[paper] Defects of Japanese-Style Management Found in the Case of Mizuho

Sei Nakai: Senior Managing Director, Japan Securities Investment Advisers Association

Sei Nakai has been the Senior Managing Director of the Japan Securities Investment Advisers Association since 2000. Before assuming his current position, he filled several important positions in the Ministry of Finance including Councilor of the Banking Bureau, Deputy Director-General of the International Finance Bureau and General Manager of the Institute of Fiscal and Monetary Policy. His major published works include Yabunirami Kinyu Gyousei (Financial Administration from a Squinted Viewpoint). He received a B.A. in Law from the University of Tokyo and a L.L.M. from Harverd Low School.

The system failure of Mizuho Bank is very similar to the failure of the Japanese military in World War Two. Their points in common are a "disregard of logistics" and a "lack of strategy." The Japanese military of that time was prepossessed with its success in the Japanese-Russo War, and not only relied upon highly capable noncommissioned officers and neglected to modernize weapons, but also disregarded logistics by putting weight on the mental side of the force. It is the same case with the Japanese banks, where the system development was carried forward without serious trouble by highly capable staff. However, the development was completely left to these field staff even after the environment had changed dramatically and required fundamental changes, and the commandant, in other words the management, did not give any specific direction.
Two reasons can be cited for this. One is that, because the system development division had never been a mainstream of one's career track in bank, there was nobody among the management who was aware of the significance of the troubles with the system. Another is that, because working overtime without getting paid for it was becoming a routine, there were ambiguities in the cost accounting. This led to management being unaware of abnormal circumstances such as the rapid increase of overtime being done in the system division.

Upon integrating the systems of the three banks after their merger, they did not make the decision from the strategic point of view such as in terms of which system was most suited for the new age, but decided to seize the initiative as a compromise to inter-group strife. This is also a following in the footsteps of the former Japanese military. This is a common problem among Japanese companies regardless of their business areas, which means that their corporate governance is called into question. Not only can the leadership of top-management not be brought out in emergency, but also the system for shareholders to monitothr for possible management negligence has not been developed enough.

The background to these problems that cannot be overlooked is the lack of a sense of crisis among the management of Mizuho. Because the mega bank, with an asset size of over 150 trillion yen, is too big to fail, its management became bloated.

There are two solutions to this problem. One is to enhance the surveillance function of shareholders, and the other is that banks are supervised more strictly by the Financial Services Agency and the Bank of Japan. Specific and effective measures such as to implement examination by teams consisting of independent experts are desirable.