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International Rectifier's Mike McGee

As the first non-Japanese chairman of a Japanese-listed company, McGee had to orchestrate a restructuring that ran contrary to traditional Japanese business practices.

1Jan

You think your commute is long? Don't complain to Mike McGee. For five years (2000–2005), McGee served in two executive capacities: as CFO of International Rectifier, an El Segundo, California-based power semiconductor company, and as co-CEO and chairman of Nihon Inter Electronics Corp. in Japan. McGee's role at Nihon was hardly ceremonial. After IR had taken a 5 percent stake in the Japanese chip maker, Nihon's managers tapped McGee to turn the foundering company around. That was no small task. As the first non-Japanese chairman of a Japanese-listed company, McGee had to orchestrate a restructuring that ran contrary to traditional Japanese business practices. And he had to be there to do it: in his five years at Nihon, McGee reckons he made the 14-hour flight to Tokyo 80 times. But the hours spent in transit paid off. Last year, Nihon Inter Electronics posted record profits, and IR has now gained a foothold in the semiconductor market in Japan.

Why did IR allow you to assume this role?


It was strategic. IR is going through a transition from a manufacturer of commodity components to a manufacturer of real high-value proprietary products in two key markets: consumer electronics and motor control. Those two markets are also prominent in the Japanese electronics industry. But to work with [managers at] Japanese companies, you must understand the culture. Having an IR executive manage through a troubled business there demonstrated our ability to work with Japanese companies. In addition, as IR repositions, we need to address some of our older assets and either sell them off or use them in joint ventures. So my participation in Nihon also gave us opportunities to participate in the restructuring of the Japanese semiconductor industry.

What were you least prepared for at Nihon?


The decision-making process is very different. You do something called Nema Washi, which involves talking to all the constituents about important decisions and requesting their support before it is discussed at a meeting. In the United States, a business meeting is usually very functional, with a lot of dialogue and an exchange of ideas. But in Japan, a meeting is much more procedural, since prior to the meeting everyone has already agreed to a decision.

Did you find that frustrating?


The Japanese culture focuses on harmony and doesn't ever want to put people in a position where they could lose face. So, many times when you're talking to somebody and they say "yes," what they are really saying is, "I understand that that's important to you. I understand that's how you think." They don't necessarily agree with you. That's where Nema Washi comes in.

So how did you get them to agree to the restructuring?


A lot of conversation. I spent days in one-on-one meetings, trying to gain a certain level of trust with each member of the management team. I asked what they thought the company's strengths were, what they would like to do long term, and what issues frustrated them. I came to understand their sensitivities and their views of the company's strengths. From that I was able to create a different vision of the company, [a vision where Nihon] would be growing faster than the industry...and where its products would not be commoditized. Once we created a vision we all agreed on, we worked through how to achieve it.

What was the hardest to get them to buy in to?


One of the hardest things was downsizing the employee base by 35 percent. That was tough because management had been brought up believing in lifetime employment. So what we had to talk about was how this was the right thing to do socially. How without making these difficult decisions related to 35 percent of the workforce, the other 65 percent might not have jobs either. We spoke at length about how this is a very competitive marketplace and about how financial performance wasn't sustainable given our business model. And when the management team truly understood that this was the right social decision, they knew they had to do it.

You worked at Nihon at a time when corporate governance was becoming a hot topic in the States. Japanese companies aren't exactly known for good corporate governance. Was that a challenge?


Just because they're different doesn't mean that one is better than the other. And with the restructuring that's going on in Japan, the corporate-governance environment [there] is changing significantly. In some respects, it's stricter.... For example, we were one of the first companies in Japan to align management's and shareholders' interests by issuing stock options. And the rules on how you can issue stock options — who can get them, what kind of approval is required, when they are issued — are a lot less flexible than in the U.S. The shareholders actually have to approve the individuals receiving the stock options.

From a finance standpoint, what was the major difference between Nihon and IR?


The capital structure in Japan's semiconductor industry is significantly different from that in the U.S. Japanese companies are heavily leveraged — 70 to 80 percent of debt is short term — and they're very comfortable with that. U.S. semiconductor companies, on the other hand, are much more equity financed because you have cycles in the industry in which you must have access to capital. In Japan, the banks are the primary source of capital, so if there was a [sizable] downturn, you could rely on them to finance you, whereas a U.S. bank might pull back.... Still, when I resigned [from Nihon] in June, about 75 percent of its debt was long term as opposed to 10 or 15 percent before.

Were there any negative aspects to your experience in Japan?


Besides a loss of hair and a gain of 20 pounds? Seriously, from a Nihon shareholder's standpoint it was [a] positive [thing]. When we announced our restructuring plan, the stock was at 80 yen. It peaked at 1,400 yen. From IR's standpoint, we increased our presence and visibility in Japan. And our shareholders benefited because we've derived real business benefits from that presence.

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