Managerial dominance of Japan’s major corporations

Stewart Johnston

The literature on Japanese management is very extensive and Sullivan and Peterson (1989) have rightly stressed the richness of theorizing that has occurred in this field. Until the early 1980s, what Kagono, Nonaka, Sakakibara and Okumura (1985) termed the “dominant perspective” focussed largely on the uniqueness of the Japanese management characteristics and the socio-cultural milieu from which they arose. In the last decade, approaches have ranged through, among others, welfare corporatist (Lincoln and Kalleberg, 1990), contingency (Kagono et al., 1985; Shenkar, 1990), neo-transaction cost (Aoki, 1988; Aoki, Gustafsson & Williamson, 1990), variants of institutional (Dore, 1986; Okimoto, 1989; Johnson, Tyson & Zysman, 1989; Matsumoto, 1991), historical (Nakagawa, 1979a, 1979b, 1980; Kobayashi & Morikawa, 1986), neo-Marxist (Scott, 1986; Orru, Hamilton & Suzuki, 1989), ethical (Dollinger, 1988) and corporate governance (Gerlach, 1987, 1992a, 1992b; Kester, 1986, 1991; Sheard, 1989; Zielinski & Holloway, 1991), as well as a long-standing critical tradition (Woronoff, 1986; Emmott, 1990).

Each has made important contributions to our understanding. However, Keys and Miller (1984), in their timely reappraisal of the field, advocated the production of models that more reflect the system of Japanese management. The present paper takes up this recommendation and their theme of the long-run planning horizon to develop a model which synthesizes much of the literature to date. The model demonstrates how a number of factors have led to management’s dominance of the modern Japanese corporation. At the theoretical level, this is a normative model, which probably reached its peak validity at the end of the high growth phase in the mid-1970s. Nevertheless, it seems generally applicable to most of the post-World War II period and will be used to derive some suggestions for further research which arise from an examination of this era.

Clearly, a model of a complex phenomenon such as a management system will be deficient in many ways and to list the caveats would be a major task in itself. However, underlying the complex reality of Japanese management there is usually agreed to be an ideal type (in the Weberian sense) pattern visible within the large corporations. This pattern seems to have arisen largely as a result of a relatively small number of adaptive strategic decisions that were made by government or employers at critical times in the past. Exactly which should be included in the list of decisions is debatable but most scholars would include:

* the handover of government instituted companies to a few key entrepreneurs leading to the formation of the zaibatsu;

* cohort recruitment decisions which led to dual labor markets and company unions;

* the post-World War II decision to rebuild via investment in manufacturing using household savings and a protectionist policy;

* MITIs administrative guidance on cartelization;

* employers’ decision to fight against traditional style unions in the late 1940s and 1950s; and

* the sharing of corporate ownership with friendly parties to counter takeover and greenmail threats.

Further, if we examine the literature, there is considerable consistency with regard to what constitutes the most characteristic and readily identifiable phenomena of this ideal type – a lifetime employment ideal, seniority-based promotion, non-specialized career paths, investment in human capital, marketing strategy based upon increasing gross sales or market share rather than short-term profit maximizing and an exceptional emphasis on product quality and manufacturing techniques (e.g., JIT). Each of these is either a direct product of or totally consistent with an industrial and company strategy aimed at the long run. It is the central thesis of this paper that the long run focus has arisen primarily because, in the Japanese variant of capitalism, management of the major corporations has been freed from the major threats to its dominance – shareholders, trade unions, domestic speculators and competitors, government and foreign capital and investors. Given this freedom to act, it is in line with managerial theories of the firm that managerial actors have focused on the long run/growth strategies.

A model which outlines the causal sequences hypothesized above is presented in Figure I. It proposes that four underlying institutional factors are central to understanding the system:

H1. A financial system and industrial structure which has led to a high level of management-ownership separation.

H2. Government policies which, in the post-World War II period, consistently protected those Japanese industries deemed vital to economic development and encouraged that development in the form of competitive oligopoly via MITI, consultation with employer organizations, fiscal and monetary policy, etc.

H3. Barriers to foreign entry and involvement in the form of traditional norms of business behavior and more formal legal obstacles.

H4. The peculiarities of the Japanese labor market which have led to a distinctive brand of worker/management cooperation.

