Challenges Faced By The Nomura Securities

Nomura Securities was founded in 1925 by Tokushichi Nomura II and it was the first Japanese securities company to establish an office outside Japan in 1927. Nomura Securities Co. Ltd is a subsidiary of Nomura Holdings. Inc, a Japanese financial holding company. Nomura Securities is the leading Brokerage house and Investment bank in Japan and performs equity and fixed-income trading, underwriting of stock and bond issues, M&A advisory services. Until October 2008, most of Nomura’s operations were mainly restricted within Japan and having made a number of unsuccessful attempts to expand into other key markets, the acquisition of Lehman proved to be a watershed deal. In order to expand its operations globally Nomura took over the Asian, European and Middle Eastern (EMEA) operations of Lehman brothers, an American investment bank after it filed for Chapter 11 bankruptcy. Barclays took over Lehman brothers North American Operations. The acquisition of Lehman Brothers is expected to help Nomura reach its goal of becoming one of the top five independent successful global investment banks.

Before the acquisition of the Lehman businesses Nomura had an 18,000 strong workforce although a large part were based out of Japan, and greater than 90 % of its revenue from its local operations. After the acquisition, it retained over 8,000 former Lehman staff which meant Nomura had a difficult task in hand to integrate two very different corporate cultures. The union was termed as ‘marriage of Tokyo and Wall street.'(FT.com, 2008) This was the first time when such a union had been attempted in the investment banking arena. The firm is still in its cultural transitional phase and it’s trying its best to overcome its teething problems.

1.2 Operations

Nomura’s operations are divided into three regions:-

Asia-Pacific including Japan and India- Regional headquarter is in Hong Kong. Its operations are spread across 12 countries in the region.

Americas- Regional headquarter is in New York. It operates from 6 strategically located offices in North and South America.

Europe, Middle East and Africa (EMEA) – Regional headquarter is in London. The operations are spread across 18 countries in the region.

The bank’s global headquarters is in Tokyo, Japan. All of Nomura’s business lines are coordinated globally and the regional heads report to their Tokyo-based business heads.

Source: http://www.nomuraholdings.com/investor/summary/financial/data/2009_2q_leh.pdf

http://www.nomuraholdings.com/investor/library/ar/2009/pdf/ar_all.pdf

1. 2 Vision

Its long term vision is to become the top independent global investment bank.

Source: http://www.nomura.com/europe/about_nomura/index.shtml

Expansion of operations could render a firm’s organisational structure to become more complex as decision making takes more time. In order to make the decision making process faster and effective Nomura decided to reaffirm its matrix management style of organisation. Nomura’s approach to decision making is quite centralised. Centralization means that the responsibility of making decisions is limited to those at the top of the organisation’s hierarchy. (Gordon, Pg 403)Decision making at Nomura is top down which consists of the Chief Executive Officer (CEO) on the top followed by the Chief Operating Officer (COO) and then five CEO’s for each of its business division. The CEOs of business divisions are responsible for all the decision making of their division taking into consideration the management values adopted by the Nomura group as a whole. All these heads are based in Japan. To oversee the company’s European operations there’s also a European Regional Head.

2.1 Matrix Structure

Matrix structure is an integration of a Functional and a Market Oriented structure. Functional structure groups’ people according to their skill set. It allows division of labour as specialisation which makes the organisation more effective. On the other hand in a Market Oriented structure employees are grouped according to product, project, client or geographical area. A Matrix structure team has two heads i.e. one being the functional head and other a regional head. Matrix structure helps in flexibility of employees as per the changing needs of the organisation. It also aids in prompt decision making and brings about diversity in skills and ideas.

At Nomura, employees are grouped according to their expertise in various functional lines as well as relative experience in client servicing. The Lehman acquisition although brought in strong operational diversity and better branding the resultant organisational structure was mammoth and complex – an HR nightmare possibly.

