Mitsui & Co.'s 15 cursed years: Powerful chairmen blight a major trading house

Updated : 01.09.2016 / Category Economy

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This composite photo shows Masami Iijima, left, and Shoei Utsuda

About 15 years have elapsed since two Mitsui & Co. employees were arrested in connection with a power generator project championed by then Diet member Muneo Suzuki, plunging the major Japanese trading house into a quagmire.

Mitsui has since strived to restore the public trust it once enjoyed, the first step being the hasty appointments of Nobuo Ohashi as chairman and Shoei Utsuda as president in October 2002. The memorial service held July 4 for Ohashi, who passed away in April, may offer some clues as to what is really going on at the trading house, which suffered a huge deficit in the last business year following years of robust performance.

A large number of people paid tribute to Ohashi at the memorial service held at Tokyo's Imperial Hotel. The ceremony was conceived to commemorate Ohashi's achievements and was obviously important to Mitsui, but current President Tatsuo Yasunaga left the venue early for unknown reasons, leaving Chairman Masami Iijima to deal with visiting guests, according to a former Mitsui executive who attended the service.

"How has the president who beat his 32 bosses [to assume the post] been doing recently?" was a frequently asked question at the service. "The president" refers to Yasunaga, who assumed the presidency in April last year at the age of 54—regarded as young for a Japanese company president. Although Yasunaga was merely a managing officer (non-board member) he was appointed president ahead of his 32 superiors. This rise to power attracted much attention and the news media cast Mitsui's bold personnel strategy in a favorable light.

But fast-forward 17 months, and it seems Yasunaga may be in a difficult situation. "My former subordinates and colleagues are not willing to talk about the president," a former Mitsui executive said.

Another Mitsui source offered further insight, saying: "At weekly management conferences attended by the nine board members, Yasunaga, the youngest among them, struggles to get his opinions across. One vice president even uses the phrase 'Hey, president!' to Yasunaga, as if he were speaking to a boy. I think the blame lies with Mr. Iijima."

Iijima, who handpicked Yasunaga for president, is the only chairman among Japan's five major trading houses with representative rights and a grip on the company reins. Mitsui has a long-held tradition of chairmen pulling the strings behind the scenes, but over the years, the practice has become ever more blatant and meticulous under Utsuda (now an advisor) and Iijima.

These problems stem from Mitsui's failure to reconstruct its corporate governance in the wake of the Muneo Suzuki debacle, according to informed sources. Indeed, one might even refer to the post-scandal period as "Mitsui's 15 cursed years."

Yasunaga yet to prove his stripes
Mitsui managed to secure ¥61.1 billion in net profit for the first quarter, though the figure represented a 37 percent year-on-year drop. This financial report followed the firm's declaration of a net loss of ¥83.4 billion last business year—the first ever deficit since its founding—in the wake of steep drops in the price of natural resources late last year. Although it was braced for a rocky business environment this business year, too, the company nevertheless raked in 31 percent of its targeted ¥200 billion net income for the current business year during the April-June period, thanks to a rebound in its Australian iron ore operations.

If Mitsui continues to generate around ¥60 billion in net income each quarter, it will notch up ¥240 billion in net income for the entire business year. Furthermore, the firm plans to sell good assets and buy promising assets for the future, generating ¥50 billion in profit. If this figure is added, Mitsui's income could reach as much as ¥290 billion.

Meanwhile, Itochu Corp., Japan's top trading house, is aiming to attain ¥350 billion in net income, including ¥70 billion from its investment in China's biggest conglomerate, CITIC Ltd. But a financial source was skeptical about this target, saying Itochu is unlikely to reap ¥70 billion from the investment, due to China's slowing economy. More realistically, Itochu will pull in net income of around ¥320 billion for the current business year. Meanwhile, Mitsubishi Corp.—also hit by its first ever deficit last last business year—is expected to rake in more than ¥300 billion in net income, likely leading to a fierce contest among the three leading trading houses as they vie for top position.

In light of the firm's good first-quarter performance, Yasunaga appears to be making a good fist of helming Mitsui—a company primarily dependent on natural resources. One Mitsui source opined otherwise, however, saying: "The good performance in the first quarter was due to the declaration of impairment losses and profits from assets developed in the past. Although he is attempting to foster non-resource-related business, Mr. Yasunaga has to yet to prove his stripes in this area."

Certainly, Mitsui's investments in Australian coal, Chilean copper and Brazil's major resource company Vale S.A. have improved its performance, helped by a reduction of depreciation costs from the declaration of a ¥284 billion impairment loss last year. Also, Mitsui's leading profit earner, Mitsui Iron Ore Development Pty. Ltd.(MIOD), which has operated in Australia since the 1970s, has been performing solidly.