There is a case for arguing that a fifth factor, perhaps labelled “culture”, should be included since there is little doubt that many elements of Japan’s cultural heritage (e.g., groupism, Confucianism) influence the Japanese corporate milieu. It is seen in the rise of the interstitial samurai as the early entrepreneurs, in the leanings to corporate paternalism and long-term contracts. As commented in the literature review, the comparative cultural approach was, for many years, the dominant mode of analysis. The weaknesses of “unique culture” as a single explanatory variable have been pointed out (Kagono et al., 1985, pp. 7-10; Urabe, 1988, p. 8) but that does not, in itself, dispose of the importance of the cultural variable. The prime difficulty presented by “culture” is its all-pervasiveness and perhaps the most insightful response to the problem is that offered by Urabe (1988). In his evolutionary model of the Japanese management system, he hypothesizes the existence of two types of variable impinging upon management’s adaptive decision-making:

managers make decisions on both factual and value premises. Environmental information about technological, economic, and social changes affects the choice of alternative strategy as a factual premise, whereas the culture affects the strategic choice of managers as a value premise (my emphasis). (p.9)

As a value premise (or better a complex of premises) culture is best seen as permeating the entire model influencing Japanese managers whenever a strategic or implementation decision has to be made. When its role becomes particularly important to our understanding of any particular aspect of the model, this will be expanded upon.

Before continuing, however, a further caveat is required. It is necessary to clarify the terminology that will be used since there is some lack of consistency in the literature. This paper deals only with the major Japanese corporations and their primary subsidiaries. These cannot be defined solely by level of capitalization or gross sales, although such measures are usually substantial. The defining characteristic is best considered to be membership of or strong ties to the large industrial groupings which typify and dominate Japanese industry and commerce. Gerlach (1989) estimates that the six main groups collectively control between one third and two thirds of total sales in many of the main industries. Sheard (1989) calls this network the main bank system and this is where the typical phenomena of the Japanese management ideal type are most readily identified, although aspects are found in other companies. There are many variations on the theme but essentially we can identify two types of group. The category kigyoshudan will be used to refer to groups such as Mitsui or Sanwa, which are horizontally connected sets of between 20 and 50 companies stretching over a wide spectrum of industries but centering around a major city bank with or without a trading company or other company. The term keiretsu will refer to vertically integrated groups (Matsushita and Nippon Steel are typical) gathering around a single large parent company (Dodwell, 1988). Bearing in mind that a central member of a kigyoshudan may well be a keiretsu.(1) Mitsubishi Heavy Industries, for example, is a core company of the Mitsubishi kigyoshudan, while having some 30 or so primary subsidiaries in machinery, construction, etc.

Separation of Management from Ownership

The analysis of management-ownership separation under capitalism goes back to Berle and Means (1932) who identified 88 of their sample of 200 US firms as being management controlled, using their definitions. Later, Marris (1964) offered hypotheses which suggest that management control will lead to a generalization of the growth motive and Galbraith (1974) supports this interpretation, pointing out that once a minimum level of earnings is achieved the technostructure overwhelmingly chooses growth as as its primary aim. Sawyer (1981) summarizes most of the work in the 1970s in this area (including the important empirical relations between executive income and company size) and expands upon Marris’s theory with regard to the critical role of acquisitions. The situation is complex but, in broad terms, the fear of acquisition (especially with the increasingly sophisticated capital markets of the 1980s) is a severe constraint upon the managerial growth motive. High and ever-increasing profit levels become a necessary stimulus to share prices and dividends to keep the eager takeover raiders from spotting an under-valued bargain. While company ownership in the West may well be dissipated among many individuals, pension funds, insurance companies, etc., the shareholder discipline which kept management in line in the past has been replaced by an equally, if not more, strict market discipline.

In Japan a somewhat different scenario prevails. The pattern of ownership that had developed in the period since the Meiji restoration protects the management of companies in the major groupings from both takeover and shareholder pressures, enabling them to pursue their growth aims with unique vigor.(2) Three influences have combined to bring this situation about.

Bank rather than equity financing. The Japanese household propensity to save is legendary and while no longer approaching 25% (Sasaki, 1981) as it did at some points in the past, even today remains substantially the highest among the developed nations. Many reasons have been suggested for this phenomenon including the lack of adequate social welfare, costs of education and housing, the twice yearly bonus system, seniority based remuneration which gave the older workers more surplus when they least needed it, a post office savings monopoly, tax benefits, as well as innate inclination. Whatever the reason or reasons, the product was a banking system which, during the 1950s and 1960s, found itself awash with funds available for lending and companies only too ready to borrow at the lenient rates (the Temporary Money Rates Adjustment Law artificially maintained rates at around 3% until the mid 1970s) and extended terms offered. Drucker (1975) offers an elegant explanation of management rationality at this time. Why struggle to produce the high profits needed to attract equity buyers so that capital is available for investment, when it can be borrowed from a bank which requires only interest and a risk margin? Little wonder that management availed itself of the opportunities presented. As a result, the high growth period of the late 1950s to the early 1970s was characterized by a rash of what appear to be, by conventional Western standards, excessive debt/equity ratios (Suzuki, 1987). However, a number of studies (Sarathy & Chatterjee, 1984; Michel & Shaked, 1985; Rappa, 1985; Suzuki & Wright, 1985; Kester, 1986; Allen & Mizuno, 1989) have suggested that this superficial impression masked a more complex and less risk-ridden reality:

1. A tendency to high leverage on book value but not on market value;

2. High debt financing is more characteristic of the mature capital intensive industries;

3. Generally debt/equity ratios are decreasing;

4. Special relationships between companies and their group or main bank.

The predominance of bank financing meant that only small amounts of equity from major companies ever appeared on the market and, hence, the status quo remains with regard to ownership. The implications of this will appear as 4 above is examined.