Nomura’s post-Lehman operational structure looks more diversified both from a product offering as well as a geographical stand-point; Nomura has three reportable geographic segments with a stronger talent pool and a broader franchise i.e. Asia-Pacific, Americas and Europe, Middle East and Africa (EMEA). It has appointed CEOs every business division stationed in Tokyo with every region having a regional head as well as a regional ‘divisional’ head.

3. Organisation Culture

Organisation Culture is defined ‘as a set of shared values and beliefs that interact with an organization’s people, structure, and systems to produce behavioural norms.’ (Harvey Brown, Pg 69) Every organisation has a unique culture. Nomura traditionally has been a conservative investor and largely risk-averse which seemed poles apart from the usual wall-street philosophy. The distinctions between Nomura’s Japanese and American Corporate cultures are cited below:

Employment Tenure- Employees in Japan are more likely ‘married’ to their firms with most firms expecting to retain talent through long-term employment schemes. American firms, on the other hand have their eyes firmly set on profitability and return.

Promotions- In Japan promotions are based on age and seniority whereas in America promotions are based more on performance.

Payroll- Japanese Companies usually pay their employees a fixed salary with low or very little bonus whereas American firms have fixed salaries and employee bonuses are decided according to their performance.

Decision Making- In Japanese companies decision making is top down whereas in American style companies managers have more delegation and authority. Therefore decision making in American firms is prompt.

Attitude towards risk- Japanese are risk averse whereas Americans are more aggressive.

Work Culture- Japanese work culture is very stiff in terms of dress code and punctuality to work whereas American culture is more flexible.

Nomura hired 8,000 former Lehman employees. In order to keep the Lehman operations running Nomura had an uphill task of retaining Lehman’s employees which meant it needed to change its organisation culture.

Source: http://globalization.suite101.com/article.cfm/japanese_corporate_culture

4. SWOT Analysis

Strengths- Lehman had a strong position in Europe and it had well developed IT and R&D platforms. It possessed high velocity trade machines. Lehman was very active and was one of the best in the markets aided by a very skilled work force which gave Lehman a competitive edge. 95% of Lehman’s employees accepted job offers given by Nomura. It is imperative for Nomura to effectively utilize the skill set and knowledge base in order to enhance its business prospects and also achieve economies of scale by resource integration.

Weakness- Nomura needed to protect its human capital resulting in high employee costs right at the outset very much in line with Lehman tradition of keeping up higher pay outs. Nomura also needed to build its client franchise from scratch given its lack of presence in the EMEA region and also battle a growing reluctance from clients to trade with a relatively fresh and un-proven broker-dealer. It also initially suffered the baggage of the Lehman bankruptcy, which made it extremely difficult to convince clients and regulators as well as to its viability as a solvent counterparty.

Opportunities- One could say that the recent credit crisis provided Nomura with a unique prospect of re-inventing itself. Additionally Nomura’s traditional Asian advantage enabled it to push its franchise far more aggressively having added talent from Lehman. Nomura currently has a sound platform to launch a strong client-focussed business. Joint operations will create synergies and generate higher revenues as Nomura can be cost effective in running combined operations. It has a diverse set of services as well as workforce which can help them specialise in niche markets as well as create innovative products in investment banking.

Threats- Market conditions are currently volatile across Europe while recovery in the Americas has been painfully gradual. Nomura continues to sustain high operational costs. Although Nomura is desperately trying to mould itself into a global player the inherent cultural clash remains, which could de-motivating for the employees.

