Having grown up in California and knowing that Japan – where he has lived since 2004 – is equally earthquake-prone, McCarthy did not think anything out of the ordinary during the first five seconds when the building rolled. As expected during earthquakes, he walked toward the door of his office to take cover and get away from the glass windows. He soon realized that what he was experiencing was no ordinary earthquake when the building continued to roll from side to side for what he believes was around 30 to 45 seconds.

“I got to the door jamb and then I couldn’t go any further. The rolling just kept on getting more and more intense to a point, pretty quickly, where you couldn’t walk,” he says. “I looked down the hall and saw people were being thrown to the ground, on their knees, or pinned against the wall and at that point we couldn’t move. What was unique was that the intense, heavy rolling went on for five minutes. When you try and take a step, you lose your footing. It’s almost like being in a wicked storm on a small boat where if you tried to move, you can’t. Five minutes is an eternity when you’re experiencing something like that.”

McCarthy thought for sure that the building’s glass windows would shatter and debris would scatter on the premises, but “the good news is the windows stayed intact and the building held”. Nevertheless, McCarthy and the rest of the Nikko AM employees reached out for and wore their helmets – yes, helmets – which were tucked under their desks together with what he describes as an emergency kit that also contained water, peanut butter, energy bars and first aid supplies, among other things. Coincidentally, the person in charge of restocking the emergency kits ordered bottles of water on Friday morning because those in stock were scheduled to expire in April.

For the most part, McCarthy had faith in the structure of the building. It was, after all, built on the grounds that used to house the Japan Imperial Army headquarters. “It is known for its stable bedrock, which is why the government built its defense department on it in the first place,” he says. The property was turned over to developers in 2000. Attracted by the building’s stable foundation and power source from two grids, Nikko AM moved in three years ago.

Nikko AM and its 500 employees in Japan occupy three floors of the 54-storey Midtown Tower: the 40th, 41st and 42nd floors. Worldwide, the company has more than 800 employees in 10 countries.

Although it’s a tall building by Tokyo standards, McCarthy notes that Midtown Tower was built after “so many of the standards and knowledge” derived from the 1995 Kobe earthquake, which killed more than 6,000 people, “were applied”.

Understandably, however, doubts tend to creep in when faced with danger.

“The problem was when the rolling began to slow down, and for that first half hour to one hour after the quake hit, you weren’t sure it was over,” McCarthy says. “I remember looking at the clock and it was 4 o’clock and there were still tremors. It was hard to tell when one would begin and the other would end. It reminded me of when my wife gave birth. Things flash through your mind.”

It wasn’t obvious to McCarthy and the others around him, until later, that their legs were beginning to buckle under pressure. “If you’ve been on a boat, you start to get sea legs. That was the feeling we had. A lot of us, when we started moving around, we felt like we had sea legs.”

While all this rolling was going on, Nikko AM’s systems room on the 42nd floor caught fire. “It was just too much for all our switches and they burst into flames,” McCarthy says. “All the switches are centrally located and that’s what runs the phone system, the data network, and the like. It caught fire right at the end of the most intense part of the earthquake.”

Sure enough, smoke started to fill the whole floor. “That became our immediate concern,” he says.

Disaster Preparedness

It is at this point in his recollection of the events that transpired on Friday that McCarthy talks about Nikko AM’s disaster preparedness – which is part of its Business Continuation Plan (BCP) – and how it paid off. The company’s BCP team is made up of around 75 employees from its 29 departments. And these people take their BCP roles seriously, jumping into action with fire extinguishers to put out the fire in the systems room.

“That’s what gave me some comfort in a couple of fronts. I knew we had a disaster preparedness plan,” McCarthy says.

The helmets, which helped prevent injuries, was also part of the disaster preparedness plan. “We were seeing things start to fall and in one area, the water main broke above us and some of the tiles came off,” McCarthy says. “Most everybody had their helmets because we’ve drilled them” about disaster preparedness.

Each department has two so-called wardens. Nikko AM conducts three drills per year: two are mini-drills where departments take turns responding to made-up scenarios and one is a major drill where the entire office is shut down, an emergency is simulated and employees head to a backup site located in Nerima, which is at the Northwestern edge of Tokyo.

When the fire in the systems room was put out, McCarthy and the BCP team led people to the stairs. “The stairs were clogged. There was smoke. It was pretty scary,” he says. “We were able to get everyone eventually out of the building. I never really left. I circled the floors with the wardens to make sure everyone was out.”

While evacuating the employees, McCarthy says he was making a mental accounting of Nikko’s key senior management. He knew Bill Wilder, president and chief investment officer, was attending a conference south of Tokyo and was thus farther from the epicenter of the earthquake. He knew Charles Beazley, Tokyo-based head of international and institutional businesses, and Blair Pickerell, Hong Kong-based head of Asia and global chief marketing officer, were traveling overseas and safe. “I was pretty confident that if something happened to me, the company would still run,” McCarthy says.

When all the fires were put out, the structures inspected and the building was deemed safe, building management announced that people could go back up.