Traditional company groupings. The sudden shift from the near feudal social arrangements of the Tokugawa era to a proto-industrial state following 1868 meant that there were few focal points around which the new industries could grow. The process has been examined in detail by Hirschmeier and Yui (1975) but, in brief, after a short period when the government attempted to act as instigator, a cohort of entrepreneurs arose from the fading merchant and samurai classes to take over the task. Usually already relatively wealthy and well connected, it was from the ranks of these government proteges and favorites that the major zaibatsu founders arose. By the 1930s, the zaibatsu, industrial conglomerates overseen by family-based holding companies, dominated Japanese commerce.

After the defeat of Japan in World War II, the MacArthur administration began its wide-ranging reform process. One of many objectives was the deconcentration of industry via the dissolution of the zaibatsu and other large groupings. While the zaibatsu holding companies were dissolved and the families were never again to have the power they held of old, the overall deconcentration policy was continually modified and diluted until the outbreak of the Korean War saw it finally scrapped. Importantly, the largest financial institutions had remained intact and in the 1950s the banks became the centers of the re-establishment of some of the pre-war and other new group affiliations. These kigyoshudan were flatter structures than the zaibatsu and in them the major companies were linked together not by a hierarchical structure topped off by a holding company but by affiliation to the same central bank, trading links and wide-ranging mutual shareholding. This pattern is most apparent in the groups derived from the old zaibatsu arrangements – Mitsubishi, Mitsui and Sumitomo – while the newer groups – Sanwa, DKB and Fuyo – which formed when the relics of the medium-sized zaibatsu aligned with city banks, are generally less closely intertwined. In the 1960s and 1970s a number of other groupings formed around non-bank foci such as Matsushita and Toyota but significantly these were again held together by trading and reciprocal shareholding links. Large and strong on their own account these keiretsu groups have developed various forms and strengths of ties with the kigyoshudan groups and banks.

The details of these intercompany linkages have been the source of voluminous statistical, empirical and theoretical studies. Clark (1979), Nishiyama (1984), Scott (1986) and Gerlach (1992a, 1992b) have researched the field and Orru et al. (1989) present an extensive compilation of the work in the area. Orru et al. (1989) also illuminate the horizontal and vertical control mechanisms which characterize interfirm relations in the business groups. While there is substantial variation in detail, it is apparent that the ownership of any given major company will probably lie in the hands of its affiliated bank, other banks, insurance companies and affiliated companies. (Antitrust legislation in Japan is much gentler than in the US, for example.) Even in the keiretsu which are often fairly recent creations and the influence of founding figures might be expected to be still strong, there is a clear tendency for this pattern to be increasingly evident. For example, since the mid 1970s, individuals have disappeared from the list of top ten shareholders in Nissan, Matsushita and Tokyu (Dodwell, 1975, 1991). The company itself will probably hold shares in its major bank and affiliated companies. The insurance companies are almost all mutual companies and hence owned by their policy holders. Individual and groupings of individual shareholders, then, are generally not major players in the corporate control arena. The overall effect is to leave control almost totally in the hands of management by virtue of its dominant position. Policy making is the prerogative of the professional managers who meet in the unique Japanese institution, the shacho kai, the President’s Councils which exist within each of the major groups. Although the members of these councils deny they set the policy of the group in the manner of the old zaibatsu holding companies, pointing out that no discussions or decisions are binding, these are clearly extremely powerful assemblages and one would suspect various forms of “administrative guidance” to be common.

A second but equally important effect of these particular shareholding arrangements is to exclude from the open market the majority of shares of any major kigyoshudan or keiretsu company. Thus, an implicit mutual insurance scheme has been created. The rational Japanese chief executive will usually happily forego the short-term profit to be made by selling off holdings in another friendly company. No doubt it is seen as a very cheap premium to be asked to pay for the ensuing security. As a consequence, only a relatively small proportion (perhaps 20% to 30%) of a company’s equity can ever find its way into the hands of a potential takeover raider and on the rare occasions when it has occurred the group executives have closed ranks to completely exclude the threat. The effectiveness of this ownership structure is amply demonstrated by the way it neutralized the efforts of T. Boone Pickens’ foray into Koito Manufacturing, a Toyota affiliate (Fingleton, 1989). In this way, the traditional company groupings and their modern offspring present a solid bastion against the twin threats to managerial dominance offered by a powerful ownership holding or a corporate raider.

