A positive management style takes root in Japan

By , Staff correspondent of The Christian Science Monitor

Be decisive. Reward generously, but punish lightly. Delegate authority wholeheartedly.

These are some of the key characteristics of top managers, according to Ichiro Isoda of Sumitomo Bank.

This year Mr. Isoda was named banker of the year by the respected financial journal, Institutional Investor.

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''He took a shattered institution,'' said the journal in its August 1982 issue, ''and introduced some of the most sweeping managerial changes ever seen in Japan.'' The result was that last year Sumitomo, Japan's third largest bank, regained its position as the country's most profitable financial institution - a recovery the journal characterized as ''miraculous.''

Mr. Isoda does not at all fit the stereotype of the cautious, cold-blooded banker. Nor does his style of management accord with the image of time-consuming , consensus-seeking Japanese executives. During his university days Mr. Isoda was rugby team captain, and today the septuagenarian remains tall and erect and his eyes flash that old do-or-die fire.

Sumitomo's troubles began in December 1974 when it appeared that Ataka, then Japan's ninth largest general trading company, looked as if it would go under because of the failure of a Canadian refinery it had invested in. Mr. Isoda was then vice-president of the bank, which for many years had been Ataka's main financial institution.

''The main bank system, I think, is one of the strong points of the Japanese financial system,'' Mr. Isoda said in a recent interview in the Tokyo office of the bank. (Sumitomo, one of prewar Japan's three major zaibatsu, or trusts, is headquartered in Osaka, as are many of its top clients.)

Under the main bank system, an enterprise has a close relationship with the principal bank from which it borrows funds. Because most enterprises in Japan are undercapitalized, they are heavily dependent on banks for money. An enterprise's ''main bank'' will nurse it along in lean times and share in its prosperity when conditions improve.

Sumitomo had been uneasy about Ataka for some time and had been gradually reducing its loans, Mr. Isoda recalled. Nevertheless, the relationship with Ataka had been a long one, and when the news broke that the company might have to default on loans, the Sumitomo board was forced to make up its mind in a hurry.

Until then Sumitomo had a reputation of being hardheaded. Its position as Japan's most profitable bank was built on careful evaluation of loan risks and by unsentimental dumping of even long-established customers in trouble.

Mr. Isoda argued strongly to board members that not only Ataka, but Japan's international credit, was at stake. The oil shock of 1973 had created a jittery mood around the world, and Japan, as a nation dependent on imports for 99 percent of its oil, was considered a potential danger spot. The sogo shosha, or general trading company, is a uniquely Japanese institution, buying and selling in huge quantities all around the world, often operating on slender margins of profit. ''A manufacturer has tangible assets, but a trading company has nothing but the confidence of its customers and suppliers,'' Mr. Isoda said. ''If it loses that, it has nothing.''

Allowing Ataka to go under might raise questions in the international financial community, even about Japan's largest trading companies such as Mitsui or Mitsubishi, Mr. Isoda argued. That could be disastrous for these companies and for the Japanese economy.

If Ataka were to be saved, how much would it cost, and should Sumitomo shoulder the lion's share of the burden itself even though it had been reducing its loans and had fewer loans outstanding than another bank? It was calculated that Sumitomo might have to cover as much as 150 billion yen (about $600 million) of Ataka's bad debts the first year. Altogether the rescue operation might cost $1 billion.

Mr. Isoda stressed that Sumitomo could afford these sums and that no other bank was as well placed to bear the brunt of the rescue operation. It did not have to dip into deposits because it had $4 billion of its own resources. (Japanese banks are allowed to own shares in other companies.)

His plea convinced the president and the chairman of the board. The decision was made to go ahead with the rescue. Isoda knew that ultimately Ataka would have to be merged with a stronger partner, but it would have to be kept going and its debts covered until it became a more attractive bride.

Mr. Isoda went to the president of C. Ito & Co., one of Japan's five largest trading companies, headquartered, like Ataka, in Osaka. He knew Ataka's iron and steel trading operations were sound and that C. Ito wanted to strengthen this area of its business. If C. Ito agreed to take over Ataka, Mr. Isoda proposed, Sumitomo would cover the losing side of Ataka's operations. C. Ito needed only to pick out for itself the profitable aspects, among which were iron and steel.

On this basis, the merger was eventually achieved. C. Ito took over about one-third of what had been Ataka. Sumitomo's own losses came close to $1 billion.

Later, Mr. Isoda recalls, he had a conversation with a colleague at the Deutsche Bank, who shook his head over the extent to which Sumitomo had committed itself to Ataka. Yes, the colleague had agreed, when the first news of Ataka's losses had come out, his own bank had taken another look at its own loans to Japanese trading companies. In this sense, Sumitomo's action had been reassuring.

But to take on such a huge burden - hundreds of millions of dollars of losses for the bank concerned - that was plain stupid, in the German banker's view. ''If we hadn't been Ataka's main bank, we would never have done it,'' Mr. Isoda comments. ''That's what being a main bank means.''

Meanwhile, however, Sumitomo faced another grave problem. The oil shock delivered a disastrous blow, not only on Ataka, but to another of Sumitomo's main clients, the car manufacturer Toyo Kogyo of Hiroshima. Toyo Kogyo, maker of Mazda cars, is Hiroshima's main employer. Together with its parts suppliers, it accounts for one-fourth of the city's employment.

