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Asian Journal of Business and Management Sciences Vol. 2 No. 3 [43-49]

Multinational Corporation Adherence to the Duality Management Structure in Japan versus the United States
James Tanoos, PhD Asst. Professor of Business Business & CIS Dept, Saint Mary-of-the-Woods College 012 Hulman Hall ABSTRACT Traditional cultural norms have affected human resource management philosophies in America and Japan, prompting organizational structures unique to each society. In particular, these two countries differ in their adherence to duality, wherein the CEO and Chairman of the Board are the same person in the firm. Recent reports on decreasing global rates of duality have been a result of fewer American multinational corporations utilizing this management approach. While duality has been common in the US in the past, it has always been rare in Japan, and this study concludes that highperforming American companies are still much more likely to adhere to this management philosophy than similar multinational corporations in Japan. INTRODUCTION Duality is the organizational governance structure in which the same person acts as both Chairman of the Board of Directors (Chair) and the company CEO/President (Vo, 2010). A Company CEO (sometimes referred to as the Company President, or President/CEO) is the highest ranking executive officer of the organization, whereas the Chair generally oversees, organizes, and conducts business related to the Board of Directors (Board). Advocates for duality report a reduction of information transfer from the CEO to Chair as well as smoother cooperation between the Board and company executives (Vo, 2010). Opponents of duality cite the fresh and objective organizational insight from the Chair in appraising the companys performance as well as the CEOs (Jennings, 2000). In recent years, the proportion of global multinational organizations operating under the duality arrangement has decreased, in large part because American companies, which were more likely to employ this template, are becoming less likely to utilize the duality management structure (Balsam & Upadhyay, 2009). Duality has never been a common management style outside the US. For instance, Japanese organizations traditionally have utilized a separate CEO and Chair organizational governance structure (Imai, 1994). Many have predicted that the percentage of American companies using duality soon will more closely match the global norm; in particular, the percentage of American companies using duality will be closer to the rates of Japanese companies operating under this management approach (Schaede & Grimes, 2003). As such, this paper will examine the proportion of the current top-earning multinational companies from both Japan and America that utilize the duality governance structure. Background The focus of past literature related to Chairs of multinational organizations has been Chair compensation structures, Board dynamics, and levels of shareholder advocacy. Scholarly work also exists examining devoted to Board size, Board members relationship to the

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company, and activities of Chairs that operate separately from the CEO (Jennings, 2000). Fewer academic studies have focused on the dynamics and effects of duality (Vo, 2010), and no studies compare the proportion of similar-sized American and Japanese multinationals that adhere to the duality structure. Scholarly concentration on duality has occurred in part because the market is extremely vested in successful dynamics between the company CEO and Chair. Similar studies have analyzed variables that prompt changes in company CEOs (which have often centered around the Chair), conditions in the market, the Board, company stock price, or a combination of these variables. It has been reported that the greater the number of outsiders on the Board, the more likely that there will be a change in the CEO (Coughlan & Schmidt, 1985). Furthermore, Boards in the US with long tenured members are more likely to dismiss a CEO (Fredrickson, Hambrick, & Baumrin, 1988) and are more likely to push for a CEO change when profitability or shareholder value lags (Crain et al., 1977). In addition, the stock market in the US has tended to predict CEO succession (Sakano & Lewin, 1999). The field of American corporate leadership succession studies has traditionally focused on shareholder value, Human Resource Management policies, candidate comparisons, and/or Board politics. Schloetzer, Tonello, and Aguilar (2012) surmised that "anticipating a change in CEO and understanding the succession process can often be a challenge for market participants (p. 2). A Chair that is not CEO often is referred to as a non-executive Chair. In many instances, this type of Chair has the responsibility not only to monitor the Board, but also to critically evaluate the performance of the CEO. An American company that does not separate the roles of CEO and Chair tends to appoint a presiding director (or lead director) to advise the CEO/Chair and set Board meeting agendas in order to prevent conflicts of interest. In general, the responsibility of a Board is to monitor, oversee, and hire the day-to-day management on behalf of the company shareholders (Johnson et al., 1993). The makeup of American Boards typically consists of well-respected industry specialists, community leaders, and other respected independent auditors. Today, Fortune 500 company Boards in the US generally consist of nine non-company members and three company members, and the inclusion of friends and cronies as a strategy is seen as an outdated management approach (Schaede & Grimes, 2003; Winthrop, 2009). A CEO tends to be more likely to protect his own interests if he is also the Chair, and in the wake of the corporate scandals of 2001, there has been pressure on politicians to curtail duality in order to achieve stronger ethical practices and more transparency in corporate America. In part because of the widening gap between CEO pay and average worker pay as well as the corporate accounting scandals of 2002, many American CEOs are now looked at with suspicion by average Americans. The higher the profits of an organization, the more likely critics may feel the organization contains cronyism or corruption, especially if the CEO is also the Chair. There has even been discussion about prohibiting the duality structure (Sharpe, 2012). However, shareholders of major US firms were particularly happy that legislation in the Dodd-Frank Act did not bar the duality model in 2010 (CFOZone.com, 2010). The United States In the US, duality traditionally has been the more common type of company governance structure, especially among higher-earning companies. In 1987, Dalton and Kesner (1987) found that duality was the governance structure for 82% of large corporations in the United States, 30% of large corporations in the United Kingdom, and only 11% of large corporations in Japan. A 1989 study of 661 large US organizations showed that 81% of