Finally, as one would expect, the central bank within any of the kigyoshudan is always the prime lender to its affiliated companies (See e.g., Dodwell, 1988; Sasaki, 1981; Gerlach, 1987), further reinforcing the relationships and enticing management towards bank financing. In more recent times there has a tendency towards financing capital expenditure from internal cash flows and it might be argued that, given the nature of the relations within the kigyoshudan, there is some similarity between the two. Keiretsu companies tend to establish a number of links with several banks which they maintain at approximately the same proportions over time (see Dodwell 1975-1991). Although, again, many core companies finance capital investment from retained profits or depreciation.

Lack of a modern capital market. During the first three decades of the century, two types of major bank had arisen. Specialized government sponsored banks such as the Industrial Bank of Japan and the Bank of Tokyo and commercial banks tied to each of the major industrial groups. These banks dominated the allocation of capital by the 1930s and after World War II their influence increased with the zaibatsu disssolution. By making capital investment the primary rebuilding tool of the economy, government further centralized the banks’ role. Throughout the high growth period of the 1960s and 1970s the economic framework was intended to encourage investment and exports and this was done by relying on direct Ministry of Finance guidance of credit allocation as part of a highly control-oriented financial system. In particular, deposit interest rates were strictly regulated to utilize the nation’s high personal savings rate. The worldwide shift to floating exchange rates and the oil crisis of 1973 were the catalysts of change in the Japanese financial structure and from 1975 a gradual but irrevocable move to a much more open international financial market began (Suzuki, 1987). The more recent trends will be discussed later but, until the mid 1970s, the absence of extensive direct financing facilities and the controlled low interest rates had further reinforced the dependence on bank finance and the consequent restraint on attaining influence via equity power.

Policy of Industrial Encouragement

The government has a number of structures (e.g., the Economic Planning Agency) to aid in guiding macroeconomic policy (Ito, 1992) but the heart of industrial encouragement in the high growth era lay in the relationship between the Ministry of International Trade and Industry (MITI) and business. In the pre-World War II period, cartels had been rife in Japan and the MacArthur administration saw the enactment of anti-monopoly and anti-cartel legislation as part of its role. With the recession that followed the Korean War, oversupply became a major problem and the benefits of organized restriction of output became apparent. Accordingly, the government, under the influence of MITI, modified the legislation and sanctioned, but nevertheless “cutthroat” (Hadley, 1970), oligopoly became the order of the day. (The steel industry, for example, was dominated by the “big six” – Yawata, Sumitomo, Kobe, Fuji, Kawasaki and Nippon Kokan.) This was the first step in a process which saw the growth of a complex network of relationships between the bureaucracy and business aimed at producing a coherent industrial development and encouragement policy. Many attempts have been made to simply categorize this state of affairs – a commmand economy (Sethi, 1984), guided free enterprize (Vogel, 1978), teamwork between competitors mediated by government (Ouchi, 1984), a plan rational economy (Johnson, 1982), patterned pluralism (Krauss & Muramatsu, 1988), a societal state (Okimoto, 1989) – but the complex intertwining of the education system, the bureaucracy, the LDP and business and how they combine to generate this unique Japanese stimulus to industry defies easy abridgement. Johnson (1982) and Okimoto (1989) offer detailed description and analysis of the history and functions of the policy.

At the center of this network lie the four major business associations – the Keidanren, the Keizai Doyukai, the Nikkeiren and the Nihon Shoko Kaigisho – and MITI. The Liberal Democratic government that has held power in Japan since World War II has unitl very recently set industrial growth as a major priority and its primary industrial policy arm is the MITI. This ministry does not hold much official power in the form of legislative activity or controls and rather than directing the economy its function is to coordinate and guide policy. When markets fail to bring about the desired results of projected capacity or industrial restructuring or whatever, MITI uses “administrative guidance” (gyosei shido) as an instrument to signal preferred courses of action to private economic agents. There is no force or legal compliance available but MITI has much influence in areas such as technology transfer, patents, licences, etc., and only few firms risk the price of non-compliance. MITI guides largely by working with the business associations which themselves act as the channel through which smaller groupings and individual companies can make their voice heard in the corridors of power. (Hirschmeier and Yui, 1975, describe the growth of the business associations.) The MITI-Business relationship is always delicately balanced. One must not intrude into the legitimate affairs of the other and the result is a simultaneous collaboration and competition between firms under the watchful eye of a government which is determinedly hands-off providing the national interest is not violated. This produces a relatively coherent and consistent set of policy objectives and, equally important, the willpower and energy to see them through.

