Made In Japan

by Akio Morita

  I met Dean Graham Allison of Harvard’s Kennedy School of Government at the Shimoda Conference, a periodic gathering in Japan of American and Japanese intellectuals, businessmen, and others, named for the town that became the site of America’s first consulate in Japan. The conferences are a great opportunity for communication, for analysis from both sides, for expressing opinions in an attempt to increase understanding, and for just getting to know people. In my discussions with Dean Allison, I must have been pretty animated on the subject of lawyers, because he invited me to come speak at the school, and in his letter of invitation he assigned me a provocative title: “The Role of Lawyers in Handicapping Entrepreneurial Efforts in the United States.”

  When I began researching my subject, I discovered that other businessmen have been worried about the problems that lawyers create for business and for American society generally. My friend John Opel of IBM wrote an article a few years ago titled “Our Litigious Society,” so I knew I was not alone in my view that lawyers and litigation have become severe handicaps to business, and sometimes worse. I was once told by an American friend that in some cases lawyers step in when there is a traffic accident and sometimes take 65 percent of the insurance money or the court award, leaving the victim only 35 percent. It is an astounding situation from our point of view.

  There are over five hundred thousand lawyers in the United States, and I understand that every year more than thirty-nine thousand people pass the bar examinations, so the number of lawyers continues to grow. Many people take law degrees in the U.S. even though they do not intend to practice law. In Japan we have approximately seventeen thousand lawyers, and the number grows only by about three hundred persons a year. The bar examination is so difficult that less than 3 percent of those who take it pass it. Those who pass it go to the National Legal Training Institute, where they choose to pursue one of three branches of the law: public service as a prosecutor or as a judge, or private practice.

  The three hundred annual graduates of the institute are usually divided almost equally among prosecutors, judges, and private-practice lawyers. Of course, there are thousands of young people who study law and get degrees and then move into private companies where they do corporate legal staff work very much like American lawyers, but they do not practice before the court. Others who are trained in law sometimes sit as arbitrators. In Japan, we have no huge law firms as in the United States, where dozens of lawyers’ names cover the front door—sometimes the front wall. Also, when someone files a lawsuit in civil court, he is required to pay a nonrefundable filing fee based on the amount being sued for. If he loses the case, he must also pay the court costs. This is one reason why in our early days we were hesitant to go to court in Tokyo against Balcom Trading over the tape recorder patent infringement case; we couldn’t afford to lose if the case dragged on for a long time, building up the court costs.

  Even though we are not busy in Japan creating lawyers, our courts are still jammed with cases that take years to settle, which is partly a function of the small number of lawyers. This state of affairs also tends to discourage casual litigation, because people know when they go into court that it may take a very long time to reach a settlement. Therefore, most ordinary disputes between people and even many between companies are settled by arbitration. But as crowded as Japan’s court calendar is, it is nothing like the American situation where, according to Opel’s calculations, in the year 2010 there will be nearly a million cases on appeal.

  While the United States has been busy creating lawyers, we have been busier creating engineers. We have twice as many engineering graduates, which means, taking the relative size of our countries into account (the U.S. has about twice the population of Japan), four times the ratio of engineers. In the electronics field alone, each year we graduate about twenty-four thousand engineers, to about seventeen thousand in the U.S.

  With this situation in mind, I flew to Boston for my speech on a June day in 1982 and drove to the Harvard campus where Dean Allison met me . As I looked out over my audience in Faneuil Hall, I thought to myself, there are probably a lot of lawyers here, and this is America, so I had better start out with a disclaimer. I said, “First I wish to make it very clear that what I am about to say is my personal observation and not an opinion having any legal meaning. I don’t need any legal problems.”

  The audience was anything but hostile, and they chuckled at my opening observation. But I couldn’t help saying what was in my heart and mind. I told about my first experience with American legal procedures in setting up our company and about how much I learned. Although I had known quite a bit, for a Japanese, about the law in the early days of our business, it was pretty much centered around patents and things directly relating to our products. We knew nothing of contracts, of consolidated accounting, or other complicated matters like dealing with American government agencies, which you cannot do yourself but must have a lawyer do for you.

  I said we have many lawyers in our company today and are involved with many law firms in America and elsewhere, and they give us valuable advice. “But if we listen to lawyers too much,” I said, “we cannot do any business. The lawyer’s role is very important for the businessman, but I also think that it poses a danger. Even if the lawyers think of all the possible risks, an unpredictable thing may happen.” I told of my American friend who was so afraid of falling and hurting himself in the bathtub that he had the tub covered in rubber—and then one night he fell down in his bedroom and broke his leg.

  When I had warmed up to the subject, I made the point that “if you have so many lawyers, they have to find business, which sometimes they have to create. I know there are many lawyers sitting here. But I think that is a fact. Sometimes nonsensical lawsuits are generated by lawyers. In this country everybody sues everybody.” Contingency cases, which are frowned upon in Japan, are common in the United States, and I know of cases now in the U.S. courts involving large sums of money that I believe were thought up by an outside lawyer and sold on a contingency basis to an American company.

