Recruit Holdings, an advertising media, staffing, and business support conglomerate was founded in Japan in 1960 by Hiromasa Ezoe. The company was built on the principle that the company should add value to society. But in 1988, Recruit hit rough waters when Ezoe sold 2.8 million shares in a subsidiary before it went public to 76 Japanese leaders in politics, business, and media. The “Recruit Scandal,” as it was called, resulted in the resignation of Japan’s prime minister and his entire cabinet.
Thirty years later, Recruit has become a global conglomerate, with $16 billion in sales in 2017. How did the company not only survive, but thrive after its insider trading scandal? Harvard Business School professor Sandra Sucher examines how Recruit’s unique corporate culture helped to restore lost trust in her case, “Globalizing Japan’s Dream Machine: Recruit Holdings Co., Ltd.,” and her book, The Power of Trust.
BRIAN KENNY: If you feel like you don’t know who to trust anymore, you’re not alone. The 2021 Edelman Trust Barometer, which surveyed 33,000 people in 28 countries to gauge their trust in government, business, NGOs, and the media, reveals that people don’t know where or who to turn to for reliable information. A majority of respondents believe that leaders and journalists are purposely trying to mislead people by saying things they know are false. And yet, as awful as this sounds, there’s a glimmer of hope for business. This year’s study shows that business is not only the most trusted institution among those studied, it’s also the only trusted institution with a 61% trust level globally, and the only institution seen as both ethical and competent. Which makes one wonder, how did they gain that trust? And more importantly, how do they hold onto it? Today on Cold Call we’ve invited Professor Sandra Sucher to discuss her case entitled, Globalizing Japan’s Dream Machine: Recruit Holdings Company Limited. I’m your host, Brian Kenny, and you’re listening to Cold Call on the HPR Presents Network. Sandra Sucher studies how organizations become trusted and the vital role leaders play in the process. She’s just published her third book called, The Power of Trust: How Companies Build It, Lose It and Regain It, and she has written or co-written 110 business cases, is that right?
SANDRA SUCHER: Some of them were really small. Yes, it’s a real number. It’s a real number.
BRIAN KENNY: I think we’re going to have a lot of fun talking about this today, and the ideas in your book, because this case I think helps to surface a lot of those ideas. And it’s certainly timely, as we can see from the tease that I did up front, people don’t know where to turn for trustworthy information. Let me ask you to start by telling us what your cold call would be to start this case in the class.
SANDRA SUCHER: The cold call for this case is a little different from most of the other cold calls. I start the case by asking students to vote on the scandal itself. And I ask them to vote on a scale from: this too shall pass, bad but not fatal, and should have killed them.
BRIAN KENNY: Okay. And this is a scandal about the company in the case.
SANDRA SUCHER: Exactly. And then I tell them that Leo Tolstoy’s novel, Anna Karenina, begins with the line, “All happy families are alike. Each unhappy family is unhappy in its own way.” The same might be said of business scandals. Enron is different from Wells Fargo, VW is different from Uber, and then the cold call is: how would you characterize the Recruit scandal? Describe it to us.
BRIAN KENNY: And how did you hear about Recruit? And more importantly, how does it relate to the ideas in your book?
SANDRA SUCHER: So I heard about Recruit through Hiro Takeuchi, who’s another member of the faculty. There was a member of the Recruit senior leadership team on campus for an Executive Education program. And he said that he thought that because he knew the research I was doing, that I might be interested in talking to these people. So she came over, we had an initial conversation and, it’s sort of like she had me at hello. It was just a remarkable story about the company itself, its values, how it manages itself. And it’s like, okay, I’ve got to go into this place and see what’s up.
BRIAN KENNY: And it is amazing as we dive further into what they’re about and how they’ve weathered this crisis. Let me ask you a broader question, I know that you address it in the book, but I’m wondering how you would define trust in a business context.