Barriers to Entry

An integral aim of government policy has been to establish an internal environment in which the desired industrial structure could florish. The fiscal and monetary reforms instigated during the SCAP era, on the recommendations of Joseph Dodge and Carl Shoup, were to be the prototype of the system of national financial isolation which was to serve Japan so well during its growth period. The “noninternationalization of finance” provisions of the Foreign Exchange and Foreign Trade Control Law which shielded Japan from monetary flows in and out of the economy, also gave management total protection from foreign influence via investment or takeover.

As well as propping up the artificially restrained interest rates, the government, under MITI’s guidance, established a range of protective measures for what were considered critical industries. During the wave of liberalization of the late 1950s and 1960s, Japan decided in principle to conform but, in practice, excluded a vast range of products while, at the same time, introducing legislation to foster their development (see Okimoto, 1989, pp. 26-27, for a list of policies). The overall effect was to formally protect key industries from destructive external competition. Odiorne (1984) calls it “hardball trading practices” and Sethi et al. (1984) “bending the rules of the game of international trade to their advantage”.

An equally formidable protective barrier lies in the nature of what Iwata (1982) calls the “familiarity relationship” which is embedded in the web of “relational contracting” (Dore, 1973, 1986) that typifies the Japanese business infrastructure. It has taken Western managers a long time to realize that the precursor to successful dealings with Japan is the establishment of a long-term commitment. A Japanese executive anticipates a long-term, even lifetime, undertaking and the creation and maintenance of goodwill and mutual trust via a protracted process of relationship development is much more important initially than any short-term interests. The effects of this business relationship are twofold. In the first place, it has acted as a further barrier to entry to most western companies and secondly it reinforces the long-run strategy.

Domestically the barriers are perhaps more penetrable given the highly competitive nature of the corporate arena in Japan. However, those companies in the “Banking-Industrial complex” (Flaherty & Itami, 1984) currently dominant are still substantially more privileged than new entrants. The sanctioned oligopolies in key industries are carefully nurtured and protected and only rarely broken into by outsiders from fear of MITIs subtle and not so subtle pressures. Honda and Sony are notable successful exceptions. Secondly, requirements for going public in Japan are extremely stringent and with an underdeveloped equity market, successful businesses cannot sell their stock to obtain capital. In 1980, for example, only 14 new offerings appeared on the Japan stock exchange compared with 298 in the US. Low labor mobility adds to the challenger’s problems, discouraging the potential entrepreneur from striking out for fear of failure and making skilled, experienced staff difficult to obtain. Competition, where it does exist, may be fierce but is usually confined within the MITI instituted oligopoly for that industry.

Labor Market Effects

The industrial harmony (wa) that is purported to exist between management and labor has consistently been cited (e.g., Abegglen, 1958; Iwata, 1982; Ouchi, 1981; Dollinger, 1988) as a major beneficial influence and has become part of the accepted mythology. It is usually hypothesized to have grown from the influence of Confucian beliefs, although Kinzley (1991) suggests that it is, in fact, an invented tradition consciously created by the Kyochokai (The Cooperation and Harmony Society).

Whatever the relative validity of these views, if we return to the position of a management untrammelled by the restrictions of either shareholder or market discipline, then it is apparent that the enterprize union and the consensual nature of labor-management relations are the perfect foil for their long-term growth oriented strategy. Assessing how these two phenomena arose returns the analysis once again to the post Meiji Restoration period. The pattern of workplace unions that grew up in the early decades of the 20th century was to be revived in the critical decade post World War II as the familiar enterprize unions.

A centuries-long rural to urban drift had preceded industrialization in some western countries but the early industrialization of Japan (as in the US) was characterized by severe labor shortages. In the first place, the employer responses came in essentially two forms. In the textile industry, especially, they developed the factory dormitory system for the unskilled young workers and in many other industries, where skilled workers were a scarce commodity, they were forced to accede to the use of labor contractors (oyakata). Neither of these phenomena is particularly unusual for this stage of industrialization but Japanese management’s response is predicated by a unique cultural heritage and consequently produced a unique system as a result. Littler (1980) describes the situation and demonstrates how the oyakata and their workteams were incorporated into the wider organization over time. Management was ever more desirous of having control over its increasingly skilled workforce and the oyakata resisted. Their workteams were not the opportunistic groupings, dependent upon pecuniary advantage for solidarity, so typical of the West. The oyakata welded his team together with Confucian principles of hierarchy and loyalty to the group. When the teams were incorporated into the firm, he remained a powerful influence on his workers lives, utilizing the extant relationships to build an alternative influence and support structure within and limited to the boundaries of the firm. These protounions were to form the model for company unions of later years. The price of the acquiesence of the oyakata and his key male workers (Whitehill & Takezawa, 1968) was managerial recognition of their unions and elevation to the pseudo-samurai status of the shoku-in(3) class with all its privileges. The other permanent workers were lured with increasingly generous welfare measures. The price for this corporate paternalism was paid by the increasing layers of temporary workers and the emergence of the now familiar dual structure of the Japanese economy.

