A recent article by Leo Lewis, the FT’s Tokyo Bureau Chief, dwelt on the importance of kaizen to the Japanese economy and the fact that the much larger Chinese economy seems to be applying the principles at scale to huge advantage.
These principles were developed to improve efficiency in a manufacturing environment, but it prompted the thought that they could be applied to the provision of information to guide the decisions of boards of directors. This plays directly into our mission for companies to use stakeholder surveys to guide corporate governance in securing the long-term future of a company, rather than boards simply seeking the safe harbour of compliance with a Code.
What is Kaizen?
Kaizen is a Japanese word meaning improvement, and its commercial use originated in the concept of what was called Total Quality Management, or TQM, which became popular in the 1970s and which evolved into Just in Time manufacturing, a process initiated in Toyota whose success took the company into the top league of automobile manufacturing.
The principle is that a company needs to create a culture in which every problem is immediately addressed at the point where it is encountered, leading to an overall system of continuous improvement, operating from bottom up rather than top down. In fact, the origin of the word, if you look at the Kanji symbols, actually reveals how the philosophy is based on using self-discipline to contribute to the greater good. Something corporate culture everywhere would do well to integrate.
There are variants of Kaizen’s application in business, but the general principle is that of constantly monitoring what is going on to pick up immediate issues or the risk of something going wrong, and taking corrective or preventive action promptly.
One of the results, brought out by Lewis, is that the consequence of kaizen having been applied on a wide scale by Japanese industry over time is that, through a process of continuous adaptation, most companies have been protected from being left behind by the major changes which have occurred in recent decades.
Failures in conventional board reporting
In established companies, conventional reporting systems are reliable, consistent and timely. Taken in totality at board level, they should help the board to set policies, approve the appointment of the managers to implement those policies, monitor progress and change either the policies, if they need changing, or the managers if they prove inadequate.
The problems with these established systems are threefold:
- the reports received by the board are produced by management which is naturally incentivised to show itself in the best light and hide problems until they can’t be hidden any longer, hoping that actions taken will make those problems disappear before they come to light; the detailed reports are produced at divisional level and summarised (or interpreted) for the board members who may not have the knowledge or experience to delve deeper
- the most reliable reports are, by definition, backward-looking, the issue here being demonstrated by the ironic description of the reporting accountant as being the person in the back of the boat saying “that was a big rock we just missed”, but who is unable to see the iceberg looming ahead.
- finally, the silo nature of reporting means that the output from the finance and accounting division, marketing, operations, HR and the rest is presented only infrequently in its totality, at planning and budgeting time, or when a crisis looms. Hence the collective impact on the corporate plans is only considered intermittently.
Actions required to be considered at board level will tend to relate to big projects and will otherwise be left at divisional level. The consequence is that divisional capture of the reporting systems limits the degree to which the board can judge to what extent, and indeed whether, its agreed policies are being put into effect.
Relevance of kaizen to holistic stakeholder surveys
We have promoted the concept of holistic corporate governance for many years, and what it entails is:
- a holistic set of metrics which relate to the company’s goal and the business plan to support it, underpinned by an appropriate culture and accountability to stakeholders, coupled with compliance with applicable regulations and codes
- an external system of gathering opinions from the key stakeholders regarding the performance of the company against those metrics, reporting directly to the chairman level
The relevance of the kaizen concept is that a continual survey of stakeholders, structured holistically, as outlined above, conducted free from internal capture, and presented in summary form that directors unfamiliar with the technical details can easily grasp, can provide the means of picking up risks and opportunities at a much earlier stage than is possible with conventional reporting.
Linking the regular survey results to the divisional aspects of the business plan can provide divisional heads with the opportunity to instal the continuous improvement programme that kaizen is all about.
Assuring long term corporate survival
The stakeholder engagement system we have been describing could have prevented so many of the major corporate failures of recent years. To take just one example, Carillion. Carillion was an embarrassing failure where the board was criticised for not adequately understanding what was going on, though the company had a string of unprofitable contracts, huge debts and unsatisfied pension fund obligations. The feedback from stakeholders through the system we describe would have left the board in no doubt about the direction in which Carillion was going.
Additionally, where the board seems out of touch, activist investors step in. Oliver Shah, associate editor at the Sunday Times, recently penned an article lambasting BP’s previous CEO and the current Chairman for pursuing a ‘bet the farm’ strategy of taking BP rapidly out of oil and gas and into renewables, long after it became clear that the original goal had become unacceptably dangerous. Feedback from stakeholders in the holistic form we are promoting would have caused the rest of the board, if not the two mentioned here, to realise that the policy should be changed in short order. The share price would have performed better, and Elliott would not now be knocking at the door.
