Investing in People Creates Social Wealth (Part 1)
In Part I, Mr. Kato, President and Investment Evangelist of WealthPark Lab, asks Mr. Fukuhara, President and CEO of Institution for a Global Society, about the importance of human capital in society, as well as what kinds of assessment and education will be needed in the coming era. Mr. Fukuhara also shares his views on challenges that Japanese society faces and the ideal world he is looking for.
Masahiro Fukuhara, CEO & Founder of Institution for a Global Society (IGS)：
After graduating from Keio University, Mr. Fukuhara joined the Bank of Tokyo (currently MUFJ Bank). He holds an MBA from French business school INSEAD, a Master’s degree (with Honors) in International Finance from Grandes Écoles HEC (Paris), and a Ph. D. from the University of Tsukuba. In 2000, he joined Barclays Global Investors, where he became the company’s youngest-ever managing director and a director of the company’s Japanese subsidiary. In 2010, he founded IGS with the vision of “Inspiring self actualization through assessment and education.” Books he authors include Hābādo, okkusufōdo… sekai no toppu sukūru ga jissen suru kangaeru chikara no migaki-kata (Harvard, Oxford…Ways to Hone Thinking Ability Practiced by the World’s Top Schools)（Daiwa Shobo）; AI× biggudēta ga jinji wo kaeru (AI x Big Data Will Change Personnel Management) (Asahi Shimbun Publications); Nihon kigyō no potensharu o tokihanatsu ― DX× 3 P keiei (Unleashing the Potential of Japanese Companies — DX x 3P Management)（Eiji Press）; published January 11, 2022). He is also a specially-appointed professor at Keio University’s Faculty of Economics, and a Scott M. Johnson Fellow of the US-Japan Foundation.
Investments are not limited to financial assets. “People” is also an investment target.
Kato: It’s great to have Mr. Fukuhara, CEO of Institution for a Global Society (IGS), here to discuss with me the importance of educational investment in schools and organizations, and the importance of human capital.
In our world, we call lots of things “assets”. The market value of the major measurable assets — stocks, bonds and other financial assets, real estate assets, and crypto-assets — is estimated to be as much as 30 trillion dollars, or about five times the world’s annual GDP. But that is just the sum of visible and easily recognizable assets. The biggest asset the world has is its people — human capital. Some scholars even estimate its value to be roughly 50 times that of global GDP.
Although WealthPark mainly invests in alternative assets like real estate as well as the financial assets that are derived from them, human capital is very important to us because people are the ones who make these assets valuable. I myself was impressed by Gary Becker’s approach to human capital, and in my past books, I have proposed new ways to think about internationally diversified portfolios based on human capital.
I’m at the point where I’d like to continue promoting the concept of international diversification of human capital not confined by age groups. Mr. Fukuhara, at IGS, your vision is “Inspiring self actualization through assessment and education.” Would you share your views on the importance of human capital for the wealth and happiness of society?
Fukuhara: As you say, all our social activities start with people. One example is the value of a company’s stock, which is also created by the people who set up the company. Also, real estate gets its value from the cities and cultures that people have created. In the world of Robinson Crusoe, where there is only one person, land has no value and meaning. Since both corporate value and real estate value are determined by human activities, the most fundamental element of asset value is people, or human capital.
In relation to asset management, Milton Friedman wrote a paper in 1946 that clarified human value and stated that human value itself should be considered an asset. Like Mr. Becker, he stressed the importance of visualizing your own capabilities and investing in yourself to improve your own lifetime value. In other words, besides financial assets and real estate, yourself is also an investment, and you should view education as an investment, not a cost. Of course, self-investment takes on a very different meaning at different ages. The size of human capital changes with age, and as a result, it is also widely known that individuals should change their component ratio of financial assets.
Kato: There are unique examples of human investment in young people in Japan, as seen in the Terakoya temple schools that helped achieve an industrial revolution in a short period of time, and the extensive training that companies provide to new employees. As we enter the “era of the 100-year life span,” self-education and self-investment will become increasingly significant. As you noted, if a culture that makes human value visible and takes a positive view of self-investment takes root, we will be able to usher in a new society where individuals can live wealthier and happier lives.
Recognition of human capital will become indispensable throughout the world.
Kato: I think we are already seeing changes in our society as we enter a world where puts more emphasis on the importance of human capital.
Fukuhara: That’s right. For example, there are more freelancers, and the worldview of paying an hourly rate for use of a person’s abilities is a sign that the value of people is becoming easier to see in society. And in the sense that value is placed on a work (the product) that results from human activity, we can put non-fungible tokens (NFTs), in which a copyright is traded as a digital asset, in the same vein, can’t we?
Kato: Yes, we are certainly seeing the value of people’s activities more. The popularity of blogs and social media has also created opportunities for individual talent to be valued in society, but if various NFTs using unfalsifiable blockchain technology can be properly linked to more human activities, it could be the starting point for a human capital revolution to come. In 2020, the U.S. Securities and Exchange Commission (SEC) announced that publicly traded companies would be required to disclose the value of their human capital to the public, and we may see many changes around the world even in just the next few years.
