Commentary / Japan

How to unleash Japan’s animal spirits

by Richard Solomon

Contributing Writer

Japan owes its wide middle class to postwar laborers who selflessly worked for large corporations on lifetime employment contracts. Now that system is faltering under the threat of digital globalization.

To return to prosperity, Japan Inc. should fast-track high-potential talent into positions of authority. A two-track employment system — one for high achievers and a second for everyone else — would unshackle Japan’s human potential.

Employees earmarked for management positions are promoted comparatively late in Japan. The tenure-based lifetime employment system may be fair, but it is inefficient. “Fair is good, but fairness can lead to mediocrity,” says Darren Menabney, speaking as adjunct professor at GLOBIS School of Management.

People assume that talent is normally distributed within companies. If it were, a small number of the best and worst performing workers would fall equally into tail ends of a bell-shaped distribution curve, with most average workers falling in between.

In practice, talent is distributed according to the power law, especially for high-tech firms where a small number of software designers write code that is spun out globally. In a power law distribution, low achievers are at the top of a downward ski slope-shaped curve and high achievers are at the bottom tail end.

For example, Apple, Google and Amazon hire, develop and fast-track top talent into positions where employees champion new products and services early on in their careers. A top software engineer might add tens if not hundreds of times more value to the company than an average one. Perhaps 10 percent of top performing employees produce 90 percent of company value.

“Very few people contribute most of the value,” notes Menabney.

In contrast, Japanese companies still treat talent as normally distributed. They must. Labor laws prevent firms from terminating employees on lifetime contracts, as the nation lacks a robust social unemployment safety net. Firms are expected to transfer poor performers internally, even if only to sit without assignments at desks in windowless offices. Unsurprisingly, many Japanese firms flounder against superior-performing global competitors.

How did this come about? Japan’s postwar manufacturers offered lifetime jobs to fill assembly line positions in an era when factory laborers were limited in their capacity to overachieve. Perhaps a top factory worker could produce 30 percent at best more output than an average performer. Similarly, the nonperformer might produce 30 percent less than an average worker.

Tenure-based lifetime employment treats them equally, incentivizing cooperation between workers who fine-tune processes and operations to build great products. As a result, Japan is a socially cohesive nation with a wide middle class. Basic services like the post office and transport run smoothly. The nation is a most comfortable place in which to live.

Lifetime employment still works in many industries, but the basis of global competition is rapidly changing. A McKinsey report highlights that globalization has entered a new period defined by data flows. Global growth in traded goods and other services have either stalled or are experiencing modest growth. They predict digital flows will surge nine times in the next five years. Companies with outdated employment systems, whose products can be rendered obsolete overnight by disruptive technologies, will struggle. Sony and Panasonic are two well-known early examples.

To compete in a speedier, more innovative and globalized world, Japanese firms should adopt a two-track employment system. The first track requires no change. Most employees would continue working in traditional jobs. They would seek, as they do now, to make incremental improvements to products and services.

A second new parallel track consisting of top potential talent would be recruited, developed and empowered early in their careers to become corporate change-makers. This group would aim to build entirely new products and services that are minimally 10 times better than existing substitutes. They would be given space to pursue their passions, take risks and experiment.

Consider the story of Akira Morikawa, an employee who was fast-tracked to become the chief executive officer of Line Corp. (then called Hangame) in 2007. Morikawa had joined the Japan subsidiary of South Korean parent company Naver Corp. four years earlier.

Once at the helm, Morikawa tried using traditional management techniques to build the company, but he failed. He reasoned that Japanese employment methods produced zoos where well-fed managers became lazy. So he jettisoned tradition to build his own “gorilla-style” management ecosystem. Within it, designers learned to take ownership over projects and to feed themselves.

First, Morikawa switched to remunerating all staff on the basis of performance. In 2008, he moved all operational staff to China, leaving a core creative staff of 400 people in Tokyo to develop new products. Designers were free to follow their passions and to develop their own ideas. Teams came together and dispersed as a few gatekeepers decided. Only top teams with the best ideas survived. The Line messaging service was born in this environment through natural selection.

The original idea was to help families living in affected areas to communicate with one another following the March 2011 triple disaster. When Morikawa finally left the firm to start his own business in 2015, Line messaging had 181 million active users and ¥86.3 billion in sales. His story supports the notion that employees can achieve amazing results early on in their careers, if given the opportunity.

A two-track employment system would give other high achievers similar chances to excel early on in their careers. Start by replacing the current pool of human resource managers with those who have been given early career advancement themselves. They in turn will recruit similar high potential talent who want to work at progressive companies. Talent could be drawn from the pool of new recruits who already have a global mindset.

Some will be offspring of Japanese parents who were posted overseas. Others will be foreigners who have experienced living in Japan. Others still might be sent overseas. When they return, they can take up positions of authority early in their careers.

Morikawa once told me: “The market is like a savanna. In this environment managers need to embrace change in order to survive.” In today’s global competitive landscape, a two-tiered employment system would unleash animal spirits of Japan’s potential top talent.

Richard Solomon is an author, publisher and spokesman on contemporary Japan. He posts regular Beacon Reports at www.beaconreports.net .