differences between unions in large and small enterprises; conflicts of interest among unions that belong to competing enterprises marketing the same type of commodities or services; incompatibility between unions in the private and public sectors; and confrontations based on loyalty to contending political parties and ideologies. These conflicts often lead to organizational splits and lend a distinctly political coloring to the decision-making process in Japanese unions. Frequent conventions are essential to ameliorating these conflicts through conciliation and compromise, and forming a new consensus.
The second peculiarity of Japanese union conventions concerns quorum requirements. In general, the constitutional quorum requirements are comparatively strict in order to prevent manipulation of the convention by the leadership or by a vocal minority of the membership. In the United States, even the United Auto Workers, noted for being particularly democratic, requires only "twenty-five percent of all the delegates seated at an International Convention" to constitute a quorum. The interval between conventions in American international unions is longer than in Japan, but most local membership meetings take place once a month. As far as I know, the most rigid quorum requirement for a local meeting in the U.S. seems to be about 25 percent of the membership, and in some locals, meetings are held with only about seven members present including the executive officers. Some American locals do not even have a quorum requirement.
In Japan, however, on the national, industrial, and plant levels, a quorum is generally two-thirds of the eligible delegates or, in the case of small local unions, two-thirds of all the dues-paying membership. Despite growing apathy among young Japanese union members (which has not yet reached American levels) almost all Japanese unions closely adhere to quorum regulations. One reason is that enterprise unions can hold meetings on company premises, where it is easy for members to attend. A more important reason is conflict among various groups or factions in the union or federation; if quorum requirements were lax, certain groups could be over- or underrepresented, upsetting the balance of forces. Third, the leaders need the convention as a mechanism for achieving the greatest possible majority of supporters.
Another distinctive characteristic of Japanese labor conventions is the system for selecting convention chairmen. In the United States, almost without exception and regardless of the level of union organization, the
union president automatically becomes the chairman of the convention. In most cases, he is also empowered to appoint members of such important committees as resolution, credentials, constitution, auditing, order of business, and grievance. As convention chairman, he even has the right to call on speakers from the floor. Such a one-man concentration of power would be unthinkable in a Japanese convention. Japanese unions make a great effort to keep the legislative, executive, and judiciary functions separate in order to avoid concentrating power in a single individual or office.
The purpose of the Japanese convention is to examine, evaluate, and criticize the actions of the executive committee. The president along with the entire executive committee, which he represents, is put in the role of defendant. Thus, the president would not be allowed to take the chair in order to manage the convention in a way advantageous to the incumbent executive committee. Convention chairmen are chosen on an ad hoc basis by vote of representatives or of the entire membership. On the industrial-federation and national-center levels, a "body of chairmen" is often chosen rather than a single individual—a further act to reinforce or correct the existing balance between contending factions and interest groups in the organization. The elected chairman, or body of chairmen, has supreme authority over convention management; the executive officers therefore are temporarily subjected to his control. Of course, when the president has the support of a majority of the union membership, the delegates will most likely choose a chairman acceptable to him. He is then able to manage the convention from behind the scenes, and in fact this is common. Nevertheless, there are comparatively fewer opportunities in Japan for manipulation by strong leadership.
Intermediate Legislative Bodies
Another peculiarity of the government and administration of Japanese unions is the widespread use of interim legislative bodies in national centers, industrial federations, and even the large-scale enterprise unions. These intermediate bodies have supreme authority over governmental and administrative matters in the interval between conventions. They are usually convened either to alleviate the financial burden of frequent plenary and extraordinary conventions, or to cope with emergency problems which cannot wait for convention decision. They have various names, depending on the union: chuo[*] iinkai (central committee), hyogikai[*] (council), and daihyosha[*] kaigi (representative conference). The frequency of their meetings varies, but most union constitutions stipulate two to six meetings a year. Power to convene intermediate bodies rests with the union president, and he usually assumes the chairmanship. Most union constitutions specify the range of issues to be decided by the union conventions and intermediate bodies respectively and prescribe the
relationship between the two bodies. The intermediate body acts both on matters explicitly delegated to it and on matters that require immediate decisions, but must be ratified by the union convention afterwards. Generally speaking, decisions made by the intermediate body are minor compared to those reserved for convention decision.
The jurisdiction of the intermediate bodies vis-à-vis the convention is sometimes only vaguely delineated, and their spheres often overlap. Both organs ascertain the will of the membership, reconcile opposing opinions and interests, and set official union policy; this union policy, in turn, guides and regulates the activities of the executive committee. The intermediate body serves as a sounding board for the rank-and-file's reaction, evaluations, and criticisms of the executive committee. Accordingly, it is not unusual that executive officers ask for a vote of confidence from the intermediate bodies.
The Executive Committee
The executive committee is responsible for putting into effect the policy resolutions passed by the legislative organs, but its specific jurisdiction is often not clearly defined. Theoretically, the executive committee has authority over all affairs of the union that are not specifically delegated by the constitution to the legislative bodies. Furthermore, to the extent that the handling of a given matter is not provided for specifically in the constitution, the executive committee is free to determine whether it will consult a legislative body. On the whole, however, union executive committees are careful, even timid, about exercising their prerogatives. In addition, there are several specific restrictions on their rights and duties.
In contrast to the American practice, Japanese executive committees are standing committees which operate under the principle of collective decision-making. In collective decision-making, the individual rights and jurisdiction of top leaders, such as the committee chairman (union president) and secretary-general, are often ill-defined. Hence the executive committee also meticulously avoids concentration of power and authority in one or a few men or offices.
In the AFL-CIO and most American international unions, the executive board, or executive council, is not a standing body, and meets only two, four, or at the most six times a year. In other words, its role resembles that of the Japanese intermediate legislative councils. Although these American bodies are called executive boards, they actually act as advisory councils to the top leaders—the president and secretary-treasurer. Since they are not standing committees, they do not require full-time members. Their members attend meetings and offer their services on a part-time basis. This is the case in most unions in Great Britain as well.
In Japan, however, executive committees are standing committees, and according to union constitutions, must convene at least once a week. Many
of their members are full time and, just as in a government cabinet, each member is responsible for a certain area of union affairs; executive committee members head various departments, including finance, education, planning, research, wages, and organization. In addition to regular meetings, the committee can be convened at any time, and in principle, any important issues that come up to the executive committee are decided by an agreement of at least a majority of the members.
The specific and exclusive power and duties of Japanese executive officers are not clearly defined, although the authority of the union president and secretary-general is more narrowly limited than in American unions. In the collective decision-making process, the officers are on an equal footing with ordinary committee members. The constitutions of many unions set forth the jurisdiction and duties of the president in an abstract and vague manner: "to coordinate union activities and represent the union." Even where presidential duties are spelled out in more detail, they are usually limited to activities such as convening the convention and central committee and signing the agreements, contracts, and official documents issued by the union. The vice-president aids the president and represents the union in the president's absence. The secretary-general is responsible for carrying out the daily business of the union, coordinating the activities of the specialized departments, keeping records of meetings, storing union documents, and so on.
Judging from union constitutions, the jurisdiction of top union leaders often extends only to a bare minimum of essential union business. The main decision-making and executive functions are carried out collectively by the officers through the executive committee, avoiding concentration of power in individuals. At the same time, the principle of shared responsibility operates in all the executive organs.
Psychological Factors in Decision-Making
We have seen two areas in which the rank and file have strict direct and indirect control over decision-making by union leaders: in the structural forms and administrative practices of the legislative and executive organs; and in the distribution of power among the levels of union organization and among union officials. As Sidney and Beatrice Webb have pointed out, the conflicting needs for popular control and administrative efficiency have shaped the history of the labor movement. In the Japanese case, it appears that administrative efficiency is sacrificed to popular control. One reason for this is the structural weakness of unions organized on the basis of enterprise. In addition, however, there are certain psychological factors which prevail in the Japanese union movement.
The Psychology of Group Orientation
The first psychological factor of significance is the marked "group orientation" pervading all organizations in Japanese society, including unions. There is a tendency to resist any special privileges or responsibilities that would distinguish between one member, or one group faction, and another. Most leaders fear being isolated from rank-and-file membership and whenever possible seek a membership consensus. In other words, they try to prevent open confrontations over conflicting opinions or interests between leaders and members, or among the members themselves. The members expect their leaders to follow the principle of collective, consensus-oriented decision-making, and leaders who fail to meet their expectations in this regard tend to lose their positions. Before a leader hands down a decision, he listens to the opinions of other leaders and members, tries to reconcile differences, and gets as many others as possible to participate in the decision-making process. This is what the labor movement calls the "mass line" or "mass debate." When a decision is made collectively, the responsibility is widely shared.
Hence the union democracy ideally conceptualized by Japanese union members and their leaders is similar to the "primitive democracy" discussed by the Webbs: "In this earliest type of Trade Union democracy we find, in fact, the most childlike faith not only that 'all men are created equal,' but also that 'what concerns all should be decided by all.'" Most Japanese union leaders as well as members are far from childish; the unions, in fact, diverge from this type of "primitive democracy" as their organizations get larger and their functions diversify. A certain degree of bureaucratization is inevitable. The faith, however, that "what concerns all should be decided by all" is retained in the deeply rooted belief that important decisions should be made collectively by committee members or a delegates' meeting duly elected by all of the membership.
Distrust of Union Leaders
Another important psychological predisposition derives from the ideological conflict of the prewar union movement. Prewar leftists, particularly Communists and their sympathizers, often attempted to undermine confidence in rightist labor unions. In line with a strategy of "boring from within," they sometimes launched individual attacks on rightist union leaders to discredit them in the eyes of the rank and file. A favorite expression of leftist vocabulary at that time was darakan (corrupt leader). The term was used to slander labor leaders by implying that they had sold out the workers in order to reach a modus vivendi with the government, police, and employers; that they were making illicit profits; or that they
ran their unions in an authoritarian manner. These "corrupt leader" attacks became common in early postwar Japan as well. Most of the slander had no basis in fact, but it had strong appeal, given the predisposition of the average Japanese worker. The workers often mistrusted the leaders and were quite receptive to suggestions that the leaders, if given broad powers, would put their own interests before those of the workers they were supposed to represent. This frame of mind has led to the belief that the rank-and-file members and their representatives must seek to observe and control even the day-to-day decisions and activities of their leaders. The leaders themselves often attempt to avoid "corrupt leader" charges by restricting the scope of their leadership and authority as much as possible. The leaders, too, have benefited from the system of collective leadership, because collective sharing of power renders the role of the leader less responsible and thus less hazardous.
Respect for Institutional Prerogatives
A type of authoritarianism does prevail in Japanese unions. If we may exaggerate somewhat, the respect commanded by a given decision does not stem from the sagacity, insight, appropriateness, speed, or rationality of the decision itself. Nor is it a consequence of the great past accomplishments of or respected position of the individual leader who supposedly made the decision. Rather, the legitimacy of the decision hinges on whether it was processed by the appropriate governmental organs of the union—convention, intermediate legislative body, or executive committee—via the duly established and orthodox procedures. If the decision is made "by action of the convention," or "by action of the central committee," and passed with the proper formalities and procedures, it will be granted full legitimacy and respect.
How thoroughly the convention or committee debates the content of the decision and how large a majority of the membership participates in the discussion are only secondary considerations. What matters is the consensus effect—whether the action of the union's highest legislative organ confirms the support of all, or at least a majority, of the membership and affiliated unions. In other words, even though collective deliberation by union organs is often nothing but ceremonial play-acting, this formality constitutes an important criterion for legitimacy. In fact, ceremony often covers up for the leadership's lack of persuasiveness and the membership's shortcomings in comprehension.
Actual Operation of the Decision-Making Machinery
Needless to say, the system for decision-making in Japanese labor unions includes much administrative inefficiency. The Japanese union decision-making process is often criticized as excessively time-consuming. During collective bargaining, for example, the management side is often irritated by the inability of union negotiators to reach a decision among themselves. The more urgent and important a problem is, the more likely the negotiators are to postpone discussions in order to consult with the committee. Such irritation is often shared even by the public-interest members of dispute-settlement machineries.
Excessive decision-making time means inefficiency in the use of manpower and finances. The total amount of money spent by Japanese labor unions, in real terms, seems greater than that used by unions in many countries of Western Europe; in comparison with wage levels, it exceeds even that required by American industrial unions such as the United Automobile Workers and the United Steel Workers. A large portion of Japanese union expenditures goes for the salaries of full-time officials; Japanese unions usually have one full-time official for each three to four hundred members—a rate unheard of except in Japan and the United States. Furthermore, craft unions, which are the major cause for such high figures in the United States, do not exist in Japan.
A considerable part of the manpower, time, and energy of Japanese unions is spent planning, preparing, and recording the countless meetings required to deliberate and produce policy decisions. One of the largest items on the union expenditure list is conference costs—the charges for renting meeting halls, delegates' travel and accommodations, communications, and so on. Inefficiency in the use of manpower, finances, and other resources is among the most difficult problems faced by Japanese unions. It is not, however, frivolous waste. Rather, it is an essential cost for maintaining the solidarity of union members.
The decisions made through these inefficient procedures are not as rigid as usually thought; they do not restrict the freedom of judgment and action of the union leaders as severely as might be supposed. Often, in fact, the decisions are impractical. Accordingly, there are times when the decisions are respected, but not observed. This is especially true of decisions regarding collective bargaining.
How an Actual Decision Is Made
The best example of the actual decision-making process occurs annually during the spring "wage offensive," when decisions concerning wage
demands are made. The process is a complicated one. The wage proposals discussed at workshop and plant level membership meetings are collected by the headquarters of the enterprise union. The executive officers make proposals based on information on the labor market, commodity prices, living costs, enterprise profits, and wage levels in other industries and enterprises. These proposals are communicated down the organization hierarchy to the membership below. Industrial federations, affiliated unions, and national centers cooperate in collecting information.
After this process of information exchange is completed, a union convention is held. The executive committee makes a proposal, and after discussion by the assembled delegates, the union wage-hike policy is formulated and issued. It may say, for example: "We demand the employer grant an average monthly wage increase of over ¥15,000 per worker. Should we fail to receive this amount, we will go on a strike of unlimited duration."
After reaching a decision, the convention delegates and executive committee swear solidarity and announce their determination to succeed. On the plant level, workers wear armbands or headbands with slogans like "Yokyu[*] kantetsu " (Achieve our demands), and perhaps hold demonstrations. Nevertheless, everyone knows that the wage-hike decided on at the convention can never be achieved, and also that the union will not resort to an unlimited strike.
The wage demand decided on at the convention is conveyed to the management side, and collective bargaining begins. In the interval before management replies to the demand or makes a counterproposal, the union may execute a strike of four to twenty-four hours' duration. This strike is to hasten management's reply or to tell management, "We really mean it!"
In order for negotiations to proceed, however, the union must revise its wage demand to a more realistic figure. At this stage, the central committee, or even an informal representative conference, convenes and decides on a "Realistic Wage-Increase Proposal" along with a schedule of strikes and other tactics. This time, the original demand for a ¥15,000 increase falls to ¥12,000. The original vow to carry out a "strike of unlimited duration" is dropped in favor of a plan for a series of twenty-four hour strikes. These intermittent, short strikes are used to force up the amount of counterproposals from the management side.
As a result, the positions of management and the union begin to approach each other, and the bargaining reaches the crucial juncture when the union will make its final decision. The management side will have already made a final proposal of, say, a ¥10,000 increase (both management and union make repeated use of "final proposals," but this one is really the last). The union side, at this point, must decide to accept the wage-hike offered by management and terminate the struggle, or to reject the proposal and initiate a much longer and more difficult strike with a limited chance of achieving gains. This decision is made either by
the executive committee itself or by an expanded central struggle committee. This is the time when the leadership capabilities of the top leaders are displayed. A leader's intuition, analytical skill, and judgment become crucial; he must assess such factors as the mood surrounding the negotiations, the relative bargaining power of union and employer, the ability of the union to persevere in a long strike, the movements of anti-mainstream groups within the union, the benefits that may be expected to accrue from a longer strike as against the possible losses, and so on. Then he must be able to persuade his fellow committee members of the wisdom of his position.
The members of the executive committee or the central struggle committee finally reach agreement, and the struggle is usually terminated. The executive committee then must convene a meeting of the central committee, or a convention, to explain the course of the negotiations and seek membership approval for the decision reached. The necessity for compromise has considerably reduced the original wage-hike figure decided on by the convention, and instead of a strike of unlimited duration, only a few short strikes have been called. In order to improve the management counterproposals, the executive committee may have made concessions on working conditions that had not been approved in advance by the convention. These moves have flaunted the sacred "collective decision by convention or central committee."
The executive committee members who have committed these infractions must be examined by the central committee and their "misdeeds" sanctioned. When we remarked earlier that the executive committee is placed in the position of defendant during conventions, we were referring to this type of situation. Here, too, is a crucial test of the executives' leadership qualities. The leaders explain the reasons for their decisions to the assembled delegates and seek to persuade them of the inevitability of the results. Regret over the "executive's failure to abide by the convention's "decision" prompts "self-criticism" and a vow to do better in the future, but sometimes the dissatisfaction of antimainstream, opposition elements in the union cannot be easily dispelled. If the executive committee feels that, as things stand, the convention will not ratify their actions, the committee calls for a vote of confidence in the leadership. This time, they go on the offensive. The membership is forced to decide whether to express overall confidence in the incumbent leadership, and hence ratify their specific decisions, or to vote them out and accept the leadership of an anti-mainstream group. In either case, the convention or central committee itself makes the decision.
The intellectual capabilities, eloquence, and persuasiveness of the leaders influence decision-making at the convention and central-committee levels,
but these qualities are not entirely sufficient. Since decisions of the legislative councils are by consensus or majority vote, the top leaders must engage in various political maneuvers to obtain majority support. The executive officers are weak in statutory rights and duties, and decisions are made collectively; hence, it is essential that the officers retain the support of their trusted factions and caucuses. If the leader's faction does not command a stable majority, he must negotiate with other factions, even those in overt opposition, in order to move the convention in the desired direction. Hence, behind-the-scenes negotiation or, as it is termed in Japanese, nemawashi (binding the roots of a plant before pulling it out), is carried out prior to the formal debate and vote. In many cases, the formal decision on the floor is little more than a ceremony to confirm the decision already reached behind closed doors. In such cases, decision-making is done in places and through procedures totally unknown to the rank-and-file union member. Great ability and wisdom in such political maneuvers is one of the most important qualities of a union leader. If a leader has majority support, violations of decisions collectively made by the convention, or even unilateral changes in policy in the course of collective bargaining, will usually be accepted by the rank and file.