  Worse, in my opinion, is that nobody seems to trust anybody in the legalistic climate that has been created in the U.S. I often say to my assistants, “Never trust anybody,” but what I mean is that you should never trust someone else to do a job exactly the way you would want it done; so therefore, do not put the burden on someone else to fulfill your wishes. In Japan we customarily trust each other, which is why government and industry have managed to get along so well since the war, even though they often squabble.

  In the United States businessmen often do not trust their colleagues. If you trust your colleague today, he may be your competitor tomorrow, because people frequently move from one company to another. It is almost inevitable in this situation that mutual trust and confidence are lost all across the board. Management doesn’t trust its employees, and employees don’t trust management. The government doesn’t trust business organizations or industry, and industry doesn’t trust government. Sometimes at home the husband doesn’t trust his wife, and the wife doesn’t trust her husband— although that isn’t strictly an American characteristic. About the only person you can trust in America, it seems, is your lawyer. The conversation and correspondence between the lawyer and client are protected, legally. All other things can be disclosed in court, so how can you trust anybody else?

  I have had my difficulties with the American legal system, and so I feel qualified to talk about it. We established our company in the United States as Sony America, an American company, and we have been good business citizens of America. We had to learn about American government and legal procedures right away and I was lucky to have a lawyer like Edward Rosiny to make the introductions. It was not easy for me to grasp why some things were necessary, but I learned to comply with the endless legal requirements. However, I think in America there is such a thing as legal harassment, and here is a good example:

  In 1968 the Electronics Industries Association filed a complaint with the
Treasury Department claiming that Japanese TV makers were selling their sets in the United States at lower prices than in Japan, in short, dumping them and causing injury to domestic makers. Sony was investigated and found not to be dumping, but because all Japanese companies were suspected, Sony continued to be subjected to an incredibly tedious, inefficient, time-consuming, and costly investigation for many years to come. Finally, in 1975 we were excluded from this television dumping ruling, which we had no reason to be included in in the first place. But for technical reasons, it took another eight years to clear the case.

  While this investigation was going on, in 1970 Japanese TV makers including Sony were named defendants in a private antitrust lawsuit filed by an American TV maker, National Union Electric Company (NUE), which used the brand name Emerson. That suit also charged dumping. It took ten years of hard work by some of my best legal staff people and outside lawyers before the Federal District Court in Philadelphia delivered a judgment in our favor, saying in particular that Sony’s well-known position as the highest priced seller in the U.S. market makes it “an illogical candidate” for membership in a low-price conspiracy. Yet it took another two and a half years to have the judgment confirmed by the Court of Appeals.

  I thought that might be the end of it, but I was wrong. A coalition of American color TV makers and their unions filed a petition with the International Trade Commission claiming injury from increased Japanese color TV exports. President Jimmy Carter didn’t go along with the recommended duty increase of 20 percent, but he negotiated an orderly marketing agreement with the Japanese government restricting shipments for three years. My company was covered by the agreement, even though our sales in the U.S. showed no sign of the kind of increase that could cause injury to domestic makers.

  Well, if that wasn’t enough to wear us out, along came two duty petitions seeking to place higher duties on our products. And even when the Treasury Department concluded in these cases that Japanese-made electronics were not subsidized by the government, Zenith sued the U.S. government over the ruling! They challenged the ruling and said that the refund of the Japanese commodity tax on exported goods was a subsidy. Three years later, the U.S. Supreme Court dismissed the Zenith case. I must say that all of this— and there is more I will not mention—indicates the use of the law by American companies to harass and actually block Japanese imports. These companies spent millions of dollars in the legal battles, but they failed to make themselves more competitive against the Japanese makers. The result was a great deal of bitterness and a lost battle. The only ones who profited from it were the lawyers, not the consumers, the American companies, or the Japanese firms. And so if I used the phrase “handicapping entrepreneurial efforts” in my speech, as Dean Allison suggested, I think it was apt.

  One of the things that bothers me the most about the problems that can be created by lawyers is illustrated by the National Union Electric case I mentioned earlier. While this case was dragging on, it struck me that it was costing everybody a lot of money, and I thought it would be wise to come to some kind of agreement to end these costs. The parent company of NUE was Electrolux, and I went to see the chairman, Hans Werthen, and suggested we talk about settling the case. But he said he had no control over the case and would have to get his lawyer’s OK. I see nothing wrong with asking and taking a lawyer’s advice, but why give them so much control? In this case, Werthen was even worried that if he settled with Sony he might be sued by his own lawyer!

  Werthen made a deposition to our counsel in 1978 and recounted our meeting, saying, “I had to tell [Morita], however, much as I sympathized with him, this lawsuit is absolutely out of my hands. I told him that I have a deal—we have a deal with our legal people here that they handle the lawsuit against a sort of compensation that depends on the outcome… . That means that I cannot start to give orders to my lawyers to say dismiss this one or bring this one. They must handle it. I told Morita that I would hardly be in a position to give orders in this case… .”

