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Asia Pacific: Can Japan’s families handle the scandals?

Family-run businesses in Japan have spawned world-leading corporations, but ruinous inheritance taxes and fraud scandals have taken a heavy toll. Tim Hornyak meets the great and the good of family business leaders in Japan to gauge their views…

Family-owned businesses with a long track record are often better positioned to weather the turbulence caused by events such as the current credit crunch. And Japanese family businesses are, perhaps, the world leaders when it comes to longevity and stability, surviving recession, war and natural disasters. The country was even home to the world's oldest company, Kongo Gumi, which had a 1,400-year run until it fell to excess debt and hard times in 2006. Yet even centuries-old firms are struggling amid the current business climate, heavy tax burdens and seemingly endless corporate scandals.

Sour tastes
Many Japanese were shocked last year when news broke that 300-year-old family-owned confectioner Akafuku was forced to halt business operations following revelations that for decades it falsely labelled production dates on its bean-jam sweets. The case followed a string of food industry scandals that eroded consumer confidence.

Major candy and cake maker Fujiya, a family-run company founded in 1910, was found to have used expired milk in its products. Both incidents rocked a society with a much-loved tradition of presenting sweets as gifts to family, colleagues and business partners. But it didn't stop at candy.

Executives at bankrupt meatpacker Meat Hope were arrested for labelling 138 tons of minced meat containing pork and chicken as 100% beef. Police raided poultry firm Hinaidori after executive Seiichi Fujiwara admitted to disguising regular chicken and eggs as the prized "Hinai" variety, exploiting the Japanese zeal for specialty and luxury products. Japanese consumers have therefore become used to seeing news footage of executives bowing in apology for fraud.

Akafuku, however, had a special place in the hearts of Japanese, who have been buying its souvenir sweets from its original store beside Ise Shrine, the country's holiest religious site, since 1707. As a shinise (traditional shop of long standing), it was expected to be above the "profit first" motive that has tarnished many corporate reputations. 

"The biggest challenge we're facing is the raw materials problem, as seen in the BSE and bird flu crises," said Noriyuki Muramatsu, president of Maruhachi Muramatsu (pictured). Established in 1868, Maruhachi is a family-owned company based in Shizuoka Prefecture that received the Japan Family Business Award in 2007. It produces natural seasonings by processing marine products like mackerel, salmon and bonito (the name given to various species of medium-sized, predatory fish in the mackerel family), sourcing its materials globally.

The firm has faced increased price pressure on tuna as worldwide consumption rises as well as industry-wide fallout from tainted dumplings made in China and sold in Japan. Muramatsu believes the crux of the scandals in the Japanese food industry is a problem with corporate mentality.

"The attitude of managers affects the behaviour of employees, and scandals result when compliance is weak," believes Muramatsu. "If you ask why this came about, well, Japan lost World War II, and many companies grew out of the wasteland, but corporate dishonesty was common – a situation like you see in China today. That postwar culture lingers on, especially among older managers, and so scandals can happen easily."

Japan's endless appetite for apology as a means to atone for wrongdoing stands in stark contrast to North American-style litigation over corporate malfeasance. Said one business observer: "Japanese firms prefer to apologise simply because it's cheaper than hiring lawyers." He noted that customers are now lining up for Akafuku's confections once again.

Success and succession
Muramatsu is the fifth-generation president to head up Maruhachi and is grooming his children for roles in the company. Faced with a shrinking consumer base in Japan as the population dwindles, Maruhachi, which booked €105 million in sales in 2006, is looking to bolster its overseas activities and expand into neighbouring Asian markets. Roughly 10% of Maruhachi's business is devoted to functional extracts and biomaterials, and it is pursuing research related to health foods as it believes that product category has strong growth potential.

One bright spot for Maruhachi and other family businesses in Japan, though, is a government plan to drastically lower Japan's heavy inheritance taxes regarding the transfer of smaller firms to the next generation. Current regulations have played a role in the flood of closures of family businesses occurring when founders die, and the government is concerned that valuable manufacturing know-how is being lost. The 10% tax reduction on unlisted shares is to be hiked to 80%, according to a plan unveiled by the ruling coalition in December 2007. Another bill will allow successors to inherit full stakes in the family business, ending a Civil Code provision requiring shares to be distributed to other heirs.

"The world trend is to eliminate inheritance tax, and if Japan doesn't come into line, wealthier citizens will simply go abroad," says Muramatsu, who was adopted into the family twenty years ago. "Japan has the highest rates in the G8. It still has the mindset of sakoku (feudal policy of self-imposed isolation)."

Yet the corporate focus on longevity instead of shareholder value that Japanese family businesses represent is a source of strength in uncertain times, says Shigeo Taki, president of Nagoya-based Takihyo. The major textile wholesaler, founded in 1751, makes and imports reasonably priced product lines under license that include Disney Kids, Anne Klein and Wrangler, focusing on ladies' wear and clothing for infants. With nine companies in the Takihyo group, it posted consolidated sales of €566 million in 2007, up from €527 million in 2005, when it joined the prestigious First Section of the Tokyo Stock Exchange. Taki attributes his firm's 250-year record to its family-run structure.

"We've been able to be in business for so long because we don't work to serve the company, we work to serve the family," says Taki. "Compared to an ordinary company, where employees think about themselves and their salary, often jumping ship to a better-paying job, family businesses have an important merit in that solidarity and consideration for the family are essential." Taki firmly believes that an unchanging succession formula is key to stability: it should always fall to the eldest son, regardless of ability, and the system will prevent feuds. He added that family managers should radiate "warmth, kindness, and brightness" throughout the company and its business.

Japanese clothing businesses have been hit by rising prices for raw materials, higher labour costs in China, and vulnerability to sluggish sales blamed on unseasonable weather. So far, the China-related scandals that have hammered consumer confidence in the food and medical products industries have not spread to clothing.

"Everybody understands how far they can push things when it comes to fraud scandals," says 56-year-old Taki. "For instance, in clothing you can't say a jacket has been made in Japan if only the buttons were manufactured here. It's common sense, but this kind of common sense doesn't seem to exist in some other industries like the food business. Clothing firms are able to carry out self-verification in this regard. Our company dispatches staff to manufacturing sites in China to verify everything."

Taki also welcomes the expected change in Japanese inheritance tax polices, saying that while the regime had admirable goals of providing a more equal playing field for society, the heavy burden on smaller business owners has been a negative factor. He added that in planning for the future, Takihyo plans to expand its operations while maintaining its three corporate creeds: "One, nothing stands before trust; two, prosperity lies in modesty; and three, customer before thyself." That's food for thought for Japan Inc.

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