Decision-Making at the National Level
National industrial federations have become increasingly involved in collective bargaining, although their role is generally still confined to coordination of the policies and activities of their affiliated unions on an industrial level. The national centers such as Sohyo[*] (General Council of Trade Unions of Japan) and Domei[*] (Japanese Confederation of Labor) also play an important role in shunto[*] (the annual "spring wage offensive" for wage increases). Particularly Sohyo, which jointly with Churitsuroren[*] (Federation of Independent Unions) organizes the Joint Struggle Committee for shunto , is responsible for setting common targets, exchanging information, and organizing a scheduled united drive of affiliated unions which includes mass meetings, demonstrations, slowdowns, and strikes. However, Sohyo and other national centers do not take part in collective bargaining. It has been very rare, at least so far, for Sohyo's[*] top leaders to meet and negotiate with the prime minister or cabinet ministers to settle a general strike of the transportation and communication industries.
While some of the characteristics of union decision-making described thus far are also applicable to the national centers, the national centers have some unique characteristics of their own, since their function is more political than economic. This is particularly true of Sohyo, which, unlike Domei and Churitsuroren, is composed largely of unions in the public sector—those of national and local civil servants including teachers, and employees of public corporations such as railway, postal service, telecommunications, and national forestry. Union members from the public sector
constitute two-thirds of all Sohyo[*] membership, and their activities are intrinsically politically oriented, since their employers are government or semi-governmental agencies, which limit or forbid the unions' right to bargain or to strike.
One of Sohyo's[*] most difficult and controversial decisions is on which political party to support. The decision is simple for Domei[*] because it is committed to support only the Democratic Socialist Party (DSP), but Sohyo's convention must decide whether to support only the Japanese Socialist Party (JSP) or two parties—Socialist and Communist. Socialist party supporters have a caucus called the Socialist Party Members Council, which has been able to command the majority position so that they have been called the "mainstream faction." Communist party supporters also have their caucus, and they join with non-Communist leftists to form the "antimainstream faction." In addition, there is another group of unions from private industry which supports the DSP, but this group is of minor importance compared with the other two factions.
In every Sohyo annual convention, open strife takes place on the floor between the two factions over the issue of supporting a political party. In such a highly ideological issue there is no compromise. Unlike the issue of wage increase, the executive officer cannot make the kind of proposal that is accepted by the convention but later actually modified or negated. The choice between the alternatives can only be decided by taking a vote of the delegates to the convention.
The vote is taken in two ways. One is the vote cast by individual delegates, who are allocated to each affiliated organization in accordance with the number of its registered (Sohyo dues-paying) members. In this kind of vote, big organizations with hundreds of thousands of members have the decisive power. The second type of vote is for each affiliated organization to cast one vote as a single unit. This type of vote is designed to counterbalance the power of big unions.
Naturally, the two factions compete with each other in various ways to attract unions and their delegates to their respective sides as effectively as possible. Therefore, this process of decision-making reflects exactly the actual balance of power between political factions within Sohyo. It is difficult to predict what will happen when the vote is ultimately taken on the convention floor. This may be even more true in the near future, since the political situation within Sohyo is supposed to become more complex and unstable.
Despite many administrative inefficiencies, it appears that the Japanese union movement has been highly successful. Union membership has risen steadily to the present high numbers. Wages have risen at a speed unprecedented in Western industrial nations. Job security has increased
along with overall improvement in hours and working conditions. The many large-scale discharges and long strikes of the 1950s, which often caused union splits, have become rare exceptions in the 1960s and 1970s. Despite the increasing apathy among young workers toward the union and union activities supposedly revealed by recent attitude polls, support for unions among workers as a whole is quite strong.
Hence, union organization has been a huge success in terms of wages and employment conditions. In large measure, the achievements have been due to such favorable environmental conditions as rapid economic growth, a shortage of labor, high labor productivity, and the strong competitive power of Japanese goods on the world market. Unions have done little more than act to protect their interests under such favorable economic conditions. However, in the process it seems that union leaders have been guaranteed a stable position. Hence, even though procedures have been inadequate in the eyes of a certain segment of the membership, a high level of satisfaction has been the rule.
Nevertheless, the leadership crisis is the greatest problem facing the Japanese labor movement. Within the last two years or so, several eminent and capable leaders of powerful industrial federations and national centers have been forced to resign. In some cases, rank-and-file members have criticized the leaders for their decision-making and administrative practices, and either ousted them with a vote of nonconfidence or pressed them to resign.
Prominent leaders who lost their positions in 1971 included Takaragi Fumihiko, president of the Japan Postal Worker's Union, and Nabasama Yutaka, president of the Japan Seamen's Union. Both of these men were supported by large majorities of their union members and commanded great respect both within and outside their unions. Both, however, were forced to quit by a revolt of the rank and file. President Takaragi fell
victim to rank-and-file discontent when he made concessions without consulting union members at the close of a "struggle" against the government. In President Nabasama's case, the membership refused to accept the rate of wage increase obtained through compromise by the leadership, since it was considerably below the amount previously specified as desirable by the union convention (though it was not below the average increases obtained by other unions).
Rank-and-file revolts, because they often include an emotional or ideological element, sometimes become quite intense. Young workers are usually in the forefront. We cannot say that rank-and-file workers—particularly the younger generation—have never criticized or been dissatisfied with the decision-making and administrative practices of the leadership in the past. But in the past, the authority of the leaders has been protected by majority support in legislative councils, and the membership has recognized, at least in form, the mechanisms of union democracy designed to alleviate such unrest. To the extent that rebellion against decision-making under formalistic democracy has continued to take the form of apathy and indifference, no serious organizational problems have arisen. But the resulting lack of public criticism of the leaders contributes to facile self-confidence, widening even further the large gap between the leadership and the rank and file.
We can isolate several reasons why the previous apathy on the part of the mass membership has given way to revolts against leadership in some of Japan's large labor unions. First, the demands of young workers have become stronger and more diverse. Young workers have been in a very advantageous position in the labor market. Even though their wage increases have been more rapid and continuous than those received by their elders, they feel dissatisfied with a wage system based on seniority. In addition, they feel that high wage levels have been due more to the effects of supply and demand in the labor market than to the efforts of the union and collective bargaining. For this reason, they ask unions to take a more militant position for bigger wage increases. Furthermore, young workers and union leadership have different standards for evaluating the fruits of management-union wage compromise. The leaders' emphasis on experience as a guide is no longer convincing to the younger union members.
A change in the value structure of young workers is a second cause of revolt against union leadership. Increasing labor mobility and a higher level of education among young people have accelerated value change in postwar Japan. This has had a great impact on all organizations in Japanese society including the unions and has contributed to a growing generation gap between union leaders and rank-and-file members. The value changes are diverse, but with regard to union government there are two: the denial of the legitimacy of established authority, and the demand of young workers for a more active role in making decisions that affect their working and living conditions. The younger workers do not tend to
value the existence, continuity, and stability of the union organization as ends in themselves. Rather, they are interested in the benefits the organization can bring to them as individuals. Nor do they necessarily value for its own sake the established authority deriving from past accomplishments and diverse experience. They are not willing to be manipulated by such authority. Formerly, union leaders were able to bolster their negotiating position in collective bargaining by mobilizing the aspirations and energy of young workers. After that, the leaders could obtain approval of their decision from legislative organs. Now, however, the young union members are no longer satisfied with their former passive role in the decision-making process. They demand the right to be heard directly and to participate actively in decision-making. They strike out at the alienation of workers under the leadership of bureaucratized labor unions and call for a "restoration of humanity."
It is true that the attitudes of the young workers and the actions and demands that grow out of these attitudes are often emotional and impetuous and do not always serve the long-range interests of the union structure. However, the unions are confronted with the distressing fact that these attitudes are now being shared by an increasing number of older workers. In other words, the mistrust of established decision-making and administrative procedures is gradually broadening. Japanese labor unions, which have enjoyed unprecedented growth in the postwar years, have been jolted by these problems, and are facing a critical juncture.
The Company Work Group
Thomas P. Rohlen
Although their labels have been diverse, few writers comparing Japan with other industrial societies have failed to give a central place to the strong tendency toward group involvement one finds in Japanese institutional life. This group emphasis is generally understood to predate the modern period, and thus it is a major element in the discussion of such issues as cultural continuity in modern Japan and the reinforcement of modern organizational patterns by traditional values. The consensus about the importance of group involvement is not, however, enriched by a very extensive understanding of just what Japanese groups are like, how they vary, and what factors are causing them to be refashioned. Obviously the term group is a vague category encompassing numerous quite distinct entities. This paper aims to bring into sharper focus one crucial subcategory—the company work group. The discussion is based primarily on material from a one-year fieldwork study (1968–1969) of a bank of three thousand employees and a three-month study (1972) of a plastics manufacturer employing six hundred people in two factories and a head office.
The General Character of Work Groups
A key variable in most employees' response to their company is the quality of their face-to-face relations in office or factory groups (usually called ka ). Informants frequently cite teamwork and related qualities prominent in company ideologies in their descriptions of good relations, and those dissatisfied point to interpersonal problems in work groups as the source of their unhappiness. Management takes a similar view of the importance of work-group relations. Regarding white-collar work in particular, personnel departments show a preoccupation with improving office morale as the solution for problems as different as emotional instability and declining productivity. As further evidence of managerial concern, personnel departments, which are charged with improving work-group morale, typically have far greater status and authority in the Japanese company system than in American firms. In sum, management regards good relations at the small-group level as crucial to maintaining high levels of energy and attention. This perspective did not originate with modern theories of personnel management (although the thinking of the Mayo School has been influential), but rather it echoes ideals and psychological predispositions characteristic of premodern Japan. The large organizational framework places various constraints on this pattern, and yet any attempt to characterize Japanese companies without recognizing that their dynamic is generated, fundamentally and quite intentionally, in small-group contexts would obscure a most significant quality.
General Structure .—No one works totally outside a group context. The president and his council of executives have considerable independence, yet ideally they decide matters through frequent joint meetings. All employees, even those with the most isolated tasks, have a place in some work group. Almost all white-collar employees and many blue-collar workers are assigned first to a group and then to a specific job. Rank, skill, and actual task are correlated, but their final sorting out accommodates the requirements of the group first. Nakane notes that Japanese companies hire potential, not skills, and to a lesser degree this observation holds for the way employees enter company work groups. On-the-job training often brings individual potential into line with group requirements. Regular employees are sorted by a rank system, which gives a pyramidlike
structure to the work groups. In manufacturing firms, clerical and engineering workers tend to be organized into one rank system, while blue-collar workers are organized into a separate rank system. Even more than for white-collar workers, promotion up the blue-collar ranks is a direct function of years of service.
The result is a hierarchy in most work groups that closely corresponds to age. Exceptions occur if (1) older women are present, since women are rarely promoted above the lowest few ranks, (2) older people with short company service are present, or (3) men who have been promoted either very slowly or very fast are present. In the blue-collar situations, the first two factors were the primary causes of age-rank discrepancies, whereas the third possibility was most influential in white-collar situations. In both companies there is also a small percentage of persons (such as temporary workers and custodians) who are not regular employees, and thus of lower status. They are typically older and unobtrusive to a fault. The group's informal social activities seldom include them.
Size of groups varies considerably. The smallest branch in the bank and the smallest factory section both have less than six people, while the largest units number over forty. Whenever size passes something like twenty-five, subdivisions become the loci of face-to-face interaction and interpersonal relations. This can be a source of confusion, and furthermore some larger units lose the valued atmosphere of small-group involvement. The bank's managers recognized the special problems of its large branches in this regard.
The ideal office, from the point of view of smooth relations, has ten to twenty people and an ascending distribution of ages within its hierarchy. Groups of ideal size and symmetry are not likely, given the varying work requirements and the numerous ways age-rank disjunctures may arise. In the bank, the youngest section chief (kacho[*] ) is thirty-eight, but many are in their late forties and early fifties. In the manufacturing company, section leaders are as young as thirty-three, and before age fifty they tend to be promoted to the position of department chief (bucho[*] ) without any change in their actual leadership responsibilities. Factory supervisors (kantoku ), the highest blue-collar rank, are all over fifty. Whenever the leader of a work group is old, younger men are usually crucial in subordinate positions to
keep close relations with the very young, lead the group's recreational activities, and generally serve as a bridge between the generations. This bridge is missing in some cases, and there the generation gap, so prominent in Japanese public culture, emerges full blown. Older men, furthermore, reportedly resent working under a younger man, but few such problems actually occur in either company. It seems that because the younger leaders are sensitive to the problem, they give less cause for resentment.
Group Competition .—Competition among the branches of the bank and the sales teams in the manufacturing company is regular and highly conscious, but it is carefully avoided among individuals within groups. Each branch of the bank is assigned a quota for new deposits, and it is well understood that the standard of success is relative to the record of other offices. Branches that do well are given public notice at awards ceremonies. Other classes of recognition (for effort, cooperation with other branches, enthusiasm, and office efficiency) are also distributed to the most successful branches, and awards given to deputy-group leaders (dairi ) almost invariably reflect office-group performance. Only the lowest ranking employees appear to receive awards without particular consideration for the record of their offices. Although branch chiefs seldom receive individual rewards, any honors to their office are honors to them and strong indications that they are looked on with favor by those who decide promotions.
Neither company gives a commission or other direct-pay incentives. There are cases in the bank of individuals with good collection records actually giving credit for their deposits to others whose records are down for the month. Similarly, sales in the manufacturing company are handled totally on a team basis. The result is a situation in which (1) group leadership is emphasized, (2) leaders find themselves in competition with one another, and (3) leaders must rely on their followers for support and further promotion.
Morale is, thus, not simply a matter of the group, but also a question of loyalty to the group leader. Although the production side of the manufacturing firm does not lend itself to intergroup competition, the sense that motivation is in proportion to the group's enthusiasm for its leader still exists.
Morale .—Several general patterns of organization characterize the normal activities of office groups. These are manifested in the adjustments of the group to two basic requirements—work output and group maintenance.
The two patterns are a formal hierarchy and an informal circle. The arrangement of desks within any office reveals much of interest in this regard. Typically, the chief's desk is at the back-center of the office. His deputies' desks are on either side and a bit forward. From there, the desks of the rest of the staff are gathered in small infacing clusters that form a haphazard ring. Whether they become an actual circle is less relevant
than the fact that the desks are arranged to face one another. The exact pattern is determined by the space available and the preference of the chief, but never will one see a section arranged so that people are looking at the backs of others in the same group. Even with this group orientation, the positions of importance are easily determined at a glance. The chief, at a slightly larger desk, is clearly the focus of the arrangement and his location permits him to take in all that transpires within his section in a glance.
The office at work generally follows the lines of hierarchy that link employees to deputies and deputies to chiefs, but there are qualities that distinguish it from an impersonal kind of office hierarchy. First, the general group relationship is expressed by the inward directioning of desks. Second, the character of vertical ties within the office is direct and close, for no barriers are set up between the leader and his followers. There is a striking absence of any sense of individual isolation or of mechanical relationship in this pattern. The office is arranged to maximize the group sense, and interferences such as noise are not considered serious enough to justify separation or seclusion. Furthermore, authority does not require the creation of impersonal distance.
In factory situations, one finds the foreman moving about discussing problems, helping with a piece of work, talking to outsiders and instructing the inexperienced. With the exceptions of lunch and evening quitting times, break-taking and consultation are not formally regulated but determined rather by the flow of work. The intermediate ranks in most factory work groups share some supervisory responsibilities, but they also have regular tasks that limit their movement. General get-togethers for the communication of messages occur at a brief daily meeting before work starts, and more extended discussions of common problems take place after work, without overtime pay. The same is true for office meetings.
An informal circle is the common arrangement for relaxation and fellowship. Group morale and commitment and the intensification of individual friendships are sponsored through activities arranged to reduce the sense of rank, age, and even sex differences. The circle form stresses the fact of common membership. If the essence of the working order is hierarchy, the essence of the group principle is the circle. It is not difficult to perceive the interplay of the two in most office activities, for seldom is the pattern strictly linear or circular. Each activity and context calls forth slightly different arrangements, and the group finds it quite normal to shift from one to another. One characteristic of vital work groups, in fact, is their frequent but orderly shifts from one arrangement to another,
permitting realization of the spectrum of possible official and personal relationships within the group.
It is, of course, imperative that hierarchy regulate the daily affairs of the office. The shifts to informal, group-centered activities require effort and time (and are most vulnerable to the debilitating effects of complex organization and patterns of modern living). The general expectation that group relations will be satisfying can produce a breakdown or loss of motive force in the working order unless discussion meetings, parties, and other maintenance gatherings are forthcoming. It is part of the leader's job to be sensitive to this general need and to meet it energetically.
The work of group maintenance, above all, requires time. Just working together in a hierarchy is not sufficient. For the group to coalesce and realize the potential for cooperation and team motivation, informal social activities after work and on weekends are needed. This is why administration and office leaders plan, conduct, and partially pay for a heavy schedule of group social affairs. These activities are ostensibly voluntary but virtually all members participate—some out of group loyalty, some out of interest, and a few with a sense of being coerced.
The emotional momentum and sense of group solidarity are largely cultivated during such social activities. The annual calendar of office events typically includes two overnight trips (ian ryoko[*] ) at company expense, monthly Saturday afternoon recreation at company expense, and an average of six office parties held to celebrate one thing or another. In the manufacturing firm economic stringency has caused the company recently to stop paying for work-group trips, but most groups have continued to go at least once a year at private expense. Also for financial reasons that company has no monthly Saturday recreation program, believing that company-sponsored sports teams and summer camp-outs are the more effective means of satisfying its young people. Several basic differences between the two types of companies are indicated here. First, company prosperity and size are correlated with greater expenditure on such recreation and, second, the branch banking system offers no alternative to office groups as units for the organization of leisure, whereas a factory or main office readily accommodates sports teams, youth groups, and other alternatives. We should also note that hikes, after-work drinking expeditions, mahjong and bowling, involving some but not all people in an office (age and sex being the primary sources of separation), are frequent activities in both companies.
