Ecological Stewardship in Japanese Firms
By Jacob Park
According to a recent Fortune Magazine ranking of the world's largest companies, five of the six largest corporations in terms of revenue are Japanese: Mitsubishi, Mitsui, Itochu, Sumitomo Corp., and Marubeni Corp. They are bigger than the largest petroleum companies like (Royal Dutch Shell and Exxon); even a second-tier Japanese trading company like Nichimen has a larger revenue stream than Switzerland's Nestle and UK's Unilever. Yet, as late as 1992, a leading Japan-based environmental monitoring group reported it could not find one example of a satisfactory corporate environmental report issued by a Japanese company.
Understanding Japan's Green Management Challenge
Compared to the corporate governance structure in North America and Europe (with the possible exception of Germany), individual shareholders do not play a prominent role in the Japanese system of corporate governance. This frees Japanese business executives from the pressures of rigid quarterly earnings requirements and activist groups (eg. like the Boston-based Coalition of Environmentally Responsible Economies (CERES), which lobby the interests of ecologically-minded shareholders).
Second, sogo shosha dominates the Japanese economy. Roughly translated as "trading companies," no comparable business institutions in North America and Europe exist. Sogo shosha like Mitsui, Mitsubishi, and Sumitomo are household names in Japan (much like GE, Microsoft, and GM in the U.S.) and are involved in a diverse array of markets, ranging from textiles to electronic commerce, through their many corporate subsidiaries. Subsidiaries build oil pipelines in Central Asia, invest in real estate in Latin America, and develop consumer distribution networks in Southeast Asia. The environmental impact of a company's business activities is more difficult to evaluate when it is involved in many different industrial sectors, a problem which many sogo shosa cite as the main factor behind their relatively weak environmental reporting and disclosure policies.
Third, the Japanese economy is characterized by a select group of high-tech export powers surrounded by a sea of uncompetitive, domestically-insulated firms. Although there are more than 70 petroleum companies, only two Japanese companies (Nippon Oil Corp. and Mitsubishi Oil) are ranked among the world's largest. Similarly, out of more than 1,000 Japanese drug companies, only a handful are globally competitive.
While many companies in the US, Canada, and Europe are not globally competitive, the key difference is that Japanese firms (at least those operating mainly in Japan) have a much different stakeholder relationship. The lack of shareholder activism, the complicated corporate structure of the sogo shosa, weak environmental NGOs, and relatively lax financial disclosure requirements mean that most Japanese companies are not required to, and often do not feel compelled to, release eco-efficiency information like the rate of recycling and energy intensity of production and services. While North American and European firms are subject to a diverse array of pressures from both within (environment-minded shareholders and managers) and outside the company (regulatory measures like the U.S.'s toxic release inventory and pressure from environmental NGOs) to release relevant environment-related information, many uncompetitive, insulated Japanese companies are not bound by these pressures. This explains why the North American and European subsidiaries of many Japanese firms (even those that conform to green best practices) often pursue more environmentally "aggressive" policies than those adopted by the company's worldwide headquarters.
Evolving Corporate Response to Environmental Problems in Japan
The response of the Japanese business community to environmental problems has gone through three distinct stages, the first of which (late 1960s - mid-1970s) can be described as a national awakening to an industrial pollution crisis. A series of highly-publicized pollution cases in the early 1970s, including the famous Minamata Disease, led to an unprecedented session of the Japanese Parliament (so-called "Pollution Diet"), where the most stringent air, water, and noise pollution standards in the world were adopted. The national system of environmental administration was consolidated under the supervision of a new Environment Agency, and national environmental legislation was enacted which obliged each manufacturing site to maintain an "appropriate" internal pollution prevention and environmental quality control system.
The economic impact of stringent anti-pollution standards fell heaviest on the energy- and pollution-intensive industries like steel, industrial machinery, and petro-chemicals. This raised a lot of concern among Japanese industry leaders and policy makers since these industries formed the bedrock of the Japanese industrial boom in the 1950s and 1960s. However, there was broad consensus (reflecting the second phase of corporate response to environmental problems) that only a massive mobilization of energy efficient technologies and investments in resource productivity would save Japanese companies from an overdependence on oil imports and increase its industrial competitiveness.
Although overall capital expenditures dropped sharply as the result of the economic recession stemming from the 1973 oil shock, Japanese companies continued to place a high business priority on energy-efficient technologies. Between the late 1960s and the mid-1970s, the ratio of pollution prevention investments as a percentage of total capital expenditures increased from three percent to a high of 20 percent. While Japan's GDP grew 1.7 times from 1973 to 1987, its annual energy consumption level essentially remained flat, which means that the overall rate of energy consumption declined by more than 40 percent.
