Practical and clear-thinking views about corporate governance and stewardship that Konosuke Matsushita (the founder of Panasonic and PHP Institute) expressed some 40-50 years ago are once again drawing attention. Last year, in the monthly magazine “Voice”, published by the Institute, an old article by Konosuke Matsushita, “Create a New Prosperity Through the Popularization of Stock Investment” was reprinted. Below, we introduce relevant excerpts from this article, and also some quotes from his book, “Practical Management Philosophy.”
Summary: In Mr. Matsushita’s eyes, corporations are not the property of presidents or executives, but of shareholders. At the same time, companies are also “public institutions” of society. Executives report their performance at the shareholders meeting every fiscal year, and when it is good, they receive praise and appreciation from shareholders. When performance is below expectations, executives should humbly accept the harsh complaints and criticism they receive. This is the way corporations were meant to be. Managers should never forget that shareholders are their masters. As for shareholders, for them it is important not to resort to short-term trading, but rather to maintain an undaunted stance and fulfill their role as the ”central actor” of the corporation. Shareholders’ behavior is admirable when they do not merely hold stocks and quietly receive dividends, but rather, when they warmly encourage and rigorously guide management with authority, and provide insights as shareholders. (The above summary was written by BDTI. The following are excerpts from the recent reprinting of the original article, and a book written by Mr. Matsushita.)
|“In Japan 20 or 30 years from now, the time will come when – and I think [policies] should be designed to cause it to happen – people will receive dividends as shareholders just as they receive salary from working. “ — More than half a century ago, in an article in “PHP” published in November 1967, Mr. Matsushita expressed his concerns about the uneven distribution of shareholdings at the time and stressed the importance of the popularization of stock investment and the promotion of economic and social revitalization through the actions of citizens. This article is a reprint of his article, with partial edits.|
New Prosperity through Popularization of Shares
Shareholders Contribute to Prosperity
In some capitalist countries, a system exists called a joint-stock company which collects capital from many investors in order to run a business. A large number of such joint-stock companies can be found in Japan, and they contribute greatly to the prosperity and development of the nation and its people. Likewise, in order to realize such prosperity and development, it is indispensable for a stock company to be operated in a sound and stable manner, which in turn requires soundness and stability by its shareholders. I wonder whether shareholders in Japan still maintain that posture.
Immediately following World War II, “separation of capital and management” was promoted in Japan through the dissolution of “zaibatsu” conglomerates and other policies aimed at achieving economic democratization. This led to an increase in the number of shares held by the general public, which marked a very positive step forward in capitalism. In recent years, however, company management has shown a general tendency toward disregarding of individual shareholders. In fact, the ratio of shares held by individuals has been declining. Under the pretext of stabilizing shareholders, many companies have been attempting to transfer their shares from the hands of private investors to specific corporations. This is unavoidable in some way and may lead to some positive result, but it is not desirable since it may lead to the uneven distribution of capital as was the case before the war.
In addition, shareholders have an important mission to participate in national industries by investing in joint-stock companies. While receiving dividends, they are also obliged to monitor the management of the company, and at times encourage and reprimand the company management to expand the business. However, the tendency toward speculative investment has become stronger recently.
I believe that in this new age of Japan, the government, management and shareholders, as well as the people themselves, must seriously consider what constitutes a system of share ownership that will lead to the true prosperity and development of the nation and its people.
Progress in the Soviet Union
When a Japanese delegation visited the Soviet Union two years ago, one of the leaders of the Soviet Union remarked that Japan’s postwar development had been achieved through monopolistic capital. The head of the delegation replied, “That’s not true. Capital is collected widely from the public, and companies pay a portion of their profits to the state as taxes, return dividends to their shareholders, and benefit the public by reducing the prices of products, and apply the capital to improve the welfare of their employees or to expand their businesses. That is the basis of Japan’s remarkable development.” The Soviet leader was very interested in the answer and sat down to listen.
In fact, many Japanese hold stocks in Japan today, and compared with the United States and Europe, there is probably no other country where ownership of company shares is as popular as in Japan. The profits generated from the use of capital are not monopolized by a small group of capitalists, but are distributed widely among the public. This is one of the reasons for the nation’s dynamic economic activity.