The drinking party is a particular and important part of many work-group social relations, although the blue-collar workers report its decline. The reasons for its influence can be appreciated from an analysis
of its dynamics and the expression of emotional participation involved. The first stage is marked with the serving of food, toasts by leaders, and much reciprocal pouring of drinks within the group. To keep up with the generosity of neighbors, one is constantly obliged to drain a glass or cup only to have it refilled by another waiting patiently with bottle in hand. The purpose is primarily to get everyone loosened up and happily inebriated, but the exchange of offerings and acceptances provides opportunities for the subtle expression of feelings of affection, admiration, and even repentance among persons who in normal circumstances are circumspect with one another. The gesture of filling another's glass is a convenient bridge across strained relationships. No one is forgotten. No one need pour his own drink. Support and attention for all revolves within the group, and a swaying, relaxed fellowship is created. This first stage prepares the atmosphere for the rounds of solo singing performances that often follow.
It is no easy thing to stand before a group and sing. Trembling hands, shaking voices, and nervous faces reveal the stress many suffer at the moment they are selected. The group responds sympathetically, however, with clapping, encouragement, and sometimes by actually joining in the song. When the ordeal is over, it is normal for the performer to experience a rush of relief and a feeling of gratitude to the others for their help. From that point he is deep into the group emotionally, for he has revealed his humanity and been accepted by the others; what occurs is much like a confession-forgiveness sequence. Each also acts as part of the group in helping other soloists through the ordeal and receiving them into the fellowship. With the solos over, restraint decreases noticeably, and the drinking has brought the men, at least, to a plateau of drunkenness. The process of uniting the group has ended, and there is no further obligation for full participation. Those in the mood are left to continue the party.
I estimate that in a week the bank office groups spend fifty-six hours working together and four to six hours socializing. Drinking parties do not occur more than every month or two, but they do represent pinnacles of emotional involvement that are not soon forgotten. The point that the work group does considerably more than simply share an office and a set of tasks is evident. This fact colors all that transpires within the hierarchical framework.
Decision-Making .—At the office level, discussions are another activity that serve maintenance functions. The manner of arriving at conclusions, however, varies greatly. The chief is empowered with the authority to make all decisions, and if he wishes he may maintain a strict order in which he alone decides. On the other hand, since the entire group is involved in the work of the office, the chief is free to submit decisions to discussion and, again if he wishes, to the rule (a rather flexible one) of group consensus. He may also encourage open discussion but decide the issue himself. There is no fixed procedure; among the crucial determinants
are the nature of the issue, the type of group, and the personal style of a given leader. Group processes require considerable time, and to push for an early consensus or to fail to involve everyone can often lead to resentment and opposition. It is difficult to hurry discussion, and one simple rule influencing office decision-making is: the more urgent a decision, the more likely it will be made according to hierarchy. People favor group discussions, however, and have an expectation of participating in considerations of group affairs. This includes the joint consideration at the office level of new company-wide policies and directives. Opening an issue to general office discussion may take time, and may even reveal an embarrassing gap in opinions, yet the sense of unity and the identification with the solution that usually results make the practice worthwhile from a leader's point of view.
The subtle question of the delegation of decision-making power arises in this context. A chief, anxious to utilize the positive effects of group discussions without relinquishing his own control over major decisions, may hold numerous meetings but submit mainly issues of minor significance, retaining his authority over crucial matters. He may also choose to discuss his own decisions with the group. The alternative of introducing a question for the group's consideration only after being certain that his opinion will previal is also available. The conclusions may be foregone, but the fact that discussions have been held is very important since a chief is expected to share his opinions, ask for advice, and permit dissenting voices to emerge. His trust and respect for the others and his acknowledgment of the group's importance are symbolized by the discussion process.
These general considerations only begin to accommodate the range of variation. Some offices are characterized by a steady stream of meetings, others may have no more than one a month. What are the differences involved? In the factory, production units do not gather frequently for discussions. They are not free to leave their tasks, and unless the issue is serious, they do not feel inclined to stay around after work just to take up minor matters. For the most part the unit leader consults with his men individually, and sometimes there are huddles of three or four men over some problem. Routine and minor adjustment characterize the situation, and there is little for group consideration except when new production goals or the Zero Defect program are discussed. At the opposite extreme are design engineer teams, sales teams, and groups empowered to formulate new programs. Meetings are frequent, open, and animated with leaders taking rather nonassertive roles, but always formulating the conclusions. Offices characterized by a high degree of routine, such as accounting, meet less frequently.
The degree to which central authority delegates decision-making power to groups is another crucial matter. Characteristic of the management of both companies is the practice of assigning specific goals and expecting the
work groups to develop the means to achieve them. Obviously, groups with established routines will need many meetings only when the goals assigned create a crisis because the routines must be overhauled or new ones established. In the factory it is notable that blue-collar groups are strongly inclined to regard the established procedures of production as their domain. The resident engineers do not have control over regular production, and supervisors (men at the top of the blue-collar ladder) are given the time and latitude to solve problems in conjunction with their subordinates that would quickly draw intervention from higher (outside) authority in American plants. This is most true of units using techniques and equipment of long standing, since experience has led to mastery. In the case of new forms of production, however, engineers are much in evidence. While such considerations help explain the degree of variation in small-group autonomy, the general rule that goals come from above, implementation from groups below, remains characteristic.
I should add that stagnation and demoralization can result from a lack of direction and encouragement from managers (usually the department chiefs) intermediate in the hierarchy between the work group and the general goal-setting top level. What the group-level leader needs is a guarantee that his group's actions will be accepted, supported, and brought into coordination with the total organization. Forceful middle managers are those who form close personal relations with group leaders below them and encourage them to dynamic action.
Handling Deviance .—Turning back to the internal processes typical of small groups, we should consider briefly the way the group responds to deviance. Actions at variance with the expected and required behavior within the group seldom if ever take the form of open confrontation with authority or a refusal to perform required work. Numerous factors, including the ethic of cooperation and the general restraint of expression in Japan, inhibit direct confrontations in the office. Deviance and opposition take more private and qualified yet discernible forms, and the response of the rest of the group to even mild nonconformity is worth considering.
Deviation is most often expressed by withdrawal from participation in the group and with its leader. The individual who is unhappy or in strong disagreement, but who cannot express these feelings, is likely to set himself at odds with group norms in areas of behavior where matters of personal preference and the standards of the group intersect. Some typical examples would be avoiding office social activities, excessive make-up, drinking too much, joining a leftist youth group, and remaining silent during group discussions. These kinds of actions disturb the sense of unity, but cannot be labeled insubordination and summarily dealt with. They are conventional symbols of dissatisfaction and isolation from the group. It is true that some people quit in protest against a group or its leader, but to do so without a
prospective job can be a form of career suicide, especially for white-collar men. Such eventualities are avoided by restraint and a sensitivity to the nuance of individual participation.
Conformity and full participation are, in one sense, offerings individuals make to the common existence. They should not be forced from them. The individual right to disagree and criticize through acts of nonparticipation is recognized, and the group must attend sympathetically to such indications of a problem. Often acts of "resistance" (teiko[*] ) to the group or its leader are understood as analogous to the rebellious behavior of children toward their families, particularly when hurt feelings rather than principles are at the heart of the matter. The individual's natural state of existence is within some group, it is assumed, and resistance is easily interpreted as a sign of unhappiness and an indirect expression of personal need, which should be answered with sympathy and special attention that create a sense of belonging. The group's members, especially its leaders, experience considerable irritation to be sure, but these reactions should and usually are repressed. Understanding and tact are required, reminiscent of the general expectation that parents will be flexible and tolerant in the face of their children's recalcitrance. That order and participation begin with individual feelings and cannot be forced through rules and punishments is the crucial assumption.
What about difficult individuals, we might ask? How does the group deal with the contentious, the overly ambitious, the lazy, and other similar types? This question is of interest primarily because personalities are seldom typed this way in small group contexts. Actions that would fit such categories are not absent, but the practice of writing people off into immutable character boxes is avoided, and in its place one finds a faith in the possibilities of group socialization to smooth rough edges. Much of the most effective smoothing occurs as part of senior-junior relationships, and the group's informal social activities offer further opportunities to generate a cooperative spirit in the less well adjusted. Even so, there are people who come to be recognized as permanently difficult, and the solution is to place them in isolated jobs (company librarian, warehouse attendant, truck driver, and so on) that effectively separate them from work groups even though they remain attached to one or another group for formal purposes. Rarely is a troublesome person treated with anything but sympathy and constraint, and this in turn undoubtedly generates constraint and cooperation from most potentially difficult people. The calm surface of mutuality, however, can be accompanied by much hidden disenchantment and resentment.
When most of the group object to their chief, it is likely that complaints will find channels to higher authority, particularly the personnel department. In the bank such a leader is likely to be transferred, but in the much smaller manufacturing firm such shifts are more difficult, and attempts to change the leader's ways is the likely outcome. In either case, quitting or
the threat of it from established employees is a certain spur for the reconsideration of a group's situation by management.
Short of such extremes, it is usually necessary to live with a degree of problems, and the chances of redemption often hinge on the departure of those who do not fit in, or the arrival of a new chief or deputy able to draw the office back together. Even so, efforts to engineer cooperation and full participation, through focusing increased attention and affection on those withholding themselves from group life, are highly predictable. The effectiveness of these methods is not as predictable, however, partly because of the very fact that they are expected. Finally, it is my impression that the white-collar world is less likely to show the tension of work relations than the blue-collar, perhaps because open hostility is even more inappropriate.
Employees in both companies share a vocabulary of labels for work place relationships, and while their typology is not fully discreet, these labels do mark the basic starting place for the distinctions that constitute the interpersonal world. As such they deserve enumeration and clarification, but we should be forewarned that like most typologies, they only begin to sort out the situation.
As in most organizations the most crucial face-to-face relationship is the one between a superior and subordinate who work together. In Japanese company organization these are regularly employees of different rank who are assigned to the same work unit.
Because of seniority in promotion, it is highly likely that a superior will be older. No man in either company had a woman superior, and only a small percentage of women had another woman as her superior. Two terms, uwayaku and joshi[*] , refer to superior or boss, and the term buka refers to subordinates. The characters for "above" and "below" are used to write these words, indications of the clarity of the hierarchical order involved. When addressing one another, subordinates and superiors have a different set of terms. One may address his boss using either his family name (plus the suffix san ) or his rank (for example, kacho[*] ). The superior has the option of using the subordinate's family name suffixed by san or the more intimate kun . (Only once have I ever heard a woman subordinate addressed with kun , however.) While details of address may seem rather mundane, they provide an outline of some of the basic dimensions of the relationship. It shows that hierarchy is a constant in both address and reference and that the option of openly expressing intimacy is given only to the superior. The mutual use of family name (plus san ) offers an egalitarian form of address that bank policy urges, but in practice both official titles for addressing superiors and kun for male subordinates is often preferred. People say there is more flavor and a sense of connectedness to these expressions. While
women may be addressed familiarly by their first names, the widespread use of the intimate kun for male subordinates reflects the centrality of male-male relationships in business organization. Male-female relationships are essentially appendages to a central core of hierarchical male ties.
Much of this will not seem particularly unfamiliar to Americans with experience in complex organizations. Clearly hierarchy, degrees of intimacy, and sex distinctions are part of our own systems of address and reference. Our language, however, provides greater flexibility for the establishment of degrees of intimacy and equality (such as the use of first names or initials), and we may obscure hierarchy altogether by using first names to address superiors. Sense of hierarchy is more constant in Japanese.
One's boss may or may not be personally close. It is his official position alone that makes him a uwayaku or joshi[*] , and this becomes clear when we contrast the superior-subordinate dyad with another relationship, the senpai-kohai[*] (senior-junior) relationship that is also hierarchical but centered on interpersonal involvement. While senpai often means any person senior in age, it is common in a company or other specific organizational context to use the word to refer to (and occasionally address) one or a few older people who are especially close and supportive. Ideally, one's superior in the official hierarchy is close and supportive ("like a father or older brother"), but for a variety of reasons, the ideal is generally hard to realize. It is, therefore, necessary to distinguish the official roles of superior and subordinate from the interpersonal senpai-kohai relationship even though both are hierarchical and both can, and ideally should, overlap. The distinction is crucial to any analysis of the nature of authority in face-to-face relations in Japanese organization.
Before discussing authority, however, it will be useful to examine the senior-junior relationship, for it provides an ideal model for its official counterpart. To begin, the Japanese have a comparatively positive attitude toward hierarchical relations involving explicit age differences. They do not assume that hierarchy precludes the opportunity for intimacy. The term for senior, senpai , is a compound of two characters: the first meaning before or ahead, and the second meaning companion. A senpai is understood to be a person who proceeds or leads with the
implication that those who follow are his companions in the same pursuit, career, or institution. Kohai[*] , literally "companion that is behind," expresses the other half of the relationship. The complete image created by the characters is one of "friends," one ahead and the other behind, passing along the same path of endeavor.
While all those who are older in a company are, in a general sense, seniors, the term is used most often to refer to one or a few specific older individuals of the same sex who are particularly close and protective. A senior, however, may have more than a few juniors—one of a number of interesting correspondences between this relationship and that of parent and child. Among the reasons for the division along sex lines is the implied comradeship between senior and junior, a form of comradeship that does not easily cross the boundaries of sex.
The basic characteristics of the relationship are:
1. The senior is older than his junior, has worked longer for the company, and is in a position of relative power and security. This position enables the senior to assist the junior.
2. The senior is beneficially disposed toward the junior, and befriends him.
3. The junior accepts the friendship and assistance of the senior.
4. These acts and related feelings are the basis of the relationship. There is no explicit agreement.
5. Ideally, the junior feels gratitude to the senior for his beneficence, and this feeling is accompanied by a desire on the part of the senior to become a good senpai for those younger.
The similarities between this and parent-child and older-younger sibling relationships are more than coincidental. It appears that family relationships provide the underlying model for the senior-junior pattern. Interviewees occasionally stated that "seniors are like older brothers"—a revealing analogy, particularly if we examine the ideology of the Japanese family. First, interdependency and continuity are central to the family ideal. Second, the emphasis on continuity translates into gratitude toward past generations and obligations to assist future ones. Third, affection and hierarchy are understood as mutually reinforcing rather than contradictory. Last, the dependency of the younger, weaker party is not only accepted, it is the focal point of the relationship. These are basic elements in one major Japanese code of interpersonal relations, which make seemingly dissimilar situations and involvements, such as a family and an office group, in essence quite comparable. Because of this code, company senior-junior relationships receive powerful reinforcement from the patterns of interpersonal relations throughout the society since all repeat the same basic message.
The kind of assistance expected of a senior varies greatly. Not only will he advise, console, and protect his junior, but like a good older brother, he is also likely to be a strict judge of performance and a stern task master. A
good senior is one who fosters the growth and adjustment of his junior with a strong mix of encouragement and criticism, all in the context of a close friendship. Socialization of young men into the company is primarily accomplished within this and the larger work group contexts.
The pattern describes an image of one kind of ideal working relationship, one that is secure, beneficial, reciprocal, and selfless to a degree. The ideal of close involvement between older and younger, experienced and less experienced, more established and less established is often applied to the relationship of superior and subordinate in the official system of organizational roles. Company leaders, for example, are occasionally referred to as senpai in company publications. The paternal and familistic philosophies (onjo[*] shugi and kazokuteki keiei ) espoused by most companies also suggest that leadership should be as sympathetic, protective, and unselfish as good senpai . While clearly the ideal may go unrealized, it does establish a set of expectations about proper leader and follower conduct.
Returning to the question of authority in the superior-subordinate relationship, we should note that legalism (such things as explicit rights and duties) is not characteristic of official hierarchical relations in Japan. Instead, short of leaving the organization entirely, a subordinate has no recourse for contending directly with his superior. Open argument with him, refusal to obey orders, other forms of "insubordination," and open appeal to higher authority are all possibilities so rare in the Japanese context that they never occurred during my observations. There are no rules that would condone or permit such actions. People with exceptionally strong grievances usually hide them behind a screen of silence until they can leave the organization or the authority of their superior entirely. Thus, the superior has absolute authority, but without legal basis. Like parental authority, it derives from general custom and the compliance of subordinates. In the companies I studied, no union power or set of company rules stand between a superior and his ability to exercise authority. Nor are there any reports of dramatic scenes of inflamed passion or righteous resistance to an unfair boss. The only times such overt expressions occur is when union and management adopt recalcitrant and hostile stands toward each other; at this juncture the company is likely to cease existence in organizational terms. Such a rare occurrence underlies the fact that in face-to-face relations Japanese are, by Western standards, unused to and unable to cope with open expressions of resistance to authority.
In another equally real sense, however, the superior finds his authority strongly limited by the general expectation that he will look after the best interests of those who work below him—that he will be their guardian or patron in the senior-junior model.
It would be erroneous, however, to view Japanese superiors either as pseudo-parents or as extraordinary and unlimited tyrants. These two extremes, although possible, are hardly ever realized in actuality. Confu-
sion does arise about the nature of authority in instances of trouble, since the expectations of obedience and paternal regard can become separate and opposing interpretations in times of discord.
The possibilities inherent in the Japanese superior-subordinate situation are of even greater complexity. On the one hand, there is a strong tradition, particularly emphasized in the military heritage, for a very strict form of order and discipline, and it is not unusual to come across scenes in Japanese offices highly reminiscent of the most thoroughgoing military procedure. At other times, however, one may find leaders and their followers gaily drunk together after work, staggering arm-in-arm down some back alley. This is part of a tradition of co-worker camaraderie. Superiors seldom hesitate to ask subordinates to do unpaid overtime work (at least in the white-collar world), yet it is equally common to find them involved in helping a subordinate with a private problem at considerable personal sacrifice. Such seemingly contradictory patterns are actually characteristic of common themes such as group involvement, an emphasis on feeling, and little capacity to separate the people from their roles. Definitions of what is proper vary with the people involved and the context, not with some contracted or administrative formula. The energetic, warm leader creates for himself great power, whereas the opposite commands no more than a mechanical authority based on his position alone. In Japanese companies, loyalty to an immediate leader is obviously a crucial aspect in the flux of motivational levels. The more important group motivation is to accomplish the work at hand, the more important leadership becomes.
