Japan’s manufacturers have been having a difficult time. Pressured to cut costs due to increasingly sophisticated competition elsewhere in Asia and facing deflation since summer 2015, The Japan Times reported on April 1 that Japanese big manufacturers’ business sentiment deteriorated to the lowest level in nearly three years. This is, of course, against the background of Japan’s systemic issues of a shrinking domestic market and an increasing labor shortage. While the causes are complicated, it seems at least that the well-earned reputation for highest quality cannot save Japan’s manufacturers, nor, indeed, Japan. What can? The same thing that saved Nike and Nestle, and will likely save the World Cup: sustainability.
At the April 2016 Asia Regional Forum on Business and Human Rights, organized by the United Nations and attended by participants from over 60 countries, keynote speaker professor John Ruggie spoke of the “significant unrealized opportunities” for business that sustainability, and in particular, respect for human rights throughout corporate supply chains, can bring.
His comments came as we stand in the midst of a global regulatory cascade that includes the U.K. Modern Slavery Act, the California Transparency in Supply Chains Act, the conflict minerals provisions of the Dodd Frank Act and the EU Directive on non-financial disclosure. These laws have one thing in common — they require companies to have an understanding of their supply chains, with the broader aim of forcing companies to take responsibility for the environmental and social issues therein.
Thus, not only to stay within legal compliance, but also to meet social expectations, retain access to government procurement, obtain investment from Scandinavian pension funds and meet an increasing web of commitments such as the U.N. Global Compact, the Global Network Initiative and the EICC, large companies atop global supply chains require partners who can save them time, money and management hours through strong sustainability credentials.
In other words, the world’s increasingly regulated, scrutinized and ranked leading (predominantly Western) companies urgently need business partners who at minimum can guarantee that they won’t be the subject of an Oxfam expose, and ideally who can align with them in their sustainability goals. Japanese companies can and should rush in to offer that partnership.
With a bit of effort, Japanese firms are well poised to take this opportunity. The West is grappling with the state of capitalism. The Harvard Business Review publishes articles with titles such as “How to fix capitalism” and Unilever CEO Paul Polman is revered as a demi-god for highlighting the need to move “from share value to shared values where business sees itself as part of society, not separate from it … where the needs of citizens and communities carry the same weight as those of shareholders.”
If I would translate this into Japanese I might simply say “sanpo yoshi — a phrase from the Edo Period in which “sanpo” means “three ways” and “yoshi” refers to satisfaction. It was used to mean that every commercial transaction should benefit the buyer, the seller and society.
Japan has a long tradition, albeit domestically focused, of putting people before profits. As an island nation with limited natural capital, Japan has been extremely successful in environmentally sustainable business. Japanese companies must now leverage this to demonstrate sustainability credentials in broader geographical and subject areas, namely, in their overseas supply chains and as regards respect for internationally recognized human rights.
Concretely, Japanese companies must show evidence of a PDCA (“plan, do, check, act”) cycle that also includes risks to the human rights of the company’s stakeholders domestically and abroad (i.e., human rights due diligence). For a manufacturing company, this would extend to, for example, checking the conditions of supply chain employees and communities surrounding their factories or those of their business partners overseas.
For non-manufacturing companies, it means, for example, understanding and checking how compliance with foreign government requests could potentially harm individuals who are not customers. For Olympic sponsors, it can mean taking a position on key human rights issues in the host country and demonstrating an attempt to use leverage with the government to improve the situation. In short, it means going beyond legal compliance and living up to society’s increasing expectations of globally leading companies.
This may seem to be a lot of effort — and there are undeniably costs in the short term. Some companies may prefer to wait and see how peers move, or wait to be publicly embarrassed by an NGO before feeling the push to take action.
However, short-termism is what got us into this mess, and it has never had a place in corporate risk management. Moreover a “wait and see” approach will almost certainly result in missing the business opportunities that flow with this tide. Chinese companies are struggling to shake a “high risk” tag; but they are investing in sustainability: For example, state-owned enterprises are mandated to produce sustainability reports by a 2009 government directive, and Chinese extractive companies operating abroad have been told to follow the Guiding Principles on Business and Human Rights. Japanese companies need to act quickly and offer themselves as the apex of a socially responsible Asian supply chain.
At the same Asia Regional Forum, panelists in a separate session on business and human rights in Japan (jointly organized by EY Japan, IDE-JETRO and the U.N. Global Compact Japan local network) fielded questions about why Japanese companies and government representatives were so seldom participants in these forums that shape global thinking, and as a consequence, regulation and business opportunities in the field of sustainability. (Questions were politely phrased in terms of what “further support” Japan must need to be more active in this important global dialogue.)
Corporate Japan should not continue to miss the opportunity to be visible in these debates and brand itself as a hub of sustainability excellence. Japan has a rightly celebrated tradition of best quality merchandise. However, in this decade, that is not what will save Japan.
Ashleigh Owens is executive director of EY Japan Climate Change and Sustainability Services, and coauthor of “Business and Human Rights: Corporate Japan Rises to the Challenge.”