【JFS】Supporting 'Good Companies' that Create Future Society（Apr, 2017）

JFS Newsletter No.176 (April 2017)
https://www.japanfs.org/en/news/archives/news_id035814.html

A variety of efforts have been made in Japan to generate money flows for building a better society.

In this issue, we introduce ideas presented by an investment company striving to build a better society by investing in "good companies." We refer to an interview with Mr. Kazuhiro Arai, director and asset management manager of Kamakura Investment Management Co. That interview was published on the Institute of Studies in Happiness, Economy and Society website.
(Interviewer: Junko Edahiro, co-founder and chief executive, JFS)

Channeling Money Directly to 'Good Companies'

Edahiro: When I suggested creating a 30-year closed* eco-fund for future generations at an environmental and financial symposium about 15 years ago, I was laughed at and told that such a thing would never work, but Kamakura Investment Management has created a much better one. You used to work as a fund manager, using exactly the opposite approach. What was the major turning point for you?

Note: a "closed fund" is one with a fixed offering period and terms of conditions in which redemption is not allowed prior to the maturity date as a general rule.

Arai: When I was working at the investment management company, socially responsible investment (SRI) funds began to emerge. As a fund manager, I was interested in them, but all they did was conduct various CSR activities to improve scores without delivering any message about the future significance. Our conclusion was that the funds would not work due to lack of information on which to base decisions. We wanted to make something different. This was one of the factors.

Another factor was that I came across with a book, "Nihon de Ichiban Taisetsuni Shitai Kaisha (Companies We Want to treasure Most in Japan)," published by Asa Publishing Co. and written by Koji Sakamoto, a professor at Hosei University. I realized that there were things much more important than what I was pursuing as a fund manager. I observed many companies with Professor Sakamoto. This was definitely a major opportunity for me.

Saving Money and Receiving 'Happiness' Returns

Edahiro: You have disclosed investment targets and management methods on your website instead of following other companies' examples. How did you come up with such a business model?

Arai: I wanted to prioritize the principle of making a system to support good companies. Ordinary people don't think about achieving maximum performance by "investing in good companies." I was able to do so because I was determined. I don't think this is acceptable to other professional fund managers.

Investment funds are products in which "money is saved for a return." We, on the other hand, decided to "save money and provide happiness in return." For that reason, we formulated three requirements. First, the money must increase. Second, the companies receiving the investments must enrich society with that money. Third, our customers must feel fulfilled in the process. When all three requirements are met, we think, our customers will be happy. I think this is probably the fundamental reason Kamakura Investment Management has become a unique fund managing company.

Kamakura Investment Management has gathered about 24 billion yen (about US$214 million) from 16,000 customers since its fund started operating in 2010. Since its founding, various new fundraising measures have emerged, such as microfinance and crowdfunding, along with a new form of social enterprise, social ventures. Under such circumstances, we keep asking ourselves whether we are still really a needed method of financing or not. Our stance is that we should provide an alternative rather than listed as a good company on the stock market, so that we can grow as we are, without having to demonstrate rapid growth to satisfy venture capital requirements.

Edahiro: Are there any companies that have started up businesses similar to yours?

Arai: When it comes to investment trust funds similar to ours entering the market, I'd say they are on a different level. We need to wait for another generation. Specifically, the current investment trend is shifting from SRI to ESG (environmental, social and governance), but what we deal with is CSV (creating shared value) investment, combined with impact investment. We call it "sustainable investment," but I think it is ahead of its time.

The situation, however, is changing little by little. Many investments in the form of crowdfunding have become available that are similar to impact investment, and even the Tokyo Stock Exchange is considering establishing a specific system for social enterprises. I don't intend at all to change society as a whole by making our company larger. My intention is to propose that this kind of fund may find acceptance in society.

From now on, we will have more and more new kinds of initiatives, some of which may fail, and society will go forward in a good direction. Only simple, natural things will remain. Complex, unnatural things will be weeded out, we believe. Therefore, a business should be simple. If a company deals with a wide range of businesses, we will not invest in it, because complex businesses have a hard time conveying their messages.