Obligation to clients

“After we accounted for all the people, we started to get to work on the business,” McCarthy says, who noted that he felt the earthquake around 20 minutes before the Tokyo Stock Exchange closed. “We had trades outstanding. The market didn’t close; it shut off automatically. We had to cut an NAV [net asset value]. That was our next duty. We have 350 funds, 200 institutional clients, and they are going to want to know in the morning, what’s my NAV, what’s my price, is the company still running?” In Japan alone, Nikko AM has five million customers and 210 distributors.

Nikko AM’s fund managers trade on 55 countries worldwide. “There were a lot of trades to confirm,” McCarthy says. “The problem was our network caught fire. We had no phones, no data, we couldn’t turn on our computer. The challenge was how do we confirm the trades?”

In the first two hours that Nikko AM’s employees were back in the office, none of Japan’s mobile phone companies were operating. “After two hours, at any given time, one or two of the seven mobile phone companies would have service. So we all got into one room with people with cell phones that represented seven different phone companies. That allowed us to talk to the key brokers, the government, the FSA [Financial Services Agency], our custodians and our record keeper.”

Shortly before 8 p.m. on Friday, Nikko AM had confirmation on pricing, which then gave way to the processing of the NAVs of its funds. The next hurdle was how to input the information in their systems.

Backup site

The Nerima site was used By Nikko AM on Friday and the succeeding days, serving its purpose.

“Our driver shuttled two car loads of people back and forth to Nerima. Normally it would be a 30-minute drive, but it took one hour and a half each way. We got a critical team of about 20 people to Nerima. By midnight, all the funds were completely processed, all the NAVs were cut and available. We didn’t miss anything,” McCarthy says. On a normal day, pricings would be done by 6 p.m. and final processing would be completed by around 10 p.m.

McCarthy, who personally helped set-up the company’s BCP, believes Nerima is the best place for a backup site because of its location – it is near enough that traveling to the site during an emergency wouldn’t be impossible, but it is far enough that the land rests on a different tectonic plate.

Nikko AM occupies half a floor in the backup site in Nerima in a building – which McCarthy declines to identify for security reasons – that was built precisely for disaster preparedness. The company’s BCP team of around 75 people can run all critical functions in that site for “a month, two months or more”, he says, adding that up to 110 people can fit in the space.

“When I was studying about disaster recovery, one of the concerns I had was if you have your backup site so far away, how can you get people there? Like you saw with this disaster, the first thing that goes is the train system,” he says. “You can have your backup site in Osaka but that’s three hours by bullet train, which aren’t running so what good does it do to have the backup system all the way over there?” McCarthy says people could literally get to Nerima in three hours by bicycle.

McCarthy adds that Nikko AM could also use its offices in Singapore, Sydney, London and Hong Kong as backup sites, if needed, because those offices are on the same network as Tokyo. Operationally speaking, Tokyo-based COO Frederick Reidenbach Tokyo and systems and operations manager non-Asia ex-Japan Teck Keng Neo, who splits his time between Sydney and Singapore, would also be key to ensuring business continuity.

On Friday, Nikko AM employees who lived around eight to 10 kilometers away walked home. Others, particularly those who couldn’t get home while trains were out, opted to sleep in the office. “We had blankets, food and water for emergencies,” says McCarthy, who lives close to his office and headed home at past 1:30 a.m. on Saturday.

Key employees have been coming to work every day since Friday. A special meeting of all Tokyo-based Nikko AM investment managers – less than 100 – was called on Sunday, McCarthy says, noting around 30 made it to the meeting. He says the company has had a contingency system in place for managers since the bird and swine flu crises hit Asia in 2009. “We have around 50 people who have the capability to trade from home.”

The meeting was necessary to ensure that the company’s key positions and liquidity were discussed, McCarthy says. “We wanted to be prepared for redemptions, but the redemptions on Monday were comparable only to a normal heavy redemption day.”

Around 60% of Nikko AM’s AUM comes from investors in Japan. That’s also how much of its revenues are derived from Japan and how many of its employees are locals.

Of the 60% of AUM – or around US$102 billion – sourced from Japanese investors, around 65% – or around US$66 billion – are invested in non-yen-denominated assets, especially in the Brazil, Russia, India and China (BRIC) markets.

Given that bank networks in major cities remain operational, McCarthy doesn’t see any major disruption to distribution of Nikko AM’s funds. The company wasn’t planning any new fund launches until May, and thus has enough time to weigh market conditions before deciding to push through with plans, he says. It launched four new funds over the past eight weeks.

McCarthy estimates Nikko AM’s AUM before the earthquake and tsunami at US$170 billion, but because markets – particularly Japan’s – are expected to continue reacting strongly to the disaster and the threat of a nuclear crisis, he says it would be more conservative to peg the amount at “more than US$150 billion”.

(Note: This article in the Electronic Financial Times was one of the top 5 most popular Articles for the year 2011 !)

By Rita Raagas De Ramos March 16, 2011

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FINANCIAL TIMES MONDAY NOVEMBER 14 2011 – Face to face

Tim McCarthy tells Lindsay Whipp about recent acquisitions and local expertise

Tim McCarthy, Nikko Asset Management’s burly American chief executive, is a far cry from the more conservative Japanese heads of domestic fund management companies.