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these companies utilized a duality leadership structure (Brickley et al., 1996). In 1992, the New York Times reported that 75% to 80% of US organizations operated with a duality structure (New York Times, 1992). Also in 1992, Korn Ferry International found that of the 1,000 largest American companies, 80% operated under the duality template (Vo, 2010). These statistics have shifted in recent years, however. According to a study of 1,500 US companies during the period from 1996 to 2005, the percentage of companies with the combined CEO-Chair steadily decreased from 76% in 1996 to 69% in 2000 and then to 60% in 2005 (Balsam & Upadhyay, 2009). By 2009, it was reported that only 54-60% of the top 1,500 US companies operated under the duality structure (RiskMetrics, 2009; Vo, 2010). Even though duality is still far more common in America than around the world, its popularity has been decreasing in recent decades. There are several reasons why duality has been more common in the US, especially vis-vis Japan. DeFrank et al. (1985) found that American CEOs are more likely to exhibit Type A behavior, which is conducive to ambition and individualism, whereas Japanese CEOs take a more socially-oriented or paternalistic and family-oriented approach to management. This mindset might result in the CEOs making decisions unilaterally, rather than depending on consensus or Chair oversight and approval. Other reasons credited for the higher incidence of duality in the US are that corporate Boards determine that their CEOs have the capabilities to do both functions that the Board has given the CEO the Chair position as a reward for stock performance. In addition, American companies are more likely to be operated by a family head or founder, who is more likely to have ultimate power. As American companies less frequently use the duality management structure, global percentages associated with duality have decreased. In 2004, 73% of all Fortune 500 companies operated under the duality structure (CFOZone.com, 2010), but Booz and Co. (2012) reported that global appointments of new dual CEO and Chair positions decreased from 34% in 2000 to 14% in 2011. Duality in Europe has seen concurrent steep declines, with appointments of new CEO/Chairs dropping from 53% in 2000 to 17% by 2011 (Booz & Co., 2012). In 2009, only 18% of new CEOs in North America were hired with the added role of Chair, a sharp decrease from the North American historical average of nearly 40% (Kneale, 2009). Japan Scholarly focus on duality and its effects has been rare in Japan, as this management practice never was popular. Studies on general Japanese organizational leadership reached an apex in the late 1980s when Japanese companies were making large profits (Pudelko, 2006). Since the 1990s, emphasis on Japanese management and organizational leadership has been less studied because of declining organizational success (Numagami, Karube, & Kato, 2010). Statistics of Japanese adherence to duality have been scarce. In 1996, Fox (1996) commented that up to that point, the only report on CEO duality in Japan was by Dalton and Kesner in 1987, which reported that 11% of Japanese firms operated this way. Another report from a study between 1999 and 2005 reported that 10-20% of Japanese companies adhered to duality, versus 60-80% in the US during that time (Nigel, 2010). Over the 15-year period of 1988-2002, Crossland and Hambrick (2007) assessed 222 public companies in US and 286 in Japan and found that duality occurred 74% of the time for US multinationals versus 46% for Japan multinationals. Most recently, according to a GovernmentMetrix study in 2008, 13% of Japanese companies operated under duality (Graybow, 2008).