In the Soviet Union, ownership of private property is restricted, and most of the means of production are controlled by the state. This is a monopolistic capitalism by the state, and in principle, conducting of business activities through voluntary or joint investment by individuals and to profit from them are not allowed.
However, from the perspective of human nature, in order to motivate the work of individuals and achieve further results, it may be necessary to respect the freedom of individuals, to advance management activities in a free competition, and to return the results of each individual’s work to their respective interests. It is said that the Soviet Union has begun to discuss the possibility of allowing joint-stock corporations, and that even in communist society, the recognition has been growing that the introduction of free competition based on human nature will benefit the nation.
The social structure of economic activity that appeals to human nature is the system of corporate stock ownership. Therefore, increasing the number of shareholders is a very desirable situation, and to put it bluntly, it is best that everyone become shareholders of some company. While stock ownership suddenly became popularized in Japan after World War II, unfortunately at present this favorable situation is threatened with destruction.
Perfunctory General Meeting of Shareholders
In Japan today the tendency has been growing to neglect shareholders. In reality, awareness is low that a stock company is not owned by a president or executives but by its shareholders. One example is the fact that shareholders’ meetings are often brief and perfunctory. At the general meeting of shareholders, management reports on its performance to shareholders at each accounting period, and if the results are favorable, it receives praise and appreciation from shareholders. Should the results be insufficient, management is reprimanded. This is how general meetings should be conducted.
At present, however, many managers, show pride in the brevity of their company’s general meeting and believe orchestrating it in such a manner to be one of their skills, which is a gross disregard for the shareholders. This does not give rise to an attitude of serious devotion to management as carrying out the will of shareholders. It discourages constructive shareholders who look forward to the development of the company and are pleased with its development, and consequently encourages them to divest of their shares.
Alas, it seems that all too few shareholders today are serious about investing in a company or in supporting the company’s development. Also, those who incur losses are starting to think investment in stocks is risky and that investing in land is safer than stocks. This, I believe, may be one of the reasons why land prices are skyrocketing today.
On the other hand, the interest in fluctuating stock prices alone has led to a vicious circle in which more people acquire stocks out of a sense of speculating, leading managers to regard them even more contemptuously.
We must work to break this vicious cycle quickly so that the public can invest in stocks with peace of mind and enjoyment.
Breaking the Vicious Cycle
First, the government should recognize the significance of the popularization of stocks and show respect for shareholders, actively encourage the people to own stocks, and come up with concrete measures to encourage people to do so.
For example, the government must take meticulous measures as appropriate, such as underwriting loans for acquiring shares, providing financial incentives, and exempting minority shareholders below a certain figure from taxes. Of course, some form of preventative measures are needed to discourage fraud. It is also important to instruct shareholders not to let go of the stocks as much as possible once they have acquired.
Second, we want company managers to remember that shareholders who are investors are also company owners. Companies must not unilaterally decide whether to boost or cut dividends in accordance with profits or losses. This may be necessary in some cases, but we should not forget to take into account the feelings of shareholders.
What shareholders are asked to do, however, is to return to their original role. Shareholders have a noble mission to participate in and contribute to the development of national industries by investing in stocks, from which they receive a legitimate dividend for fulfilling their mission. It is important for shareholders to be aware of this original mission and, in principle, own shares based on the idea of long-term investment.
Today, stocks are easily bought and sold speculatively, which has led managers to view shareholders with contempt. If shareholders firmly maintain belief that they will continue to own shares in the same company for two or three generations, I don’t think they will be taken so lightly.
Even if a shareholder holds only a few shares, they should be aware of their importance in the oversight of the company. By maintaining a firm attitude so as to call managers to account and make appropriate requests, a company will become more serious about its management, achieve favorable results, earn profits, and return them to shareholders.
Having considered the attitudes of government, management, and shareholders, I would like to conclude by noting that the mission of securities companies is to create as many individual shareholders as possible among members of the general public. An increase in the number of shareholders as a result of the popularization of stocks will create sufficient overall business for securities companies. Rather than 100 shareholders who trade stocks once a month, 10,000 shareholders do so once a year will result in more trades. If the number of speculative shareholders declines and sensible shareholders increase, securities companies will be able to achieve steady growth and fulfill their noble mission.
