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You've got to have 'wa'

When Japan's old-fashioned boardrooms open up to the modern world, disrupting harmony (wa) often follows. David McNeill reports from Tokyo

A venerated but barnacled Japanese firm appoints a British CEO to drag the management into the 21st century and chart a course through the shark-infested waters of global business. Months of painful internal headbutting later, the appointee is gone, citing a cultural wall too high to climb.

Sound familiar? Two years ago the man in the executive hot seat was not ex-Olympus CEO Michael Woodford, but Stuart Chambers, who abruptly quit as head of Nippon Sheet Glass after only a year in the job. Mr Chambers ran the Merseyside-based Pilkington when Nippon Glass took it over in 2006, and was made the Japanese company's president and CEO to smooth the integration. After his resignation, he explained that he was unable to meet the demands of his new employers to put work before family. "In that process I have learned I am not Japanese," he said.

That memorable departure line seemed to sum up two widely held beliefs about Japanese business: That it is a grim, airtight all-male club leaving little room for anything else, and that most foreigners don't have what it takes to survive there. Time and again, gaijin (foreigners) like Mr Woodford find the upper reaches of corporate Japan too foreign and impervious to change.

"A couple of weeks ago, those who support the 'Japan is changing' theory would have been able to cite the appointment of a gaijin president at Olympus as evidence of this," says Graham Harris, a veteran Japan-based British business consultant. "Now, as we get a glimpse below the surface, we see that 'old Japan' continues to thrive, even in a Japanese company with an international reputation."

For decades, Japanese companies generally operated in a way that modern American or British CEOs would find incomprehensible, flouting many of the accepted "rules" of global capitalism. Veteran Japan-watcher Karel van Wolferen, who once memorably called Japan "a wartime economy operating in peacetime", says it has always done things its own way. "Neo-liberals don't understand Japan because Japan is not a capitalist economy."

The Japanese way: long-term, government-directed industrial planning, strong banks and weak shareholders was immensely successful and drove the economy to the top of the economic league tables before it ran out of steam in the early 1990s. During Japan's journey from ruined Second World War pariah state to the world's second largest economy, its corporations were largely insulated from the West and business was done very differently.

Boards of directors were, by and large, considered rubber-stampers, not governing bodies as they are understood in Britain or the US. Elderly chairmen and CEOs retire "yet still come to the office on almost a daily basis, still wielding considerable power and undermining the authority of the new head", points out William Saito, a Tokyo-based venture capitalist and long-time business commentator. "Shareholders rarely fight management," he says, especially when so many companies are tied to main banks and subsidiaries through cross shareholdings. "The board doesn't represent the shareholders' interests but their friends internally." Regulators, employed to show that this system functions along standard capitalist lines, rarely show their teeth.

Women still make up only 1.2 per cent of top Japanese executives, and foreign board members on Japan's roughly 4,000 listed companies are as rare as sparrows in winter. The exception is a handful of troubled giants, notably Sony, which made Welshman Sir Howard Stringer its chairman and CEO in 2005, with very mixed results, and Nissan Motor, where Brazilian Carlos Ghosn has been in charge successfully for more than a decade. That startling lack of diversity, and the lingering insularity of corporate Japan, has not gone unnoticed at home. In 2009, the Japan Association of Corporate Executives (Doyoukai) published the results of a damning two-year survey that concluded by calling on its members to revolutionise their boardroom practices. "Japanese firms are terribly behind in accepting diversity," said the Association's then vice chairman, Yasuchika Hasegawa. "They should radically transform their corporate culture to provide the same opportunities to employees all around the world."

Easier said than done. Ever since Japan's corporations began operating in large numbers overseas in the 1970s, they have followed a tried and tested formula: whatever happens outside of the country, control stays in the iron grip of the all-Japanese boardroom back home. Managers – many of whom can barely string together an English sentence – are still dispatched from head office to run Japanese operations around Asia, Europe and the US. The companies that prove the exception to the all-Japanese rule are instructive. For Nissan, it was change or die. And Sony, operating in a hi-tech world where radical decisions need to be made quickly, was struggling with an increasingly sprawling, calcified management. It had become "too Japanese".

"Japanese companies are gradually realising the need for external directors, especially those who are genuinely trying to globalise," says Ian de Stains, former executive director of the British Chamber of Commerce in Japan. "But there is still a long way to go."

What was Woodward's mistake? Clearly, his questions about the $687m paid to advisers during the 2008 buyout of Gyrus ruffled feathers and, in Saito's words, upset the wa (harmony) of the Olympus establishment. "No one expected Woodford to bite back – they probably forgot that he wasn't Japanese because he spent so much time working for them." One of the virtues of wa is you can ignore contradictions. So Olympus chairman Tsuyoshi Kikukawa is scheduled to talk next week to an international audience in Tokyo on "Global social responsibility". Olympus, it seems, believes it is still obeying the rules of good global capitalism.