How Japan's Other Hybrid Can Save American Jobs

The days of Japan as No. 1 are over. But it's worth noting the Toyota Way motto: "Base your management decisions on a long-term philosophy, even at the expense of short-term goals.
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Co-written with Sanford M. Jacoby. Original version appeared in Seattle Times, Sun March 29.

Today, President Obama announced that the United States government is effectively taking over General Motors and Chrysler and considering bankruptcy. But while Japanese automaker Toyota is also taking a hit as global auto sales slump, analysts expect Toyota to ultimately prevail. It's not just the Prius. Another type of hybrid built into Japan's economic model blends corporate interest with the common good. Japan's cooperative capitalism is the key to Toyota's future -- and ideally America's, too.

Promoting his stimulus package, President Obama said, "If you delay acting on an economy of this severity, [it potentially] becomes much more difficult for us to get out of. We saw this happen in Japan in the 1990s, where they suffered what was called the 'lost decade.' "

Yet while Japan has been used as a cautionary tale, in many ways even at the peak of its recession Japan remained better off than the United States today. Japan did not see its middle class disappear into swelling rates of poverty and unemployment. And Japan was not plagued by growing class resentment. Its inequality remained modest and its large corporations did not have bloated CEO salaries, including at those firms receiving government aid.

Why? Despite some changes in recent years, most large Japanese corporations still practice a form of capitalism in which different groups with a stake in the enterprise -- owners, employees, managers, suppliers, creditors -- work together to create value. Cooperation is possible because the various stakeholders have made long-term commitments to the firm. The result is a more holistic corporation, balancing short-term opportunities with long-term needs.

A large company in Japan is less likely to lay off thousands of employees simply to help its share price or to gut pension benefits to pay out higher dividends. In other words, Japanese corporations contribute to the common good rather than compete with it.

American corporations (including banks), under pressure from speculative investors, prioritize driving up short-term stock prices and dividends. Executives are "aligned" with shareholder interests through stock-based compensation. But this creates an incentive for executives to boost their own compensation by taking excessive risks and by manipulating share prices. Ultimately this harms the long-term health of companies and thus the long-term health of America's economy.

Toyota, for instance, refused to line investors' pockets and instead reinvested profits in capital improvements and in research and development, which led to the hybrid. By contrast, through the late 1990s, GM funneled billions of its profits to shareholders -- as dividends and share buybacks -- a fact often overlooked in discussions of what went wrong in Detroit.

In stakeholder capitalism, employees participate in corporate decision-making. While unions in both Japan and the United States have declined in recent years, the level of unionization in the United States today is about half that in Japan. And in nonunion Japanese corporations, human capital still is valued more deeply. Senior human-resource executives are far more influential than in comparable American companies, where it is chief financial officers who rule the roost.

And when corporations function as teams, fairness becomes an instinctive priority. In the United States in 2006, the average CEO earned more than 364 times the average U.S. worker -- a huge increase from, say, 1980, when the differential was just 40 times more. Japan, on the other hand, has one of the lowest CEO pay gaps in the world, with chief executives earning on average 10 times more than the average worker.

Measurements of economic inequality find that wealth, too, is less unequally distributed in Japan. The United States ranks among the worst nations in terms of wealth inequality, at the end of the scale with South Africa and Iran.

Of course, Japan is not an economic paradise. About a third of the population works in "atypical" jobs that carry no promise of employment security. These workers, mainly women and young people, don't receive the same benefits the Japanese business model provides others. Just as women and African-American and Latino men face disproportionate discrimination in the U.S. labor market, Japan's inequities, while lower overall, still exist.

Nevertheless, lessons from Japan could strengthen the U.S. economy for generations to come. We can cut the gap between CEO and worker pay by giving shareholders a say in executive compensation, an idea that ideally will be ratified now that the SEC is under new management.

But we need to go further. For example, we need to revamp corporate charter laws to mandate stakeholder governance and corporate accountability, to adopt laws like the Employee Free Choice Act to strengthen employee representation and to tax unearned income at the same rates applied to wages and salaries.

Toyota, like Japan, is not a perfect example. The days of Japan as No. 1 are over. But it's worth noting that the first plank in the Toyota Way is: "Base your management decisions on a long-term philosophy, even at the expense of short-term goals." That's a good place to start as we rethink the American corporation.

Sanford M. Jacoby is professor of management and public policy in the UCLA Anderson School. He is author of "The Embedded Corporation: Corporate Governance & Employment Relations in Japan and the United States." Sally Kohn is senior campaign strategist for the Center for Community Change.

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