There is an increasing focus on corporations’ need to assess their impact on the environment, society, and stakeholders. This broad concern falls under the umbrella of Environmental, Social, and Governance (ESG) criteria, encompassing practices like the use of sustainably sourced materials, reduction of carbon emissions, enhancement of labour practices, cultivation of positive community relationships, and promotion of ethical corporate conduct, including combating anti-competitive actions and corruption.
The concept of ESG first emerged in a 2004 UN report titled “Who Cares Wins.” However, conducting business ethically has deep roots, dating back centuries in Japan. During the 17th to 19th centuries, the Ohmi merchants from Japan’s Shiga Prefecture (formerly Ohmi Province) adhered to a business philosophy known as “Sanpo-yoshi,” translated as “three-way good.” This philosophy advocates for business practices that benefit buyers, sellers, and society. The legacy and business philosophies of the Ohmi merchants are still celebrated in Shiga Prefecture, where museums, breweries, and warehouses stand as testaments to the enduring principles of Sanpo-Yoshi. Despite the similarities between the concepts of Sanpo-yoshi and ESG, more research needs to be conducted to explore the impact of Sanpo-yoshi on a company’s ESG performance.
To fill this significant research gap, a team led by Associate Professor Pengda Fan from Ritsumeikan University in Japan embarked on a groundbreaking study. They explored whether the principles of Sanpo-yoshi influence the ESG performance of Japanese companies. Their findings, which were initially made available online on February 20, 2024, and later published in the Journal of Behavioral and Experimental Finance on March 01, 2024, are set to revolutionise our understanding of the intersection between business ethics and corporate governance.
Dr Fan explained, “Our research aims to highlight the impact of ‘Sanpo-yoshi’ on the ESG performance of Japanese firms and to promote the richness of Japanese culture globally, akin to the international recognition of Confucian culture.”
Corporate policies are typically shaped by top management, including CEOs and corporate executives, whose personal experiences, cultural values, and attitudes influence decisions. The researchers theorised that individuals in top management familiar with Sanpo-yoshi might be more likely to integrate these principles into their firm’s decision-making processes, especially those related to ESG.
The study examined the ESG performance of 467 publicly listed Japanese companies from 2001 to 2018, encompassing 6693 firm-year observations. The ESG performance was assessed using the combined ESG score (ESGC), including the environmental, social, and governance pillars and the ESG controversies scores. This data was then linked with information about the companies’ Boards of Directors and CEOs to investigate the relationship between the executives’ backgrounds and the companies’ ESG performances. The findings indicated that companies with more directors and CEOs connected to Shiga Prefecture showed superior ESG performances. These results were further confirmed through Propensity Score Matching (PSM) and Difference-in-Differences (DID) analyses, which supported the initial findings. The research also considered the influence of the local political environment, the prosocial attitudes of top management, key economic indicators, and female leadership on the relationship between Sanpo-yoshi and a company’s ESG performance, finding that these factors did not alter the primary conclusions and highlighted the positive influence of the Sanpo-yoshi philosophy on ESG scores.
Dr Fan commented, “We introduce a novel stakeholder-centric model that incorporates the ethical principles of Sanpo-yoshi into the essence of corporate governance. Our approach aims to enhance ESG metrics and promote inclusivity, transforming this ancient Japanese philosophy into a universal framework for sustainable and equitable business practices.”
In summary, promoting the values of Sanpo-yoshi can enhance the ESG performance of Japanese companies and help set a global standard for responsible business practices.
More information: Thi Khanh Giang Nguyen et al, Sanpo-yoshi, top management personal values, and ESG performance, Journal of Behavioral and Experimental Finance. DOI: 10.1016/j.jbef.2024.100903
Journal information: Journal of Behavioral and Experimental Finance Provided by Ritsumeikan University