It is ironic, then, that companies (on years of service considerations) regularly place many men in group leadership positions who lack the capacity to motivate their followers in the highly personal manner required. In such cases, the ideal model, with its heavy demand for personal involvement, actually serves to generate disappointment and resentment among subordinates. Companies have a particular dilemma in this regard since they consciously seek the benefits of group-ordered work, yet are bound by other factors to retain a promotion system based on considerations other than leadership capacity. High group morale is hard to produce and impossible to guarantee in large organizations, and
this fact has encouraged Japanese companies to establish supplementary efforts of a different kind. Increased emphasis on ability in promotions, on character-building programs, and on penalties for poor performance are all aimed at the individual rather than the group. These attempts, although minor, are indications of management impatience with the inadequacies of the group-motivation approach.
Modern Obstacles to the Work-Group Ideal
The effects of large-scale organization and modern life styles on the effort to establish satisfactory work-group relations can be pointed out, but to measure their impact requires historical and comparative frameworks beyond the scope of this paper. Among the most significant organizational constraints to note are the absence of any work-group-level control over recruitment and promotion. Transfers may be initiated by problems in office or factory groups, but no group leader has much power over who will be assigned to his unit. The personnel department in the manufacturing firm does on occasion attempt to place factory workers with an eye to special connections (such as kinship, regional affiliation, and personal obligation), but this practice is very rare for white-collar work groups and, in fact, requests by section leaders for individuals are generally discouraged. Since promotion is presently governed by seniority considerations, some are given leadership positions for which they are unsuited. The fact that the rank of section leader is a meaningful career goal, a reward for service, and a mark of status complicates the problem of establishing greater coherence between the work group and the promotion system.
Personnel turnover is another source of work-group problems. Transfers are greatest in the bank with its many branches, less frequent for office workers in the manufacturing firm, and almost negligible (except on a voluntary basis) for blue-collar workers. Although the men in the bank
retain a long association with their company, their participation in any particular office group is interrupted by periodic transfer. We can estimate an annual turnover in any office of 15 percent, and the bank's personnel department offers the additional information that the average length of time spent in an office is 3.75 years. Transfers involving women seldom occur and only when it is possible for them to commute from home to a different office. In the manufacturing firm, transfer rates in general are much lower, with only salesmen being shifted at approximately the same rate as men in the bank.
Thus continuity, so characteristic of a man's relationship with his company, is not characteristic of office work groups, an interesting point regarding the nature of Japanese organization.
Office groups are also seriously affected by the high turnover rate of women who leave to marry. One in four (in both companies) leave each year for this reason. For male blue-collar groups, quitting and mid-career entrance (a few each year among three hundred factory workers) are the major sources of change. In one factory the quitting rate for young people in their first five years of work was almost 50 percent and in the other 30 percent. We must conclude that the small work group in modern companies does not resemble the traditional family, the village, or the small commercial enterprise in this respect. The ideals and procedures may be the same, but the depth of acquaintanceship and involvement are certainly affected by the greater turnover. The intense interest in creating good group relations shown by the bank is partly explained by its high rate of transfer, just as the manufacturing company's emphasis on youth-oriented leisure activities is best explained as a response to the high turnover rate among its new, young workers.
The size of office and factory groups is not determined by considerations of group dynamics, but by the work load and other external factors. In consequence, many groups are too big to be organized on a small-group model. Attempts at subgroup arrangements are seldom satisfactory since the lines of cooperation in work cannot be easily aligned with boundaries established by informal involvement.
Private living patterns also have considerable impact on work-group relations. Dormitories, for example, draw residence and work together, whereas dispersed private housing tends to reduce the time co-workers interact, particularly if commuting time is great. The worker's degree of involvement with social ties outside the company (such as family, neighborhood, and voluntary associations), as well as the strength of his
desire for private as opposed to company-oriented leisure, weigh in the final balance of after-work time allocation, and this in turn has much to do with the capacity of work groups to hold lengthy discussions, enjoy parties and otherwise maintain close personal involvement.
Both companies, while not intending to increase family-type company housing, still emphasize dormitories for unmarried employees and have recently built new ones. Dormitory life is a major source of friendship for many young people (only for men in the bank, but for both men and women in the factories). Wherever dormitory social life is dormant, there is the complaint that modern salaries have provided luxury which in turn has caused young people to separate socially. Individual rooms, private stereos and TVs, the independence of a private automobile, and other similar factors all appear to have reduced the inclination or opportunity for communal forms of leisure. Dating, clearly on the increase, also has this effect. Where dormitory life is active, on the other hand, young people prefer it to socializing with older co-workers. Activities popular with the young such as sports, camping, hiking, bowling, and weekend travel are all forms of relaxation in which older people have difficulty participating. There is, in short, a trend toward more age-segmented after-work leisure, and while this is often encouraged by management because it satisfies the young, it also points to the widening gap between the ages in work-group situations. The bank has gone further than simply recognizing the trend. It has recently created formal associations for its unmarried men and women.
We need to remind ourselves that although Japanese company people are remarkably company oriented by contemporary Western standards, modern living is eroding this involvement at what managers see (using the criteria of the Japanese work-group tradition and the present ideal) as an alarming rate. In the two companies studied, for example, it was no longer shocking to hear of a group leader so much absorbed in his own private affairs that his after-hours socializing with co-workers had become minimal. For workers, marriage and family, while by no means Western in character, have increased in significance, particularly with the growth of family-oriented leisure. Furthermore, people with very long commuting times, new homes or an unusual interest in outside affairs or hobbies—matters that are regarded as modern trends—find it hard to give time to work-group relations. Watching television, the most mundane of these, has for some become a nighttime preoccupation.
The separation of young and old is another common topic everywhere, and both ends of the spectrum comment on how hard it is to understand and talk frankly with the other. There is no better way of measuring the solidarity of a work group than to ask about the relationship among the generations. Only where the group is well knit and the leader personally involved does the age gap seem inconsequential. Such cases are certainly in the minority, particularly among factory workers, but they do illustrate the fact (and hope) that when successful the work group has considerable
potential to integrate young and old regardless of their very different experiences, attitudes, and life styles.
Perhaps the most debilitating of all on work-group relations is the general decrease in identification with and enthusiasm for company and work, something that apparently derives from both the scale of organization and the nature of contemporary public culture. While there are employees of all ages thoroughly involved in their work, there are many who mention as reasons for uninvolvement such things as the distance between themselves and top management, the lack of a sense of common purpose, the attractiveness of private forms of leisure, and their sense of a conflict of interest in company-employee relations. Alienation may not be nearly as strong in Japan as in America, but it is present and does affect the morale of work groups. There is no easy way to gauge its general increase, but the increased company-to-company movement of young blue-collar workers is a strong signal. On the other hand, many of the young people most expressive of a modern sense of alienation are likely to adopt a different, more accepting stand with age. Finally, it is well to remember that any general organizational arrangement can tolerate a good deal of dissatisfaction, particularly if it is rarely expressed openly as in the Japanese case.
My case material indicates, then, that solidarity in work groups is something to be achieved and that, compared to the ideal, groups are likely to be viewed as imperfect. Basic understandings and values create a
dimension of concern that not only points to goals, but also highlights existing inadequacies. Acknowledging the various qualities of small groups to be matters of degree compared with a set of ideals, creates the basis for examining the dynamics of the situation in terms of shifting conditions within the group. When the sense of solidarity is down, for example, hierarchy is less agreeable and more apparent. The reverse is also true. Solidarity itself is essentially a subjective quality or mood that arises primarily from the emotional aspects of the group, particularly the relationship between the group leader and his subordinates. When things go well, when the leader is followed out of affection as well as because of his formal position, the internal structure of the group appears quite useful and proper. The three general factors of positive emotion toward the leader, solidarity, and structure are interrelated in essentially the following manner: (a) positive emotion and working solidarity are mutually beneficial, (b) structure as a means of ordering work may also contribute positively, but (c) when structure comes to stand for separation and difference, then it is viewed negatively. To prevent the ever-present hierarchy from becoming onerous the group has recourse to activities of the circle kind. The leader's style and energy are also crucial, particularly as he must be able to create a mood of respect and fellowship.
The most poignant source of stress in this situation is the requirements of work itself. Pelzel is perfectly justified in underlining the importance of the task orientation of Japanese groups. Without a common task, office and factory groups would have nothing to justify their existence, and their enjoyment of one another informally would seem frivolous. Yet, it is the demands for greater production, the problems of sharing the work, and the responsibility and fatigue of strenuous effort that most tax the emotional ties and the sense of mutuality within office and factory groups. This pressure falls particularly on the chief, for he faces the demands and criticisms of top management.
It is interesting to note the response of employees in the bank to the characterization of their organizational life in terms emphasizing their close personal relations and sense of unity. These, they say, are qualities a foreigner (using a cross-cultural perspective) might choose to emphasize, but such a description ignores the daily problems and inadequacies of Japanese organization. When the problems are discussed, however, comments from the same people imply that models of close relations and solidarity do exist. Outstanding groups are the ones with good working relations, and they provide standards for comparison. Cross-cultural perspectives, we may conclude, are significant precisely because they highlight a particular conceptual framework and a set of ideal models, and therefore provide a perspective of reality that will deal adequately with the thought-action dynamics in real problem-filled situations.
The question of authority is a central issue in any cross-cultural comparison of bureaucratic organizations. Recently Crozier, citing cultural differences as significant, has suggested how impersonal authority problems in French bureaucracy are closely related to various themes and patterns of French culture. Face-to-face dependency and warm primary group relations in work are difficult for the French, and the result is a high degree of impersonality. Crozier's general approach, one that views the response to authority as varying with such things as dependency, is of special interest in the light of the fact that Japanese work groups seem so different from the French.
The acceptance of dependency (with limits) is a definite part of successful work relationships in Japan, and there is much evidence that dependency is very often regarded as a positive aspect of social relations. But dependency does not automatically lead to the "acceptance of most arbitrary discretion," another of Crozier's preconditions for bureaucratic success. We have seen that work-group discussions and situations of informal intimacy are regular aspects of the program designed to maintain participation in the group and acceptance of its leader's prerogatives. Without such efforts to maintain a sense of unity, the group ideal of mutual interest would soon disappear. For the office leader, the ability to be arbitrary one moment depends greatly on his readiness to be responsive to the group the moment before and the moment after. This shifting of emphasis, which serves to preserve the acceptance of leadership and trust mentioned by Crozier, is supported by official company policies and is therefore institutionalized and expected to a large degree.
Although Japanese procedures indicate much the same authority/compliance complex discussed by Bernard (1938) and those after him, the actual practices of American and Japanese work groups are quite different. For the Japanese, the procedures of discussion and participation are institutionalized, office groups are far more sensitive to the process of inclusion, and their leaders are far more inherently equipped to manage
this form of direction. In fact, the terms for authority (ken'i and kenryoku ) are not used in everyday descriptions of group dynamics. Acceptance (nattoku ), participation (sanka ), resistance, and opposition (hantai ) are the key dimensions, and neither impersonal rules nor formal role definitions are of much significance in adjusting behavior from the negative to the positive sides of these dimensions. Instead, the leader's virtue, his concern for others, and the general esprit within the group are the most effective means to gain individual acceptance and participation. Involvement and trust, once established, do indeed permit considerable "arbitrary discretion." Pelzel attributes essentially the same qualities to Japanese house-hold groups. He writes:
The tolerance for authoritarianism is perhaps higher in the Japanese than in many Western or Chinese situations, but in Japan no head can expect well-motivated action on any decision that has not been deliberately accepted by members who have the right by interest or competence to be heard.
In Weber's terms, Japanese work groups might appear to be highly traditional, but in Crozier's they are remarkable examples of the reinforcement of bureaucratic requirements by the psychological predispositions and small-group patterns of the parent culture.
Consequences of Work Groups for the Larger Organization
The general nature of work groups is acknowledged by the treatment they receive from above. We have already noted the common practices of encouraging competition between groups and of judging section chiefs according to their group's performance with the result that rivalry is often strong among men of that rank. A team form of motivation is heavily relied on, even in cases where the lack of comparability makes intergroup competition impossible. This complex has the following general correspondences with the larger organizational setup:
1. The role of group leader has special significance: its status is high; it is crucial to most operations, particularly nonroutine ones; and careers are either made or destroyed primarily at this level.
2. Individual forms of reward, especially immediate ones, do not receive
strong emphasis by American standards in the salary and promotion systems.
3. It is difficult to organize activities between work groups without direction from a higher authority.
Work groups, because they are recognized as independent social entities, are allowed considerable autonomy in the Japanese company system. Experts are not utilized to solve operational problems for specific groups; this would be regarded as outside interference and would undermine morale and leadership. The bank does have an inspection team, which visits each branch once every few years, and engineers are called in to solve technical problems in the factory, but basically the work group has full latitude to handle its own daily affairs. If it does not do this well, a new leader is likely. Even central administration policies may not have a binding force on the conduct of groups. In the bank, for example, most offices still were ignoring the 5:30 P.M. quitting-time policy one year after it was made the official rule for Wednesdays. On such matters, work-group compliance is encouraged, but not forced. If the issue has great overall concern or less consequence to the internal conduct of the group, however, central authority can be thorough and swift. Management watches the performance of work groups with a keen eye, but it is reluctant to interfere unless quite necessary. Finally, the sense of domain and the expectation of discussion and consensus in small groups means that much of any effort to change work methods must be directed at gaining the voluntary participation of each group. The manufacturing firm, for example, instituted a "Zero Defect" program only after each factory section had reviewed and endorsed it. Similarly, the bank management frequently calls for branch-level discussion of company problems. New programs are often initiated at a ceremony attended by representatives of each office group.
Neither company has a written set of rules defining the decision-making procedures for any level. Obviously, the hierarchy of ranks and the establishment of central authority serve these purposes to a large degree; but even at the highest levels, group discussion and consensus are acknowledged, although their significance varies with the situation and the arrangement of power at the top.
Above the president in the formal organization of companies is the board of directors, a group that contains the company's top executives. They meet often and are ostensibly the small group that runs the company. Other meetings to discuss, to decide, or to recommend
characterize the intermediate levels of organization above the work group. Branch chiefs, section chiefs, and managing directors' groups meet frequently, usually on a weekly basis. These middle-level meetings rarely decide issues, but they are important for the purposes of creating general acceptance of policies made above, for recommending new policies, and for improving lateral coordination and cooperation. While I do not possess sufficient material to satisfactorily discuss the variable procedures actually involved in decision-making above the office-group level, it is evident that even at the top, many of the group procedures and many of the same alternatives in decision-making patterns that characterize low-level work groups characterize the interplay of leadership and group discussion within the realm of management.
A final way the large organization and the work group are related is through the influence of the ideals of small-group conduct on the manner of administering the entire company. The image of a company comprised of people dedicated to the same goals, personally involved, and united by interest and common spirit underlies company ideology. Executives, rather than consciously concocting such an image, tend to regard it as an assumed goal of any company and any group of employees, and numerous events, policies, and statements of regret about contrary tendencies all point to the underlying model of the company as a small group.
The fascination here is the obvious fact that any organization over a certain small size will find it exceptionally difficult to preserve a sense of personal, emotional connectedness that extends beyond the work group and other face-to-face relationships. It is precisely on this point that Nakane Chie's general characterization of company organization is weak, I think, for while she is correct about the way Japanese small groups should work, she does not clarify sufficiently the basic differences between the small group and the large organization. Nakane's approach does have the virtue of describing the nature of informal cliques and personal ties often in the background of high-level influence, but companies are far more rationalized and impersonal than her account implies. It is as if her primary focus never leaves the small group and thus factions, cliques, academic circles, and other small entities within larger organizational spheres dominate her analysis.
The total company situation is more complicated. While the nature of work groups is best approached from the question of their fundamental conceptualization, it is less likely that an ideology emphasizing small-group values will have the same significance for large organizations. Company leaders may be devoted to such values, but they are not in a position to unite the personnel of a company in the same immediate way
group leaders are, and the best they can accomplish is to make a success of the directors' and other high-level small groups. The effect of an ideology of small-group togetherness on management-policy decisions is impossible to gauge, but certainly one major result is the frequent expression of regret that the small-group ideals must be overlooked in the face of larger organizational realities. Companies have been able to elaborate a wide manner of activities of symbolic participation (such as ceremonies, gatherings of representatives, company-wide outings, and civic and charitable programs), but none of this will be sufficient to secure the sense of connectedness of individuals to the whole, a crucial matter to Japanese companies. This, it seems, can be accomplished in one or several of the following ways: through the value of a company's public image (size and status), through the opportunities for rapid advancement (growth), and through the satisfactions of company work (above all social relations). Work groups occupy a central position in the last consideration for they are the primary environment in which the individual and the organization are interrelated, with all that means for such matters as authority, motivation, and individual satisfaction.
Apprenticeship and Paternalism[fn1]Apprenticeship and Paternalism
George A. De Vos
Organizational structures cannot continue to operate effectively without some mutually reinforcing isomorphic resonances originating in the personality structure of the participants. Such a general contention is central in a psychocultural approach to a study of any society. To illustrate, I shall attempt to compare and delineate some cultural differences between the implicit attitudes of superiors and subordinates in Japanese industrial organization and those of their counterparts in the United States. The firsthand empirical evidence and the experience indirectly brought to bear on the subject is that obtained by Hiroshi Wagatsuma and myself in the course of our research among the merchants and artisans of Arakawa Ward in Tokyo. However, the reports and writings of others as well as the plots of films and literary works give credence to the wider social application of the generalizations partially derived from our empirical research. We believe that what we observed as underlying social attitudes embedded in the roles of apprentice and patron in Arakawa is also operative more generally in the economic and cultural historical processes at work in the course of Japanese industrialization. We
do not prophesy how long these attitudes will be maintained in the face of countervening sociological forces. Suffice it to indicate that their present existence as influences has helped set the tone of contemporary Japanese organizational behavior.
Psychocultural Reasons for the Relative Absence of Disruptive Industrial Strife in Japan Compared with the United States and Western Europe
In the course of the past century, at an ever-increasing rate, the Japanese population has shifted demographically from rural villages to urbanized industrialized communities. Compared with the United States, however, Japanese cities give much less evidence of social unrest or personal disruption. Why has the population migration been so relatively nontraumatic?
