Like a rampaging Godzilla through the streets of downtown Tokyo, Nintendo’s Pokémon GO smartphone app has shaken up the social gaming world. This cultural phenomenon has led millions of 20-to- 30-something- year-olds chasing virtual cartoon monsters around their homes, workplaces, neighbourhoods…and even into minefields in Bosnia-Herzegovina. The rapid success of the game led Nintendo’s stock price to skyrocket, more than doubling on the day of its release, before losing roughly half that growth after investors realised that, as Nintendo is only a part owner of the game, it would have a limited impact on the company’s financial results. However, the real story lies in the game’s origins, which are intimately tied to the push for corporate governance reforms in Japan.
Despite being a country synonymous with fast-moving trends and high-tech gadgetry, Japan is historically a nation slow to change but with an unmatched verve when modernisation kicks in. One need to look no further than the Meiji Restoration and its post-war economic miracle as evidence of this. The success of the latter was largely due to the formation of a unique corporate model dependent on close-knit networks of manufacturers, suppliers, distributors and banks that was often built upon a foundation of inter-linking shareholdings – known as ‘keirestu’.
Underpinning keiretsu was a corporate culture which placed management and employees as the key beneficiaries of a company, rather than shareholders and other stakeholders – fostering risk-adverse management with a lack of independent oversight. Coupled with a cultural preference for holding on to capital rather than redeploying it, this business philosophy has been a factor in prolonging Japan’s economic stagnation after the Japanese asset price bubble’s collapse in 1991 until now.
Upon his re-election in December 2012, Prime Minister Shinzo Abe instituted a series of economic reforms aimed at addressing this malaise. Abenomics, as his economic policies have become known, are based on a three arrow approach – the third arrow being structural reform, including corporate governance. Abe, acknowledging the lack of board independence and diversity, introduced new corporate governance principles loosely based on the UK model requiring every board of directors to include two members with no ties to the business and to justify any shareholdings in other companies. Whilst outside observers have been critical of a top-down approach to reform as merely a “tick-box” approach, the success of Pokémon GO may foreshadow that such pressure might be the most compatible with the Japanese business psyche.
At the start of the 2010s, Nintendo was in a similar position to most major Japanese firms. Despite hosting a series of globally recognised IPs and being a market-leader in the gaming world, the Kyoto-based company posted its first annual loss in FY2012, sending shockwaves through the gaming community. However, the timing may have been fortuitous; it was the same year smartphone gaming had its first major breakout hit – Candy Crush. Seeing the success and expansion of smartphone gaming, a number of minor, predominately foreign-based, shareholders began agitating for a strategic shift into this new frontier.
However, like the Tokugawa clan a century earlier, the much loved CEO of Nintendo at the time, Satoru Iwata, took on the mantle as the ‘last samurai’, refusing to cave into what he saw as inferior ‘low-grade’ gaming. Instead, his executive team preferred to maintain their focus on console sales and development – the theory being it is better to make the hardware other companies use than to build software. As such, Nintendo maintained its focus on its console gaming leading to successive years of losses up until FY2014 and the Company’s share price falling by 50% over the period.
In light of this financial performance and the implementation of Abenomic reforms, Nintendo took its first steps in changing its corporate governance structures by appointing its first independent director in June 2014, and by submitting to its overseas shareholders’ pressure by announcing the development of smartphone games based on its library of IPs in March 2015. While only minor steps, as evident from the stampedes of ‘Pokémon Trainers’ around the world, the reforms have had a dramatic impact commercially for Nintendo and surely further strengthen a strategic pivot in the company. At its 2016 AGM in June, Nintendo submitted two more additional independent directors on its board and has subsequently announced a series of successive smartphone games.
Without these small steps towards improving its corporate governance, Nintendo arguably risked going the way of the samurai (or in a more relevant comparison, the downfall of its once archrival firm, Sega, from the console market). As such, Pokémon GO should be a sign to the Japanese corporate world that opening up to better corporate governance practices and listening to shareholder activists can lead to commercial success.