This did not eliminate the influence of the mainstream labor-union movement(4) which was appearing at this time (see Okochi, Karsh & Levine, 1974, for a detailed study of its history) but the militarism of the pre-World War II years effectively stifled its growth and sent management-labor relations down a cul-de-sac with the mandatory formation of a brand of workplace joint consultation called Sangyo hokokuk (Association for Service to the State through Industry). The post World War II American administration thus had a carte blanche with which to work. They enacted legislation resembling that of the US in the 1930s, legitimising the rights to form unions, bargain collectively and strike. As a consequence, the late 1940s and 1950s were a boom time for the unions with membership reaching nearly 6.6 millions and 56% of potential in 1949 (Okochi et at., 1974). This rush of support occurred despite the problems of coordination arising from a lack of national infrastructure. A constraint, however, which was to prove a substantial drawback when the confrontation with management finally arose. The new unionists were generally strongly left wing and this was a turbulent era with wide-ranging and often bitter disputes, although Fujita (1974) suggests that the exact nature of these disputes seems to have changed with the introduction of the shunto spring offensive in 1955. Depending upon one’s ideological stance, the result was that management either quashed or came to terms with the union movement and imposed/agreed to company unions based upon the model developed 30 years earlier. The Nissan lock-out of 1953 was a typical and significant conflict from this era, although it was undoubtedly a case of management confronting the unions and winning the ensuing battle. Such disputes are solid evidence for the late developer thesis which suggests that this was the critical time when management, having learned from the West of the rigidities of traditional unionism, stood out for newer forms of worker representation. The success of the employer tactics is evidenced by the fact that in the 1960s the unionization figures had dropped to around one-third of the workforce and while there were a number of competing umbrella union organizations(5) the major bargaining units are the enterprise unions found mostly in large companies.

Ironically, by the 1920s, the skill focus in the growing industries had begun to change. New technologies from the West in the wake of Taylorism had made the traditional master-servant skill transfer relationship redundant. Factories needed educated, motivated recruits for training in the new techniques and the traditional Confucian value of perfectability of the individual can be partially credited with developing a comprehensive modern education system entirely suitable to business’ needs. The ensuing new labor market practice of hiring recruits in cohorts from school (pioneered by Mitsubishi) and later university, proved crucial in the development of internal labor markets, enterprize unions and the corporate personnel policies so evident in later years. As Dore (1973) points out, it is the obvious strategy in conjunction with age/experience-related pay scales, although for a number of reasons it was not commonplace until the 1920s.

Another employer response to recruitment problems (and precursor of corporate paternalism) was the dormitory system which was established in the 1900s. This arose alongside the labor contracting system largely to accommodate the short-term female employees who made up the bulk of the textile industry workforce in the early decades of this century. The textile industry was something of a special case at the time being the largest mature industry in Japan but also being fragmented into large numbers of varying sized firms. While each of the zaibatsu had major cotton and silk processors within their folds, most of the industry was made up of small/medium companies. The dormitory system was common in all Companies but many of the newer personnel practices passed these smaller units by. Throughout the rest of textile-producing world, this system was a temporary phenomenon but its fit with the traditionally-derived familistic/paternalistic business ideology of Japan has enabled many variants to survive to this day.

Overall, the labor contract system, corporate paternalism and cohort recruitment grew up in response to the unique exigencies of the Japanese situation (in the U.S., for example, the main response was immigration) and these in their turn were the dominant causes of the small external labor market, widespread internal labor markets and company unionism which have come to characterize the Japanese labor market. Little wonder that management-union cooperation has developed as the norm. While the unions are by no means docile in their wage bargaining efforts, they pose no threat to managerial policy-making dominance. Indeed, the shunto wage round, despite being a tough negotiation exercise, is a de facto incomes policy presenting management with a predictable wage environment in which to work.

Summary and Discussion

Despite the volume of theorizing that has taken place, our understanding of Japanese management as an entirety is still unsatisfactory. There have, however, been a number of major contributions, each coherent at its own level of analysis and the current paper attempts to pull together much of the significant work in the field, to produce an overall conceptualization under the aegis of a managerial dominance perspective. It is suggested that adaptive strategies arising from a series of historical events have combined to produce a variant of managerial capitalism in which management is, in effect, freed of all the major constraints to its actions – shareholders, trade unions, domestic speculators and competitors, government and foreign capital and competitors. The system is structured in a manner which furthers the interests of three of the many potential and actual stakeholders. Shareholders (or more correctly their representatives, other managers), trade unions and government are generally prepared to leave management to its task providing their interests are adequately looked after. The monitoring and controlling role of the main bank is critical here (Sheard, 1989). The rest are effectively restrained from influence by various institutional barriers. Consequently, management has developed policies totally in line with managerial theories of the firm as first postulated by Berle and Means and extensively developed by others. The major characteristics of these policies are growth and security and this has the effect of producing a corporate strategy aimed almost totally at the long run (see e.g., Kagono et al., 1985; Kono, 1984, for evidence of long run strategic aims). In support of this strategy, internal labor markets and company unions have been developed, formal and informal barriers to entry have grown up and a wide-ranging industry-government alliance created.

