The startling lack of diversity and the insularity of corporate Japan have been noted by the country’s more progressive bosses who want more women, foreigners and English-speakers in their boardrooms

SPIRALLING PUBLIC debt, record bankruptcies and the humbling of the country's greatest corporate stars - this has been a traumatic decade for Japan. Its troubles were capped last year by the end of more than half a century of conservative rule by the Liberal Democrats and their replacement with a centre-left government. One thing hasn't changed, however: Japan's boardrooms are still almost completely devoid of women or foreigners.

Just 1.2 per cent of top Japanese executives are women, according to business publisher Toyo Keizai, and gaijin(foreign) board members on Japan's roughly 4,000 listed companies are rare. The exception is a handful of troubled giants, notably Sony, which made Welshman Howard Stringer its chairman and chief executive in 2005, and Nissan Motor Co, where Brazilian Carlos Ghosn has been in charge for more than a decade.

That startling lack of diversity and the lingering insularity of corporate Japan have been noted by the country's more progressive bosses. Last year 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," says Yasuchika Hasegawa, the association's vice chairman. "They should transform their corporate culture radically to provide the same opportunities to employees all around the world."

That is easier said than done. Ever since Japan's corporations began to operate overseas in large numbers in the 1970s, they have followed a tried and tested formula. No matter what happens in operations 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. Americans, Europeans and Asians can stay where they are.

All agree that communication is one of the key issues. "There is a language barrier for foreign board members," says Taiji Okusu, managing director of Credit Suisse in Tokyo. "It is costly to hire a professional translator for each board meeting."

He adds that some companies choose to have an advisory board where foreigners participate in the corporate strategy and nomination, citing the case of chemical and pharmaceutical multinational, Teijin.

In a drastic attempt to topple this corporate Tower of Babel, Japan’s largest online retailer, Rakuten, told its employees this year that they must be fluent in English by 2012. Executives who aren’t up to speed by then will be sacked; rank-and-file workers will find their path to promotion blocked.

Fast-expanding retailer Uniqlo, one of Japan’s most remarkable success stories of the past decade, is among a handful of companies here that has recently made English their internal lingua franca.

Language is only part of the problem, however. Many analysts also cite the deep-rooted practices of Japanese corporations such as providing lifetime employment, strict seniority and the preference for slow managerial progression up the corporate ladder rather than quick promotions of the talented or headhunting outside. When the economy was booming, these practices were cited as among the reasons for Japan’s phenomenal success. Now they are to be ditched.

“Japanese companies still tend to have permanent employment where people have worked together for 30 years, and hardly ever had any lateral hires,” says TW Kang, a Korean national and fluent Japanese speaker who served on the board of NEC Electronics, the semi-conductor arm of NEC Corp, from 2007 to 2009. “You come in as a heterogeneous element and the guys are used to working together. It’s not easy for them.”

Kang says the system did, at one time, make sense. “If companies can avoid cultural differences and communication problems, and maintain their overseas profitability with that approach, then good for them,” he says. “Unfortunately, it’s very difficult for those living in Tokyo to understand what’s going on in Beijing.”

Toyota’s recent crisis, particularly its slowness to respond to problems with its cars, might have had a happier ending if the company had a foreigner on its board, he says.

“A lot of big companies like Toyota have to deal with complex problems involving foreign governments, legal processes and consumers. To think these problems can just be tackled with insiders is a mistake. An external director forces you to listen to external issues.”

Japan’s boardroom rigidity is not immune to change, as Rakuten, Sony, Nissan and Uniqlo have shown. In the late 1990s, when the Asian financial crisis finally forced a state-led showdown with Japan’s debt-laden banks, many Japanese firms were forced to divest non-core assets and subsidiaries – bringing long-awaited opportunities to private equity funds and foreign investors, recalls Okusu of Credit Suisse.

The pressure for good corporate governance eased after the government bailed out the banks. “Japanese companies are quick to change and learn if it is inevitable,” he says.

Boardrooms can afford to ignore pressure for change from shareholders, however, because they still shun the capital markets and rely mainly on Japanese banks, another deep-rooted element of the country’s postwar political economy. That makes the entire system much more susceptible to government control and the continuation of the corporate status quo. As long as that system survives, Okusu says “bad companies” in terms of corporate governance “will have no clear strategy and tend to appoint board members within their own firms”.

Still, last year’s report by Doyoukai, which represents the interests of small and medium-sized firms, is a sign that the message may be filtering upward into boardrooms.

Hasegawa is unequivocal. “Local people should be the top of local subsidiaries, non-Japanese should be made board members and the personnel system needs to be globalised,” he says.

“Above all else, we need to globalise our headquarter functions. While Japanese corporations insist on these being based on the Japanese language, there is no possibility for foreigners to play a significant role in management.”