3 things Japan’s century-old businesses are “unconsciously” doing

Consulting

Oct 13

Japan is home to numerous long-established companies. At the same time, 99.7% of the country’s businesses will disappear into history even before celebrating their 20th anniversary. What is the secret of corporate longevity? The analysis by Kyohei Hosono, Director and COO of Dream Incubator Inc. (DI), may provide interesting observations into the subject matter.

Japan has over 33,000 companies that are 100-plus years old. Of those, over 1,300 businesses have been around for more than 300 years.

I guess anyone with experience of running a business would say the same thing: achieving business longevity of 100 years is, to be honest, beyond our wildest dreams. Dream Incubator Inc., where I am honored to serve as a director, was founded in 2000, so we are celebrating 22 years of business this year. The numbers tell the story that only 0.3% of all Japanese companies make it past the 20-year mark, if so, DI is part of the group that manages to sustain in the cut-throat competition. DI, since its inception, has been actively engaged in strategy consulting and venture investing that only emerged as new industries 50 years ago or so in Japan.

The history of strategy consulting in Japan dates back to 1966 when the American global consulting firm Boston Consulting Group opened its office in Japan. Running that business was, to my knowledge, a real bumpy ride filled with ups and downs until the latter half of the 1980s. Japan’s first venture capital firm was established in 1972, shortly before the first venture boom occurred in the 1970s. Either industry is just about 50 years old. Whether DI is going to be a 100-year-old business, it is a journey beyond what I can imagine.

In Japan, there are 69 incredibly sustainable companies with more than 300 years of history and annual sales of over 5 billion yen (“Why do the 300-year-old companies keep thriving?” (written by Yoshihiko Takubo, published by Toyo Keizai Inc.). The largest shareholders in more than half of these businesses are the founding family (most of them are unlisted). Unlike the United States and other countries where M&A prevails, Japan still maintains a relatively high level of founding-family ownership. Some studies have looked at the relationship between founding-family ownership and their business’ super-longevity.

According to several interviews and analysis, old family companies seem to unconsciously know exactly the answer to the big question: “What’s a company for?” They just know and do it.

What is the purpose of a company? I believe there are 3 purposes defining the reason for a company’s existence:

1. To create profits

2. To contribute to society (stakeholders)

3. To sustain

Profit is the first purpose. In this sense, I think the American economist Milton Friedman is right when he argues that “The Social Responsibility of Business is to Increase Its Profits”. That is to say, the key driver of business is business (“The business of Business is Business”). Companies that are not profitable cannot contribute much to society. Old companies survive because they keep generating profits. It is nonetheless hard to maintain long-term and stable profits to survive treacherous waves of the market. Given the unstable profitability structure of DI, we are currently struggling to pursue structural transformation aimed at generating long-term profits. We learn the hard way how challenging it is to continue making profits.

The second purpose of a company is giving back to society. “Society” can be rephrased as stakeholders. Common examples include customers, employees, suppliers, local communities (the global environment) and long-term shareholders. The oldest still-functioning companies that have survived to stand the test of time – like Gekkeikan, Okaya & Co., or Nishikawa Sangyo – all have that spirit of service and giving back to stakeholders, passed down from generation to generation of directors, and it has been wired deep into their employees’ DNA.

We all know that there has been an increasing number of pressing questions on stakeholder capitalism in the United States, home to the shareholder-first capitalism (shareholder primacy). The “Statement on the Purpose of a Corporation” released in August 2019 by the Business Roundtable, the largest trade association of CEOs of the largest and most influential U.S. companies, states 5 fundamental commitments to all of their stakeholders, which are partially quoted as follows.

1. “Delivering values to our customers. […];

2. Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world;

3. Dealing fairly and ethically with our suppliers. […];

4. Supporting communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.

5. Generating long-term value for shareholders, […]”

While such stakeholder capitalism may seem obvious to the Japanese, I think it is a big turning point in history when 181 heads of America’s major corporations representing over 30% of the total U.S. market capitalization began to recognize the importance of stakeholders other than just shareholders.

More importantly, the Business Roundtable says that it commits to “create long-term value” to shareholders. In other words, the statement can be interpreted as investors who look for short-term investment and high-frequency trading powered by AI are not shareholders, in the essential meaning of the word.

Last but not least, a company is to last. Some may think “to sustain” comes as a hindsight, but I think continuously operating is also a meaningful purpose. To me, it is close to the idea of preserving species of living organisms. Likewise, when preserving the seed of “company” as our purpose, we pursue a “survival-of-the-fittest” strategy that fosters corporate longevity. A company that suddenly lays off employees, defaults on its debts, or can't pay business taxes is just a nuisance to society. Lasting for a long time helps businesses make a stable contribution to the world.

Undoubtedly, oldest companies eat, sleep, and breathe these 3 purposes, whether their management team is aware of these or not.

In addition to these purposeful actions, I believe that the governance, where moral values are handed down by past generations of directors, is also what makes long-lived companies long-lived.

Adam Smith and Max Weber, the fathers of modern capitalist thinking, never preached the shareholder-first capitalism. In the “Theory of Moral Sentiments”, Adam Smith argues that the basis of economic policy defined by laissez-faire (“to leave alone” or government non-intervention in the economic affairs of individuals and society) and the division of labor that later develops into capitalism lies not in the pursuit of self-interest, but in the pursuit of morality and ethics.

Max Weber argues that if the capitalist economic system is left unchecked, the pursuit of profit itself can easily develop into an activity trap and go out of control, thus “business leaders must act with a high sense of ethics and moral values.” In the early days of capitalism, the pursuit of profit was affirmed by the idea that “by answering God’s calling to live ascetically, God's will would manifest itself in our life and we will be saved.”

For both Smith and Weber, the pursuit of profit requires a sense of morality and asceticism, and without these, capitalism would go out of control.

To last 100 years, it is essential to (1) create profits, (2) contribute to society (stakeholders), and (3) sustain, and to pass on management ethics to the next generation (this is all easier said than done, though).

Written by Kyohei (Kay) Hosono

About Mr. Kyohei Hosono, Dream Incubator Inc. (DI) Director and COO

Kyohei graduated from the Faculty of Letters, the University of Tokyo. He studied at St. Petersburg State University in Russia and holds the Master of Public Administration (MPA) degree from the University of Michigan in the United States. In 1996, he joined the Overseas Economic Cooperation Fund of Japan (later the Japan Bank for International Cooperation, JBIC). At JBIC, he was engaged in ODA projects from Japan to developing countries – mainly specialized in the former Soviet Union countries in Central Asia (Uzbekistan, Kazakhstan, etc.), debt restructuring for developing countries, ODA reform, among other activities. He joined DI in 2005 and engages in strategy consulting for large corporations and venture investment. He then served as DI Vietnam General Director, DI investment director, managing director before assuming his current position in June 2021.