Source: http://n.ethz.ch/student/rebibr/projects/Lehman-Nomura.pdf

5. Organisational Change

Organisations have to change in order to stay competitive. Changes in an organisation’s environment in terms of competition, new clients and diversity in workforce force an organisation to make changes to its culture. However these changes are significant to Nomura’s goal to become a world-class investment bank. Organisational change represents any alteration to existing cultural fabric of an organisation. It happens when a company is growing and going through evolution in terms strategy. Nomura is adopting a behavioural approach to change i.e. it’s a planned change and ‘ it improves communication, group behaviour, leadership skills, and power relations by changing employees knowledge, skills, interactions and attitudes as well as the organisational culture.'(Gordon, Pg.460) The Organisational change was done in four Phases:-

Create Synergies

Promote efficiency

Start Joint Operations

Ex- Lehman staff

Join Nomura

PHASE 1 PHASE 2 PHASE 3 PHASE 4

Phase 1-Retain Lehman employees in order to smoothly run the acquired business.

Phase 2- Integrate infrastructure as Nomura took over Lehman’s Information Technology (IT) platform and Global Services in India.

Phase 3- Making sure that the combined infrastructure and Operations are running efficiently.

Phase 4- Joint operations will create synergies and generate high revenues.

Source: http://www.nomuraholdings.com/investor/summary/financial/data/2009_2q_leh.pdf

5.1Changes in Nomura

Compensation Structure- Nomura is seeking to follow Lehman’s compensation structure of paying high performance bonus of its employees in line with global investment banking standards. Although Nomura’s old employees were given a choice to choose Lehman’s compensation structure of low basic pay and high performance bonuses. Over half of their old staff chose the Western compensation system which is very different from the traditional Japanese pay structure.

Job Security- Earlier Nomura’s employees had a better job security although compensation levels were average and very different from the Wall Street philosophy. With the current structure the employees would be offered performance-based bonuses and higher total compensation although the job security would be relatively absent.

Complex Matrix- It has adopted a complex Matrix type of organisation structure to achieve flexibility and prompt decision making.

Decision Making- Regional and Divisional managers are given more delegation. Traditionally decisions were taken in groups.

Managerial Changes- Traditionally most of the senior managerial positions were handled by Japanese but recently three non Japanese Managing Directors have been appointed who are ex Lehman staff.

Changes in Job Scope- In the past positions were decided according to age and seniority and now more emphasis is based on the skill set of the employees and their performance.

The takeover of Lehman by Nomura looks like a reverse takeover as Nomura is trying to follow Lehman’s Organisation cultures rather than super-imposing its own culture. This is because it realises the value of the ex Lehman staff as they can give them a competitive edge over other investment banks. Therefore its making sure that the ex Lehman staff is satisfied working at Nomura so that they can perform well and stay in the job. Another reason for adopting these changes could be that in the past Nomura had made some failed attempts to expand its business operations outside Japan.

5.2 The Change Process

The change process of Nomura could be explained with the help of Kurt Lewin Model. The model describes the change process in three stages which are as follows:-

1. Unfreezing- Creating awareness of a need for change and create the right environment for change. Giving old Nomura’s employees an option to change their compensation structure is a method of unfreezing as its older employees realise that their counterparts from Lehman will be earning higher. This could have put pressure on Nomura’s employees to perform according to Lehman’s expectations and thus forcing them to change to the new culture.

2. Change- Making the change. In Nomura this was done through changing its management structure, educating employees and motivating them to work together as a team. The Chief Operating Officer (COO) of Nomura, Mr. Takumi Shibata acknowledged that there were cultural differences in integrating the two companies but they were focused to work as one team, one firm.

3. Refreezing- A firm has to cement the change and make it its organisation culture. In Nomura’s case, they are still undergoing change as the takeover took place only a year and half back. However the progress so far achieved has been no less spectacular given the hard line differences and size of operation.

Source: http://www.mansis.com/freeze.htm

Nomura Annual Report 2009

6. Organisational Development Techniques

“Organization development is a system-wide application of behavioural science knowledge to the planned development and reinforcement of organizational strategies, structures, and processes for improving an organization’s effectiveness.”(Cummings and Worley, Pg 2)

Nomura believes in upgrading the skills of its employees through its employee development programmes. This is done so that an employee’s potential could be maximised at work. Employees are given authority to demonstrate their skills, abilities and they are evaluated on the basis of their performance. In order to enrich the careers of its employees Nomura initiated comprehensive education and training programmes. In 2006, it launched a Happy career and life project which aimed to help its employees maximise their potential.