SANDRA SUCHER: Trust is, in a business context, and actually more generally, is vulnerability to another party’s actions and intentions. So this is kind of a standard definition of trust from the organizational literature on trust. And the important points for all of us in business, first that the notion that trust is vulnerability. When people trust you, they’re vulnerable to the actions that you perform and also to your motivation toward them, your intentions. And it’s a willingness to be vulnerable in that way that we mean when we say someone trusts.
BRIAN KENNY: Yeah. And it’s a little counterintuitive in a business context because with business, we talk about hard driving and got to make the deal and that kind of thing. And vulnerability is not a word that you hear often uttered in conference rooms.
SANDRA SUCHER: Sometimes it’s uttered as advice to leaders: make yourself vulnerable so you become more likable and people can identify with you. But this really speaks to an important dimension to business, which is the power that business has to affect the lives of people. And so, when we start to think about businesses having power, then this notion of vulnerability becomes a little bit more understandable. Okay, I have power. People are relying on me, depending on me for certain things.
BRIAN KENNY: Let’s dive in and talk about Recruit Holdings. Just an amazing, interesting company. Can you describe what business they’re in? What would they say they do? What’s their business?
SANDRA SUCHER: So Recruit is in two businesses, the main part of their business is recruiting. So at this point they own Indeed, they actually own Glassdoor, and then they have a host of businesses around recruiting that they started in Japan. They also have a very sizable staffing business where they provide people, this is international as well, both for part-time and full-time work. And permanent and temporary work. And then the part of the business that’s actually really fascinating, in addition to this to understand, is that it’s like a platform matching business. So what they do is they say, okay, there are people with needs and there are organizations that can fill those needs. And they create the infrastructure through which that relationship happens. And so this part of their business, it’s around a quarter of their revenues. So for example, they divide it into two categories. One is life event, so they have websites around getting education of many different kinds, websites about getting a job, websites about being married, websites about buying a house, websites about buying a car. On the lifestyle side, they’re in the restaurant matching business, salons, travel. So you’d have to put together Zillow, Zagat, name about a hundred different sites in order to create what they’ve created in this Japanese business.
BRIAN KENNY: So they had humble origins, maybe you can talk a little bit about how the company got started and then what happened, what the scandal was all about.
SANDRA SUCHER: The company was founded in 1960 and the founder recognized that there was a recruiting problem in Japan. And the problem when something like this, if you went to a prestigious university in Japan, companies would come to you and allow you to apply. If you were a mid-tier or lower tier higher education, no one would show up. And so there was a real deficit in the market for ways that people from these other kinds of education got to actually engage with employers. So his first product was actually just a magazine with advertisements that allowed-
BRIAN KENNY: This is early on before the internet and…
SANDRA SUCHER: Right. And this is like, okay, you want a job? Here are people who are hiring. And it was the first way to try to make this matching happen where people who need jobs and people who have jobs can get together. And the architecture here, this is how Recruit does business, they say that their mission is to add value to society. And they go after very particular needs that people have and just keep saying, “What’s a better way to make that happen? Can we do something about filling that need?” So in that way, this first business actually set the tone for everything that followed.
BRIAN KENNY: And then what happened? What caused the scandal and what were the ramifications of that?
SANDRA SUCHER: So the scandal started the way that lots of business scandals started, with a shares for favor problem. And so the CEO, Hiromasa Ezoe, he offered shares of a subsidiary that was about to go public to 78 members of government and business. In exchange for that, he got some insider information, he got to sit on four government councils. And basically when the company went public, people made a hefty profit. So two years after this occurred, 1988, some journalists were trying to figure out how it is that this company, Recruit, had managed to get this prime piece of real estate in one of Japan’s cities. And they started digging in and what they found was that Ezoe had offered shares to the person in charge of this plot of land, a government official. And then that broke the case open. It ended up capturing about 160 members of government and high flying people in business culture in Japan. The prime minister and his entire cabinet had to resign. And at the end of it, many, many years later, actually, as it turns out, Ezoe went to jail. So that was the scandal. And the scandal was so big it is still written about in elementary school textbooks. And if you stop someone on the street in Tokyo and you say, “Recruit,” they are quite likely to say to you, “Scandal.” And that’s how well known it is. So when we got there, Shalene Gupta, my research associate and co-author, and we found that they had somehow recovered from this, it was like, okay, now we just have to understand how this happens. How do you possibly recover from something that large?