There are, for example, statistics on numerous mental health breakdowns attendant upon migration in the United States. Admittedly these cannot be considered symptomatic in all situations of urbanization. There are special minority status features in the United States that cause stress in urban migrants. Urbanization is apt to be relatively more traumatic when the migration takes place between rather than within cultures. One cannot conclude that the urbanization experience itself explains social disruptions when they occur. One must look to other pertinent societal factors such as the relative degree of direct impersonal exploitation of the urbanizing workers, or the degree to which urbanizing workers are constrained to accept a continuing minority social class or ethnic status within an urban community. Such conditions can lead not only to social unrest but personal emotional breakdown. In the United States, the reported high rates of mental ill health among both European immigrants and black migrants from the rural South must be considered a symptom of cultural dislocations and social discrimination rather than a symptom of the urbanizing process per se.
Social conditions aside, there are also cultural factors. Contrary to the experience of some migrating groups, Japanese who move both within Japan as well as externally to North or South America generally maintain
integrative family and community life and manifest no forms of increased crime or delinquency that could be attributed to either urbanization or migration per se. There are obviously strong socially integrative cultural traditions at work, which can overcome even the severe social discrimination that occurred in the United States. One must consider, therefore, that in some situations, at least, cultural patterns may overcome social conditions.
Labor conflict is another possible disruption attendant upon industrialization, and more a symptom of social rather than personal ill health. Compared with the history of labor grievances and labor unrest in the United States, one finds the history of the Japanese labor movement relatively nontraumatic. One can question whether this is due simply to a relative lack of social exploitation in Japan, or again, to the countervening force of cultural patterns. I believe the latter is the case.
Several of the economic disruptions experienced in Japan from the beginning of industrialization until World War II have been cushioned by a culturally available pattern that encouraged the family's reabsorption of displaced or unemployed workers back into the rural areas. Japan has also been able newly to reemphasize some practices and attitudes derived from the premodern cultural past to establish job security for most workers.
In the course of Japanese industrialization, former merchants, artisans, and farmers have been recruited into the cadres of industrial workers, who have been either hired in the large, modern, industrial plants or apprenticed in the small, urban-house factories that remain as part of Japan's dual economic structure. Yet from what we witnessed in the microcosm of the Arakawa area of Tokyo, urban migration has been neither personally alienating nor socially disruptive. We found no evidence of any form of general disaffection or of anomic disorganization in the more newly formed urban communities. We did find evidence of how the newly constituted communities functioned to integrate the individual and his family into more or less encompassing, if not entirely satisfying, larger units of social organization. In Arakawa one can document the pattern by which the so-called shitamachi (downtown)-traditional-townsman culture of northwest Tokyo had moved steadily into the newly settled areas of northern Tokyo; as it moved, it maintained considerable organizational force, which encompassed the new recruits from the countryside enough to counter the possibly disruptive processes generated by the large-scale industrial movements of people.
Even granting the integrative force of the community-organizational features of Japanese local neighborhoods, one must still turn to the cultural features that influence experience within the work situation itself to explain the relative lack of alienation experienced by Japanese workers. There are mutually complimentary attitudes between subordinates and
superiors in Japanese hierarchical social organizations; these extend through social class barriers and are a strong force against the development of the type of class alienation that Marx predicted so well for Europe in his analysis of the development of industrial society. Marx's predictions do not seem to work for Japan. Why is this so?
The Expressive Functions of Japanese Paternalism
In Arakawa Ward at least (perhaps to an embarrassing extent for Japanese Marxist theorists), one does not find the kind of social alienation or class consciousness among Japanese industrial workers that one quickly recognizes in contact with Italian or French workers; nor does one find the less ideologically tinged but equally strong hatred of management that is characteristic for American industrial workers. The reasons for this difference between the Japanese industrial situation and that of Western Europe and the United States can be found in the cultural, historical continuities of Japanese social organization. Especially pertinent is the way individuals within Japanese families are socialized to fit into the pervasive, usually hierarchically structured social networks within which they spend their later lives. Reasons are also found in the consequent expressive satisfactions of Japanese paternalism—both in the way one plays the superordinate role as a boss, or the subordinate role as either an apprentice or a long-term, faithful, factory employee. One has to examine more carefully, therefore, the cultural forms of secondary socialization into occupational roles, which follow upon the primary socialization occurring within the family.
In the traditional Japanese social system, a youth was usually introduced into a network of occupational expectations around the time of puberty as an apprentice who would be taught a particular skill. The apprentice role was defined in quasi-familial terms and became part of a network of mutual expectations—both instrumental and expressive in nature. Since some of the apprentice's expectations could be actualized only in the distant future as part of his work role, he was also being trained to develop a future-time orientation. He had to maintain sufficient faith in his future gain to forego immediate material or emotional payment. He was resigned to what an outsider might consider harsh, exploitative treatment for the sake of the future promise of continuing paternalistic support. This sense of reciprocity through time was reinforced generally by the social attitudes of his own family and others.
In Japan today this type of apprenticeship role is being redefined as the social atmosphere affords less reinforcement for the sanctions that maintain the individual in his subordinate role. Youth are increasingly
more apt to quit than to put up with constrictions of sustained discipline. We found in Arakawa Ward, however, that the external social sanctions of the society were still applied in the person of the police and with general social approval. One of the police functions in Arakawa was to arrest apprentices who had absented themselves from work. The apprentice role, therefore, was socially defined in terms similar to that of a student in school. The police, in both instances, were expected to enforce required attendance.
By degrees the individual is expected to gain a sense of pleasure from his increasing competence, as he gradually internalizes the standards of excellence related to his craft. Ideally, he would also be increasingly rewarded with signs of appreciation for his growing skill. Hence, there is a gradual socialization of inner satisfactions to be gained by approximating the standards of skill set by the master or teacher within any given tradition.
In this secondary period of occupational socialization, socially expected attitudes of gratitude and repayment were turned from the parents onto occupational mentors in the quasi-familial master-apprentice situation. The boss or master was not free to ignore the dependent expectations of his former apprentice. His own sense of actualizing his master's status derived from a capacity to meet some of these expectations and to do well for those who had been depending on him.
In sum, the Japanese were socialized to gain certain reciprocal expressive satisfactions on all levels of dependency or interdependency. Such gratifications act as a counterforce against the potentials for alienation in an industrial society. One finds evidence that this attitude of mentorship on the part of older men toward younger workers continues even in industrial units. The Japanese working in modern industry still seek out relationships with some nurturing paternal figure with seniority. The bonding together of nonage-graded "brothers" in labor organizations does not seem to satisfy many Japanese the way it does workers elsewhere.
One reliable index of social alienation is delinquency among youth. After a fifteen-year postwar surge in youthful delinquency among lower-class youth in Japan, the overall rates are going down rather than up. Instead of finding restive alienation among the lower-class youth in Japan today, one finds that it is the youth from relatively higher-status backgrounds in the universities who express more social criticism and feelings of social alienation. There is an obviously increased malise about the impersonal, albeit vastly expanded, system of advanced formal education. College students are exhibiting more signs of personal social
stress than the youth who go to work in either large- or small-scale industries. The students from middle-class families seem to lack integrating personal interaction with occupational mentors. The teacher's role has become not only distant but much more impersonal than in the past. In contrast, industrial workers, or college youth after they enter business concerns, quickly become part of an organization and take on a sense of personal belonging.
In contrast to the American society with its more stringent forms of age segmentation and peer-group orientation, and its high rate of unemployment among all youth but especially minority youth, the more hierarchically organized Japanese society still, to some degree, bridges the generation gap induced by rapid social change. It is the Japanese upper-middle-class youth, during their time spent as noncommitted students, that manifests crises related to occupational choice. The period of worker apprenticeship, whatever its hardships and strain for the individual, is not a period of protest or alienation for most. In brief, to the degree that it is still maintained in Japan, the apprenticeship system remains a force for maintaining social cohesion in modern Japanese society. The same cannot be said for the university.
Let us consider certain organizational and psychological features of Japanese culture in turn. They are inseparable aspects of observed social behavior. Nakane Chie in her recent volume, Japanese Society , distinguishes between two types of belonging: "attribute" and "frame." Attribute groups include both those entered by ascription through birth and those entered by acquiring an occupational specialization. In the first instance, the groups may take the form of clans or kinship lineages; in the second instance, the individual enters a group designated by class position or some given occupational definition such as plumber, carpenter, or professor. In contrast to all such attribute groups is the second major type of group of identity produced by "frame." For Nakane, a frame is a situational-historical definition of belonging such as what happens to you when you join the Ford Motor Company or become a member of the New York Times staff, regardless of the actual position. In this sense, partially at least, the U.S. labor movement might serve as an illustration: the CIO organized industrial unions on the basis of frame, whereas the AFL organized workers on the basis of attribute.
The strongest sense of occupational commitment or loyalty found in Japan is in a frame group. One joins such a group for life. Within a frame organization of one kind or another, Japanese subjectively experience working together on common objectives as satisfying to their own inner sense of purpose. These groups, by definition, are internally cooperative; no overt displays of competition are permitted. Any existing competitive-
ness, such as seeking some special recognition or advancement, must be disguised in terms of overall group objectives. Fixed ranking is used to minimize competition, and the principle of seniority is often exercised as the major criterion of precedence. Nakane's principal contention about Japanese social organization, past as well as present, is that frame interpersonal organizations have been more important within Japanese culture than attribute organizations such as kinship structures. This is despite the fact that kinship terminology is used to indicate the familylike atmosphere that is supposed to unite groups. In fact, individual Japanese do characteristically identify themselves as a permanent member of some group like the "Asahi family" rather than as a janitor or newsman who happens to be working for the Asahi press. A sense of belonging with other members of the Asahi is more important than maintaining some formal occupational-class cohesion with other janitors or reporters working elsewhere. Nakane further cogently analyzes how cooperation is emphasized in team efforts shared by all members in a hierarchically defined frame cluster such as a manufacturing company, or even the university, which tends to function in direct competitition with other similarly constituted social units.
From a psychocultural standpoint, I contend that the propensity to join a frame organization, whatever its compelling organizational features, is integral with Japanese socialization experiences that continually emphasize the interdependency of individuals within the primary family. The family is also organized around a sense of precedence in time by seniority among branches and within sibling relationships. The sense of order in precedence or seniority learned within familial relationships is transmuted into one's occupational role.
The traditional sense of tragedy in Japan involves conflicts of loyalty between that accorded one's occupational status and that felt toward the primary family. The acceptable moral resolution of this quandary has usually been structured in favor of the occupational role. In this respect, too, Nakane's analysis makes good sense.
Nakane's description of the vertical structures in Japanese social organizations helps spell out why there is so little evidence of class alienation in Japan compared with Western and even Soviet industrial societies. It is my contention, however, that this cohesiveness must be further explained in the special features of Japanese paternalism as it is experienced in an emotionally satisfying way by Japanese. The expressive satisfaction to be gained sets behavioral limits on the superordinate role. It mitigates against the more widespread appearance in Japan of alienating and exploitative abuses of workers as impersonal objects; workers in the West can deal with such abuses only through the formation of conflicting organizations, which exercise a protective power reinforced by legal contracts.
Nurturance, an Expressive Need:
Actuality and Illusion in Japan
Central to a psychocultural analysis is a thorough consideration of the nature of the subjective experience of exploitation from an expressive as well as an instrumental standpoint. One has to examine, for example, how particular emotionally satisfying or expressive features of a subordinate role can conflict, in the inner experience of the Japanese employer, with the instrumental advantages to be gained by uninhibited economic exploitation of subordinates. Conversely, one has to examine how the exercise of culturally patterned dependent expectations on the part of subordinates can, in certain instances, distort perception of the actual situation so that they hide from themselves the degree to which they may have been victims of exploitation on the part of their superiors.
One can make the extreme contention, for example, that instrumental or economic exploitation does not exist as a social problem until it is consciously perceived and defined as such by the individual subjected to it. This lack of readiness for the Japanese worker generally to perceive himself as exploited is a point of considerable frustration to the leftist political parties in Japan. One may generalize that the majority of Japanese workers choose to continue to think in positive personal terms about their superiors rather than to perceive themselves as used impersonally by them simply as a means toward economic gain.
One is constrained, therefore, to consider the fact that in Japan a Western type of alienating class consciousness is countered by a type of economic and social paternalism that is still experienced as relatively satisfying by both those in the subordinate as well as those in superordinate positions. Such an expressively satisfying paternalism can offset the alienating processes involved in more directly impersonal instrumental situations of class exploitation. From a psychological-motivational point of view paralleling Nakane's structural analysis, the paternalism in Japan works because there is a reciprocal, personal, psychological identification between subordinate and superordinate individuals. Status differentials in Japan do not completely impersonalize or distantiate, causing a lack of emotional concern between those on different levels of Japanese status hierarchy. Therefore, there is possible an emotional interchange of a type that is very rarely experienced between present-day superiors and subordinates in Western economic settings.
One has to examine whether the Western manager or owner has learned to think so completely impersonally about his work force as a consequence of his social history or as a consequence of his trained capacity to think in impersonal abstract terms. Impersonal abstract thinking is notably lacking in the Japanese tradition. Western economic theory is, by and large, impersonal. The operative forces are economic forces. Decision is "rational." Personal, emotional concerns and what are
defined in Western economics as irrational considerations are handled with difficulty in economic formulae. The presence or absence of paternal attitudes, therefore, has only a secondary role, if any, in economic theory. The laws of supply and demand are impersonal, mechanical forces; human decison-making starts with the assumption that man given the opportunity will maximize his material benefits rather than impose irrationally based constraints on himself.
An examination of Japanese legal structure demonstrates how the subordinate has been in effect at the mercy of the superior. What is imperfectly understood even by the Japanese themselves in examining social science theory is the degree to which there remain implicit, legally unenforced constraints that limit the decision-making of the superior. These constraints are not established in law, but enforced simply by Japanese psychology.
Paternalism in Japan is real. Those in the oyabun (parent role) positions do indeed relate very often to their subordinates as if they were charges. They are not simply dealing with impersonally conceived contract labor from whom one seeks to obtain maximum productive output. The subordinate is not depersonalized or treated as a machine. Even in Western capitalism there is now some knowledge of the fact that one has to oil the morale of one's workers at least as well as one's machines to maintain proper functioning without too much disruption or need for constant, costly replacement.
The master who takes on an apprentice might be seen from outside the system as one who economically exploits the labor of the young by paying them pitiful salaries under the pretext that they need years of training in order to learn a skill well enough to function independently. The same behavior perceived internally and subjectively may be phrased quite differently by the participants; this internal cultural perception at times demands the capacity for considerable denial or distortion away from the raw objective fact of exploitation. In their mutual internal perceptions, the Japanese see the apprenticeship situation as a reciprocal payment of present labor for future-oriented training in a skill. Although apprentices are paid poorly, if at all, the apprentice is learning a necessary trade through which he will later realize himself and earn his own living. Indeed, very frequently an apprentice inherits his master's job, even his family. This is not to gainsay that in many occupational situations in Japan there is a lifelong perpetuation of kobun (child status), where the individuals remain subadult and maintain an emotional and financial dependency on an oyakata (parent figure) who periodically rewards his followers by symbols of appreciation or nurturance. Such ties remain highly emotional, internally reinforced by potential guilt should the subordinate not repay his benefactor. And what is often missed by the Westerner and even by modern Japanese is the fact that guilt arises on
the part of the benefactor should he fail to give proper care to his subordinates.
Some Western observers might concede that an apprenticeship situation can be tolerable when one can identify with the future privileges to be reached by seniority. This is probably more quickly understandable to some than situations of satisfying lifelong dependency. Those espousing modern Western concepts that all individuals in a society should strive for a sense of independent adulthood are disturbed by the readiness in some cultures to espouse the permanently dependent role as a positive feature of a society. Western theorists do not like to consider the fact that Japanese paternalism also gratifies an expressive need for dependency on the part of many. Such gratification is considered irrational in both impersonal and economic terms.
The propensity to continue dependent gratification is related emotionally to the way many Japanese are socialized in their early primary family experiences. William Caudill and others who have studied Japanese socialization in considerable detail find that a primary feature of Japanese socialization is the manner in which strong dependency needs are developed and sustained by culturally typical patterns of maternal nurturance directed toward the young. This early childhood pattern is reinforced in later secondary occupational socialization by the manner in which passive compliance is periodically rewarded. The individual learns to seek continuing gratification in this manner. He not only learns to expect it, but learns to some degree to distort his perception so that he will achieve fancied gratification from those in superior positions to him.
This latter observation of how Japanese characteristically distort toward the experience of fancied care and gratification from others is well brought out in descriptions of Naikan therapy very often practiced with delinquent youth. The individual sits and contemplates or meditates on how he has been ungrateful in the face of the supposed benefices given by his or her parents, mother-in-law, or other parental authority who are culturally expected to gratify the individual's need for nurturance.
This is a highly complex process to be further explored psychologically and culturally. Japanese characteristically seek to quell internal resent-
ments by distorting toward a not infrequently illusory perception of gratification within the family; in like situations in the West, the individual might more candidly observe a non-nurturant family environment and turn outside the family to religious beliefs. He is taught not to expect nurturance from those who cannot give it, but to overcome resentment by turning to a universal source. In fact, the seeking after dependent nurturance only within the family is culturally discouraged. Individuals are supposed to learn to be less emotionally dependent, less "hung up" about what to expect from others. We cannot overemphasize this cultural historical difference in ways of achieving emotional security as it relates to religious belief systems. One central function of Christian beliefs is to give the individual the assurance that there is someone who cares for him and will take care of him; someone who recognizes his deepest needs, understands, and accepts. This person is not a real figure in the actual social environment but either the Virgin Mary or Jesus Christ. God the Father for many is too aloof an authority figure to concern himself individually, but his compassionate son or the mother of his son are considered approachable figures, from whom to receive a sense of care and concern. In turn, one "gives" himself over to Jesus. One finds a release from the petty resentments of life and can then experience a flow of love. The Japanese generally have no such religious recourse to a Jesus figure, although some have found emotional satisfaction in reliance on figures such as Kannon, an oriental goddess of mercy.
In most instances, however, Japanese are constrained to find the illusion, if not the reality, of "giving" within the primary family or in some occupational transmutation of the primary-family relationship, so that individuals in parentlike roles tend to be imbued with capacities and desires to give what they may not actually possess. Japanese are wont, therefore, to feel gratification from individuals who have in actuality done very little to deserve such attachment. It is often curious to Westerners when they find Japanese expressing gratitude for behavior that they themselves had given little thought to. They do not well understand the Japanese need to feel that someone has cared, has given special attention—has indeed inspired him, released his energies productively, and freed him from the necessity of feeling resentful toward an impersonal ungiving world.