Few would dispute that the management system in Japan is evolving and the changes of the last 20 years have been enough to regularly revive the “Japan must inevitably fail” school of thought (Sethi et al., 1984; Woronoff, 1986; Emmott, 1990) which first appeared during the mid 1970s recession. Nevertheless, it is suggested that the model above remains robust enough to use the phenomena of the model as the null hypotheses for comparative research.

The implication of this model is that the continuance of the system in its present form depends upon the stability of each of the four proposed factors. While the model, as an explanation of the past, essentially depends upon plausibility for its validity, it is possible to investigate it more formally by assessing its predictive power. This can be carried out by empirical analysis of phenomena in each of the four areas. In each case, the hypothesis will be that change in any part of the system may disturb the equilibrium and consequently increase the constraints upon managerial action. The crucial point about the testing is that the model does not predict that the situation will not change. Rather, it suggests that the lack of change will allow the continuance of management’s present range of long-run strategies, while change may impose constraints upon them. The results of the ensuing investigations must then be drawn together and their degree of correlation with the continuing existence of management’s strategies examined, thereby testing the model.

Some data is already available but if the four factors proposed in this paper are examined in turn it is apparent that whatever changes have occurred, they have not, as yet, seriously disturbed the carefully nourished balance that has held Japanese management in power.(6) However, suggestions for further empirical research will be made to confirm or refute this initial observation.

Financial/industrial structure. In 1977 the authorities began to restrain bank holdings of company shares, reducing the upper limit from 10% to 5% with the banks having 10 years to comply. The process has proceeded cautiously but steadily with little apparent disturbance. In an attempt to gauge the amount and direction of any change, the author is currently conducting longitudinal research on the patterns of change in major company shareholdings over the last two decades. Any evidence of major change in this area is likely to have many ramifications. For example, Gerlach (1989) has hypothesized that internalization of equity shareholdings within groups is on the rise in response to the liberalization of the capital market and the consequent potential vulnerability to merger. Alternatively, if the equity networks are loosening, this should correlate with reduced intercompany trade in the Japanese variant of vertical integration since the presumed transaction cost advantages in the form of reduced information impactedness will be reduced (Williamson, 1975, 1985).

In the area of financing there have been three discernible trends. First, the development of a globally-linked modern capital market, in conjunction with freeing up of previously government controlled interest rates has had noticeable effects. It has tempted some companies to move away from substantial reliance on indirect finance towards the commercial bill market. Second, other companies have attained levels of cash flow that enable them to pay off bank loans or finance capital development totally via internal cash flows. Third, for a period in the late 1980s the “outrageous mispricing” (Zielinski & Holloway, 1991) of Japanese shares enabled some companies to indulge in a range of financial manipulations including much predatory acquisition. A reinforcement, perhaps, of the growth predilections of Japanese management but also a signal that growth is a multi-faceted concept and can come about as steady, organization-oriented sales increases or as more dramatic market-oriented acquisition. Significantly, acquisitions have usually been of foreign rather than domestic targets. These events have obviously reduced the level of dependence on bank financing and generated some stresses in the traditional relationships. Sullivan and Peterson (1989) argue that managers in Japan are agents of bankers rather than investors and the exact form of any changes in capital raising proclivities needs to be elucidated in order to theorize on the possible implications for this important relationship. Further, as Sheard (1989) reminds us, the firm is a device for connecting capital and labor markets and changes in the former may well affect the distinctive characteristics of the latter.

While it is evident that care has usually been taken not to disturb the equity/finance system enough to endanger management’s power base, that security cannot be guaranteed indefinitely and if there is a major threat to managerial dominance, it probably lies here. The bull share market was very much a two-edged sword and Kester (1991) offers a stimulating divination of future merger and acquisition activity on traditional Japanese corporate governance, suggesting that “the genie is now out of the bottle as far as Japanese shareholder activism and contests for corporate control are concerned”. In recent years, the Tokyo Stock Market has suffered a severe recession and, as a consequence, any equity-linked funding of potential or actual greenmailing or corporate control operations, have been severely circumscribed. With regard to financial and ownership structure it can be asserted that, for the moment, no momentous modifications have occurred. Nevertheless, the market will not remain depressed forever and having now been forewarned, what will be the response of Japan’s managers? The traditional Japanese disdain for speculation as a means of wealth accumulation was little evident during the late 1980s and opportunism can be expected to reappear. A reasonable hypothesis would be that the established managerial cohort would attempt to develop defensive strategies based upon increasing intragroup linkages of various kinds.

