Corporate Crisis Management
How do international corporations deal with inept or under-performing Japanese subsidiaries? What do you do if a rogue CEO is embezzling funds from the company? In Japan, there are unique challenges in the business environment that require qualified professionals to swiftly and decisively take action when trouble arises. Join Timothy Langley and David Russell, as they explore the topic of corporate crisis management in Japan.
Tim: You know the interesting thing about this is that different countries do it differently: the British have a rather long term view of sending an executive from the home office to Japan to establish the presence and to be rotated in and out, usually sticking with their own countrymen; the Americans are a little bit more egalitarian; the Australians are too. And there’s always this push to transition to the local market and that’s the point you were talking about: this breakdown in communications because maybe the person that hired since they’re local, they’re not from the head office. They’re not seeped in the culture and the way of communication of the home office and so you have a really ripe recipe for a lot of different things to happen.
Dave: Yes. I’ve seen many cases, I’m sure you have too. I’ve seen cases both where the parent company transfers one of their employees to run the Japan office, whether it’s a subsidiary or a branch office, and the person they send over may be very competent. He may or may not speak Japanese; he may or may not know about Japanese business culture but he tries his best to run a good office here and winds up with tremendous problems because the local Japanese staff don’t communicate well with him, they don’t trust him. “He’s from overseas”. We’ve also seen a couple of cases where the person who was sent over here turns out not to be competent and winds up running his own little fief in Japan and trying to hide that from the head office overseas. And what we’re seeing more and more these days, I think you’ll agree, is branch offices, subsidiary offices, that are now run by Japanese CEOs whose responsibility is to report back to the parent company overseas and they’re running their own little fiefdoms over and they’re using company money as they please and basically not reporting to the head office. And ultimately, they’re trying to cover-up what’s going on, cover-up accounting failures, cover-up lack of sales, cover-up all sorts of problems that are going on in the Japanese office. Are you seeing more and more of that?
Tim: Well, I don’t know if I’m seeing more and more of it. It’s part of the structure here. So you might recall that when you’re a Japanese kid who’s joining a company your first job is to integrate and to assimilate with the people that are in your Entering class and to those who are above you, and maybe in two or three years, those that are below you as well. You integrate. You’re not learning your job, you’re integrating with the team. So you don’t want to be left out or kicked out: you want to come in lockstep. And that kind of continues through the career as well. So, if you’ve got an executive who has actually changed jobs to run your subsidiary or your branch office, he’s been seeped in that and maybe he’s changed out too once or twice. It used to be really bad that you changed jobs, but now it’s not. There are CEOs and CFOs who have changed jobs, you know, four or five times in the last ten years. That used to be unheard of. So the communications breakdown is is not just about language, it’s also about building your base and securing your role in the company. People don’t want to be fired, they want to be respected and admired by the people that are closest to them, so that creates a natural tension that I think some people fall in the cracks of.
Dave: That’s a very good point. I think the thing that I keep seeing again and again is foreign companies that are really struggling with how to deal with this problem. What happens if you are operating a company from the U.S., from Europe wherever and you start to get that feeling that maybe your Japan subsidiary is not operating the way it should be, whether the CEO is someone that you sent in there or someone you hired locally, you have that sudden loss of trust in your operation. What do you do? That’s a critical situation.
Tim: Yeah, that’s a very difficult situation for any company. I mean you’ve selected somebody, the shareholders have selected somebody to run the subsidiary. So the person who is running your subsidiary is not an employee: he’s selected by the shareholders to run this wholly owned subsidiary. So, he reports to the shareholders, he serves at their pleasure and whenever his term is up, maybe in two years or three years, the shareholders have an annual meeting and they revote him in. So, when he’s not doing well or when he doesn’t meet expectations or when there’s cause for distrust, the shareholders can move him out, he’s not an employee; the rules that guide that are different. He’s serving a term and at at their request he could resign voluntarily. Or, he could be forced to be resigned.
Dave: Have you encountered cases in your practice where foreign companies have lost trust in their Japan operation and have had to take extreme actions?
Tim: You know, it’s not talked about widely, but when guys like us get together and we’re drinking beers and we’re talking scuttlebutt, these stories come up all the time. There are some very famous stories of rogue CEOs who have gone through and even the headquarters cannot control what’s going on in Japan. I mean, let’s face it, even in the headquarters they really don’t understand what’s going on here and they always criticize people in Japan and they say “don’t tell me anymore that Japan is different; that we have to do it different. I don’t want to hear that anymore. I’ve heard that enough just do it the way I asked you to”. There is a clash of cultures here, there’s a clash of business ethic that people run into ran afoul of all the time.