BRIAN KENNY: So that is about as big a corporate scandal as you’re going to find anywhere. And in Japanese culture, which takes so much pride in doing the right thing, and being responsible, it must have been even worse than it would be in some other places. How did employees react in the wake of this scandal? Did they leave? I mean, what do you do?
SANDRA SUCHER: So there were two reactions. One was, employees were actually … their kids were being harassed on playgrounds. Your parents work for a bad organization. This was really hard on employees in this kind of a culture, in any culture, to have your kids attacked that way. On the other hand, what happened was, the employees decided, with the first level, second level managers, this is our problem to solve. And that didn’t come out of nowhere, Recruit has a culture of autonomy; autonomous decision making, helping people learn how to make good decisions. And the employees actually ended up feeling like, we want a role in trying to make this right. They actually gave the company about six months to live, but they were willing to try to recover the company and to make the company’s problem their own.
BRIAN KENNY: Okay. So how do you go about doing that?
SANDRA SUCHER: So there were some small things that they did first that were really important. One is, they gave everybody who was customer facing the ability to say, “I had nothing to do with this. And I’m going to dedicate myself to try to make sure that there is no way that your business with us is going to be affected.” That kind of face to face, meeting up with people who were their clients, really stilled a lot of the departures that might have happened. They also did a thing that’s somewhat particular to Japanese culture. And so what they did was that, in Japan, if you introduce yourself, you usually say your company first and then your name. And what they did in a very subtle move, they said, “I’m Sandra Sucher and I’m from Recruit.” And what they were doing was creating a little bit of white space between themselves and the company in order to help the person understand that they were committing, on behalf of the company, to ensure that the services that they counted on weren’t affected. In a broader sense, the culture that had been built, and that needed to now be really strengthened, is built around one question. And the question was a surprising one for a business, the question that all employees get asked is, why are you here? And the insight here is that all of us who come to work want to work in an organization that allows us to do work that makes a difference. And so at Recruit, they believe that so strongly that they have policies that say, the most junior person, but the person with the most enthusiasm, gets a new assignment. Even if they don’t have background in it. Their performance appraisal system is called Will, Can, Must. And the Will is what the employee wants to do in the next six months and over the next three years. And so they’re always pushing people to say, “Where are you headed?” And then the other thing that they do, which is quite unusual, is they have an attitude of wanting to get a constant flow of people coming in and out of their organization. It’s a highly innovative organization and so they created a whole program to help people leave with retirement bonuses in order to have new people come in. So those changes that I just described, those policies were put in place, and programs, over time. But the core idea, that people are motivated by a desire to try, to do, to connect their efforts to what’s good, is something that they were going to do. And also just the autonomy, to go and make your own decisions, try to do some stuff, and that actually helped build.
BRIAN KENNY: So it sounds incredibly entrepreneurial and it also sounds incredibly chaotic. I’m wondering, are they putting too much trust in their employees? It seems like a lot of things could go wrong when you entrust an important project to somebody who doesn’t have the background or the experience to do it, right?
SANDRA SUCHER: Right. And in fact, some of the people in their global subsidiaries would say that, actually that policy is not so great. That if someone shows up representing marketing, who doesn’t know a whole lot about marketing, you’re not advancing the cause. And on the other hand, they’re pretty determined to keep growing people’s skills and marketability. That’s really what they’re trying to do. They said, “You know what? We’re a Japanese business, we can’t guarantee job for life. That’s not going to happen in a company after our scandal. What we can guarantee is employability. And everybody who leaves the company is much more marketable than they were before.” So there is a downside, as you just said, to that kind of a process. But the people’s development, the thing we all talk about, the fact that we want to do, is so much more profound because of the trust that they put in people. And the opportunities that they give people. It’s a very unique approach to employee relations, workforce management, and culture building.
