Mizuho's New CEO Faces Legacy Issues From Decades-Old Merger

(Bloomberg) — Mizuho Financial Group Inc. is tapping a relatively young career insider to turn around the bank that’s been plagued by a series of technical disruptions and is still grappling with the legacy of a three-way merger more than two decades on.

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Japan’s third-largest lender named Mizuho veteran Masahiro Kihara as chief executive officer — its third since 2011 — on Monday. He’ll replace Tatsufumi Sakai on Feb. 1, a series of technical troubles that led to business improvement orders from the Financial Services Agency.

At 56, Kihara is seven years younger than his counterpart at Sumitomo Mitsui Financial Group Inc. and four years the Mitsubishi UFJ Financial Group Inc. CEO’s junior. His experience in risk management helped him secure the role, according to people familiar with the matter, who asked not to be identified as the appointment is confidential.

Mizuho’s technical glitches that took down Sakai trace as far back as the early years of the century, after the group was formed through the merger of Dai-ichi Kangyo Bank, Fuji Bank and Industrial Bank of Japan in the midst of the nation’s banking crisis in 2000. Unresolved cultural and structural problems stemming from the combination still persist and largely contributed to the bank’s most recent technical woes.

‘Risk Avoidance’

“The task for the next CEO is making sure that related issues with Mizuho’s corporate culture such as a tendency toward risk avoidance are overcome,” said Michael Makdad, an analyst at Morningstar Inc. in Tokyo. “Both Mizuho and regulators know it’s important.”

Although this won’t be easy, Mizuho does have “some tailwinds” going forward such as the progressive retirement of older workers who faced “tricky post-merger politics,” an influx of new employees and the reorganization of operations with digitalization, according to Makdad.

Mizuho said on Monday that it submitted a business improvement plan to the FSA, based on the regulator’s order issued in November. The plan includes steps for improving IT systems as well as customer relations and crisis management, it said in a statement.

“We will take measures to enhance our frameworks for our people and organization and reform our corporate culture,” Mizuho said.

Despite having a solid reputation and a well-connected family, few executives expected Kihara — who joined the Industrial Bank of Japan in 1989 — to nab the top job because of his age. Directors only decided in the past week to go with a candidate who is young enough to signal a definitive break from Mizuho’s deep-rooted problems, according to a person with knowledge of the matter who asked not to be identified.

His appointment follows a series of system failures at Mizuho’s commercial arm since February 2021, which included ATMs swallowing up more than 5,000 cash cards and another disruption in which it failed to carry out anti-money laundering precautions.

Successful Integration

To ensure the successful integration of the three banks, Mizuho for years tripled everything from executive positions and offices, and IT systems were not fully integrated. More recently, Mizuho has made a cost-cutting push to streamline operations, including its IT systems, resulting in chaos.

In November, the regulator — in a rare departure from its prosaic style — criticized Mizuho for a culture of “not speaking up when something should be said, and doing only what’s been instructed.”

A June report by a panel of outside experts commissioned by Mizuho also said there were many occasions when bank employees lacked initiative and failed to act beyond their direct responsibility to curb and solve the problems during the system trouble.

“We are closely watching Mizuho’s corporate governance and management’s performance in evaluating its credit, given it received a business improvement order,” said S&P Global Ratings credit analyst Toshihiro Matsuo. “It remains unknown if it will lead to improvement of corporate governance with reported management appointments.”

Current and former Mizuho employees say the bank’s culture of passivity will be hard to reform, citing deeply-entrenched divisions between employees from the three different banks. Concerns over cost cutting measures and shrinking opportunities also made employees fearful of taking risks or standing out, those employees said, asking not to be identified.

Management Overhaul

While Kihara is expected to implement some kind of management overhaul, he won’t be the first to attempt a restructuring. After a massive system outage in 2011, Mizuho combined its two commercial banking units to create a greater sense of unity among staff. After a public outcry when it was revealed in 2013 that Mizuho made loans to organized crime members, the lender also adopted a Western-style board structure, the first one to do so among megabanks, giving more authority to outside directors.

Some Mizuho employees said that one reason successive attempts have failed was that many senior staff are strongly focused on satisfying the interests of their original bank before the merger. Japanese lenders, as part of a unique custom of solidifying business ties and ensuring roles for older workers, usher most employees beyond a certain age to a second job, often at client firms or affiliated companies such as leasing or insurance firms.

While a chosen few stay on for senior management within the bank, many are appointed to their second job at around 50, with the unlucky ones being ushered on in their 40s. Such decisions are often based on connections through their first employer, helping to keep loyalties divided, the employees said.

Mizuho named 59-year-old Seiji Imai, formerly of Dai-ichi Kangyo Bank, as its chairman on Monday. He will replace Yasuhiro Sato on April 1.

The company previously announced that Masahiko Kato, who started at Fuji Bank, will become president of Mizuho’s core lending unit. Local media have said the appointments reflected Mizuho’s attempt to balance out the interests of the three factions.

“I don’t think it’s just a coincidence that the key posts were balanced among executives from Mizuho’s predecessor banks,” Makdad said. “It shows that despite all its efforts to create ‘One Mizuho’, its executives are still cognizant of which predecessor bank other executives are from, and to some degree sensitive to it.”

(Updates with announcement of appointment in second paragraph, business improvement plan in seventh)

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