When these nurturant expectations are not fulfilled, the Japanese have a cultural reluctance to place blame or resentment on external society or on particular individuals; under duress, their only object of blame readily available tends to be the person's own body. This psychological pattern makes resentful social protest or persecutory personal paranoia culturally less frequent. Japanese paranoid individuals in my experience, for example, more characteristically exhibit delusions of grandeur than of
persecution. There are in any Japanese population a number of benignly paranoid individuals whose delusionary system includes some beneficial act, which he is bestowing upon the entire world, such as the creation of new inventions or the writing of some book that will unite conflicting societies. In effect, these are grandiose delusions of bestowing benefits upon a needing world that blot out the hard fact of being ignored or forgotten as an individual. Japanese would rather distort reality in a direction of experiencing gratification from understanding superiors than distort in the direction of experiencing themselves subject to a melevolent, impersonal, exploitative social system in which they are being used, broken, and cast away as rubbish. Such a view of life for many a Japanese would elicit an unmanageable sense of irreparable outrage.
Seeking to continue dependent gratification in the adult occupational role is related emotionally to the way that many Japanese are socialized in early primary-family experiences. A primary feature of Japanese socialization is the manner in which strong dependency needs are developed and sustained by the culturally typical patterns of maternal nurturance directed toward the young. This nurturance pattern is reinforced in later, secondary, occupational socialization in a sufficient number of instances to make it a culturally prevalent belief system. Passive compliance is rewarded in emotional currency.
Not every individual has to have these learning experiences in his childhood and reinforcement of them in his later adulthood for the cultural belief system to persist. In a culture that puts heavy emphasis on a nurturant mother, some individuals may not experience such a nurturant mother; but since it is a shared belief transmitted in interpersonal communication that one is to expect a nurturant mother, one will tend to distort one's own experiences toward the maintenance of the belief that he too experiences the type of giving for which he should feel grateful. In the West, the figure of Jesus or Mary as a giver of care and concern is used symbolically in the religious system; in Japan, the mother, or parents, or later the boss is perceived as a potential source of nurturance. If the wish is not reinforced by the immediate experience, it is reinforced by the communication of a social belief in which the particular individual participates.
This emphasis on dependency and interdependency is related psychodynamically to a second feature of Japanese socialization—the capacity to sustain oneself through present adversity toward the realization of a future goal. The virtue of endurance is recognized in Japanese culture and expressed through a number of terms with various shades of meaning in given circumstances. Endurance is a continual test of a capacity to win out in the end. "Succeed" is an English word that still carries both senses of its
meaning in Japanese. That is, to succeed is both to accomplish and to inherit—usually on the part of someone who has played an inferior role for a long time in anticipation. For a Japanese there is nothing personally demeaning in being a pupil for a long time or in submitting oneself in a seemingly passive way to the active dominance of someone playing the master's role. There is the balancing anticipation that by submitting one will eventually learn the necessary secrets of power and mastery. So too, as a nation Japan could learn from the West because there was no sense of pride being permanently wounded by taking in knowledge when one knew it was for the purpose of future mastery, independence, and perhaps, dominance.
A third feature typical of Japanese socialization is how the development of empathic capacities for vicarious identification is crucial for the exercise of paternalism. I have elsewhere noted the psychological identification of a mother with the success of her male child, or with the success of the lineage into which she has been adopted by marriage. There is the same capacity for vicarious identification on the part of an inferior with the behavior of the individual in a superior role. It is less frequently noted but true, however, that the individual in the superior role identifies in some ways covertly, if not overtly, with the person in the inferior role. This last type of identification is usually on the part of older men toward younger men, since men are less permitted to cross the barrier of sexual roles and identify with women in their subordinate status. Men can be rather unsympathetic or unconcerned with the feelings of women or even their own children while quickly sensitive to the feelings of male subordinates outside their own family. Nevertheless, although it is generally disguised, there is a potential for guilt on the part of males toward their long-suffering mothers, if not their wives. As a consequence, potential for guilt on the part of superiors toward inferiors becomes a deeply internalized part of a Japanese sense of status responsibility.
It is necessary to take into consideration such patterns of vicarious identification that are emphasized in Japanese socialization; one cannot explain simply from a social structural point of view why the Japanese society is so well knit together in vertical structures by expressive affectional ties instead of by the externally visible instrumental contractual bonds required in the West.
In Japanese society, the capacities to endure in order to succeed and to identify vicariously with one's superior reach their apotheosis in the role of married women. Women identify readily with males carrying out their
expected roles. This identification is an essential part of the woman's capacity for a deep sense of accomplishment as a mother; and her capacity for endurance permits her to go through what seems to be almost incredible acts of metamorphoses in the later stages of her life cycle. The meek bride is, in effect, the pupal stage of the later horrendous mother-in-law, just as the eager male apprentice is the larval stage of a potentially dominant master in the future. Many males, of course, carry on a continuing larval existence as more or less well-cared-for drones. The fact that the final stages of metamorphoses do not occur for all in the same way does not negate a Japanese cultural climate of relatively high worker morale.
Psychologically at least, if not in actuality, it is as if Japanese are in various stages of "becoming" during their life cycle. This gives them a sense of forward thrust into an optimistically conceived future. If the subsequent stages of metamorphoses do not occur during one's own life, there is the hope that they will see realization in one's children. While looking forward, one remains at the same time in a dependent position within hierarchical relationships. Premature assertion of independence would be disruptive. The individual would be destroyed and, therefore, would never reach the final stages of development, which require waiting and patience. Better to wait for an opportunity than to destroy one's chances by a premature assertion of independence that will not be sanctioned by the existing social reality.
The Western image of paternalism connotes an instrumental-exploitative use of a dependent labor force with whom there is no sense of personal involvement or belonging. The Japanese, in contrast, tend toward strong belief in political and social myths about their nation, company, group, or family collectivity. The boss or oyakata is supposed to have parentlike feelings. Indeed, the social expectations of his role often cause him to manifest overt behavior suggesting such feelings whether they are present or not. The good parent is assumed by the group or the community to provide for his dependent children—no matter what internal emotional reality is experienced. There are positive fantasies of protective consideration directed toward such superiors as bosses or company presidents that reinforce an internalized sense of responsibility on their part. They are not psychologically free to dehumanize their employees into numbers or abstractions of statistical tables giving projections of maximal efficiency. Many Japanese industrial leaders as well as the small-scale entrepreneurs we have researched are caught with an inner necessity to play out the benevolent aspects of an idealized wise company president spontaneously concerned with the welfare of his workers.
Some of these individuals who have succeeded from humble origins in the expanding national economy of Japan can hearken back in their imagination to their own previous status as young apprentices. They take
pride in their rise through adversity, and maintain within themselves a personalistic capacity to identify with an eager younger man who seems dependent on an older leader. On a deep psychodynamic level, one finds in Japanese an age-status network of affection binding persons of sharply different status into relations with one another. This sense of expressive rapport transcends status differences that more characteristically alienate individualistic Westerners from one another. The Western identification is more easily directed horizontally, whereas the Japanese sense of identification extends itself up and down in vertical relationships—characteristically defined as age-graded patterns—in which the individual has earlier experienced the lower stages and anticipates his experience of higher stages with succeeding age.
Since the subordinates have no instrumental power in the Japanese status hierarchy, they can only hope to induce kindness in their superiors by invoking potential feelings of nurturance and appreciation from them. This capacity, which is called amaeru in Japanese, has been very simply and cogently discussed by Takeo Doi. If fate puts one in the hands of a harsh authority, one has no recourse but to endure and to hope for change in the future. Japanese must depend on the positive expressive aspects of their dominant-subordinate relationships to be rewarding, since they have only recently begun to create in their social institutions the instrumental guarantees that ensure or secure what Westerners consider rights or justice for the weak.
It is often difficult for modern Western observers to consider a combination of nurturance and control that works both ways: not only is nurturance used to control, but control sometimes is a means to the bestowal of nurturance. The fact that he had early gratification of his own dependent needs constrains many a Japanese boss to find social means to bestow on others what a Westerner would view as almost maternallike nurturance. Such constraint comprises a profoundly significant part of Japanese social consciousness and sense of social responsibility. Wagatsuma and I have described the not unique incidence of a company president of a tiny five-man factory who turned back his extra income to his workers, realizing for himself his idealization of being a warm, paternal figure. Robert Bellah has provocatively contended in a cogent argument that the traditional image of the emperor contained maternal attributes. While agreeing with the essential arguments forwarded by Bellah, I would put it that what one calls maternal in Western parental role concepts can be readily fantasied as part of paternal authority behavior by Japanese. It is indeed true that the experience of such nurturance is derived from the mother-child experience; nevertheless, one frequently finds Japanese
males behaving toward one another with maternal-like nurturance attitudes.
A system of reciprocity in expectations between superiors and subordinates only works when there is sufficient belief on the part of the subordinates that they will be rewarded if they perform properly in their subordinate position. The system therefore implies a reciprocal sensitivity to the expressive needs of subordinates on the part of superiors, not a simple exploitation of the weak on the part of the strong. In processes of socialization found frequently in Japan there is indeed a particular kind of internalization socialized into those who will later assume positions of authority. This process starts with a strong dedication on the part of the mother to her role as responsible socializer. This dedication requires considerable desexualization and the general foregoing of immediate gratification.
The Cleavage between Social Theory and Practice
It was also the expected, or at least idealized, role of the samurai bureaucrat in the premodern culture to be as truly dedicated to his job as a mother to her children. We are wont to hear more, much more, about the samurai as a swordsman, who would cut down inferiors, than about the samurai as a dedicated administrator, who was relatively uncorrupt and who would attempt to govern with an unusual degree of equity and fairness. Craig and Shively, in a number of chapters in their volume, present instances of notable samurai who performed as dedicated governors and administrators. Administrative authority may have been feared in Tokugawa Japan, but there was also an overall general respect for it. This is not to gainsay the periodic peasant rebellions against improper treatment. These were indeed symptomatic of misrule and corruption in local instances, but generally the system worked because there was enough relative honesty to keep it going. Therefore, individuals who held authority positions were generally invested with a certain moral ascendancy by their subordinates. The obvious split in the West between the idealized spiritual authority of the church and the rebellious self-righteous hatred of corrupt state power does not appear in Japan. In the West the individuals in the religious hierarchy were supposed to be more dedicated, while those in the secular hierarchy were expected to be less trustworthy. If there were any counterpart in Japan to Western religious authority, it is curiously enough found in the role of the dedicated civil bureaucrat.
Present-day police and governmental administration in Japan, compar-
atively speaking at least, inherit considerable public respect. Whatever the negative feelings engendered, authority is never perceived as so dishonest that it is distrusted, and for the most part it is granted a degree of respect rare in the United States. This attitude of respect is more feasible for Japanese emotionally. It is mobilized as an implicit expectation that gratification will be awarded for compliant behavior. The Western sense that moral obedience gains God's reward of nurturance is seldom extended to civil authorities; in Japan it is indeed toward the civil not the religious authority that one traditionally directs respectful obedience.
Such a pattern of emotional interaction in a hierarchical social structure is highly repellent to Western theoreticians and, of course, to modern Japanese Marxist theorists as well. They choose to ignore its operational force in present-day Japanese society or to see it as socially pathological. They choose the Western model of society as the ideal basis for social analysis. Japanese social historians, also influenced by Marx, emphasize rational instrumentality and ignore, if not abhor, the continuing force of expressive needs that permeate occupational as well as familial hierarchical structures in Japanese social organization. They do not like to see the relation between high industrial morale and what they term feudalistic social patterns. In the West, industrialization separated social classes rather than bringing them together. The lack of identity between classes in Western nations has become an alienating factor. Not only is there a lack of emotional ties, but there are direct and continual experiences of impersonal exploitation. The results are strong feelings of mutual class antagonism and a further separation between the different occupational strata of Western societies. Western nations, despite their capacity to arouse ethnic or national patriotism in wartime, are not knit together like Japan with a mythology of quasi parentage, or extended quasi-familial networks of obligations that act as nonlegally specified internal constraints against raw exploitation.
It is difficult, however, for Japanese to extend their administrative organization overseas to include non-Japanese. The implicit role patterns that allow mutual understanding of noncontractual operations within a totally Japanese social organization do not function well when members of alien cultures are involved. During their period of military expansion, the Japanese found that they could not readily identify downward with subject members of alien populations, and moreover the expected types of deference were not forthcoming from subordinates. In this situation, the Japanese potential for a racist-type of arrogance was quickly manifest, alienating even the previously subordinate populations who had initially viewed the Japanese as liberators.
Even today the implicit understanding that makes decision-making and interpersonal communication possible in Japanese occupational hierarchies cannot work with a minimum of formal legal contractual structuring
when non-Japanese are involved. The Japanese are constrained to adapt themselves in their external dealings to programs lacking the expressive aspects of psychological functioning that continue to operate peculiarly within Japanese organizational life.
Economic Realities and Enterprise Strategy
Peter F. Drucker
A great many books and papers have been published in the last few years pointing out, especially to the Western businessman, the differences between the way business is conducted in Japan and in the West. There have been discussions of Japanese personnel policies, of the decision-making process in Japanese business, and of the relationship between business and government. But the area in which Japanese management seems to differ most in behavior from what Western executives are wont to take for granted is the area of business strategy.
In the first place, Japanese business does not, it seems, put great stress on "maximizing profit." Second, Japanese business enterprise, for all its vigorous selling efforts, does not usually market and sell its own products. Indeed, it relies on an outside "trading company," which handles a great diversity of products for a great many different producers in the domestic Japanese market as well as in the export markets.
Finally, Japanese business enterprise aims at maximizing volume. Increased sales, rather than increased profits, seem to be the first objective. The Western company, American and European, that enters into a joint venture with a Japanese company, invariably reports receipt of a most comprehensive sales plan from its Japanese partner. But rarely does the Japanese partner seem to pay much attention to the profit planning which the Westerner has come to regard as the necessary foundation of rational business strategy.
Businessmen notice these phenomena, but are understandably not much interested in explaining them. Scholars also have made few attempts at
explaining Japanese business strategy. The Japanese tend to take it for granted; and Westerners tend to fall back on such bromides as "Japanese tradition," or "Japanese values," or some variant of the "inscrutable Orient."
Yet an understanding of such basic differences in business strategy should contribute greatly to our understanding of Japan and of the Japanese economy; the nature of cultural differences; and the economists' "theory of the firm" that is our model of microeconomy and of economic behavior. The Japanese have built and are running exceedingly successful businesses; yet their basic business strategy not only violates everything a Western executive "knows"; it is incompatible with the economist's (including the Japanese economist's) theories of economic behavior and of microeconomics.
It is the thesis of this paper that the business strategy of Japanese enterprise, while indeed different from that of American or European business, is not "mysterious" nor "nonrational" nor "culturally conditioned." It optimizes, in perfectly rational fashion, the specific structural realities in which Japanese businesses operate, especially those of banking and capital markets and those of wage system and wage structure. And these structural realities, in turn, are not the result of Japanese tradition or of Japanese values. They are of recent origin—mid-Meiji at the earliest. When introduced, they were genuine innovations and not adaptations of new tasks to old institutions or old traditions. They resulted from accidents of personality or from highly specific socioeconomic and political conditions at a given moment in time. This paper will attempt to place the Japanese structural realities and the resulting Japanese business strategies in context by comparing them with both American and European realities and resulting business strategies.
Capital Market, Banking Structure, and the Role of Profit
There is evidence that the Japanese business enterprise puts profits much lower on its scale of values than any Western enterprise. By any of the conventional measurements, the profitability of the Japanese business enterprise appears low. Measured, for instance, as percentage of sales—the most widely used measurement of profitability and profitability objective—Japanese business enterprises, especially large businesses, perform at a much lower rate of profitability than enterprises in similar lines of business in the United States or in Europe.
And yet it is also clear that the Japanese economy operates at a higher rate of profit than any Western economy. Japan has, ever since the Meiji period, managed to run its economy at a phenomenally high rate of savings and investments measured as a percentage of total gross national
product. This would not be possible unless profits—a major, if not the major, component of capital formation—were consistently very high.
The explanation for this apparent paradox lies in the structure of the Japanese banking system and capital market. As the result primarily of a historical accident—the ascendancy of Iwasaki Yataro, the founder of Mitsubishi, during the formative years of Japan's modern economy—"profit" is not what the business enterprise shows as such. The profit that matters to the economy is what the banks return, especially the zaibatsu banks that finance the zaibatsu industries.
In the early Meiji years when Japan started to build her modern economy, banking was already seen as central to economic development. Fukuzawa Yukichi stressed the need to develop a banking system in his very early writings. And the most brilliant of the young economic leaders in early-Meiji government, Shibusawa Eiichi (1840–1931), resigned from one of the most powerful positions in the Ministry of Finance at the age of thirty-four to become a banker and thus to serve his nation more productively and forcefully than he could even as a powerful civil servant and government leader.
At that time, the model of banking that dominated the developed world was the English banking system. Fukuzawa Yukichi focused on it in his writing. The early banks, started around 1870 or so, were meant to be joint-stock banks on the English model. But this model of what Americans call the "commercial" bank was not suitable for Japan.
The English banking system had been developed before the Industrial Revolution. It was a child of the Commercial Revolution of the late-seventeenth and early-eighteenth century and focused on trade, not industry. When industry developed almost a century later, it developed essentially outside the banking structure and without the benefit of the banking structure. Banking remained focused on the commercial, the trading transaction. The English capital market, and following it, the American capital market grew up almost entirely outside the banking system and contributed venture capital directly to local industry.
This original pattern has persisted to this day in Great Britain. No major British industry has been built by the banks, whether the joint-stock or merchant banks. The most comprehensive history of a major British industry does not even mention banks and bankers as factors in the founding, growth, or even the merger of the multitude of companies out of which Imperial Chemical Industries was created in 1926. While the entrepreneurial banker had a major role in the United States between 1870—when J. P. Morgan returned from Europe and started his own
banking house in New York—and World War I, the capital market in the United States started outside the banking system and during the Depression was moved away from the banking system into separate institutions.