BRIAN KENNY: Yeah. And they actually reward people for moving on from the company, can you describe what that’s all about?
SANDRA SUCHER: So if you’ve been there for six and a half years, you turn 35, you get a retirement bonus, which is equivalent to your last year’s salary, and you get some additional money. At that beginning stage it’s quote/unquote, “just $75,000.” And three years later, it turns into $150,000. So they’re truly motivating people to leave. And that has two benefits. One is, the people who stay really want to be there. Because they had every reason to leave and they chose not to. And the other is that people who left knew that they were helped dramatically by Recruit. And so there’s what’s called the Recruit mafia in Japan, of people highly placed throughout all organizations, walks of life, who are graduates of this organization. And it builds a kind of a loyalty to them and a way of understanding how it is that they are contributing to Japanese society.
BRIAN KENNY: So they’ve got this huge network effect out there in the workplace that probably makes them a pretty desirable place for young people who are looking for a place to start their careers. What’s the tension there that exists between the desirable brand they’ve created and the scandal that is the shadow that’s in their legacy a little bit right. How do they manage that?
SANDRA SUCHER (19:04): So interestingly, the story of that scandal is still on their website. They’ve never lost sight of the fact that this is a company that had a scandal. And they never walk away from that. And that’s quite different from the, I’m going to turn my back on this thing and try to move on.
BRIAN KENNY: It’s almost empowered them, in a way. It’s almost like they’ve embraced it and they’ve learned from it and they’ve become empowered by it.
SANDRA SUCHER: Right. And they’ve allowed it to shape them and they’ve been very vocal about that. And I think that, if you study trust more broadly, there are like three steps to trust recovery. The first is that you have to acknowledge the harm you’ve created and apologize for it. It’s just, if you want someone to trust you again, you have to know that you understand that you did something wrong to them, and that you’re sorry about the effect that your actions had. The second step is that you have to hold someone accountable. And because organizations, business organizations, are not democracies, it makes sense to try to make that as senior a person as possible. In this case, Recruit was lucky because Ezoe was, in many ways, quite gifted and also a crook. He ended up going to jail and so they could cabin off the accountability and say, “This was one bad guy.” But nonetheless, he did end up paying for it. And then the third thing that you do, if you’re recovering, is that you really do go into your business and try to say, “What is it that I can strengthen in order to make sure that this doesn’t happen again?” They taught me almost everything I know about the process of recovering lost trust, which is such a rare art, but needed, unfortunately, pretty often in business.
BRIAN KENNY: Yeah. And vulnerability and trust is, I would say, it spreads across everything they do and all aspects of their business. And I’m thinking now about the companies that they’ve acquired, you mentioned Indeed before. You have some great interviews with people from these acquisitions, where they talk a little bit about how it’s almost unsettling, that they’re given so much latitude and trust by Recruit Holdings. They’re looking for a little more direction, I guess. I’m not sure. But I thought that was a really interesting dynamic.
SANDRA SUCHER: There are fun things you get to document in a case. And one of the fun things here was just, the question of globalization, as always: what’s the same and what’s different? That’s always what you’re looking at if you’re looking at a company that expands. And in this case, they were getting very direct feedback from their acquisitions saying, “We would like more guidance on how it is that you do the things that you do.” They also wanted some more guidance around profitability and could they have stretch goals. And Recruit’s pretty consistent in saying that, “You know what? That wasn’t the deal.” And when they acquire companies, they make it very clear that this is what it means to join. We are buying you because you’re good at what you do, and we’re not going to mess with the asset. And so it’s kind of a tough love message. Because they’re not a top down kind of place, they’re a bottoms up sort of place. And so they need to be consistent with their way of doing business.
BRIAN KENNY: And again, that’s counter to what you would think about a Japanese firm. Because they are top down, they’re known for being top down, so these guys are definitely swimming against the current on that one.