Inthe fuel-cheap 1960s, when pollution rather than fuel economy was the main concern, Toyo Kogyo developed the Wankel rotary engine for automotive use and brought its pollutant emissions down to the strict American and Japanese standards.

The Wankel, however, was a gas guzzler, and when the oil shock hit, Toyo Kogyo's export sales slumped disastrously. The company's initial reaction was to tough things out. Production was stepped up, not curtailed, and by 1975 the company had 250,000 unsold cars in its inventory. That year the company suffered an operating loss of 17.3 billion yen (then worth $75.3 million). Its accumulated debts, long and short term, totaled 358 billion yen ($1,559 million).

Sumitomo was Toyo Kogyo's main bank. Should it let the carmaker go bankrupt, or should it try to rescue it, at a time when the success of the Ataka operation was still far from guaranteed?

''If Toyo Kogyo had been in Tokyo, we might have let it go under,'' Mr. Isoda recalls today. ''Somehow its employees would have been able to find work elsewhere. But Toyo Kogyo's failure would have meant the collapse of the whole Hiroshima economy. The Hiroshima Bank, Toyo Kogyo's main local bank, would also probably have gone under. We just couldn't allow that to happen. And again, no other bank had the resources to come to Toyo Kogyo's aid.''

So, once again, Sumitomo gritted its teeth. It did not look for a merger partner, but sent in senior officials from its own staff to occupy managerial positions in the company.reached the point where Sumitomo became the middleman for a technical tie-up with Ford, which in turn led to a 24.44 percent participation by Ford in Toyo Kogyo. This participation continues to this day and, Mr. Isoda feels, has benefited both parties.

In retrospect, Mr. Isoda acknowledges that the years that immediately followed the decisions to rescue Ataka and Toyo Kogyo were very tough. From being Japan's most profitable bank, Sumitomo plunged to No. 8, and many pessimists prophesied that it would never return to the top rank. But when Mr. Isoda became president in 1977, he made a formal pledge that in three years Sumitomo would regain first place.

''It was a matter of keeping up company morale,'' he said. ''Once we got used to the idea that we would be just another middle-level bank, our people would never have the grit to try to get back on top.''

Mr. Isoda does not believe in one-man decisionmaking, but neither does he approve of having decisions filter from the bottom up to the top through a lengthy series of meetings and paper shuffling.

''We had executive council meetings which had become purely a matter of form, '' Mr. Isoda recalled. Early in his presidency, a senior managing director called on him, together with a department chief, about a matter which the senior managing director was planning to present to the executive council later that week.

''Don't tell me about it now,'' said Mr. Isoda. ''Bring it up at the executive council meeting.''

In this way, he restored the significance of the executive council meeting. The presentations made there became much more intensive, and the questions asked more penetrating. Mr. Isoda demanded of himself and of his fellow executives that they know at least as much about specific aspects of the bank's operations as their subordinates making presentations. This arose out of his own experience when he was a junior officer.

''Reward generously, punish lightly.'' This is another of Mr. Isoda's tenets. Under his predecessors, Sumitomo was tough with mistakes made by branch managers and other line officers. A single defaulted loan, and off the branch manager would be sent to Sumitomo's equivalent of Siberia.

Mr. Isoda felt this practice tended to cramp branch managers, to make them supercautious. They should be going out and cultivating new customers aggressively, he said. If one loan turned sour, this should not be held permanently against a line officer.

''It took about two years for people to realize that I meant what I said,'' he said. But the results were gratifying. Mr. Isoda said he could feel the whole bank's morale tightening up. People were on their toes. He himself never vented anger for personal reasons on his subordinates. But he gained the reputation of being a frightening superior nevertheless because of his insistent questioning, which made his subordinates realize that unless they knew more about their subject than he did, they would be sure to be found out.

Finally, when Mr. Isoda felt he had got the whole bank accustomed to his managerial style and had placed into executive positions persons in whom he had confidence, he called in McKinsey & Co., the celebrated American management consultants, to thoroughly investigate the bank's structure and to recommend a complete overhaul.

''Younger officers in the bank had suggested McKinsey to me for some time,'' Mr. Isoda said. ''But I wasn't very keen on the idea. The whole way we do things in Japan, the whole social climate, is so different from the United States. I thought McKinsey just wouldn't understand us.

''But gradually I was won over to the idea. And I must say I'm very pleased with the results.''

McKinsey recommended, and Sumitomo carried out, a throughgoing reorganization which entailed a drastic delegation of authority. Three groups were set up, each under a senior managing director. One was the international banking group. Another was the corporate banking group, which handled the requirements of 200 of Japan's leading corporations. The third, the domestic banking group, took care of individual customers and companies not covered by the corporate banking group. Each group was delegated wide decisionmaking authority.

In conclusion, Mr. Isoda says that to him, ''management's most important job is personnel. Differences in the quality of companies reflect differences in the quality of the men they employ. When evaluating personnel, don't think in terms of deducting points (for various shortcomings), but rather stress their good points. People grow through their experiences. The whole Ataka experience has strengthened us all. Become a real pro. Become a craftsman.

''Finally, for the chief executive, the most important job is to make decisions. To make correct decisions, he must know his work thoroughly. After taking into consideration all the pessimistic factors, once he has made a decision, he must behave optimistically.''

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