  There is no proof that his lawyer controlled this case in order to get a large attorney’s fee in the end, but I have to strongly suspect that this was the case, because Werthen said to me that his lawyer represented his company on a contingent fee basis, and the amount of possible recovery in this case—under the old law that allowed for treble damages if proved—was three hundred and sixty million dollars. Whatever the truth was in this particular incident, a combination of the system of treble damages and private lawsuits, which are allowed under the 1916 Revenue Act in suspected unfair competition cases, plus contingent fees, seems to give incentive to clients and their lawyers to bring private antitrust actions in order to share the recovery of damage awards between them. The idea must have come from lawyers, and that is why I say it is the lawyers who create problems.

  I believe there may be some justification for contingency cases. Sometimes it enables people who could not afford to hire a lawyer to make a legitimate claim, and I know it is legal in the United States, and not actually illegal in Japan. But I do not think that contingency cases should be applicable to large industrial companies.

  Many Americans seem proud of the adversarial relationship between government and business, as though their aims are naturally antagonistic. In Japan we do not see it that way. To put it bluntly, whether we like it or not, the government is a partner in our business without owning a single share of Sony stock or running any risk. And the American government is a partner of American business, too, in the same way. The Japanese government takes away more than 50 percent of our profits, and that in a sense makes it a majority partner. So from our government’s viewpoint, it wants its partner to work hard and make a profit. By doing so, business is able to keep people employed, enabling the company and its employees to pay taxes rather than to go on the public dole. This is done with a long-range viewpoint. So while we often have our disagreements with the government and its bureaucracy, which actually runs the government, and while I often criticize specific government programs or policies, I know the relationship is basically supportive.

  The American system of management, in my opinion, also relies too much on outsiders to help make business decisions, and this is because of the insecurity that American decision makers feel in their jobs, as compared with most top Japanese corporate executives. The legal requirement for disclosure puts the manager’s performance on show every quarter and the main evaluation of an executive too often is done in this shortsighted way. Obviously, after the Great Crash of 1929 the reasons for regulation and/or constant public reporting were evident to everyone, and the objective of protecting the shareholders was a worthy one. But the SEC and the FTC became like policemen. And maybe that is justified in the United States, where there have been so many cases of executives being arrested for economic crimes.

  In Japan a person who holds an executive position of trust and who violates it is really disgraced, and because of our closed-circle society, it would be impossible for him to continue to do damage to company after company, as some have done in the U.S. and even in Europe. Often if some major failure or illegality takes place somewhere within the company, or if there is a breach of trust with the consumers, it is the president who resigns to accept responsibility for the failure of the company to do what was correct. Rarely is such an executive personally held responsible for the failure.

  For example, in 1985 the president of Japan Air Lines resigned after a JAL 747 crashed, killing five hundred and twenty people in the worst single-airplane disaster in history. Several years before, he personally visited the survivors and the families of the dead in an accident that was less disastrous. The head of a famous Tokyo department store, who was known for his autocratic and flamboyant ways, created a sensation when the business reputation of his fine old company was damaged by the scandal of having misrepresented and sold some bogus Persian antiques as real. When he refused to resign to take responsibility for it, his board defied long-standing tradition and actually voted him ou
t. Since Japanese management of a company is long-range and collective, the departure of any one top official is not likely to change the long-range goals of the company or the way it deals with its employees and suppliers. In this case, the scandal was so humiliating to this firm that the board felt it was necessary to repudiate not only the president but also the changes of style he had brought to the job of running the company. It is very rare, though, for a Japanese board to have to fire a top executive.

  But the differences between U.S. and Japanese companies go beyond the cultural. If you ask a Japanese executive, “What is your most important responsibility?” he will invariably say that continued employment and improving the livelihood of the workers is at or near the top of the list. In order to do that, the company must make a profit. Making a profit will never be at the top of the list. Most of the American business executives I know put the highest priority on return to the investors or this year’s profit. They have the responsibility because the investors gave it to them, and to stay in their jobs they have to continue to keep the investors happy. The board of directors represents the investors, and if top management fails to give the return the investors feel they need, he will be fired. For that reason he is entitled to use the factory and the machinery of the company, and also the workers, as tools to accomplish his aim. This can be detrimental.

  Visiting an American television plant in the Midwest a few years ago, I commented to the manager that I thought he really needed to buy some more modern equipment in order to improve the company’s productivity. He shocked me when he told me that his compensation was based on the company’s financial performance and that he was not going to do anything, like making long-range investments, that might cut his compensation for the sake of the next manager who would be along in a year or so. I have also noted in our joint venture dealings that we in Japan like to take our depreciation quickly, on a constant percentage, and get on with the business, whereas our American partners always seem to want to take their depreciation over a long period, on constant value.