Edahiro: How do you respond to the beneficiaries' trust in your visits to businesses you are investing in to build a good society while increasing their assets?

Arai: The first thing we say to our customers about asset building is to expect a 5-percent return. We have good reasons for this. Actually, Japanese companies have grown by about 5 percent even in the so-called "lost decades." Therefore, I think a 5-percent return will be possible over a long-term perspective.

Ultimately, we only have to manage the fund to gain returns as long as the companies we invest in make a profit. Currently, we invest 300 million yen (about US$2.67 million) per company, and keep it at that amount every day by buying more when stock prices fall and selling some when they rise. Even if the stock market fluctuates wildly, we rarely lose in the short term, but end up making a profit naturally, because we minimize the risk and earn profits day by day. From the beginning, we have maintained that we don't need a high return. The risk is low, and the return is proportionally low as well. Still, it works out because the reward is also set at lower level than the average of the financial industry.

Another point is that we manage the fund based on "society" as a theme. If we make an investment thinking only about profit, we naturally expect the return to be high. Since we do not invest in that way, we think we will not get great returns, but we can lower risks instead, and we think we can compete based on that.

Becoming Fans of Investees

Arai: We release our list of good companies we invest in to the public, then scrutinize these companies in detail by means no one person could achieve: using the eyes of 16,000 beneficiaries. Almost every month, we take our customers to our investees, in a sense, as an investment report so that they can see what the recipients of their investments are like. In other words, what we do is to say, "Let's become fans of the investee." We try to generate as many opportunities as possible to encourage the investors to think that they should support this company. We invest our money and become consumers as well.

If the investees show any weaknesses, we tell them what our customers have pointed out, asking "Is it okay that a recipient of our investment does such things?" Watching how the company responds to that, we judge whether it is good enough to keep investing in. If it does not take its customers' complaints as a treasure, or says, "Only some customers say so," we regard them as "companies of not such a high level."

A company consists of people, so it is just like a human being. Like a person, it is better if a company has character. It can have strong and weak points, include ineffectiveness and make mistakes as well. It is not necessary for it to be perfect, but people tend to ask companies for perfection. I think that is funny. It is more important, appealing and human that their goals be very clear.

We want make connections to our investees and customers in a terribly old-fashioned way. We want to get the financial system of the good old days back in a new way, to prove it is possible to realize that the financial system is connected by trust and sympathy and should be pleasant for all concerned. It may seem very inefficient, but we want to form a structure of cooperation between each company and its investors, and between each company and other companies. The management philosophy of Kamakura Investment Management represents the Japanese "wa" with three different meanings. There is "wa," conveying the tranquil Japanese spirit of harmony. The second "wa" means "talk," to appreciate warm words. And the third "wa" means "circle," indicating a connection to society and people.

I think financial institutions in former times invested money in companies that had a vision of an ideal world and society, believing it could transform society into a better one sooner. Now, however, short-term profit has become everything and long-term ways of thinking have all been lost.

Less Trust in Front-Line Workers Undermines Companies, Making Them Inflexible

Edahiro: At which point do you think investors in Japan lost their long-term perspective on investment?

Arai: I think it was triggered by the collapse of bubble economy and implementation of the Basel II banking regulations, the second set of recommendations of the Basel Accords, in the early 1990s to liquidate non-performing loans. I believe that was the turning point in Japan.

Note: the Basel Accords are banking regulations set by the Basel Committee on Bank Supervision (BCBS), the membership of which includes the central banks of major countries. The accords provide recommendations for keeping a sufficient capital-to-asset ratio for banks in global business to avoid credit risks.

Companies with insufficient capital are seen as poor investments these days. Financial institutions are likely to rely on mechanical calculations for evaluating investments, losing human observation in the process. There used to be various ideas and passions among people involved in investment, but these are no longer considered once companies decide to take a mechanical strategy in their decisions. Large companies are no exception. The lack of trust in the frontlines is another result of such a strategy.

