How should companies generate innovation?
──Efforts in ”Public Interest Capitalism” aiming at sustainable growth
February 26, 2018
In the ”2030 Agenda for Sustainable Development” adopted by the United Nations in 2015, SDGs (Sustainable Development Goals) will be used as guidelines for eradicating poverty and achieving a sustainable society by 2030. The governments, companies, and organizations of each country are working on various initiatives and mechanisms based on SDGs. With the increasing importance of building a sustainable society, we will look at what is necessary for companies to maintain their growth.
Relationship Between ”Public Interest” and ”Innovation”
To achieve economically and socially sustainable development, companies must continuously pursue innovation. And for companies to continue innovation, efforts based on medium to long-term management and investment are required rather than management with a short-term perspective.
”Companies will eventually weaken if they merely focus on improving their products, and that is why they need to keep continuously creating new business projects. However, most new business projects tend to end up producing results in the medium to long-term. For this reason, it is important to create a mechanism that inspires the entrepreneurship of ‘taking risks’ even if profits are not expected in the short term,” says ”Public Interest Capitalism” advocate George Hara, Representative Chairman of the Alliance Forum Foundation and Special Advisor to the Cabinet. ”Public Interest Capitalism” is the idea that a company’s role as a ”public entity” within society is to contribute to the ”public interest” through business.
In the ”2017 World Alliance Forum (WAF) Tokyo Roundtable Conference” which was held at the Nihonbashi Mitsui Hall (Chuo City, Tokyo) on November 9th, 2017, Hara pointed out the importance of medium to long-term investment in achieving sustainable development for a company. He said that companies can aggressively take on new business projects and generate innovation by establishing an environment that encourages long-term management and investment.
At the same conference, he also spoke about the role and specific activities of ”Public Interest Capitalism” regarding generating innovation.
Background of Public Interest Required in Companies
According to the Alliance Forum Foundation, the role of companies in contributing to the public interest has increased dramatically in recent years.
The foundation claims that there is an increasing trend of companies with sales that are larger than national revenues. Up until the 1960s, when calculating the total amount of revenue of the country/region and sales of the top 100 companies in the world, revenue of the country/region was overwhelmingly larger. However, in year 2000, the ratio between these revenues turned out to be ”country/region : companies = 49 : 51” and as of 2015, it became ”country/region : companies = 31 : 69.”
For example, sales of Walmart are larger than Spain's revenue, similarly with Toyota Motor above India and Samsung exceeding Turkey. There were also data indicating an increase in the return of profits to shareholders, mainly among companies in Europe and America.
While corporate presence and roles are becoming significantly important, investments that seek only short-term profits may induce speculative bubbles. As a result, this will lead to a state of ”Winner takes all” where the rich will take all the wealth, resulting in a serious gap between the rich and the poor.
Hara points out the problems related to excessive shareholder capitalism and claims that Japan, with its platform to practice public interest capitalism, should take the leading position to change the world economy by implementing a corporate culture of ”growing the company together with the management team and employees.”
Generating Innovation with ”Accumulation of Technology”
For Japan to proactively practice the philosophy of public interest capitalism, from the perspective of a Special Advisor to the Cabinet, Hara proposed a ”system for companies to make something out of nothing in the medium to long-term” at the government's Growth Strategy Council – Investing for the Future and Council for Advancing Structural Reform. He is focusing on contributing to the public interest of companies and working to build a platform that can promote further innovation.
”I believe that a company is a public entity of society and it should contribute to society through business. Companies should raise their added value by bringing profits and contributing to the whole organization (employees, shareholders, suppliers, customers, the environment and the community) through business, and the benefits to shareholders should be derived from these results.” (Hara)
To sustainably distribute profits to the company, it is presumed that companies will make sufficient profits and to do this, innovation is necessary.
Corporate managers, representatives of economic organizations and others attended the WAF Tokyo Roundtable Conference event and held panel discussions and presentations regarding activities. At the conference, professionals from various industries voiced their opinions for the necessity of medium to long-term investment in research and development to generate innovation.
”In order to make products that are beneficial to our customers and can contribute to society, it is necessary to spend a lot of time on research and development. We do not operate on a short-term perspective, but on a medium to long-term perspective. I know how important it is to expand the ‘sum of smiles’ for stakeholders (of the company) because this is the crucial value that makes a big difference in being accepted by society.” (employee of automobile manufacturer)
Also, a member of a major chemical manufacturer said, ”In order to provide new value that is beneficial to society, our company upholds our motto of ‘accumulate technology.’ Managers should carry out management using a long-term perspective, and engineers need to accumulate technology using a long-term perspective rather than a short-term one of two or three years when working on the business,” and mentioned that the ‘accumulation of technology’ is a requirement for generating innovation in the manufacturing industry. When attaching too much importance to shareholders, they might tell us to ”distribute the money” if profits are not made within two to three years.
Specific Measures for Correcting ”Short-Termism”
Furthermore, at the WAF Tokyo Roundtable Conference, ”Abolition of the obligation to disclose quarterly financial information” was proposed as one of the measures against ”Short-Termism” that hinders innovation.
Although the ”obligation to record the earnings column in the quarterly earnings report” has already been abolished due to the work of the Alliance Forum Foundation, since Japanese companies have a strong tendency to behave like those around them, most companies still invest in human resources from the financial affairs department to record the earnings forecast.
The proposal made by Hara to eliminate the obligation of disclosing quarterly financial information itself is aimed to further reduce human effort and to promote medium to long-term management. In the discussion, there were topics that mentioned the industries such as retail business where sales are frequently influenced depending on the month or economic trends, having to disclose earnings more frequently than per quarter or the scheme under the current system promoting communication with investors by disclosing the full-year forecast or full year and current activities. As stated by a member of a major infrastructure company, corporate accountability should be strengthened to abolish quarterly disclosures. And along those lines, communication with shareholders who make better use of qualitative information will be required rather than merely abolishing the disclosure on quantitative information.
Making Japan the World's Most ”Advanced Country for Incurable Disease Treatment”
Hara has suggested that the government should promote national strategic innovation in the medical field as an application to create a country of public interest capitalism.
This is indicated in his vision for establishment of a society by the year 2050 that can provide good health to all individuals born in Japan for their entire lives.
Currently, there is a tendency among advanced countries to develop treatment using innovative technologies, targeting incurable diseases or severe disorders that cannot be treated or cured with traditional methods. As with Japan, in the field of regenerative medicine, there are remarkable developments such as the treatment of heart failure using iPS cells. Expanding this trend to other medical fields and making Japan the world's most ”advanced country for incurable disease treatment” is the primary goal.
”Japan can surely be the winner in this field. The Pharmaceutical Affairs Law was revised, and in the field of regenerative medicine, the policy of early approval was accepted so that a new treatment method may be applied to patients when safety is confirmed during the stage. By extending this flow not only to regenerative medicine but also to fields of other incurable diseases, our goal is for Japan to receive, by 2030, international acclaim for being capable of treating incurable diseases that cannot be treated in any other country,” explains Hara. If this were to come true, it is estimated that there would be an economic effect of at least 3.3 trillion yen every year.
Hara mentions that, ”through these changes, we should be able to create a nation where young people can hold their heads high without having to worry about Japan or their future.” He advocates a structure that encourages medium to long-term investment. In addition, he hopes to create an environment where revolutionary technologies can be born through innovation.