In the non-resource domain, however, Mitsui is struggling with its food-related business, although its auto sales business in the United States and sales of feed additives are robust. In particular, Brazil's Multigrain AG, a grain-related trading house, is in dire financial straits. Mitsui acquired the company in 2011, but the subsidiary has since lost buyers that have strong connections with local farmers—a problem aggravated by its high distribution costs. Although Mitsui has dispatched highly capable personnel to the company, it has no immediate prospects for turning itself around.

Domestically, Mitsui has recently attracted attention for buying an additional stake in Starzen Co. Ltd, a meat wholesaler.

"I know it was a desperate measure, but I'm amazed by the fact that Mitsui made Starzen an equity method affiliate," an official of a rival company said, referring to the scandal in which Starzen was investigated by the Ministry of Agriculture, Forestry and Fisheries over the malicious mislabeling of meat from dairy cows as branded beef.

Mitsubishi has food makers Itoham Foods Inc. and Yonekyu Corp. under its umbrella, while Itochu controls Prima Ham Packers Ltd. Their share of the meat market, combined with that of industry-leader NH Foods Ltd., is over 80 percent, leaving Mitsui little choice but to invest in a company with a tainted history.

Unprecedented occupation of PR department
Mitsui's provision of foodstuffs and other goods to convenience stores tells a similar story. Both Mitsubishi and Itochu operate solid convenience store businesses, with the former providing foodstuffs to its Lawson convenience store chain via subsidiary firm Mitsubishi Shokuhin Co. Ltd., while Itochu provides foodstuffs to its FamilyMart chain via subsidiaries Itochu-Shokuhin Co. Ltd. and Nippon Access Inc.

Mitsui, on the other hand, suffered a hit last year after the Seven-Eleven store chain severed its dealings with the trading house. Though Mitsui had long maintained good relations with Ryuichi Isaka, then president of Seven-Eleven Japan, it decided to approach then chairman of Seven & I Holdings Co, Toshifumi Suzuki—who was on bad terms with Isaka—about a deal to jointly acquire and operate McDonald's Japan. Suzuki, who stepped down earlier this year over a bitter feud with Isaka, flatly rejected the deal, saying Mitsui "couldn't be trusted." Mitsui consequently lost a ¥100 billion deal to provide foodstuffs to the major convenience store chain.

"Mitsui's retail business has no food-related experts left," said an executive of a foodstuffs wholesaler. "They were all purged from the top echelons of the Food Business Unit by then President Utsuda."

The specialists who headed Mitsui's Food Business Unit were replaced by personnel from the machinery business section—from whence Utsuda hailed—as well as managers rom the metal and energy sections. As a result, Mitsui's connections with retail chains and food makers have weakened, while its ability to develop food products has waned. Currently, Mitsui's foodstuffs business evolves around the import of raw food materials for bulk sales.

Though Utsuda rebuilt Mitsui following the Muneo Suzuki scandal, he has also left behind negative legacies. Many people said Utsuda would never rise to the rank of president, but the situation changed drastically on July 14, 2002.

That day, Mitsui was searched by the Special Investigation Department of the Tokyo District Public Prosecutors Office following the arrest of two Mitsui employees over alleged illegal public bidding in connection with the sale of diesel fuel-powered generators to be installed on Kunashiri Island—one of Japan's four northern islands currently being occupied by Russia. The project was pushed by then lawmaker Muneo Suzuki, who was known for his strong ties with that nation.

Amid much commotion both inside and outside the company, then President Shinjiro Shimizu (now deceased) agreed to hold a news conference at 6 p.m. at a press club to explain Mitsui's situation. The conference was then postponed to 8 p.m. and eventually cancelled, infuriating the press club reporters, who subsequently proceeded to Mitsui's Public Relations Department on the 20th floor of the firm's headquarters.

The reporters shouted at PR personnel, demanding that Shimizu talk to them, but by that time, the president had already left the building via a rear entrance. Members of the media lingered in the PR department overnight, reporting on how Mitsui employees were dealing with the investigation.

As the senior executive managing officer in charge of management planning, it was Utsuda who dealt with the fallout from the scandal, including the way in which the company handled the mass media after the reporters' unprecedented occupation of the PR department. It was thus only natural that Utsuda succeeded Shimizu, who later resigned to take responsibility for the scandal.

Upon taking the helm, Utsuda announced a set of management philosophies, urging Mitsui personnel to change their focus from prioritizing profits to doing a good job while abiding by the law. He also spearheaded an investment shift from Russia to Brazil, by purchasing a stake in Vale's parent company at a cost of ¥100 billion in 2003. Riding the wave of a boom in natural resources, Mitsui enjoyed a large cash windfall, prompting many to call Utsuda a "savior."