Of course, this is not always the case for some other companies. The reason Yamato Holdings, Japan's largest parcel-delivery company, is listed in Kamakura's fund is that it has shown strong trust in its front-line workers even after becoming such a logistics giant in Japan. When a company becomes unable to trust its workers in the field, it catches the so-called "big company disease." Usually companies want to put employees under full management because they want to avoid facing reputational risks. Yamato, however, never changed its attitude of trusting its workers in the field no matter how much the company was criticized. The company's first priority is on the frontlines, giving full trust to them, and the employees at its headquarters have a common understanding that their mission is to support the workers. This is one of the core values of Yamato's culture. It is a very rare type of company.

You would never see if the company is good or not without seeing the company's frontlines directly. Impressive stories come from frontlines. That's why we want to take our clients to good companies, and help them get to know the companies better. We want people to know that their invested money is helping to support good companies and to feel happy about it.

When you are to choose one company among those with similar services, why not choose Yamato which sends 40 percent of its profit, about 14.2 billion yen (US$127 million), to the disaster-stricken Tohoku area as a contribution? We are here to raise the value of such companies, to make them attractive investments, to appeal to the public that these companies are good companies, and to support them and help make them even better companies. This will eventually help investors increase their satisfaction. I believe this is what stockholders are supposed to be.

The Earth is a Stakeholder

Edahiro: In your book titled "Toushi wa Kireigoto de Seiritsu Suru (Caring Behaviors are the Key to Successful Investment)" (published by Diamond, Inc. in 2017), you say that tips for finding good companies are to find out if the company avoids mass-production and mass-consumption, and if it has ideas for demand-based business creating products and services suited to surviving the present times. I think the number of such companies should increase and it will be an important factor in future society. What do you think about it?

Arai: First of all, I want companies to set a goal that they won't go for mass-production and mass-consumption. There are companies which emphasize the importance of avoiding mass-production and mass-consumption, whether they are in the manufacturing or service industry. As one example, there is the KOA Corporation in Nagano Prefecture, a manufacturer of resistors for smartphones. With good demand, we may think that it would prefer mass-production and mass-consumption. The company, however, has a different policy. The headquarters and other offices are located in suburban areas surrounded by woods, and aside from their business they run a school to teach people forest management work. The company claims that the Earth is one of its stakeholders. We are responsible for supporting such a company.

Other institutional investors say that KOA Corporation's return on equity (ROE) is low. This is because the company has factories in neighboring villages along with the head factory. The area where the company is located once flourished with sericulture (silk farming). As an alternative post-sericulture industry, people in the area went into the electronics industry. A production line for resistors requires about two meters of space at the least, so the company put production lines in the villages just like villagers used to do with sericulture. Institutional investors see the way the company has allocated its production lines as inefficient. Generally, they say that production sites should be integrated into one place to pursue efficiency, but I believe it would not be good to pursue such efficiency here. It would drain the villages of job opportunities -- young people would leave for jobs in urban areas, and population decline would accelerate. We shouldn't do that.

Therefore, our reports on them use numerical values that show how much the company produces social value by allocating factories to the villages. By doing so, we can help secure jobs for villages. As a shareholder, we should keep telling the company to keep its current corporate policy. The higher the company's social values increase, the more fans it will gain. What do consumers want in a society overloaded with products and services? Quite simply, empathy.

Edahiro: Kamakura Investment Management describes its investment policy in a formula, namely, "fruits of investment = building assets x shaping society x enriching the heart." We can quantify assets, but how do you think we can visualize our society and hearts to see if we are rich in those ways?

Arai: First, about "enriching the heart," we cannot measure emotions, so we simply keep asking our clients if they are happy or not. Regarding "shaping society," I feel concerned that measuring or standardizing entails the risk of undermining the uniqueness of the companies we are investing in. I believe that good companies should have sharp, outstanding uniqueness. Therefore, we should help attract attention to their unique, sharp strengths.

Only numerical values can convince certain people. Within the company, there are some who are likely to start complaining that social activities will generate little profit for the company. Kamakura Investment Management pays for the research necessary to measure such immeasurable values, and does not even think about asking the investee to pay for it. We have to tell both the company and our clients about our research findings on how the company's performance is contributing to society so that our clients can be assured about supporting such a good company.

