Explore the differences in the Japanese and western investment decision-making processes and the conflicts that arise from there
a. Difference in financial theory:
American’s companies believed that maximization shareholders wealth were realistic and necessary for the growth of the company. This means that the company’s only social responsibility is to maximize profits; its main responsibility is operate for the best interest of shareholders, the company’s true owners, by maximizing returns. Under this theory, when a firm distributes its wealth for other social causes, it is creating additional business costs at the expense of shareholders, resulting in lower net income.
It was an unfair contract for the Japanese partner, but Walt Disney’s management needed some other source of income to make the firm’s financial numbers look good, and in turn, boost up its stock price on the market.
In contrast, Japanese believed that a firm’s objective is to maximize its corporate wealth. A firm has to treat its shareholders and other stakeholders, such as management, creditors, employees, the local community and the government, equally. This means that the company’s social responsibilities go beyond earning profits to include the society’s benefits. Therefore, a Japanese firm main goal was to earn as much as possible, and to retain enough corporate wealth for the benefit of all stakeholders. Management feels that they are responsible for the impact they might cause on the environment and society. In a sense, their business purpose is more on the lines with social welfare than acting with only their shareholders’ best interest.
With this belief, OL felt a great responsibility to benefit all parties affected by the construction of the amusement park. For instance, because the land was public property, OL felt that the land should be used for something that the public could enjoy. In addition, OL’s executives were aware that the land was reclaimed from the sea, causing local fishermen to lose their jobs and income. They felt a social responsibility to help these people. During the negotiation, management did not decide on their own, but rather consulted the stakeholders before making any decisions. The interests of parent companies, shareholders, and even lenders were taken into consideration during the whole negotiation process.
c. Difference in principal-agent relationship
The principal-agent relationship in American companies is vastly different than one in Japanese firms. In Western/American firms, shareholders (principals) hire management (agents) to manage their businesses. The shareholders’ goal (principal) is to earn investment return, to maximize their wealth. To ensure that management acts for their best interest, shareholders use positive or negative incentives to bring agents on the same line. Offering stock options and other bonuses directly related to profits to management can get them to have the same interests as shareholders. In general, this arrangement works well when the agent has the managerial skills needed to maximize profits.
In contrast, Japanese firms normally are closely held by stable and affiliated shareholders who have on-going influences on the firms’ businesses. Often times, these stable and affiliated investors do not seek immediate returns, but rather long term value maximization. In other words, they can afford to suffer a temporary loss for a long term maximum return. Moreover, in Japanese firms, stakeholders (principals) act as their own agents, and each has different goals. Therefore, conflicts are inevitable and far more complex.