But how would things have played out without the Muneo Suzuki scandal?

Katsuto Momii, then president of Mitsui & Co. (U.S.A.) and currently director-general of Japan's public broadcaster, NHK, was widely tipped to become the next president. However, Momii unexpectedly lost out to Utsuda, who is of the same age, in the race to the top position, instead becoming president of Nihon Unisys Ltd. When he arrived at the company, the first thing Momii reportedly said was, "I want exactly the same car and office arrangements as Utsuda."

Utsuda's "savior" reputation tarnished
There were 10 candidates to replace Utsuda in the 2009 board member appointments including vice presidents and executive directors, three of whom had been promoted to executive director positions in October of the previous year—an unusual time for promotions in Japan. There three were: Seiichi Tanaka from the machinery field, Norinao Iio from the energy section, and Iijima who hailed from the steel department. Iijima was eventually handpicked by Utsuda to serve as his successor.

People within and outside Mitsui wondered why Iijima had been selected. Some speculated that Shimizu and former Chairman Shigeji Ueshima, both of whom resigned following the 2002 scandal, had demanded that the president be selected from among personnel who originally came from the steel department, the company's major pillar. Despite his departmental origins, Iijima was evaluated less favorably than Ueshima, who is credited for turning Australia's MIOD into a highly profitable operation. Iijima has long experience in dealing with scrap iron, and used to visit steelmakers across the nation that use the scrap metal. Utsuda reportedly picked Iijima—a non-mainstream employee in the steel department—so he could pull the strings behind the scenes.

Even after becoming chairman, Utsuda maintained a considerable presence within the company. In the 2011 business year, Mitsui registered its biggest profit ever, ¥434.4 billion, thanks to a booming natural resource business. The seeds of this remarkable success were sown when Utsuda was president. In contrast, Iijima invested in Australia's scrap iron business, a sluggish undertaking that lacks luster even today.

Such distorted relationships between a president and a chairman do not tend to last very long. Soon, developments unfolded that served to tarnish Utsuda's reputation, starting with him asking The Nihon Keizai Shimbun (Nikkei) to employ his eldest daughter, Makiko, who was once an NHK announcer. The Nikkei reportedly was unable to reject this request, as the newspaper has its origins in Mitsui's research department. Makiko subsequently served for a time as an anchor on a Nikkei CS broadcast program.

"We were forced to accept an announcer who was no longer popular because of her age," a disgruntled Nikkei source said.

Furthermore, Utsuda allowed Makiko's husband—an NHK colleague—to take a post at Mitsui, fanning distrust toward him among Mitsui employees. The personnel department was reportedly reluctant to accept Makiko and her husband, due to company protocol that forbids employees' offspring and the spouses of offspring from joining the company. However, Utsuda's flamboyant wife reportedly insisted on the appointment.

Utsuda's power waned rapidly after allegations surfaced about the use of company resources in his private life. His wife and second daughter reportedly used a company car for a shopping trip to Sano Premium Outlets in Tochigi Prefecture, while Mitsui allegedly covered up a traffic accident caused by Utsuda's wife.

Iijima's reign finally underway
In light of these circumstances, Yasunaga was appointed president in April last year. Though Utsuda and Iijima reportedly differed on the presidential selection, Iijima had his way. Apparently, having learned from Utsuda how to pull strings after becoming chairman, Iijima changed the company's articles of corporation to enable non-board members to become president, thus paving the way for Yasunaga's appointment. Iijima then defied Mitsui's practice of stripping presidents of their representative rights when they become chairman. Because Iijima acquiesced to Utsuda while the latter was chairman, his rule over the company really only began last year.

This business year, Mitsui is trying to foster its non-resource business. For example, it is increasing its stake in a U.S. feed additives company and promoting tie-ups in the carbon fiber sector. Yasunaga is also keen on developing an intracompany venture system. According to Mitsui sources, Yasunaga was ambitious in his first year as president and he sometimes ignored Iijima's wishes, but such behavior has not been noted in recent months.

"Mr. Yasunaga missed out on a prime opportunity," a Mitsui source said. "The massive deficit in the last business year stemmed from resource investments made when Iijima was president. If he'd persuaded Chairman Iijima to clarify his management responsibilities by, for example, saying he'd take a salary cut himself, Yasunaga's presence in the company would have become much stronger."

From the legal morass of the Muneo Suzuki scandal to the excitement of the natural-resource frenzy, Mitsui's governance has taken a twisted course in recent years. But if Yasunaga does not end the long-standing and ill-judged practice of chairmen pulling the presidential strings, Mitsui's 15 cursed years could extend to 20 years—or more.

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This is a translation of an article from the September 2016 issue of Sentaku. The original article can be found here.