The third phase of Japanese corporate environmental management can be traced to the growing awareness of global environmental problems like climate change and the depletion of the ozone layer. In the late 1980s, Japanese business executives got involved in business groups like the World Business Council for Sustainable Development, participate in ISO environmental management schemes, and work in partnership with green conservation groups. By the time the Keidanren (Japan Federation of Economic Organizations), a leading Japanese business lobbying group similar to the Business Roundtable in the U.S., released its global environmental charter in 1991 (proclaiming that "corporations must contribute to the realization of an environmentally sound society"), nearly 80 percent of the 140 largest Japanese companies had a separate department to handle environmental affairs or were planning to do so in the next two years.
Reasons for increasing awareness of global environmental issues
Just as Royal Dutch Shell learned in the case Brent Spar and Greenpeace cases, Japanese companies have discovered that environmental considerations form an important component of a company's corporate reputation and that it is difficult to shed the image of an "eco-terrorist" once it is firmly established in the minds of consumers. Particularly for companies operating in consumer-oriented markets like electronics and retailing, environmental considerations have become an important marketing factor that can distinguish one's products and services from a competitor's.
The second reason is the growing market for environmental products and services. With the international market for environmental and services estimated to be $300-$400 billion a year, many Japanese companies are exploring or have entered this potentially lucrative market. Solar technology firms, for example, are scrambling to double output within the next couple of years to meet growing demand from India, Mexico, Indonesia, and other emerging economies. Japan's Agency of Natural Resources and Energy expects solar energy use in Japan to increase 1,000 times to 4.6 gigawatts by the year 2010. The U.S. market for environmental technologies and services is estimated to be larger than established industries such as plastics and pharmaceuticals. Japan's Ministry of International Trade and Industry has targeted the environmental protection market as one of its strategic industries for the 21st century.
The need for a modern environmental management system is driven from an "internal" need to boost the firm's eco-efficiency capacity to stay competitive in the global marketplace. The development of an eco-efficiency management strategy has been gradual, but the growing popularity of the ISO 14000 series has served as an important catalyst for environmental management awareness in Japan.
NEC-Promoting an Organizational System for Green Innovation
NEC is one of the five largest electronics firms in Japan (along with Hitachi, Matsushita, Toshiba, and Sony) with $35 billion in worldwide sales. Its environmental management strategy simply involves establishing, monitoring, and achieving long-term environmental objectives. First, NEC established environmental management units at each of its facilities to monitor and improve its environmental management capabilities. Like many other Japanese companies at this time, energy efficiency and resource productivity drove NEC's environmental planning.
Starting in the early 1990s, NEC embarked on a series of Eco Action Plans, an annual statement of action through which the company's environmental strategy can be operationalized. Monitored annually, it is divided into specific objectives, including energy/resource savings, waste reduction, and recovery and reuse of materials. It is a "living document," continuously updated and revised according to a ecological and business circumstances.
In addition to adhering to a broad set of ecological principles, NEC established technological and management benchmarks from which to evaluate the company's overall environmental performance. For instance, according to its 1997 environmental report, NEC reduced the quantity of its industrial waste landfilled by 80 percent, compared to the 1997 target of 50 percent, and increased the percentage of plastic recycling to 41 percent, compared to the 1997 target of 32 percent.
Sony - Enhancing Green Organizational Development
Sony is arguably the most famous Japanese corporation in the world, with worldwide annual sales of $45 billion. The shift in Sony's environmental approach from technology-driven anti-pollution policy to strategy-driven environmental management came in the early 1990s with the establishment of the regional environmental management (REM) system. The corporate environmental and community affairs department in its worldwide headquarters in Tokyo provides coordination, but Sony's REM system is spearheaded by regional environmental conservation committees (ECCs), which formulate and monitor their own environmental objectives.
The overall direction of Sony's REM system is guided by an annual conference, which brings together environmental officers and other corporate representatives from the four regional ECCs (Japan, Europe, Asia, and North America). In addition to evaluating the progress of the company's environmental activities, the annual conference serves as a forum for exchanging information and developing a common environmental management platform.
Sony's Green Management 2000 Plan emphasizes environmental objectives such as zero disposal, green purchasing, product recycling, eco-product development, and ISO 14001 certification. Sony's eco-product design and development policy, for example is set by the European environmental committee because European consumers tend to be much more "sensitive" to the environmental reputation of products and services. Environmental leadership is not imposed, but rather initiated and managed by the regional committee with the best environmental expertise.
For eco-efficiency to become the driving force in the entire "value chain"-- from design to disposal -- of a company's operations, clear benchmarks and objectives need to be crafted, articulated, and well-understood throughout the entire organizational structure of a company. This is why employee education-training, eco-audits, and environmental performance objectives, constitute such an important foundation of the environmental management system in NEC and Sony.
Details on NEC's Eco Action 21 Plan: http://www.nec.co.jp/english/profile/kan/ecoac/ecoac.html#1997
Excerpted from Corporate Environmental Strategy: The Journal of Environmental Leadership, Spring 1998, Volume 5, no. 3.