In an era of fast-changing end markets, accelerating digital transformation, heightened competition and increased customer expectations, it is difficult for most businesses to stay ‘on top’ for long. Previous dominant players such as Nokia, Blockbuster, Kodak and Toys R Us are notorious examples of companies which did not adapt to their changing environments and subsequently disappeared. In the US, roughly 65% of companies fail during their first 10 years. In fact, according to the Bureau of Labor, only a quarter of businesses survive to make it to 15 or more years. A natural question to pose is what are the differences between those that survive and thrive – and those that perish?
At this point, please examine your nearest zipper
If you take a close look at the zipper closest to hand, the chances are you will see three small letters "YKK" on the slider, which, unbeknown to many, stands for the Japanese zipper manufacturer Yoshida Kogyo Kabushikikaisha.
YKK, founded in 1934, manufactures and produces approximately 10 billion zippers a year. It has impressively – and quietly – remained the global market leader in zipper sales for many decades. The business has operations in 73 countries through 100 wholly-owned subsidiaries and employs 42,000 people. Since its inception, it has endeavoured to create “better products at lower costs and greater speed” and sources its own raw materials and produces patented manufacturing equipment. This enables YKK to keep the quality of its products high while also ensuring lower cost, predictability of supply and protection of its intellectual property. This leaves it very well placed to respond quickly to customer needs.
A study undertaken on YKK published in the Harvard Business Review (HBR) argued the firms’ longevity can be assessed in the context of its competitive landscape, rate of innovation and technological change. We should recognise zippers are a speciality item not marketed directly to consumers yet make up an integral part of our everyday clothing, bags, luggage, or similar items. Second, while the zipper industry is relatively obscure, it is also large. Latest annual sales are estimated to be US$7bn to US$10bn, with the market growing at c.6% a year thanks to the rising demand for apparel and accessories, especially in emerging economies such as India, China and Brazil. Third, while the global zipper market is also highly fragmented, YKK is still the dominant player, with a 40% share of the market by value and 20% by volume.
Looking through the lenses described, it is apparent YKK has preserved its market leadership due to its ability to adapt to the needs of its customers, its focus on quality and its utilisation of an agile supply chain. This said, there are thousands of companies around the world which focus on quality and giving customers what they want; in our view, these are considered ‘a given’. To achieve dominance on a global scale, something else must be going on. HBR believe the answer is nuanced and YKK’s success lies somewhere in a combination of six factors. While none of these factors are by themselves unique, in combination they can help explain YKK’s – and other equally successful businesses’ – long-term staying power. The factors are: commitment to stakeholders; private ownership; focus on quality; company culture & values; local embeddedness; and dynamic adjustment to industry change.
Governance is the glue
Reflecting on these factors, it is unsurprising that sound corporate governance is at the centre of long-term success; in other words, the carefully planned rules, regulations, practices and processes which form the operative controls a Board of Directors use to deliver strategic goals. Moreover, there is a growing recognition successful governance initiatives should be reflective of the values of a company. HBR argue YKK was ahead of its time when its founder and chairman, Tadao Yoshida, declared the company’s philosophy should be that “No one prospers without rendering benefit to others.” He called this the “cycle of goodness” and went on to trademark the term. YKK’s corporate governance system is further operationalised through its core values which centre around not fearing failure, insisting quality in everything and working in a business that builds trust, transparency and respect.
Why we should not forget the G
Over this last decade a series of global studies, white papers and United Nations development goals have led to the adoption of long-term benchmarks for corporate environmental, social and governance (ESG) initiatives. The combination of these sustainable development targets has been a catalyst for a theme to swiftly become a dominant factor in global financial markets. The development, implementation and monitoring of ESG initiatives have now become a corporate badge of honour. Yet, the three components of this acronym have experienced an unequal share of the spotlight over this period. Environmental and social programs have dominated at the expense of governance, given the former are often more relatable, simple to comprehend and lend themselves to being measured and tracked. Commonly, this is not the case for governance which can focus on intangibles we have already mentioned such as culture, values and brand.
On this basis, it makes sense governance has not had its time in the sun in terms of driving asset allocation decision-making in this new market regime. This can be said to have very much been the case – however, something has changed this year when we have seen billions of dollars being reallocated by investors very much based on the G of ESG.
Corporate governance – a big reason to be excited about Japanese equities
While several of the longer-term issues that surround the Japanese economy have not changed – particularly the headwinds created by demographics – the main reason global investors have increasingly shifted their weightings to the Japanese equity market is an improvement in corporate governance. Listed companies have been making significant progress adopting higher standards and doing more to improve dividends and share buybacks. There are clear reasons for this, from the implementation of a stewardship code in 2014, to the more recent moves by the Tokyo Stock Exchange (TSE) requesting companies to draw-up a plan indicating what they would do to improve governance. Pension funds are also now disclosing how they vote, and activist investors have become significant influencers on corporate decision-making.
Of all these changes, the most notable – in our view – is the move by the TSE. Listed companies which trade at a price-to-book (PBR) ratio less than 1 are now required to disclose their policies and specific initiatives for improvement. Previous campaigns by activist and foreign investors to improve corporate governance in Japan and increase shareholder value have brought slow and limited success. However, this announcement has turned out to be a wake-up call for Japanese companies, as it has created major peer pressure. In the Japanese equity market, half of the companies listed on the TSE have a PBR below 1, and these businesses will be under the spotlight. They will need to work to resolve this situation, taking steps towards a more efficient capital structure – most likely involving returning cash to shareholders via dividends and/or share buybacks.
