November 08, 2005

Book by Sandy Jacoby Contrasts Cultural Contexts of U.S. and Japanese Firms

U.S. firms value shareholders over stakeholders

Sandy JacobyLOS ANGELES - Not long ago, the impressive performance of the U.S. economy not only made it the envy of the rest of the world but also got it touted as the ideal that other nations ought to emulate. However, the corporate scandals of the past few years have rocked American business with repercussions felt throughout the global marketplace. Damaging the public’s confidence in its institutions and generating a rash of regulations, the situation is prompting a re-evaluation of the way American companies are managed.

“The Embedded Corporation: Corporate Governance and Employment Relations in Japan and the United States” is the latest book by Sanford M. Jacoby, recently appointed vice chairman of the faculty and area chair of human resources and organizational behavior at UCLA Anderson School of Management. Reporting his recent research results, it contributes an understanding of how and why the U.S. system evolved as it did, through comparison of major models in America and Japan with historical and cultural contexts.

Jacoby has been a member of the Anderson faculty since 1980. Holder of the Howard Noble Chair in Management, he also has joint appointments as a professor of both history and public policy at UCLA. His teaching focus is international political economy and human resources. The combination makes him uniquely qualified to pursue research about globalization’s impact on corporations and their employees. His work is based on the idea that history and society matter to business analysis, because corporations are products of their particular time and place.

“Economists tend to see markets as timeless entities without geographic grounding and so use the same set of tools to analyze them all,” says Jacoby. “In fact, there are varieties of capitalism based on differently structured national business systems. A country produces distinctive ways of doing business because its economy is embedded in a national system that developed over time from a unique starting point and is deeply entwined with existing norms, laws and other interdependent institutions.”
 
Decision Making and the Desire to Be Different
Jacoby considers how the pressures of globalization are pushing the world’s disparate corporate systems closer together. While convergence is occurring in some areas, there is divergence in others, created by powerful counter forces, including the desire to preserve social standards and “a dawning realization that being different is an effective way to compete globally.”

The vantage point Jacoby uses to view these issues is the human resource department at the headquarters of large American and Japanese corporations. Much of the book is devoted to details gleaned from a large-scale survey of the senior executives who craft personnel policies and link them to overall business strategy. This interrelationship of executive decision making, human resource practices and corporate governance is a key concept of the book.

“Studying the role of top-level human resource managers, and their power relative to others in the company, is a good way of understanding decisions that determine the working lives of millions of people,” says Jacoby. “Since a corporate governance system holds management accountable to those with a legitimate stake in the enterprise, its rules (especially as to who qualifies as a stakeholder) also have enormous importance. Corporate decisions affect even the air we breathe, so they ultimately impact everyone.”

Culture and Corporate Governance
Believing the only way to clarify what makes American companies “American” is to compare them to companies elsewhere in the world, Jacoby includes paired case studies of American and Japanese firms. The two countries currently have different approaches to employment relations and corporate governance, though they heavily influenced each other in the past. The direction of the flow of ideas has changed with the fluctuating fortunes of each nation.

Acknowledging that not all companies in either country are the same, Jacoby places them on a continuum between an internal and an external focus. Japan is more organization-oriented with long-term employment and business relations, a tendency to grow talent from within, coordination via tacit knowledge and stakeholder corporate governance.  The United States is more market-oriented with higher turnover in employment, a tendency to purchase talent from the outside, financialized decision-making and shareholder corporate governance. In the United States, the executive HR function is relatively weak; in Japan, it wields clout.

Under Japan’s stakeholder approach (similar to much of continental Europe), managers seek to balance the interests of employees, customers, suppliers, creditors and communities, along with shareholders. In the American-style shareholder approach (also in the United Kingdom and Canada), managers focus exclusively on the interests of shareholders and all-important stock prices.

“During the U.S. economic boom, when the Japanese economy was stagnant, the Japanese were pressured to adopt our system, which was viewed as innately superior,” Jacoby says. “However, when the bubble burst and news of managerial self-dealing and ineffectual boards came to light, the shortcomings of shareholder sovereignty became clear. There were negative outcomes even for shareholders, including the worst U.S. stock market slump since the 1930s.”

Resource Reallocation
Jacoby further explains the difficulty of identifying which micro-level factors actually account for a country’s macroeconomic success. Attributing American’s growth in the 1990s to its governance system ignores the less stellar performance of Britain and Canada (which had similar systems at the same time). Conversely, Japan is now emerging from its long economic stagnation, having made only modest changes to its corporate governance system.

The restructurings of the 1980s and ‘90s were not only employed at troubled but also at profitable firms, which sought to shift income to owners and executives and away from workers and reinvestment. Accompanied by a lot of rhetoric about how the nation needed to be more competitive, they often failed to produce lasting value. For example, the majority of mergers and acquisitions from 1995 to 2001 resulted in a subsequent reduction in share-price value.

“Not a few journalists and even some respected academics argue that U.S.-style corporate governance promotes ‘rent extraction’ – or ‘greed’ in plain English,” says Jacoby. “The share of wealth for America’s top one percent (prime beneficiaries of institutional changes) doubled in 25 years. Average Japanese citizens don’t want this inequality. In 2000, American chief executives at large public companies were paid 531 times more than their average employee, but in Japan, it was 10 times.”

Redistribution of Risk
Along with wage inequity, risk associated with doing business has risen and been shifted to the workforce (or as in the case of pension and health plan terminations, to the U.S. taxpayer). Though there is lip service to the credo that intellectual capital is increasingly a company’s most important asset, human resource management remains low-status in the corporate hierarchy, and American employees continue to be treated as costs to be minimized. There are exceptions, to be sure, especially at technology start-ups and in privately-held or family-controlled companies. Jacoby cites SAS, a private software company, as an example.

At one time, America shared a more stakeholder approach with Japan, and historical evidence suggests that a wide variety of economic institutions foster growth. Important questions facing advanced industrial societies require closer examination of the costs and benefits of different national systems. Despite their faults, current U.S. and Japanese models have particular advantages. Our country’s choices are crucial, and Jacoby delineates our background as a nation to help us more effectively chart a future course. Like the United States, Japan, too, is at a crossroads as it considers how much of its distinctive postwar system should be retained.

Calling Jacoby “one of the leading experts on the subject,” colleagues in the field have high praise for “The Embedded Corporation,” including: “a persuasive and informed perspective on the reform of corporate governance and employment” and “a splendid book, lucid, cogent and written in a style that is a pleasure to read.” Thomas A. Kochan of the Massachusetts Institute of Technology sums it up: “Anyone who seeks to change corporate practices in Japan or the United States, or who writes about these issues, should stop doing so until they read and absorb the lessons of this masterpiece in comparative research.”

About UCLA Anderson School of Management
UCLA Anderson School of Management is perennially ranked among the top-tier business schools in the world.  Award-winning faculty renowned for their research and teaching, highly selective admissions, successful alumni and world-class facilities combine to provide an extraordinary learning environment.  Established in 1935, UCLA Anderson provides management education to more than 1,400 students enrolled in full-time, part-time and executive MBA programs and doctoral programs.

UCLA Anderson’s faculty includes outstanding educators and researchers who share their scholarship and expertise in such fundamental areas as finance, marketing, accounting, business economics, decision sciences, operations and technology management, human resources and organizational behavior, information systems, strategy and policy.

Recognizing that the school offers unparalleled expertise in management education, the world's business community turns to UCLA Anderson School of Management as a center of influence for the ideas, innovations, strategies and talent that will shape the future.

Contact Information

Hilary Rehder, (310) 206-7707 , hilary.rehder@anderson.ucla.edu

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