This article is an excerpt from our research publication SJ3: The pathway to regenerative business. A Japanese version is available on Note.
The Japanese traditional company
While practices in Japanese traditional companies are often perceived negatively by younger generations, there is also much to learn from these companies — business traditions that can be adapted and adopted on a global scale.
Japan has more companies over 200 years old than anywhere else in the world, with proud histories of value creation and sustainability knowledge generated throughout the Meiji era and Japan’s post war recovery, all the way through to today.
Many of the leaders of these companies are genuinely striving towards a balance of pressures that include: Environmental, Social, and Governance (ESG), share price growth and stability, and supporting their community of employees.
Our studies over 2021–2023 have shown that older generations are the most engaged with sustainability in Japan, the same group who are leaders in these organisations.
Yet these perceptions have stuck. The ‘Japanese Traditional Company’ (JTC) is a somewhat negative term that represents a set of shared challenges and issues that can be unfairly applied to all Japanese organisations.
When working with these organisations we’ve found this isn’t always the case, and there are just as many businesses committed to social and environmental impact in Japan as there are globally.
These transitions are just progressing in a uniquely Japanese way.
Making the transition
The ability for an organisation to change with strategic intent is crucial to ensuring competitiveness in the sustainability era. As ESG frameworks are adopted more widely, this is influencing shareholder decision making, threatening the survival of companies that fail to adapt.
Large, public companies have a significant influence on the Japanese economy, and our transition towards a diverse, equitable, and inclusive society depends on these employers delivering this change at scale.
These employees are the same people looking to adopt more sustainable lifestyles, care for ageing relatives, raise their children in a healthy environment, and build thriving communities.
As we’ve seen in our 2023 study around work and wellbeing, these employees will struggle to achieve this if many of Japan’s largest companies persist with structural barriers and norms that limit their future potential.
Procurers at large companies are increasingly required to demand their suppliers have the same robust governance. They feel this same pressure on a global scale, supplying even bigger companies outside Japan.
If they don’t take these actions their ESG scores will be impacted, and investors and procurers will exclude them to hit their own targets. This makes sustainability a global competitiveness issue for the Japanese economy.
Beyond this, many investors are now making an explicit link between Diversity, Equity, and Inclusion (DEI) and the overall success of a company, especially in turbulent times. They see this as not only good management, but being a prerequisite for innovation and complex problem solving.
Japan’s transition to a sustainable society, achieving its SDG goals, with a healthy and prosperous future, depends on the biggest Japanese companies going through these transitions. This is to the benefit of all, including the companies themselves.
Government urging reform
The push for reform is apparent in the recent initiatives being pushed by the Prime Minister Kishida-led Japanese government. Conscious of the risk to Japan’s economic competitiveness, the Japanese government has been pushing for transformative change with a focus on human capital.
The Ito Report¹ was published by the ‘Study Group toward Achieving Human Capital Management’ established in the Ministry of Economy, Trade and Industry of Japan, led by Kunio Ito, a professor at Hitotsubashi University.
The report explicitly advocates for the strengthening of the link between human capital and business, although several of our study’s interviewees noted that it is still rare for Japanese companies large or small to have a human capital strategy in place. It recommends organisations find the gap between the current situation and the future goal, nurturing a transformational agenda.
Five success factors are emphasised as being critical in this transformation:
- Build a dynamic talent portfolio;
- Embrace diversity and inclusion of employee knowledge and experience;
- Motivate employees to re-skill themselves;
- Enhance employee engagement levels; and
- Enable employees to work anytime, anywhere as much as possible.
With the government pushing for organisational transformation, signposting the key issues and strategies required, why are so many Japanese companies still struggling to change?
Several experts we interviewed in the study pointed to the management model followed by Japanese traditional companies — hierarchical leadership and organisational structures that are ready for a redesign.
Showa model in a Reiwa era
Prime Minister Kishida has followed business leaders in declaring the arrival of stakeholder capitalism, replacing the previous shareholder driven model.
People familiar with Japanese business culture know it’s never been solely focused on shareholder returns, instead looking to a more nuanced set of collectivist obligations and responsibilities towards employees and society.
These values can be traced back to the period after the Meiji Reformation in the late 19th and early 20th centuries, often associated with Eichi Shibusawa. A prolific banker and financier, he envisioned a vibrant economic model that learned from the West while bringing business and society together on Japan’s terms, asserting civic responsibility in business leadership.
These Shibusawa-era foundations still influence Japanese companies today, embedding a ‘mura-shakai’ (village society) mindset.
This is characterised by social structures in companies, with relationships that extend through decades of employment, shaping careers where your company is your family. It’s common in traditional, large Japanese companies to meet your partner at work, move into company housing, and for your social life to then revolve around other employee families.
