The Culture Map

I was recently eating sushi with an executive at a company I used to invest in.  He admitted how much the management team used to dread our quarterly meetings. I could hardly believe it. While I admit I was demanding and didn't hold back on calling a spade a spade, there were no theatrics or threats of bodily harm.  In my mind, I am a pussycat.

The company has an excellent business model and product lineup, but suffered from poor capital efficiency and even worse investor communications. I would tell them to aim for higher than an 8% ROIC and to also start giving investors some more clarity around the drivers of earnings.

The executive said, "We would have the 1 hour meeting with you, followed by a second hour-long meeting where we tried to decipher the true meaning of your comments."

The true meaning of my comments?

When I said 8% is too low an ROIC target for a company earning 15 percent margins, my true meaning was that 8% is too low.  And when I said their lack of disclosure means we cannot effectively underwrite the outlook for the business, what I meant was I want more disclosure.  There was no hidden subtext.

So why were they spending so much time searching for a message that didn't exist?

Mapping the Culture

The Culture Map by Erin Meyer is the book I most frequently recommend to non-Japanese investors, yet I haven't met anyone who has actually read it.  Meyer grades cultures across the globe on eight factors using a sliding scale.

Communication style is one of the categories and the scale ranges from Low Context (saying precisely what you think, often with repetition) vs. High Context (the message is nuanced and reading between the lines is required.)

As a nation of immigrants with varied languages and endless opportunities for miscommunication, the US has evolved into the world's lowest-context culture. Meanwhile, Japan is off the chart in the other direction as the world's highest-context culture. Leaving things unsaid or implied is a primary way that Japanese preserve group harmony (wa). It also means they are hypersensitive to tone, facial expressions and implied meanings; they have to work to "read the air" to understand their peers.

In my situation, the company likely didn't realize that an American was unlikely to deliver a "hidden" message. They were simply operating on their own cultural defaults—a logical, if unfortunate, waste of time and effort.

The Advantage of 23 Years in Japan

I have lived in Japan for 23 years now. I still cannot—or perhaps refuse to—deliver a "hidden message" to a company. One downside of an indirect culture is that avoiding difficult topics, such as shutting down a loss-making business, allows everyone to avoid uncomfortable conflict. If an investor never explicitly asks a company to shutter it, the status quo will persist, even if "hidden messages" were sent. In my view, this is not in the best interest of shareholders.

On the other hand, I have noticed that I am now much better at reading these hidden messages compared with other foreign investors. I recently visited a company with two non-Japanese investment professionals. When we walked out, I was delighted because I was convinced a buyback was coming within two quarters. The other investors had picked up no such message. There was no "insider information" revealed — just a reading of facial expressions, tone, and the fact that management mentioned capital efficiency without being prompted. The buyback happened three weeks later.

I recently met another CEO who I am convinced will significantly raise the dividend payout at full-year results in May. He acknowledged that the shares are performing poorly and felt he had disappointed shareholders. Coming from a different CEO, that might be a platitude; but based on the tone and flow of this specific conversation, it gave me a high level of confidence. Let's see.

In Japan, where people choose their words with extreme care, it is vital to pay attention to those choices. Why did they mention that specific competitor? Why did they ask my opinion on that particular topic? What was the last thing the company talked about (often all the most important information is in the final moments of a meeting)

Below are the Culture Map scales showing Japan vs. the USA. They are far apart on nearly all measures. In fact, Japan is an extreme outlier on almost all measures, making it unique globally.

Source: erinmeyer.com

I could write a whole series of blog posts on how these scales explain why foreign investors often get tripped up in Japan.

Or the struggles Japanese firms face abroad.

M&A: Stay Home or Go West Young Man?

Take M&A, for example. Successful M&A is largely a function of "cultural fit." If it is challenging for two Japanese companies to find a cultural fit, the difficulty of a Japanese company buying a foreign firm must be multiplicative rather than additive.

Japan is so far removed from other cultures that there are no "natural" cultural fits. Western European countries like Spain, France, and Germany remain relatively close on most measures despite their distinct languages and cultures. This is why I am almost universally skeptical when a Japanese company goes adventuring abroad with large-scale M&A. The list of disasters—Japan Post and Toll, Ricoh and Ikon, Dentsu and Aegis—is long.

Conversely, I am through-the-roof excited when I see a Japanese company buy a domestic competitor, driving industry consolidation.

On that happy note, thanks for reading!