It is impossible to measure all aspects of a company's value to society. Nevertheless, if some of the quantitative values are helpful in convincing others, we are pleased to utilize them. That's our stance. If we take it for granted that everything can be evaluated quantitatively, the focus will go more toward money, economic growth and efficiency. Instead, if we are fully aware that things which cannot be measured quantitatively are far more important, we will not make nonsensical choices.

Educating Children on Money and Work

Edahiro: I believe that your ideas will become mainstream before long. Till then, however, money and influence from conventional investors, like you used to be, will continue to dominate. Against this backdrop, where do you think we can start making changes?

Arai: My latest focus has been on educating children about money, and I am going to publish a book on money and work, targeting high school students in May 2017. Money and work closely interact with each other, but we seldom think about the things we are pursuing in life through our work.

It's merely a myth, but young Japanese people have been forced since childhood by adults to believe that they should study hard in school to get good jobs that will bring them 10 million yen (about US$90,000) of annual income, or else they won't have a happy life. What are we searching for in our lives, in the first place? A happy life, that's for sure. There are many ways to achieve a happy life. Money is just one of them but it is not all. Young people had better learn this in their early days so that they will be able to be happy in their actual lives. I want to tell them in my book, "Money can't be the goal of life. Why don't we start off by asking ourselves what a happy life is for each of us?"

Japan is a country with the potential to satisfy the major conditions for realizing a happy society. There are very few countries like this in the world. First, we don't have concerns about population growth. Second, our society recognizes the "sampo-yoshi" principle ("good in three directions," meaning that commerce should not only benefit the buyer and the seller but also society as a whole), and it is still a tradition among Japanese businesses. Third, the concepts of "mottainai" (waste not, want not) and "omotenashi" (hospitality) are also alive in our society. Since we already have enough materials and services in Japan, we'd better shift to creating more of what is mentally enjoyable. This will help Japan find itself transformed into a society in which spirituality is valued most, I believe. We have so many social challenges but that's why I think we will be able to create wonderful things in our society. Thereby Japan as a whole has the potential to go to the next stage and take the lead worldwide.

Edahiro: At the end of this interview, I'd like to ask you two questions. One is, do you think our daily lives and the Japanese economy will continue in their current state? And the other is, what are you going to choose for your next initiative?

Arai: It is a pity but in my opinion automobiles and electronics will not remain Japan's key industries much longer. It is certain that big industries will be downsized faster than the speed at which venture businesses can grow. This will eventually result in the shrinkage of employment. Even in that situation, though, there will definitely be companies growing in fields that respond to social problems. Those are businesses "society really needs." I don't think they will need to grow as big during the next stage that society will shift to after structural changes. It's my original belief that we can't expect major growth of Japanese stocks overall during the next stage because there will be less need for materials and services, even though the volume of business measurable by neither monetary values nor the GDP will grow.

We at Kamakura Investment Management have identified many issues to work for. For example, we are not responding enough to existing social problems, far from enough. Social problems will increase, so we need to talk to more people working in the front lines to address them nationwide and study their efforts. Along with that, we must take actions to cultivate social entrepreneurs, providing them steady support.

As the assets of our clients grow, the reward our company receives grows as a result. The profit we obtain is calculated by deducting costs, which stay constant, from the amount of rewards. That means our profit is constantly growing. We have decided to allow a certain portion of our profits to go to social contribution such as donations. We are considering listing "good non-profit-organizations (NPOs)" to which we want to donate. We don't want fat NPOs which are low-achievers in finance, management and disclosure, but we want to increase good, lean and financially sound NPOs. We've been considering listing "good companies" and "good NPOs" since we launched our business. Now we feel it is the time for us to start putting our original thoughts into action.

The other day, a young mother taking her baby to a "Yui 2101" briefing session told me, "I decided to invest in this fund for my child. I hope to see good companies increase more and more as my child grows up." I was very happy to hear that. I'm certain that Japan will be a wonderful country, because we have such wonderful people like her here in Japan.

Edahiro: I really agree with you. Thank you very much.

Source: Institute for Studies in Happiness, Economy, and Society
http://www.ishes.org/interview/itv12_01.html(in Japanese)