The postwar era of economic expansion, leading into the bubble era, defines the way these organisations think — with the scale, successes, and identities formed during these periods shaping what generations of business leaders have come to see as norms.Their organisational structure and leadership cultures are based around what Ken Shibusawa describes as ‘Showa mode’, an era that ended in 1989. Throughout the proceeding Heisei and Reiwa eras many Japanese companies have remained stuck in this older way of thinking, limiting their progress.
What would it take for these organisations to move towards regenerative business — designing models that generate social and environmental value in a way Shibusawa Eichi might recognise? And what parts of these traditional companies could be adapted for today?
Critical areas such as gender equity require immediate action, with Japan ranking 125th in global progress, and a substantial gender pay gap of 22.1%. Company policies play a pivotal role in this, reinforcing societal assumptions around gender roles and limiting use of government incentives like paternity leave.
Positively there are several Japanese companies that have been through a transition, transforming themselves through bold human capital strategies, with the MARUI GROUP explored in previous chapters being a prime example to draw upon.
Resistance to ESG framed progress
When considering shifts towards sustainability, company leaders in Japan tend to perceive this not just at the company changing, but their entire society and business ecosystem. This takes on a greater weight in a collectivist society.
Slow decision making about whether to lead on sustainability, driven by the structural inertia of the Showa model and risk averse leadership, goes a long way towards explaining the lack of progress on sustainability by many Japanese companies.
ESG frameworks are still in flux, and the lack of standardisation across measurement and taxonomies adds to the complexity. The validity and effectiveness of ESG tools is also regularly challenged by local stakeholders, with evidence they are gamed by companies in Japan and globally.
Frameworks give significant points for stating ambitious future targets on areas like emission reduction, without a robust plan for meeting them, adding to the scepticism.
In Western companies with short executive tenures, leaders can set targets and forget about them, aware that they won’t be the ones to execute. But in Japan leaders stay with an organisation for their entire career, resulting in caution around unrealistic targets they know they’ll have to deliver.
There are other biases that are unfair from a Japanese perspective, including the prioritisation of emission reductions, when Japan’s companies have been taking action since the 1970s, and already have much lower emission density than foreign competitors.
When it comes to social impact there is the feeling that Western organisations developing ESG frameworks are focused on their own idea of a just society, unaware of cultures and models in places like Japan.
Japanese business leaders perceive themselves as guardians of social stability and culture, and while they might accept change in the form of SDGs and other frameworks, this is something that they believe should happen gradually and without friction, through uniquely Japanese approaches to systemic and organisational change.
This means progress is often pushed down the agenda, although there’s one driver capturing the attention of these leaders: generational change.
Human capital is now the crux
Despite all of the external pressure on Japanese companies, the factor that seems most likely to drive transitions is closer to their core business: younger generations voting with their feet and rejecting traditional company norms.
This goes beyond losing prospective employees while the population shrinks — a significant issue in itself — and is tied to Japanese executives believing that risk averse leadership is in society’s best interest.
If this risk aversion is proven wrong, and rejected by the youth, it shakes their core values and beliefs.
Despite a lack of structural reforms, wage stagnation, lack of opportunities, and repetitive processes, older generations stay with traditional companies, even if employee engagement is exceptionally low. These companies are trusted like families, and even if it isn’t perfect they know the company will do everything to maintain job security.
Younger generations don’t feel these ties. As leadership gets older Generation Z employees are the fourth generation in the company, and the gap between them and management is massive in a seniority based promotion model. It doesn’t make sense for them to grind it out when they have other options with more progressive startups and global companies.
Their proficiency with technology and interconnectedness with global work trends means they are more critical job seekers, assessing their opportunities and jumping between roles to progress their careers. When they see slow, analog systems they switch off.
Equipped with an awareness of social and environmental issues from their education, this generation represents Japan’s future. Their expectations are high, and they want flexibility and change. They have little to lose and much to gain by avoiding traditional companies — but it doesn’t have to be this way.
Traditional companies that commit to transformations, making human capital a key part of their strategy, are well positioned to take the best of tradition and progressive employment policies, building uniquely Japanese companies that bridge global and local practices.
By co-creating with this emerging workforce — shaping regenerative businesses — they can reconnect with a deep history of collectivist Japanese organisations that deeply care about their employees and society.
- ITO Report for Human Capital Management. (2022). https://www.meti.go.jp/policy/economy/jinteki_shihon/pdf/0825_ITO_Report_for_HCM.pdf
Fabric is a Strategic Design and Sustainability consultancy helping businesses move towards more innovative, sustainable futures. Based in Tokyo, we’ve been consulting with global and local companies since 2004. We have extensive experience bringing together design thinking, sustainability, and human insight to deliver good strategy for clients.