Fukuhara: In Japan as well, Prime Minister Kishida has initiated to strengthen “investment in people” as a key policy. I can see there is a growing social momentum toward human capital. Quantifying human value will become imperative in Japan, and, for corporate activities, the next milestone will be reflecting human capital in integrated reports. The next milestone in terms of corporate activities is the reflection of human capital in integrated reports. In December 2018, the International Organization for Standardization (ISO) published ISO 30414 — guidelines for human capital disclosure — which lists “skills and competencies” as human capital items to be disclosed. At IGS, we provide our client companies with GROW360, an AI assessment tool that visualizes the capabilities of human capital, and we are getting more and more inquiries from clients who are very interested in human capital disclosure. In recent years, when securities companies take on the position of lead manager for a company to be listed, it has become common for them to present their own ESG-related views as well as those of the company to be listed. A company’s stance on ESG is very important, especially in order to have foreign investors to invest in the company. I think eventually all companies will become keenly aware of the importance of human capital and human investment.
Kato: Investors can easily identify whether the ESG measures are meaningful or not, so each company needs to work out its approach and communicate its ESG philosophy in its own words. At the same time, I think we are not far from a time when the foundations of corporate management will be formed by the unique human capital philosophy of each company.
The purpose of education is to make individuals happy
Kato: Next, let me ask you about what kind of education we’ll need to have in the future. Having lived in the U.K. and the U.S. for about 10 years and visited many other countries, I have observed great differences in attitudes toward education from country to country with keen interest.
Japan is probably characterized by focusing on the fair entrance examinations centered on paper tests, along with the assumption that students of a certain age group will continue on to higher education. Overseas, on the other hand, is more flexible — including curricula that mix evening-daytime classes to bring in practitioner-teachers, and allowances for long breaks in the middle of the academic year while still being able to earn the necessary credits. As a result, people of all ages can study at schools. I was struck by the fact that people can choose to study when they can, continue their learning regardless of age, and that there is an awareness of what they have achieved.
At the same time, I thought Japanese schools also have some interesting characteristics — that is, there are so many opportunities to learn about things other than basic subjects. The existence of extracurricular clubs and activities at schools is very unique from a global perspective. In other countries, those lessons and activities are likely to charge extra. A friend of mine who was an executive at a company in Singapore told me that subjects such as art, physical education, and music, which are required in Japan, are electives at elementary schools in Singapore, which is famous for being serious about academics, and not all students take them. Perhaps as a result of this, when they join the workforce, they may be completely unable to do things that are very ordinary for Japanese people, like putting graphics into a presentation or singing a song at a karaoke bar. Hearing this, I got the sense that various types of education that develop people’s abilities exist.
While I believe there is no single right answer to education, seeing as there are many forms of education out there in the world, what do you see as the essence of education?
Fukuhara: First, I believe that the purpose of education is to make individuals happy. I am a member of the Ministry of Economy, Trade and Industry’s Education Innovation Subcommittee, and our discussions are based on the premise that the ultimate purpose of education in our country is to provide the right to learn for children, and that is the starting point of the entire educational system, or so-called public education. However, right now, I feel the problem is that public education in Japan has become something that serves the state. I think that we need to change education so that it leads more to the happiness of the individual.
The Japanese educational system that was set up after World War II was to strive for catching up as a country with Europe and the United States. It was designed to develop human resources capable of discovering the optimal solutions to questions that had answers, and hasn’t been updated since then. This situation where we still have censorship in textbooks and no freedom in government teaching guidelines seems to be lacking in any consideration for individual happiness in a society that has already reached a certain level of wealth and is crying out for more diversity. Despite the declining birthrate, we hear news that there are more applications for private junior high schools than ever, which feels to me like a sign of a sense of crisis in Japanese public education. If your family has the money, then you’ll have the option of studying abroad, but I don’t think this is the way we should be as a country.
Furthermore, you could say that Japan has rarely folstered leaders with grand visions that could be global leaders. You can see quite a difference when you look at the obvious leadership abilities of politicians overseas and the educational institutions that train them. I also teach at a university, and I feel that we need Japanese universities to function properly as social systems. We need to cultivate a mindset that university is no longer “time to take a break in life”. Of course, more and more smaller universities are beginning to make their own efforts to provide a good education. The University of Tokyo is also moving forward to create new value, for example, by actively implementing education in entrepreneurship. This is a positive trend that I would like to see take root in Japan as a whole, not just in certain areas.
Kato: Indeed. The real world is a series of questions without “right answers,” so we must break away from the mindset that we always have to provide the right answer. And the fact that both the Ministry of Education and the Ministry of Economy, Trade and Industry have set up committees to discuss the ideal vision of public education gives me hope that they will incorporate diverse views from the real world.
(Part 2)
