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Corporate Japan Gets a Jolt From an Outsider

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The word gaijin is used in Japan both to describe foreigners, and to suggest their inability to truly understand Japanese culture. The term no doubt came to mind Thursday when the non-Japanese president of the giant Internet firm SoftBank used his own money to place a big bet on the company.

Japanese business executives might be tempted to dismiss the news as a typically superfluous gaijin flourish. They would be far better off if they simply followed SoftBank's lead.

Nikesh Arora joined SoftBank in late 2014 after stints at Google and an eclectic mix of tech and finance jobs from Deutsche Telecom to Putnam Investments. The promotion last month of the 47 year-old Indian-born outsider to president confirmed founder Masayoshi Son's desire to expand beyond Japan's aging, shrinking market -- and to flout the prevailing norms of corporate Japan.

That became clearer than ever this week, when Arora pledged to buy $483 million of SoftBank shares in a "personal bet" on his ability to generate growth and profits. In taking a page from Tesla's Elon Musk, Arora single-handedly boosted SoftBank shares 2.2 percent on Thursday. (He also managed to make a mockery of Twitter CEO Jack Dorsey's comparatively piddling $875,000 binge on his own company's stock.)

Arora's purchase sends an important message to corporate Japan. For decades, Japanese CEOs have considered corporate governance a contradiction in terms, a vague western construct that had little bearing on their leadership. Prime Minister Shinzo Abe has tried prodding executives to embrace global business practices by urging shareholders to speak out, highlighting well-run companies, and asking boards to add more outside directors. But, as recent scandals at Toshiba and airbag maker Takata have shown, those efforts have been no match for a culture of corporate insularity that is centuries in the making.

Part of the problem is that Japan's chieftains tend to view themselves as caretakers with a mandate to avoid unnecessary risks. Accordingly, they err on the side of avoiding conflict rather than making big interventions, whether in the form of public shows of confidence or headline-making deals.

As Arora's gesture shows, however, investors often react positively when corporate executives take personal and public risks. Will anyone in Japan follow suit?

It's an interesting question for other Japanese startup successes, including e-retailer Rakuten and clothier Fast Retailing (which sells the Uniqlo brand). At both of those companies, the founder owns an outsized stake and needs to soon groom a successor. Will they look globally for a replacement of the highest caliber, or will they promote from within, in typical Japanese fashion?

In the context of corporate Japan, Rakuten's Hiroshi Mikitani and Tadashi Yanai of Fast Retailing are both considered mavericks. Mikitani has backed smaller startups and urged Abe's government to follow his lead; Yanai has expanded aggressively overseas, made English the company's official language and scrapped seniority-based promotions.

Corporate reforms of this sort -- especially labor reforms -- have consequences for the entire Japanese economy, including its battle with deflation. Although Japan is technically short of workers, practices like lifetime employment and promotions tied to tenure mean few leave their jobs. Why? Because they don't want to work their way up the ranks again. But, by the same token, employers don't feel pressure to boost their salaries. And because it's hard to be promoted out of turn or fire anyone, Japanese workers have zero incentive to think big or take risks, which hampers innovation and productivity.

Foreigners don't have all the answers, but they are responsible for Japan's biggest corporate governance successes this year. It was Daniel Loeb, New York-based activist investor, who prodded secretive robot maker Fanuc to increase dividends and become more transparent. Earlier this month, when Loeb turned his sights on Suzuki, its shares surged $2 billion in one day.

Now it's Arora's turn to shake things up. One question, of course, is where Arora (whose own pay package at SoftBank is a record-breaking $135 million) will get the $483 million he has pledged to spend on the company's stock. If he borrows the money from a Japanese bank -- many of which do business with SoftBank or own its shares -- it could raise questions about conflicts of interest. That would be doubly true if he borrows from Son, the company's billionaire founder. 

Still, there's no doubting that Arora plans to put money where his mouth is -- and where his talents lie. It would be nice if Abenomics, the government's economic revival program, could muster more of that risk-taking spirit. But it might not be an accident that Japan needed the audacity of a gaijin to give its economy a jolt.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author on this story:
William Pesek at wpesek@bloomberg.net

To contact the editor on this story:
Cameron Abadi at cabadi2@bloomberg.net