This was not a pattern Japan could adopt in 1870. To this day most Japanese books on banking are couched in language such as that used by nineteenth-century English banking theorist Walter Bagehot in his historic book, Lombard Street . But the English banking system was incompatible with Japanese reality. Industry had to be developed before there could be trade, and the English banking system, either in its original or in its modified American version, could not do this.
At the time of early Meiji, a second banking model was being designed. The continental European model, which has become known as the "universal bank," was a "deposit" bank unlike the English merchant bank. Its purpose was entrepreneurship: to find and finance industry, and to provide venture capital. The aim was to nurse an infant enterprise to the point where its securities would become marketable. At that point the bank would sell off part of its holdings in the enterprise at a substantial capital gain and recoup its investment. The bank would, however, retain sufficient stake in the enterprise to assure for itself the firm's commercial banking business. And it would continue to have a controlling voice, since the private investors, with whom the bank had placed the shares of the enterprise, would continue to hold their shares in the custody of the bank and vote their shares through the bank.
This universal bank was the model Japan needed, and the founder of Japanese banking, Shibusawa Eiichi, clearly had this model in mind. Indeed, as a young man shortly before the Meiji Restoration, Shibusawa had spent a year mostly in France—where the idea of the universal bank had originated—and it is highly probable that it is this experience that impressed him with the importance of both banking and business.
The universal bank was indeed founded to deal with a situation exceedingly similar to the one that existed in early Meiji Japan. The universal bank had truly developed in Germany—a country of small workshops and no industry but where there was, however, a heavy emphasis on education as the main engine for development and where the government had made economic development a major priority, if only to obtain and maintain military strength. Georg Siemens, who developed the model and served as the first head of the Deutsche Bank—the dominant financial institution on the European continent within a few short years—had, like Shibusawa Eiichi, started out as a young government servant, risen extremely fast to high position and then, contrary to all
social tradition, left at a very early age to go into banking as a better way to serve his nation.
The bank that Shibusawa Eiichi founded as Japan's universal bank, the Dai-Ichi Bank, did eventually, within the last few years, become Japan's largest bank. Yet Japanese banking did not follow Shibusawa Eiichi's logical line, and the reason is one man: Iwasaki Yataro. Unlike Shibusawa, Iwasaki believed in profit maximization. He also believed strongly that it was unsound to sell shares of enterprises to the general public; an enterprise had to be controlled completely by one man. He grudgingly accepted the need for incorporation, but he made sure that control would remain vested totally in the family head and that the shares owned by other members of the family would be held in what, in effect, was a family voting trust, with the head of the house exercising voting power. As for nonfamily "outsiders" holding shares, this appeared to him to make management impossible.
Iwasaki did not represent a "Japanese" point of view. His beliefs were shared by most of the major business builders of the late-nineteenth/early-twentieth century. Even in the United States, it was strongly held, for instance, by Henry Ford. In Germany, Siemens's idea of the universal bank, which mobilized individual savings for direct investment in the equity capital of business, faced tremendous resistance from industrialists as well as from a government that did not want to have public savings directed into share ownership. Indeed, Siemens had to go into politics and get himself elected to the German Parliament to fight the governmental resistance to the idea of public ownership of businesses and of a stock exchange. And he did not win out until the very end of his life, when a historical confrontation with his own cousins, the heirs of the great Werner von Siemens who had founded the electrical company that still bears his name, forced Werner's sons to accept direct public ownership of Siemens shares and interference from representatives of the public—that is, from the bankers—with company management.
Iwasaki Yataro also saw banking as central, as indeed, any intelligent observer of 1870 Japan must have done. But his idea of a bank was as an institution to attract capital for investment in the industries and businesses of the Mitsubishi zaibatsu in such a form that the public would in no way acquire title of ownership or control. The public would come in as depositors, and not as "investors." In other words, he looked upon a bank not as a means to create a capital market, as Georg Siemens and Shibusawa did. He looked upon a bank as a substitute for a capital market. And it was Iwasaki who prevailed.
As a result, Japanese industry is financed primarily by what legally are
bank loans. Economically, most of this money is equity capital. But it is not invested in the equity form, but in the form of short-term indebtedness. As a result, Japanese business is legally financed to only about 20 percent of its total investment by equity, that is, by common shares; 80 percent of the investment is in the form of loans. In the United States, the proportion is almost the exact opposite: 30 percent indebtedness and 70 percent equity. On the Continent, the proportion of equity is slightly lower in a large company than it is in the United States, but it rarely falls below 50 percent or so of total capital employed. Where most of the nonequity portion of Japanese capital is in the form of short-term bank loans, the continental European business tends to rely heavily on long-term bonds held by outside investors. In other words, the proportion of money in the form of bank loans is probably no higher in Europe than in the United States and may well be smaller.
The form of financing makes very little difference regarding the total return on the invested capital with which a business has to operate. The "cost of capital" is remarkably similar, especially in the period since World War II with its international and highly mobile capital market. It can be said that for the period 1950–1970 all business enterprises of any size whether American, continental European, British, or Japanese have had to earn 12 percent or so pretax income on total capital invested to earn the cost of capital.
Because of the different structure of banking and capital markets, the strategy needed to earn the cost of capital is totally different in the three areas. A Japanese business must earn enough money to pay the interest on what is legally a bank loan but economically is equity investment in business and industry. The profit in the Japanese economy—the return on venture capital—is essentially the difference between what it costs a Japanese bank to attract and hold deposits, and the interest it charges for the loans to industry. Therefore, Japanese banks have traditionally kept interest rates on deposits exceedingly low—in effect nothing. The interest they charge their industrial customers, on the other hand, is rather high and runs at least one-third, if not one-half, above interest rates charged for truly commercial loans. This is, of course, completely legitimate considering that most are not truly commercial loans and therefore include a much larger risk premium. As long as the interest on these loans is secure, the bank is satisfied. Business earnings over and above what is needed to cover the interest charge with a fair safety margin are of no benefit to the bank. The bank's income is fixed, and therefore it exerts little pressure on its customers to increase earnings over and above the interest required.
There is also little reason for the Japanese business executive to try to increase earnings on that fairly small portion of his total capital that is in the form of common shares and legal equity. By old tradition—which is only now beginning to change—companies can only issue additional
shares at par value. They cannot, as in the centuries-old Anglo-American business tradition, issue shares at their market value, even if the market value is many times the original-issue value. A Japanese business does not acquire the capacity to obtain capital at more advantageous cost if its share price goes up. In effect, successful Japanese enterprises issue new shares as a form of stock dividend, a distribution of earnings, and not as a way to obtain new capital at advantageous cost.
The Japanese business manager, therefore, has little incentive to increase earnings above what is needed to cover the bank's interest charges and earn a modest return on the shares outstanding in the hands of the public—which itself is a post-World War II innovation for the zaibatsu companies. Although his minimum profitability is high for interest charges, this needs qualification. Since legally his profit is paid out as interest on debts, the tax collector does not consider it profit, but a deductible business expense. Insofar as the tax on corporation profits is indeed a tax on profits—rather than a tax on the consumer as most economists would contend—the Japanese business has a decided advantage over its Western competitors. Increasing profits also do not make it possible for him to decrease his dependence on the bank and increase the amount of equity capital he can raise outside in the growing capital market. The tradition that forces him to offer new shares at par shuts this escape hatch.
From the point of view of the Japanese business executive, however, faced as he is by the high cost of the capital on which he depends, minimizing the cost of capital is the most rational business objective. Maximizing profit makes no sense to him: there is no benefit to his company and incidentally, with stock options being practically unknown in Japanese management, no benefit to him personally. But minimizing the cost of capital—that is, trying to operate the business with the very minimum of borrowed money—is indeed a major rational business objective. His business strategy, therefore, focuses on profit only to the extent to which it represents a minimum requirement. That minimum is quite high by Western standards. It is nonsense to say that the Japanese executive is not profit conscious. But he is not "profit-minded" in the sense that profit is an objective. It is a necessity; "minimizing the cost of capital" is the objective.
That this is the result of structure and not of values is clearly shown by the way the different banking and capital market structures determine business strategy in other areas. In the United States, where the commercial banking system traditionally has been kept out of the capital market, and where the capital market has furnished funds primarily in the
form of equity capital, profit maximization is a rational objective. It is the way a business is enabled to obtain the capital it needs at the lowest possible cost—the strategy calculated to produce "minimization of the cost of capital." The American business that depends on a capital market will have to pay less for new money the higher its shares are priced in the market. The price-earnings ratio, therefore, determines to a large extent—though not entirely—the cost of capital for the larger, publicly held American business. Maximizing profit on equity is, therefore, the way in which the American manager minimizes the cost of capital. Maximizing earnings per share are rational objectives for him. At the very least, it is a rational means to the same objective of "minimizing the cost of capital" which leads the Japanese manager to a very different strategy.
On the continent of Europe, the rational strategy is neither to maximize earnings per share nor to minimize the cost of capital, but to maintain the dividend on the common share. With the bank as the determining shareholder—even though its direct holdings may be only a fairly small proportion of the share capital—maintenance of this dividend best suits the needs of the decisive shareholders. The bank depends on dividends from its business investment to pay its liabilities—the interest it owes to its depositors. It has a fixed obligation, which is met out of the distribution of business profits. Maintenance of the dividends is, therefore, far more important to the German or French or Italian universal bank than rapid growth of earnings. Fluctuations in the dividends are intolerable and dangerous. For the continental European business, this means a policy aimed at maintaining dividends at a reasonable but not necessarily very high level and building reserves during years of high profit to make dividend maintenance possible in poor years. Again, maximization of profits is a secondary goal. Stability of dividends comes first.
In fact, all three systems can be said to have the same objectives: minimizing the cost of capital and minimizing the risk of not being able to obtain capital. These two objectives are the only rational foundation for a valid "theory of the firm." They are also the only valid objectives for rational business behavior. But the structural, institutional conditions that result from accidents of history rather than from cultural traditions dictate different strategies for the attainment of these objectives in different economies.
The profitability level of the economy is dictated by objective forces, especially by the objective need of an economy for capital. For this reason, profitability of the Japanese economy—an economy developing from a low base, with poor natural resources, and with a conscious policy of not depending on capital from abroad—had to be very high. And it has been high except during periods of severe economic depression like the early 1920s or the 1930s. But because the true venture capital of the Japanese economy is not investments of the public in equity or even investments of banks in equity but bank loans, the individual Japanese business
enterprise does not base its strategy on profit maximization. To do so would be economically irrational. Instead, it bases its strategy on minimizing the cost of capital.
The Trading Company
The trading company and its role in Japan are also, in large measure, a result of the structure of banking and capital markets rather than of tradition or of Japanese values. And again, it is instructive to compare the situation in Japan with that of the United States and Western Europe.
The Anglo-American banking system was essentially created to provide medium-term credit. It is the medium-term credit, the credit with a maturity of ninety days to five years, which is the typical and indeed constitutive credit in a commercial economy. It is also the credit for which need expands the fastest with economic growth.
In England, the credit demands of an emerging commercial economy were satisfied through two different institutional channels which developed side by side: (1) the deposit bank, primarily for short-term loans needed for domestic purposes such as seasonal loans on crops or loans to artisans; and (2) the merchant bank, founded to provide medium-term loans, especially for foreign trade. In fact, the merchant bank is what was meant when people talked about banking in the mid-nineteenth century. Its highly developed institutional structure, organized around the discounting of foreign trade bills of exchange, is essentially what Walter Bagehot presented as the model for the banking system in Lombard Street more than a century ago. To this day, the commercial law of continental European countries, codified as a rule in the mid-nineteenth century, centers on what the Germans call Wechselrecht , the law relating to the instruments of medium-term credit.
In the United States, the merchant bank did not develop. The American bank that came into being instead—perhaps first with Alexander Hamilton's founding of the Bank of New York in the closing years of the eighteenth century—was designed to attract short-term deposits and to lend them out medium term. The American banking system is predominantly a medium-term banking system, designed to finance domestic trade rather than foreign trade like the English merchant banks.
On the continent of Europe, the universal bank embraces medium-term finance at least in theory. In actuality, the Continent never built an adequate medium-term banking system. In part this resulted from the availability of the City—that is, of the medium-term market in London, organized around the merchant bankers. This supplied the medium-term money needed to finance foreign trade well into this century—that is, until World War I. In part the universal bank, founded as a bank for enterpreneurship and for the development of industry, focused on its
industrial group in the supply of medium-term money. Businesses outside of a bank's orbit found it, as a rule, difficult to obtain medium-term money. The main reason, however, was probably legal. By concentrating on the formal instruments of medium-term credit, and especially on the bill of exchange—an instrument that never found true acceptance in the United States—the banks focused, in their medium-term lending, on transactions rather than on borrowers. The American banks, by contrast, soon began to finance businesses rather than transactions and thereby developed increasing expertise in medium-term finance. To this day, the American commercial bank has the leadership in medium-term finance, which explains, for instance, why in the last twenty years the major American banks have been able to establish themselves as financial leaders in European business and even in that citadel of old merchant banking, the "City" of London.
In Japan, medium-term finance remained almost undeveloped. The zaibatsu banks had set a pattern of banking as the provider of venture capital, and this absorbed all their available resources. Medium-term flnancing for foreign trade became available very early in the form of the instruments developed by the Europeans. But Kobe financed its cotton imports in London and Liverpool rather that in Tokyo or Osaka. Medium-term finance in Japan has been scarce and hard to get, even for large and successful businesses.
Yet it is medium-term credit that grows the fastest as an economy or a business expands. We do not have reliable figures, but it is safe to say that for every dollar of equity financing required for business expansion, three to five dollars are required for medium-term finance. At least, this has been the experience of the last twenty years in respect to financing the tremendous expansion in world trade.
For structural reasons, therefore, Japanese business faces a continuing shortage of medium-term finance, and at the same time a particularly high need for it. While equity finance primarily finances production, medium-term finance is required for distribution, and the Japanese distribution system is one that ties down large sums of money for long periods. At the same time, such habits as the semi-annual bonus militate against developing instruments to mobilize medium-term finance, such as installment paper.
Shibusawa Eiichi saw this clearly. In his various writings—especially his 1876 booklet on banking, which can be read as a polemic against Iwasaki and his banking policies—Shibusawa stresses the need to preserve liquidity to provide medium-term credit, particularly for distribution. Again, Iwasaki won—in part because the Japanese government (as is common among governments) gave distribution low priority compared with production and therefore sided with Iwasaki. As a result, medium-term money is the true need of Japanese business, and not only of the smaller and medium-sized businesses.
The trading company does not seem to have roots in pre-Meiji Japan. It is not the successor to the Osaka merchants. It was created to handle the buying of foreign machinery and materials, such as cotton, for the nascent Japanese industry. It was created primarily because an expert was needed for the contacts with the "inscrutable Occident" rather than because it served an economic function. Apparently it was not until late in the nineteenth century that the trading company began to move into handling trade within Japan for Japanese-produced goods. Then the trading company developed very fast. And the faster the Japanese home market grew, the more prominent the trading company became.
Outside observers are quite right in pointing out that as the market becomes larger, the need for the merchandising services of the trading company diminishes. They are also right that it makes no sense from a business point of view for a major petroleum company, such as Mitsubishi Oil, to distribute its gasoline to its network of service stations through Mitsubishi Shoji, a trading company that handles thousands of other products as well as gasoline. They are quite right in pointing out that a goodly number of foreign companies—Coca Cola is the best-known example—have been successful in marketing their merchandise directly without a trading company.
These critics, however, miss the point. The trading company is indeed unnecessary, maybe even quite uneconomical from the point of view of distribution. It means, in effect, that the responsibility for production and marketing are divorced. But the economic rationale for the trading company is not merchandising. A trading company is the one way in which the Japanese economy manages its medium-term credit problem, for the trading company optimizes the need for medium-term credit. The trading company creates its own money pool, or what bankers call a "float"—a reservoir of money that can be used whenever the need arises and that can be turned over a great deal faster than money invested in any one distribution channel or cycle. It creates a medium-term money market, and does so very effectively.
Again, a reference to the situation in other areas is instructive. In the United States, where medium-term credit is the specialty of the monetary and banking system, medium-term credit has actually become central. Because a century and a half ago American bankers conceived of medium-term credit as something given to a business rather than as the financing of a transaction, the producer is the focus of American distribution. If a bank lends to a business instead of financing a transaction, the financial strength of the business becomes the critical factor. This, in effect, means visible assets. Therefore, the more fixed
investments a business has in the American system, the more borrowing capacity it will have for medium-term money. This clearly favors manufacturers, rather than wholesalers, who as a rule have very little by way of fixed assets. In other words, the producer—and to a lesser extent the retailer—have become the centers in the American system. The wholesaler has no power because he does not have the financial capacity to attract medium-term money. In turn, the manufacturer is expected to finance the wholesaler, and to a large extent his distribution altogether. As a result, distribution costs for the American economy are comparatively low—maybe the lowest of any major economy. But distribution costs to the manufacturer are very high, since he is expected to provide the financing.
In continental Europe there is a hybrid situation. For those companies that belong to a major bank's group—most of the larger companies—the bank will provide medium-term money. Other companies cannot obtain it easily. Indeed, for medium-sized family companies, medium-term money is dangerous. It makes them dependent on a bank and is likely to lead to the demand that they join the bank's group, which means that they hand over control to the bank rather than retain it in the family. The wholesaler on the Continent, therefore, is in a much stronger position vis-à-vis the medium-sized business. A large business that is not part of a bank concern, such as Krupp before it had to capitulate to the banks in the 1960s, has to organize its own wholesaler to obtain trade finance for its distribution. Thus, in Europe the wholesaler is either nonexistent, as is the case for most of the products of large publicly owned companies, or he is in a strong and rather dominant position. In respect to medium-term finance, Europe exhibits both the characteristics of the American system in respect to large publicly owned companies, and the characteristics of the Japanese system in respect to family-held small- and medium-sized companies.
But the central role of the trading company in Japan is a reflection of banking structures and money market realities. It represents the most rational optimization of the existing structures, under which medium-term finance is critically short and inadequately taken care of by the existing banking system. In many ways, the trading company is not a "trading company," but a "finance company." Just as the zaibatsu bank is the capital market of Japan, so the trading company is its money market.
