Daiwa House's turn to “zero interest-bearing debt” (2000)

Choosing to shore up the defence in good times

What distinguishes this decision is that the company set an explicit numerical target of “zero interest-bearing debt” even though its finances were already sound. Net interest-bearing debt had been negative since the year to March 1996, and most analysts advised that the rational course was to borrow at low rates and expand the business. President Higuchi Takeo and senior adviser Ishibashi Nobuo nevertheless chose to shore up the defence, on the premise that rates would rise within a few years. The humiliation of having city-bank funding cut off in 1964, and the founder's wartime conviction that “if you lose, you cannot protect the people you are meant to protect,” took precedence over rational financial argument.

The implication of the choice is that attack and defence are not opposed. Higuchi was expansionary — “attack is the best defence”; “without a policy of expansion there is no corporate development” — but made a debt-free balance sheet the precondition for it. Draining the pus and eliminating the borrowings left financial headroom to push for orders even if the housing market contracted, and that discipline told precisely when other companies were immobilised by excess debt. Financial soundness is a number that can look excessive in calm weather and reveals itself as managerial freedom when rates or markets turn. Daiwa House's debt-free management is instructive in having institutionalised that freedom as a discipline inherited from the founder's own formative experience.