Promoting the Popularization of Stocks
In order for the people of Japan to realize prosperity, peace, happiness and true stability, it is imperative that as many people as possible continue to hold stocks and contribute to the prosperity of the nation’s industry. Shareowners not only benefit from holding shares, but also from secondary benefits created by social prosperity. Companies will not only be able to have stable shareholders when capital is deregulated, but will also be able to take advantage of the inherent values of laissez-faire capitalism. The government, corporate management, and shareholders are all in a position to recognize the immeasurable benefits from promoting the popularization of stocks.
Source: Konosuke Matsushita (1967, November), “New Prosperity through Popularization of Shares”, published originally in Voice. PHP Institute translated the summary of this article. Copyright is held by PHP Institute, which has granted BDTI the permission to publish.
[Excerpt from “Practical Management Philosophy” (1978)]
Fully Understand the Mission
Continuous “seisei hatten” is a function of natural and social law. Looking at it in a different way, human beings are always pursuing this endless process of “seisei hatten.”
As human beings, we possess the same instinct to improve our living standards and make our lives as comfortable as we can, first by meeting our needs for food, shelter, and clothing, and then meeting our emotional needs. Even if what is regarded as “comfortable” varies according to the individual and the period in which he or she lives, there is virtually no one who is not striving to achieve a better life.
The primary role, or mission, of management may be thought of as the satisfaction of the human desire to maintain and improve the quality of life and culture. Everyone wants to live in a comfortable home, but they will be unable to achieve that dream if there is no one there to produce such a home. Someone also needs to produce the material to make these homes, and that production work is achieved through management.
It is the fundamental mission of management, and of companies, to continuously develop high-quality products that will be useful to people in their everyday lives, including not only houses, but also household goods and intangibles like services and information, and to supply these goods in appropriate quantities at reasonable prices. Herein lies the answer to the question: “Why are enterprises necessary?”
The nature of the goods and services supplied will differ by industry, but all companies aim to contribute to human society through their business activities. Management that loses sight of this fundamental mission will never become truly successful.
Common wisdom suggests that the whole purpose of the enterprise is to make a profit. I will discuss my views about profit elsewhere, but certainly making a profit is an essential part of sound business activities.
However, profit is not the ultimate business goal. There must be no mistaking the fact that the fundamental goal is for the enterprise to contribute to society through its business, and that profit is important insofar as it allows the enterprise fulfill its fundamental mission.
Seen in this light, a company is a public entity, and management should be considered a public, not a private, concern.
Of course, we are all accustomed to using the term “private enterprise” when referring legally to the format of a business, and to referring to one such type of business as a sole proprietorship. However, since business activities are so closely connected with society, an enterprise is essentially a public entity.
This is why even self-employed entrepreneurs cannot think only about their own position or concerns when making decisions about their business. They must think about how their actions will impact the human community, and make decisions based on whether those actions will have a positive or negative impact.
I have made it a point to ask myself periodically whether the company I founded and manage is really benefiting people. “If the company disappeared right now,” I ask myself, “would society be negatively affected? If there would be no negative effect, or conversely if the existence of the company is not having a positive effect, I should dissolve the company. This might cause problems for employees and others with ties to the company, but that would be unavoidable. It is unacceptable for a public entity that produces goods and employs a large number of people not to make a positive contribution to society.” This is the way I see it, and this is what I occasionally convey to our employees.
This is true. It is unacceptable for an enterprise whose mission is to contribute to human society and that manages its business as a public entity to not produce something positive from its activities. The fulfillment of this mission constitutes the existential value of that enterprise.
There is much discussion today regarding corporate “social responsibility,” but while the meaning of that concept can be wide-ranging depending on social conditions at a particular time, the fundamental social responsibility of a corporation, in any era, should be to improve society through its business activities.
It is extremely important to manage all business activities based on this sense of mission.
Source: Konosuke Matsushita (2011). Practical Management Philosophy. Kyoto: PHP Institute. Copyright is held by PHP Institute, which has granted BDTI the permission to publish.