Nomura initiated training in global business etiquette in seven of its offices worldwide including Japan so that the employees could understand the differences in culture and background. This was done to increase responsiveness among its employees so that they understand the importance of building relationship with customers and fellow employees. In 2008, Nomura established ‘Diversity and Inclusion’ offices in Europe and Asia Pacific. ‘Diversity and inclusion is about respecting human rights and offering equal opportunities within organizations regardless of gender, age, race, faith, or values and harnessing peoples’ talent.'(Nomura Holdings Website) This programme was introduced to unleash employee potential and capitalize on value. Under this Nomura’s Human Resource department will analyse the HR processes such as promotion, recruitment and performance management so that their diverse workforce is well managed. In order to prevent discrimination based on age, race and gender Nomura organised 29 training sessions and over 14,000 employees attended the training. Nomura has also created support systems for its female employees in terms of proving more childcare leave and offering assistance with the day care expenses of infants.

Source: http://www.nomuraholdings.com/csr/stakeholder/employee/diversity.html

http://www.peoplemanagement.co.uk/pm/articles/2010/04/investment-bank-nomura-launches- multi-strand-equality-strategy.htm

7. Conclusion

Nomura’s long term aim is to become a World class investment bank. After the acquisition, Nomura has achieved market gains in Asia (excluding Japan) and Europe. They are aggressively building business in the US market. Nomura’s revenue from markets outside Japan has increased significantly after the acquisition of Lehman Brothers operations in Europe and Asia. Net revenue from its Asia and Europe division’s surpassed Japan in two of the four quarters for the first time. Clearly the integration has benefited Nomura as its revenue from its overseas operations has increased significantly. The Acquisition has generated immense synergies and it’s helping Nomura to achieve its goal of becoming a World Class Investment Bank. The two firms complement each other in terms of products, geographical locations and customers. Till now the acquisition has proved to be a good one but in the long run Nomura will have to address to a lot of challenges in terms of culture while maintaining balance between American and Japanese culture to keep its new as well as its old employees satisfied. It was easy for Nomura to retain ex Lehman employees as when the takeover took place as the market conditions were bad but once the market conditions stabilise employees might look for greener pastures. Therefore, Nomura has to a task of retaining its employees in the long run as employees are its biggest assets.

Source:http://www.financeasia.com/News/174347,nomuras-emergence-as-a-global-investment-bank.aspx?refresh=on

8. Recommendations

Most of the success stories on Wall Street have been of firms following a singular cultural philosophy across their businesses. Although the sweeping changes at Nomura have been largely well received by its employees, the company is a long way from realising its potential in the market-place.

It needs to inculcate the performance-based compensation spirit amongst its Japanese employees while at the same time relying on Japanese practical wisdom of conservatism. Also behavioural changes in terms of better group dynamics, equal-opportunities irrespective of race, sex and age should be inculcated given the largely male dominated Japanese society.

Nomura should take the culture change slowly as it has to keep its employees in Japan in high spirits. They might feel less motivated and think that new employees are more important to the company.

Rather than the top management deciding how to change the organisation culture the decision should be taken collectively involving all its employees.

Nomura should not get too carried away by the increase in revenues in overseas markets. It has to make sure that the upward trend in revenue generation continues without any holdups.

Nomura should not get too Americanized in terms of risk adverse attitude. American banking approach allows managers to take risks which can be very disastrous. It should follow a mixture of Japanese risk averse and American risk adverse attitude in other to run the operations successfully without any turbulence in these volatile economic conditions.

Lastly, there should be team building activities in which new and old employees should play an active part. Both old and new employees should work together as a team in order to make Nomura a successful global investment bank.