Dave: You mentioned things like rogue CEOs, I think that is every manager’s nightmare.
Tim: Yes, it is.
Dave: It is parent company. What happens if one of the people we put in to run one of our offices just goes wild and starts creating his own private fief there. Can’t they just fire the guy? I mean, it’s their CEO, can’t they just remove him?
Tim: Well, there’s a couple problems with just firing them until you could come in and just do a hatchet job. But the representative director’s name appears on your corporate records. So, people who are doing business with you, banks and main facilitators of your business, know this record that you’ve had. You’ve had a CEO, he was here for five years. Then you moved him out. There’s another guy that was here for three years and he was executed. He was fired. That comes up on the corporate records. So, the people that are closest to you, your consumers, the people who are suppliers, they know this and this is a very fickle economy, it’s a tough place to do business even when you’re good at it as your opening remarks relay. It’s just a tough place to do business and if you’re a foreigner you’ve got even more toughness to deal with and if you hire the wrong guy or if you’ve lost trust in him or something which frequently happens is, he set up an independent K.K., an independent company, on the side that he’s feeding invoices to and getting paid. That happens quite a bit and that gets discovered, that’s cause for, you know, termination immediately, but going through that process is very delicate. So, there are a lot of different scenarios that you consider, but on the good and the bad outcome you really just want to have your CEO, and if it comes to that, to resign voluntarily. You don’t want to go to the courts. You don’t want to get the lawyers involved. You want to show him why he’s not meeting your needs, why he is not competent to fill that position. And would you please resign and we’ll give you a package perhaps so that you can go on into the sunset? Rather than firing him with cause. Because what he has done while you’ve been counting the share prices in the headquarters is he’s integrated and facilitated his fiefdom. So it’s a very sticky business. You can’t just pull him out and not have, you know, fall out afterwards.
Dave: Yeah, it sounds like you’ve actually had experience with quite a number of cases there. You’re speaking from experience here. Could you, I know you can’t mention company names, you can’t discuss your clients that way, but could you give us, I’m very interested, and give our viewers just an inside view of what happens. What happens when a Japanese CEO for his agent goes rogue?
Tim: So the typical process is we get a phone call and somebody explains to me “we’re having concerns. We’re not quite sure. We’ve heard some rumors”. Somebody’s written a poison pen to the CEO or to one of the shareholders and would like you to check, so we run a due diligence and we just chase it to ground. Is this verifiable? Is the story as rich and as reliable as it is portrayed to be and then we will report. And almost every time that we’ve received that request to run a due diligence, the next issue comes up. Would you please help us? So in almost every instance where you run a due diligence, yes, there is something there. There’s a smoking gun. So the job is to find out how big is the smoke. How important is it. How critical is the issue and explain that to the shareholder, whoever it was that is a potential client, and give them some options and frequently the options are we need a scenario where we can walk out of this thing nicely. We don’t have a lot of press reports on it, the employees are relatively calm, but we’re coming in to fix this issue because this is just a symptom of something that we’ve noticed for a long time. So it’s never just one incident. It’s usually a whole Orchestra of things that just haven’t risen to the surface to make somebody say “we got to get this”.
Dave: I understand very interesting. Can you give us just a quick case study, just in your mind, think of one recent case that you’ve had and how it worked out. So we have a more concrete understanding of how this works.
Tim: Okay, before I do that I have to tell you that the road between here and Narita is replete with the burnt-out carcasses of lots of companies. Companies that have been attacked by this kind of cancer and not survived it and those that have kind of, you know. Any company that’s been here for a long time guaranteed has suffered through this scenario in one form or another. So the general scheme is it’s almost never the headquarters guys that’s parachuted in for two or three years and his wife goes to the Tokyo American Club. It’s almost never that scenario. It’s the next generation or the generation after that. And the individual is almost always a Japanese national, mid-career, that’s being pushed up to be a CEO or maybe he’s been CEO and they’ve headhunted to a new position, and immediately he begins to build his fief. Now some of that is expected and understood: it’s part of trying to get your business done by shortcuts and being able to surround yourself by people that you can rely on; you can call them up at any time of the day.
Dave: The head office has no problem with that?