SANDRA SUCHER: A part of that is because they prize innovation so strongly. And it’s pretty hard to be top down and innovative. I’ve been in business for two decades and those two things actually don’t work that well together. There’s a certain amount of releasing energy that comes if you want to be innovative and trusting that the people who are on the new path are going to be supported and all of that. And so I think it’s one of the reasons why they’ve been successful in creating all these new ways of doing business, is because they take this approach.
BRIAN KENNY: I think this case and your book come out at an interesting time where we’re facing a global pandemic, where everybody, businesses included, are experiencing things that they’ve never had to contend with before. And employees are not sure who they can trust either and whether or not businesses are thinking about their best interest. So if you think about that as a backdrop, how should employers be thinking about building trust with their employees?
SANDRA SUCHER: So the pandemic is one of the first times where, in business, we’ve had the same yard stick for everybody. So this is a time where everyone is going to be judged on how safe people are, how safe their employees are, and how safe their customers are. Some of managing through this is understanding that that’s now the yard stick. And it used to be that, unless you are in extractive industries or heavy manufacturing, you never thought about safety in any serious way. And so, the first thing that organizations need to do is to really try to understand how to make safety happen in organizations where people will have very different opinions about what’s required. Where you really do want first line managers having some kind of a conversation with the people that work for them that goes something like, “You know what we had to make some tough calls during the pandemic. And I just want to first tell you that I know that some of those were hard on you.” So that’s the apology. The second thing is, I think it really would make sense to say, “What grade do you give us for how well we managed this pandemic? Help me understand how you see the way that we’ve been doing what we’ve done.” And the last thing is, is a kind of an offer of repair. It’s like, what’s one thing that we could do to help you manage your way through this, going forward? What’s one challenge you’re facing that, as a business, we can help you with? And that’s a very trusting way to operate, to open yourself up to the perspective of others, take that in, and try to do something with it.
BRIAN KENNY: Yeah. It’s hard too though, right? It’s a lot of work because you have to be sincere about it, you have to really listen, you have to think about what people are saying. It’s a lot of work.
SANDRA SUCHER: Yeah. One of the benefits of being a professor now and not a manager, except for one or two people, is that I can say these things and not have to do them. And I must say, for anyone who is on the call right now, my heart goes out to you because I know I’m giving good advice. And as Brian just said, it’s going to be hard. These are not fun conversations. They’re hard, they’re personal, they depend on someone trusting you even to open up to have the conversation. But my intuition is that if we can start to address people’s sense of vulnerability, that is a path to rebuilding some trust that we’ve lost.
BRIAN KENNY: This has been a fabulous conversation. Sandra, before I let you go, let me just ask you, what’s one thing you want our listeners to remember about the Recruit Holdings case?
SANDRA SUCHER: So the one thing I would recommend that people think about is that lost trust can be regained. This, to me, was like, okay, that’s it. I get it. If you can recover from having the prime minister of your country and the entire cabinet resign, and show up years later that, now their sales are 20 billion dollars. Same size as Salesforce. They have 50,000 people worldwide. They’re in almost any country you could think of. So if they can do that, you can too. And so this action, this research, left me very optimistic about the fact that trust is a process. Trusting is a process. That we figure out lots of things in business and we can actually figure this one out too.
BRIAN KENNY: SANDRA SUCHER, author of the Power of Trust and the Recruit Holdings case, thank you so much for joining me on Cold Call today.
SANDRA SUCHER: Thank you, this was great. Thank you so much.
BRIAN KENNY: And that’s a wrap for 2021. Thanks so much for listening to Cold Call. Please join us for new episodes starting Jan. 11 and don’t miss our Black Business Leaders series in February when we’ll have a couple of extra episodes. If you enjoy Cold Call or have any suggestions we want to hear from you. Write a review on Apple podcasts or wherever you listen or email us at [email protected]. From our whole crew here, that’s three of us: Craig McDonald, our audio engineer, Robin Passias, our producer, and myself Brian Kenny, your host, we want to wish you all happy holidays. You’ve been listening to Cold Call, an official podcast of Harvard Business School brought to you by the HBR Presents network.