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www.ajbms.org ISSN: 2047-2528 Duality and Culture

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Cultural facets of organizational tradition affect the use of duality. One such difference is the different roles of the Chairs. Japanese Chairs tend to have more power than US Chairs because large Japanese companies have comparably less powerful CEOs due to Japanese bottom-up decision-making style, in which ideas travel through channels of management approval before being simply rubber-stamped by a CEO (Bird, 1990; Haghirian, 2000; Neary,1996). The role of the Japanese Chair generally is to help and assist the CEO on behalf of the company. The increased role of the Japanese Chair prompted Kaplan (1994) to surmise that Japanese organizations are more "consensus-orientated and less CEOdominated" (p. S20) than their American counterparts. In many instances, a Japanese Chair is the companys prior CEO (Sakado & Lewin, 1999; Schaede & Grimes, 2003). In fact, 63% of Japanese companies appointed the outgoing CEO as the Chair in 2011 (Booz & Co., 2012). The long-established approach of grooming an apprentice to take the place of the CEO and of the outgoing CEO taking the Chair position in order to guide the new CEO is referred to as the apprentice model of succession. This type of succession has been more common in Japan than elsewhere (Debroux, 2003; Favaro, Karlsson, & Neilson, 2011). Another societal factor that affects duality is that the makeup of a Japanese Board is different than that of a typical American Board. Japanese companies are more likely to have long-tenured employees on Boards, such as functional managers within the organization and other insiders, whereas US companies tend to have independent outsiders from other companies (Clark, 1979; Sakano & Lewin, 1999). In addition, while the main function of American Boards is to act on behalf of shareholders, Japanese Boards do not necessarily act on behalf of shareholder interests (Clark, 1979; Sakano & Lewin, 1999). Japanese tend to have a sacred honor for its best companies or as legitimate social institutions, and positive interpersonal relationships, rapport and harmony are valued in Japanese organizations above autonomy and independence-this accord also extends to dynamics between the company and the Board (Kobayashi & Burke, 1976; Bebenroth & Kanai, 2010). Finally, Japanese Boards place a heavy emphasis on facilitating affinity between the company and society at large. Methods/Results In order to assess the proportion of organizations that utilize the duality governance model in the US versus Japan, an all-inclusive, reputable, non-biased list would need to be utilized. For purposes of this study, the Fortune Global 500 was used; this is a current catalog of companies ranked in order of 2011 revenues and is published by CNN, Fortune Magazine, and Money Magazine. The top 50 organizations from Japan and the top 50 companies from the US were taken as the sample set. Then the multinationals were researched in full to assess the current organizational leadership as of June 2012. Through a variety of sources including newspaper articles, company websites, and other means, the names of the current Chair and CEO of each company were located. Information about the Japanese senior executives tended to be more difficult to access because of the relative lack of mainstream Japanese press and coinciding online news coverage as compared to the prevalence of American online newspapers, wire stories, and press releases. In order to assess if these companies aggregately matched in regards to revenues, the 2011 ratio of earnings for each group of 50 companies was compared. The ratio of revenues for the 50 multinationals in the sample set of US/Japan was 1.75 to 1. Although this ratio is not precisely 1.0, the ideal for perfectly comparing like companies, these multinationals are

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alike in that they are viewed similarly by their societies as the most successful domestic models from which cultural norms dictate successful organizational management practices. The search indicated that in the United States, 32 of the 50 companies, or 64%, operated under a structure in which the same person serves as the CEO/President and the Chair. In Japan, only five of the top 50 companies, or 10%, operated under this management structure. Those companies were Nissan Motor, Canon, Softbank, Suzuki Motor, and Mazda Motor; interestingly, three of the five Japanese multinationals operating under the duality structure were automobile organizations. The figure below illustrates these results.

Percentage of Top 50 MNC's Operating Under Duality

70% 60% 50% 40% 30% 20% 10% 0% US Figure 1.1 Percentage of Top 50 MNCs from the US and Japan Operating Under the Duality Management Structure The results were similar to the recent data reporting on governance models for each country. Decreasing duality reports during the last decades, including the 2009 report from RiskMetrics that reported 54-60% of top US companies operated with duality, might have suggested an even lower proportion of US companies operating under duality. However, the fact that 64% of the top 50 American multinationals are operating under duality indicates that this governance structure is still a common approach to organizational management and human resource management in the US, at least for its highest-earning companies. Future Studies In 1987, Dalton and Kesner indicated that 82% of US companies and 11% of Japanese companies used duality structures. More current statistics provide an indication that although the model is decreasing in the US, the proportion of Japanese companies using it has remained somewhat constant. Even during the peak of Japanese management studies in the late 1980s, the proportion of businesses with a duality management structure was not even close to the rate in the US. Additional studies assessing smaller Japanese companies would provide information about whether duality is trending lower or higher. Suggestions that the use of duality governance model in the US continues to decrease after steadily decreasing in past decades may have been premature. Although the model might not be as popular as in the past, it is still a more common management system in the US than in other areas. Future researchers might analyze a broader sample set or examine companies in different sectors of the market to ascertain types or sizes of organizations that operate under duality. Japan

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www.ajbms.org ISSN: 2047-2528 REFERENCES

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