Tim: They have no problem with that. Where the problem begins is when we’re starting to do inside deals: it’s all about money. It’s always about money and it’s about packing your own nest at the expense of your client, the company that has hired you. So recently I was involved in a case where it was a Japanese national. It was the third generation. The company’s been in the country for 15 years about 45 employees and it’s not a US company. It’s a European company and there were some telltale signs that things weren’t right. We ran a due diligence and found out that, yes, these tell-tale signs are rather deep and they’re rather serious, and the shareholder came in because he wanted to experience it himself. We had a one-on-one a little bit of a, you know, face to face investigation that closed the door and the castle collapsed immediately. But it had to be a controlled collapse so that the CEO says “yes, I will leave. I know you’re not accusing me, and you’re not going to, you know, slam me so that I’m not gonna be able to get a job as a CEO in this town again, but I’m going to withdraw. And all of the ill-begotten wealth that I have assumed or I’ve accumulated, yeah, since I’m not going to admit it, you’re not going to claim it. So we’ll just give it a wash.” That’s what frequently happens and that’s part of the pain of it too. But you want this thing to be a controlled collapse and get somebody in quickly. The problem with this is that for a CEO, a daihyō torishimariyaku, the representative director, to change that in the formal legal sense for going to the ward office, and getting your corporate registry changed so that your new representative director is in place. It’s a rather long process, assuming you already have a guy in the wings waiting to come in, and infrequently, it’s that case. So you have to have a stand-in to come in, run the company at the time when it’s really shaky and that’s what we would do. We would come in, manage the corporate office, get everybody, you know, back on track calm the nerves. Make sure that the suppliers and the consumers know that things are going well; the bad news is gone, and then you recruit a replacement, you fly in by the shareholders, there are a couple interviews that might take, you know, five to six months, then you have a transition there where you resign as the representative director. Somebody has to be the representative director. In a Japanese corporation, you can have two representative directors, usually somebody in the headquarters and the fellow who’s running the ship here. So this fellow who is running the ship here needs to be your representative director to give confidence to the employees and to your suppliers and then there’s a transition where your new professional CEO comes in and then we basically back out and let the company assume. It’s a rather long process, it takes about six or eight months.
Dave: Well, that’s a lot more complicated than I thought. If I understand you right you’re saying you get contacted by a head office, an overseas company, and then you do the due diligence on their Japanese office here. You check things out, if you find things aren’t the way they should be, you report that back to the parent company and then they ask you to conduct a full-scale investigation. You go ahead and you investigate. Ultimately, if you find just cause, you deal with the current CEO, the daihyō torishimariyaku here in Japan, and you convince him to resign rather than grant in a court fight, something like that, so we keep this thing out of the newspapers, minimize the publicity on it, and then you supervise the transition from his era to the next CEO, whoever that is, and if other executives have to be replaced or other staff have to be replaced, you do that?
Tim: We take care of that as well.
Dave: You do that as well? So you actually you you stop the hemorrhaging of company funds right you go in and where necessary you actually amputate the defective CEO who is causing all of this problem, right? And then you go in and you replace him you replace him with any extra staff that are needed right? This is a long complex process.
Tim: Yes, it’s a long process.
Dave: Just hypothetically, couldn’t a foreign company get the same results by hiring several different companies in Japan couldn’t they get a detective agency, a law firm, a forensic accounting firm, things like that, put them all together and create essentially the same package?
Tim: Yeah, I think probably the New York knee-jerk reaction is let’s get a law firm, let’s hire these guys. But you’re gonna spend an enormous amount of money doing that and just the management of these various desperate parts, just to get them working together would be really expensive, take a long time and, in my view and in my experience, nine times out of ten will be ultimately unsuccessful because you won’t be able to hit the sweet spot.
Dave: Tim, Thank you very much for that, really, I mean, you’ve given me into sight into things that I’ve sort of heard about but wasn’t really that much aware of and I’m sure there are a lot of foreign viewers who have the same reaction. So it sounds like you’ve got a lot of experience in this and you’ve been working a side of the street that not many people get to see. And this is part of what we want to get into.
Tim: I thank you for the interest because it’s an interesting part of the business, it’s not something that everybody can do or wants to do, but it’s it’s a really kind of captivating part of living in Japan and doing business in Japan because, you know, people, at some point or another, will run into trouble.
Dave: Exactly. Thank you again. This is exactly what brand 2020 is all about: trying to explain the inner workings of Japan, how Japan presents itself, not just to people in the country, but also to people overseas who don’t understand some of these complexities. Stay tuned. We have more good stories coming up for you.
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