Government policy and barriers to entry. The rising value of the yen and increasing labor costs in Japan have seen a steady trend towards firms in the lower wage economies of the Far East significantly underselling Japanese firms in some of the more mature industries. This was hardly unexpected and in Japan there is a demonstrable shift in industrial policy towards areas of perceived future competitive advantage particularly associated with the most recent advances in technology – bioengineering, telecommunications, etc. Significantly in these developments the overt guiding hand has usually created alliances between already favored major corporations. The government-industry alliance remains as close and powerful as ever. Oligopoly still reigns and government is only reluctantly casing the restrictions on foreign commercial entry.

Meanwhile, the Japanese domestic market remains as difficult to penetrate as ever and if a few more successes have been noted it is largely due to the increasing awareness by potential foreign intruders as to the appropriate mode of attack. However, international pressure on Japan is growing in intensity and the political rhetoric for “opening up” and “level playing fields” grows louder, with the voices of those such as Akio Morita (1992) being increasingly heard. As the national emphasis switches from growth to consumption, particularly of foreign goods, will the response be from the bastions of “Alliance Capitalism” (Gerlach, 1989) be foreign acquisition or imitative competition? Will there be a new role for MITI? Or, when foreign companies link into the established distribution networks, will this wither the “lifetime partnerships” between existing companies?

Most involvement with foreign investment that has appeared has been at the instigation of the Japanese companies themselves, often as joint ventures and largely in line with foreign investment strategies to overcome expected future barriers in Europe or the US. However, even this may have destabilizing effects in Japan. What will be the consequences at home of the outstanding success of greenfield site developments such as Nissan at Sunderland and Smyrna or the disappointments such as Sanyo at Warwick Electrical? Will the best and most ambitious young managers vie for positions in plants where the traditional practices are less entrenched?

Labor market. The national trade union organizations have centralized and politicized in recent years but union membership has continued its steady decline. There is, perhaps, some evidence to suggest that the labor market is freeing up, especially in the high technology industries where specialist skills are at a premium. Simple longitudinal and cross-sectional research comparing job tenure, turnover, etc. within and across industries is urgently needed here.

Theoretically, a number of outcomes are possible. Increased skilled worker mobility might increase the incidence of national professional associations or specialized white collar unions and will certainly bring about responses to forestall turnover with possible consequences for the seniority-based remuneration system. Moreover, the LDP has recently been showing signs of increasing instability. Okimoto (1989) demonstrated the party’s pivotal role in the system and an examination of the potential results of its disintegration or even simple fall from power would make fascinating reading, especially if any of the left of centre parties were to make large inroads.

Convergence/divergence. As for the contribution of the present paper to the convergence/divergence/reverse convergence debate, its claims for the stamina of the system seems to be substantiated by Dore’s (1990, p.443) observation that “if major changes are taking place they are slow to show up”. With many western companies blatantly moving towards the Japanese model, reverse convergence remains the most likely thesis. Dore even quotes data demonstrating that the employment system is actually diffusing down the company size hierarchy. The overall picture of institutional stability remains for the present.

Alternatively, one might argue that if the west is treading the Japanese route to success the present neoclassical consensus is distinctly out of step. If the present analysis is correct, then the necessary, if not sufficient, conditions are that management must obtain control of the key areas of finance and shareholding and government must be persuaded to take a greater guiding (if not controlling) role in the economy.

In the final analysis, the existence of convergence or divergence is a contingent empirical question that can be investigated in a large number of ways. The contribution of the present model is that it allows for both while offering an explanatory framework in which to cast the empirical data.

Acknowledgment: The author wishes to express his thanks to Dr Christina Cregan and some anonymous reviewers for their insightful comments.


1. All major companies in Japan have built up extensive vertical relationships with subsidiary firms but these subsidiaries remain outside the highly influential Presidents’ Council type organizations which sit at the centre of the kigyoshudan. For an analysis of these vertical related keiretsu, see Okumura (1984).

2. Strictly speaking there is a problem here as managerial theories of the firm present executive income as a motivator of growth since it is contingent upon firm size. However, it is generally accepted that Japanese senior managers limit their own incomes. Possible reasons would include considerations of company harmony and/or the lifetime employment career structure eliminating the risk premium that Western managers would require.

3. The shoku-in were usually ex-samurai government officials who had moved to industry and carried with them the position and traditional status afforded government officials – lifetime tenure, salary, special accommodation, etc.

4. Whitehill and Takezawa (1968) quote a membership of 228,000 (5.5% of workforce) in 1924.

5. The latter part of the 1980s has seen a number of mergers between the existing trade union associations.

6. One is reminded of Perrow’s (1986) well-known analysis of the US pop music industry. The institutional structure ensuring that the dominant stakeholders remain untouched by external turbulence.


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