A Blend Of East And West

The peculiarity of Japanese corporate governance is clearly illustrated by the difference between Japanese and US board structures.

A typical Japanese board has up to 50 members, all drawn from inside the company, with no shareholder representation, and focuses on operational management. A typical US board, by contrast, is made up of about a dozen members, a majority of whom may be external directors, and who focus on broad strategy and defend the interests of shareholders.

They are different for good reasons. Japans bottom-up management and the relatively low priority accorded to outsider shareholders is well attuned to its tradition of consensus decision-making. The US top-down management, with its acute sensitivity to shareholders rights, is better attuned to a free-market economy.

As the Japanese economy becomes more open to international market forces, some Japanese companies have started to ask themselves whether they should adjust management structures accordingly.

The latest is Sony, the consumer electronics group, and Japans perennial management trend-setter. It will ask share holders at its annual meeting next Friday to give their blessing to a unique hybrid of Japanese and US board structures.

The aim, explains Tsunao Hashimoto, Sonys vice chairman, is to sharpen up the groups strategy-setting skills. This is at a time when the companys markets are changing increasingly fast, with the advent of digital technology, increasing competition and economic deregulation.

Sonys plan is to reduce the board from 38 to 10 members and increase the number of outside directors from two to three possibly rising to six in the future.

At the same time, the board will cease to have responsibility for operations and concentrate solely on strategy. Operations are to be overseen by a new series of appointments, corporate executive officers, divisional chiefs.

It is a small revolution, says Hashimoto, We need external directors to look at what we do and provide advice from an outside point of view.

However, the real emphasis is on evolution, rather than revolution.

This is not, and never will be, an attempt to transplant US corporate governance wholesale, stress Sony executives.

As Nobuyuki Idei, Sonys president, explained to a Japanese newspaper: It would simply be too shocking to have someone with little knowledge of our business come in and announce layoffs.

There is no global standard for management. We must tailor our approach to the situation in Japan.

Accordingly, Sonys external directors are outsiders with acceptably familiar backgrounds. The one foreigner is Peter Peterson, chairman of the Blackstone Group, the US investment bank, who joined the Sony board 10 years ago. The newcomers are Japanese: Kenichi Suematsu, chairman of Sakura Bank - a 3.6 per cent shareholder of Sony - who replaces a retiring external director; and Hideo Ishihara, a former deputy president of the Industrial Bank of Japan who has been chairman of Goldman Sachs Tokyo office for the past three years. All three are non-executives.

Financial Times

The step-by-step way in which Sony prepared this move is equally indicative of Japanese, rather than US, management style. The process began three years ago, explains Hashimoto, when the group reorganised itself into eight company divisions - a first step towards devolving operational management away from the board.

Inspiration for the move came from US subsidiaries, Sony Pictures Entertainment and Sony Music Entertainment.

We felt we could take some of their concepts to improve management at Sony itself, he says.

Phase two came last year when those eight companies were expanded to 10 to take in personal computers and information technology.

Several important functions, including human resources, finance and technology, were handed to a new executive board, separate from the main board.

In this way, the board can now discard its operational responsibilities, safe in the knowledge that they are already being handled at divisional level, explains Hashimoto.

It if works, other Japanese companies which have been trying out smaller boards and outside directors, such as Mistubishi Corporation, might be tempted to move further towards US-style governance.

But, as always in Japan, it will be a process of continuous incremental improvement, rather than a management revolution.