But the philosophy that underpins his core management strategy is rooted in the very Japanese martial art of karate. While running a training place, or dojo. in San Francisco two decades ago he discovered the importance of the Japanese concept of sunao, which he interprets as meaning pure, or fully grasping a discipline, before jumping to conclusions or making changes.

“You can be a black belt in one style of karate, but when you go over to another man’s dojo which is a different style, you don’t comment, you first become a black belt in his system, and only then do you have the right and ability to compare,” Mr McCarthy explains.

This is clear in the strategy he and his management team have introduced through Nikko Asset Management’s Asia-Pacific acquisitions. Last year Nikko AM bought Tyndall of Australia for $80m and acquired 7.25 per cent of Singapore’s DBS Asset Management in a share swap with DBS. These were additional to the group’s existing portfolio of non-Japanese businesses, consisting of a 40 per cent stake in China’s Rongtong Fund Management and a 30 per cent holding in HwangDBS Investment Management.

In line with the sunao he learn through karate, after the acquisitions Mr McCarthy has relied on the expertise of his local managers to make big decisions, such as the products that should he introduced to the market and which ones need adapting to better suit the market. He says that in the past he has worked at companies where attempts to make synergies ended up forcing too much compromise and increasing costs instead.

Nikko AM generally keeps the brand names of the asset managers it has partially or fully acquired, and the staff and management local. Staff are not required to speak a language outside their native tongue and are also not expected to take part in international conference calls requiring late-nights on the telephone in pyjamas.

Mr McCarthy says his approach is different from the more usual “Anglo-American centric ego that says we know the best for you, rather than, the countries know best for themselves”, and focuses on •what can remain intact.

‘When you go over to another man’s dojo … you first become a black belt in his system’

“We localise for distributors and indeed what the local management team wants,” he says.

Back in Japan, Nikko AM is quite a different animal from its competitors, many of which are subsidiaries of mega-banks such as Mitsubishi UFJ Financial Group, or brokerages, such as Nomura. Nikko AM is 78.25 per cent owned by Sumitomo Trust Bank, 7.25 per cent by DBS, and 14.5 per cent by employees. The asset manager is believed to be planning an IPO in the near future, though Mr McCarthy will not comment on the subject.

Two of its seven-member management team are Japanese with the remaining five from Europe and the US.

Also a rarity in Japan, Nikko AM’s nine-strong board has only three members from within the company, three from Sumitomo Trust Bank, one from DBS and two independent directors.

It is interesting to note this structure at a time when boards at Japanese companies are coming under scrutiny in the wake of the scandal at Olympus, where three board members were involved in hiding losses from previous speculative investments.

Analysts say the scandal highlights problems in board composition where often the president shifts to chairman and then adviser, retaining too much control over decisions and leaving in question the true independence of the board. Outside directors are also often members of subsidiaries or main banks.

In this context, Mr McCarthy has distanced himself from the more traditional way of running a company in Japan.

He says when he took over as chief executive in 2004, all decisions were made by the person in that role. He argues that it not only involves a lot of work and lack of space to step back and catch potential problems, but that the mindset of other members of the management team becomes “passive”.

He instead put an executive committee in place to approve management decisions to recommend to the board.

As an asset manager demanding good corporate governance from companies it invests in, Nikko AM has to be able to set an example, says Mr McCarthy.

“Japan has improved, with more recognition of return on equity, but the biggest change has been the [improvement] in the dividend policy,” he says. “It takes a lot of sophistication … before people start to get that it’s easier overall and you can make more money if you follow those [governance] rules.”

Top management at many Japanese companies have worked at the same organisation since university and are often of similar age. Mr McCarthy says there are advantages to having such close relationships, but that in the network age of rapid change, this style lacks impact and breadth of disagreement.

“For the industrial age, the Japanese system worked quite well. For the technology age, parts of it worked. But in the network age, it’s all over,” he says. “That gives you a feeling for how much we need to see change here to keep up with the Chinese.”

Curriculum Vitae

Name: Timothy McCarthy

Born: 1951

Education: 1973: BA Econ and Inti Relations, University of California, Davis 1978: MBA from Harvard Business School

Career: 1983 Merrill Lynch Capital Market and Business Financial Service, New York 1987 Fidelity Investments, Boston; president, Fidelity Investment Advisor Group; president, National Financial Institutional Services;

Nikko Asset Management

Established: 1959. The group, which manages a wide range of Asian equities and fixed income strategies for retail and institutional investors worldwide, has grown into the largest regional asset management company headquartered in Asia

Assets under management: $165bn. Nikko AM has more than 400 funds and one of the largest distribution capabilities in Japan

Employees: Approximately 1,000 employees and 250 investment professionals

Offices: Operates in nine territories. Head office in Tokyo and offices in Hong Kong, Singapore, Sydney, Melbourne, Brisbane and Auckland. Global offices in New York and London provide support to investors in Europe, the US and the Middle East

Ownership: 78.25% owned by Sumitomo Trust and Banking. 14.5% by employees and 7.25%

DBS Bank

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