Productivity and the Maximization of Volume
Even if the Japanese business does not aim at profit maximization, it seems to be obsessed by volume. Larger sales, rather than larger profits, are clearly the first objective.
In the West, sales are of course important. And growth, as such, has been seen as good in itself again and again. But the periods in which "growth" was the most important objective of business have always been few and far between in the West: the 1830s, the 1870s, the 1920s, or the
1960s. Of course, economists and businessmen in the West know of the "economies of scale," but their approach to volume essentially tries to balance the advantages of larger sales against costs and risks. This does not appear to be the typical Japanese attitude. Volume comes first, and questions about its cost come long after, if at all.
Such behavior is completely rational within the structure of the Japanese wage system, which affords automatic increases with seniority and job security until retirement age. But neither Japanese nor Westerners seem conscious of the implications of the Japanese wage system for productivity and for the impact of volume on business results.
If wages go up automatically with length of service and independently of job or skill, and if employees have to be kept on the payroll until retirement, then raising volume is the only way to increase productivity rapidly. Not to raise volume is a prescription for rapidly falling productivity and loss of competitive position. Since, by and large, employees in Japan can be hired only for the entrance position (the only significant exceptions have been senior civil servants who move into top management positions in business upon their retirement from government service at age fifty-five), the only way to accommodate expansion of volume is by hiring new people into the entrance grades.
As many students of Japanese organizations have stressed, this practice creates substantial problems. It makes it particularly difficult for a new business to grow fast, which in turn explains in some measure the advantage of a "joint venture" for a new business. In a joint venture, the established partner can furnish experienced managers, foremen, and skilled workers to a new enterprise, which otherwise would have to staff itself entirely with inexperienced people just entering a career.
The advantages to the Japanese wage system have rarely been considered. Since the beginner is traditionally paid a fraction of what the mature and experienced man receives for the same work, and since most workers, especially rank and file, produce pretty much the same regardless of length of service, rapid expansion means that the persons brought in to do the additional work cost only a fraction of what the employees already at work cost, and what the employees doing the same work for the competition cost. Their productivity per man-hour may be somewhat lower than that of experienced employees, though the difference is not particularly great in most routine jobs. But the productivity per unit of wages is as much as three times that of the man who has been on the payroll for twenty-five or thirty years. The business that can expand faster than its competitors, therefore, has a tremendous—almost an unbeatable—advantage in labor costs and productivity. Conversely, with automatic
increases in wages with length of service, the business that cannot increase its volume very rapidly finds itself losing productivity.
The objective of maximizing volume is, therefore, completely rational given Japanese economic realities. In fact, it is the only rational strategy in the situation. The Japanese executive can assume, with considerable probability, that his profitability and his economic results will not be endangered by rapid volume increase even if prices decrease. In other words, he does not need to worry as long as the price he receives covers his present expenses. He knows that the true cost of the additional production is likely to be much lower. In the economists' terms, he knows that incremental revenue pricing, in which the additional volume does not have to cover anything but out-of-pocket expenses, is almost certain to be adequate to prevent a loss and, in fact, obtain a profit.
This is in marked contrast to the position of his Western colleague, who pays primarily for the job rather than for length of service. There, the fact that the new employee is likely to be less productive than the experienced man while still, especially in unionized businesses, receiving the same—or almost the same—wage as the man with seniority on the job, means that additional volume has to produce significantly greater returns to be profitable. This does not rule out "incremental revenue pricing," but does limit it to capital-intensive industries, in which capital assets are not adequately utilized. In the Japanese situation no such limitations apply. Under the Japanese system labor is, in effect, a capital expenditure and one in which, contrary to all other capital expenses, the fixed charge increases as the "investment" gets older.
This is so obvious to any Japanese business executive that he rarely mentions it. At the same time, it is so completely different from anything any Westerner has seen that he barely notices that his Japanese colleague operates with different ground rules. It is more amazing, however, that the economists also do not seem to have recognized that volume has a different impact on the economic results of a business in Japan than in the West. They have not noticed that to the Japanese executive increasing volume is the way to increase productivity, and with this the return on the total economic resources employed.
Again, we deal with a Japanese structural reality that is not grounded in Japanese history or Japanese tradition. I cannot, from the sources accessible to me, find out when payment by seniority coupled with lifetime employment became general, but it was unknown for rank-and-file employees before the 1920s. It may have been fairly common for managerial employees before that date, and apparently it had become fairly common for government employees even before that time. Yet there is no precedent for it in pre-Meiji times. The Samurai of a Han had lifetime employment, but they were paid by position not seniority. The employees of the pre-Meiji workshop had a lifelong relationship, though it would be exaggeration to call it lifetime employment. Like today's
employees in Japan's preindustrial sector, the obligation was fairly one-sided; the employee could not move, but he could be discharged and often was. And there was no payment by seniority, just as there is none in today's preindustrial sector. In other words, though quite clearly in tune with Japanese ideas of human and social relations, payment by seniority is a post-Meiji innovation. It clearly was not introduced for reasons of economic rationality, let alone to make possible expansion of volume with a built-in increase in productivity. But this has been its effect. As a result, maximization of volume is a rational business strategy in Japan way beyond its role in the West.
Indeed, the much-vaunted rapid increase of Japanese productivity since 1950 represents in substantial part—perhaps as much as half—nonrecurrent shifts in the labor force rather than genuine productivity increases. Japan, during the last twenty years, has been able to move into its modern sector—its large-scale manufacturing and service firms—enormous numbers of young people receiving very low salaries in relation to the average salary. This was the result in part of the tremendous shift of young people from the farm to the city and in part of the short but fairly sharp baby-boom Japan underwent in the early fifties. As a result, Japan went through a period in which the ratio of young employees, whether blue-collar, clerks, or managerial (middle-school, high-school, or university graduates), was unusually high. And while their wages went up very fast, the wage pyramid was highly biased toward the youngest—that is, the cheapest—category and toward the categories with the highest productivity per unit of wages. Since these employees also were very well educated compared with their predecessors, they might well be assumed to have had higher productivity altogether, or at least not to be less productive despite their lack of experience.
This period is at an end. The Japanese birthrate dropped precipitously in the mid-fifties, which means that from now on the number of young men entering the labor force each year will be significantly lower than it was in the sixties. At the same time, the movement of young, well-educated people from the farm to the city is essentially over (except, perhaps, for young women finishing middle school). In other words, the tremendous availability of young people—those of high productivity per unit of wage—is likely to be replaced by a relative scarcity of young workers in all categories (except perhaps university graduates for managerial positions, whose supply is likely to continue to grow throughout this decade at the price of a sharp cut in the supply of young middle-school and high-school graduates for blue-collar and clerical work).
It is not possible to guess what proportion of the Japanese increase in productivity can be attributed to the Japanese wage structure rather than to actual productivity increases. It may run as high as 50 percent. In other words, what looks like consistent Japanese ability in the last twenty years to increase the productivity of labor year after year may, in large measure,
reflect demographics rather than managerial ability or worker motivation. And the democraphics are almost certain to turn in the other direction and to make increase in productivity based on the influx of young and comparatively low-paid workers increasingly less important. There is indeed reason to wonder whether Japanese productivity figures are not in for a sharp drop—regardless of what Japanese management or government do. The drop would be as much of a statistical illusion as the increase has been; it would reflect a shift in age structure rather than a shift in productivity. But the net effect would surely be a basic change in the reality of Japanese business, which would make maximization of volume far less attractive to Japanese business and far less rational as a business strategy.
The foregoing discussion does not pretend to be an analysis of Japanese business or of Japanese society. It attempts to present some aspects of Japanese business behavior and business strategy that are rarely discussed, and thereby to contribute to the understanding of the Japanese economy and of the behavior of the Japanese business enterprise. But the main aim of this paper was not essentially to contribute to the understanding of Japan. Nor would the author presume to speak as an "expert" on Japan. The aim was primarily to raise two questions regarding the study of institutions and of Japanese institutions in particular.
The student of institutions is prone to start with a "model," whether he is conscious of this or not. He then tends either to impose the model and to describe behavior in terms of the model, disregarding the inconvenient fact that actual behavior does not follow the model. This has been true, for instance, for the economists' "theory of the firm" with the ludicrous result that while everybody admits that no business behaves the way the theory says it should, everybody also claims that the theory nonetheless explains what business is doing and why. The tendency has been equally true with respect to the study of political institutions, such as the attempt to impose American models of pressure groups on Japanese or European political reality. Or the analyst, realizing that his subject does not behave according to the predictions of his model, falls back on the explanation that people are "not rational."
The example of Japanese business strategy suggests, however, that the most fruitful starting point for institutional analysis and for understanding the behavior of people in institutions might be the assumption that they are behaving rationally and that they rationally optimize their realities. The assumption might be that different behavior is best explained in terms of different realities and that it is the job of the institutional analyst to find out what the realities are. This in turn might explain why people behave in what, to the analyst, seems to be such an "irrational" manner.
The Japanese businessman behaves perfectly rationally. His strategies optimize his realities. So does the American businessman, in terms of the realities of his capital and labor market, or the German businessman in terms of his. The realities are different. They are not, admittedly, easily seen from the outside, but they are usually fairly easy to find, once one starts looking for them.
The second observation is equally methodological and relates to the study of comparative institutions and the comparative study of society. We have two dominant approaches in these two fields. One might be called the ideological approach, of which the Marxist approach—that has been applied with such dubious results to Japanese history and Japanese society—is only one example. The other one might be called the approach of cultural anthropology with its emphasis on the values, the history, and the conditions of a people and of its society. Both are obviously fruitful, but are also only heuristic principles.
The examples of Japanese business strategy given in this paper suggest that these two approaches need to be complemented by a structural or institutional approach—an approach that neither assumes a universal theory nor cultural and historical determinism; that accepts, and indeed, rejoices in the diversity of human experience, of human ingenuity, and of human personality; and accepts that different historical situations, different personalities, and different historical accidents lead to the fashioning of different tools for the same job and different solutions to the same problem.
To the academic scholar, this is not very inviting. One can only see such reality in practical experience. It cannot be deduced from first principles, since it usually does not derive from first principles, but from expediency. One cannot, as a rule, identify it through values, traditions, or beliefs, since it usually has little to do with them, but represents innovation. And yet an understanding of behavior and of the dynamics of a society, a culture, a political system, and an economic system may not be attainable without an understanding of the structural realities that institutional behavior tends to optimize, and usually in a rational manner.
Economic Realities and Enterprise Strategy:
Professor Drucker's paper is deceptively ambitious. What at first seems a rather general discussion has imbedded in it a sophisticated theory of the behavior of the firm—a theory into which Japanese large firms fit, in terms both of basic business strategy and of the structural or institutional realities
affecting that strategy. I first summarize his argument as I understand it, and then appraise it.
First, the theory is about large firms with professional managers and control vested in the management rather than the diffused and fragmented stockholders. Management is subject to constraints, both those specifically institutional and those more broadly termed the economic environment. Managers behave rationally, optimizing their goals subject to the institutional realities.
Second, these firms have two goals. One is to minimize the cost of capital. The other is to be assured that they have or can obtain capital when they need it—to minimize the risk of not having access to capital.
Third, the firm's business strategy is thus to optimize these goals and to respond rationally to the existing structural realities of the economic environment. That environment has been determined historically, in part by such "historical accidents" as the nature of and differences in leaders' personalities, in part by highly specific socioeconomic conditions.
Fourth, Japanese firms, in determining their business strategies, have to respond to three important institutional realities, which lead to apparently different behavior from Western firms, but which are based on trying to achieve the same ultimate goals. These three realities are: the high debt-equity ratio; the use of independent trading companies to handle sales; and the nature of the employment and wage system. Each deserves further elucidation.
The high debt-equity ratio imposes high interest costs on a firm. Most debt is in the form of bank loans, which are a substitute for equity. Firms feel under greater pressure to cover their interest burden than to maximize the profit residual after interest payments. Therefore, they try to maintain and enhance the volume of production and sales. A corollary is that managers have incentives to sacrifice rather than to maximize profits; it is most important to pay interest charges, and next to pay some stable rate of dividends. Managers have few, if any, stock options. Rather, firms try to minimize costs of capital in other (unspecified) ways.
The extensive use of large, general trading companies is mainly due to the lack of medium-term (ninety days to five years) finance for distribution. Professor Drucker makes the important point that trading companies in practice are large financial intermediaries that borrow from banks and finance customers.
The system of permanent employment and seniority wage increases tends to raise the unit costs of production. The only way to offset this cost pressure is to expand volume. Dynamically, this lowers the average age of the work force since new hirings concentrate on young people. Statistically, with wage costs relatively fixed, it pays to maintain a full-capacity level of operation. Thus, maximizing volume and its growth holds down unit labor costs. (Note that this explanation does not require technological change or economies of scale, though both help.)
I find this an exciting and challenging line of argument. However, I have some reservations about the logic of the argument, and particularly about its empirical support.
Let me begin with the two goals that dominate the behavior of firms. Minimizing the risk of not obtaining access to capital is important; in its extreme form it means that a firm wants to stay alive, not to go bankrupt. Yet it relates to growth rather perversely. The best, and indeed complete, access to capital is a firm's own cash flow from depreciation, reserve allowances, and retained earnings. By limiting its growth rate to that financed from internal sources, the firm minimizes its risk of access to capital. But it also means substantial growth and profit opportunities foregone by the firm in a high-growth economy.
The minimization of the cost of capital is also an important goal. The article is somewhat unclear, but Professor Drucker has indicated that he includes both internally generated funds and external sources of funds in capital costs; the firm equates the cost of each, so that it is neutral between internal and external funding. The two goals conflict: minimizing availability risk means emphasizing internal funds, whereas minimizing cost may mean heavy reliance on outside funds. It is important thus to know how firms weight (trade off) the two goals. Professor Drucker does not provide us an answer.
More important, these two goals do not adequately describe the behavior of most large Japanese firms, which have grown rapidly and borrowed heavily to do so. This does not mean that Japanese managers are not rational or not optimizing—I agree with Professor Drucker that they are—but that the specification of basic goals is incomplete. We need to add additional, more dynamic goals for an adequate theory of firm behavior.
I agree with Professor Drucker about the importance of specific institutional or structural realities in behavior. However, it is unclear whether Professor Drucker regards these as constraints that firms must take into account in optimizing certain goals—just as, for example, they must take into account constraints of the law—or whether these institutional features have a greater role, somehow determining intermediate goals directly. Moreover, Professor Drucker's argument seems to reject the theory of Chandler and other business historians that strategy determines structure; rather, for Drucker structure determines strategy. However, Chandler is concerned with corporate structure, whereas Drucker is concerned with the structure of the external environment within which the firm operates. I see a dynamic interaction over time between strategy and structure. The strategy of one period results in a new structure, which then becomes a constraint on strategy in the next period. For example, the rapid growth objectives of Japanese firms in the 1950s and 1960s resulted in the new structural condition of high debt-equity ratios.
This brings me to more empirical issues. I focus on financial issues since
others are better qualified to discuss the other two structural realities of trading companies and of the employment and wage system. I want to make several brief points. The financial role of trading companies is an important point that needs further research. Why have banks been willing to lend more, and at lower cost, to trading companies than to large producing companies? Or do they, relative to the demand for funds? Professor Drucker points out that general estimates of industrial productivity growth may be exaggerated, since they reflect in part a substantial differential between the relatively high productivity and low wages of young workers. I find this somewhat confusing. His underlying demographic point is relevant: the average age of the industrial labor force will rise in the future because there will be relatively few new young entrants.
I agree with Professor Drucker on the nature and importance of the banking system and capital market for Japanese large firm behavior. The large, fixed interest charges of heavy borrowing are an important constraint on firms; it encourages them, as do any fixed costs, to maintain production and cut prices in periods when demand declines. I disagree with his assertion that such bank loans, or indeed any portion of them, are economically "equity capital." The bank's loan claims on income and assets come before any equity claims. With the equity base small the risk may seem high. But in fact this has not been true. Loan losses in postwar Japan have been and are negligible; actual risk has been low.
I regard Professor Drucker's historical interpretation of the role of finance for Japan, and for the United States and Europe, to be exaggerated. First, Goldsmith's data show that new equity-share issue through capital markets has not been a major source of finance, in the aggregate, for any industrial economy. This does not deny that at certain periods for certain firms, new stock issue, openly in the capital markets or to investment banks, has been an important source of funds. For example, large American firms do not raise the bulk of their capital in equity issue; most is from internal sources, with bond issue next. Share issue is about the same proportion of total fund sources for Japanese and American firms; the main difference is that the former rely heavily on bank loans.
I find Professor Drucker's discussion of Japan's historical financial development somewhat confusing. Shares were actively traded in the 1880–1890s, but in Japan, more than in other countries, bank loans were important. However, prior to World War II business borrowing was not great relative to their net worth position; the debt-equity ratio was about one-third. Firms financed a significant proportion of expansion from internally generated funds. Only after World War II have the debt-equity
ratios become so high; it was due primarily to the rapid expansion of company investment, much too large to be financed internally. Thus the strategy of rapid growth, in response to profit opportunities as well as competition for market share, caused the present structural reality of high debt-equity ratios and high fixed interest costs.
I do not regard this situation either as inconsistent with profit maximization or as making profit maximization unimportant. In contrast, one could argue within the context of Professor Drucker's theoretical framework that firms should maximize profits in order both to minimize the degree of dependence on borrowed capital and to be able to borrow more. There is also a strong growth incentive to maximize profits in the long run. Of course some fims, such as Shiseido, have been able in a protected market situation to generate sufficient profits to grow rapidly without much borrowing.
Professor Drucker apparently accepts the view that Japanese large firms do not maximize profits. Certainly there have been fewer incentives to do so for management in Japan than elsewhere: no executive stock options or bonuses directly tied to profitability; and substantial inability (until very recently) to raise funds relatively inexpensively by new stock issue at market price based on profitability. My own view is that Japanese firms, despite what they say, behave in a way in which long-run profit maximization is approximated. I think Japanese management has a longer time horizon than American management; at least executive incentives are structured somewhat that way. However, the principle of the maximization of profits is not strongly supported by Japan's value system, in contrast to American business ideology. Thus Japanese management justifies the firm's role in terms of benefits to its customers (consumers), to its employees, and even to the nation. We clearly need much more empirical research on Japanese management, particularly in distinguishing between stated and actual motivation and behavior.