MISMANAGEMENT IN DEFIANCE OF MARKET REALITY

A 330-sq.-meter office with a double bed, sauna and tea room was where Nozomu Sahashi, ousted president of Nova Corp., worked as the language school chain steadily teetered near bankruptcy over the past few years.

Unveiled to the media last week, the spacious presidential suite on the 20th floor of Nova’s head office in Osaka cost the company �2.7 million a month to rent and about �70 million to redecorate.

The posh office is yet another example of the reckless way Sahashi ran his firm, which filed for court protection under the Corporate Rehabilitation Law on Oct. 26.

Court-appointed administrators are hoping to come up with a new sponsor by the end of this week, which will allow about 7,000 unpaid teachers and 30,000 paid-up students to return to their schools.

Some experts see Nova’s sloppy management as well as huge investment in TV ads as key reasons for the firm’s failure, for which warning signs were seen starting around 2000.

Tsutomu Kuji, author of “Nova Shoho no Maryoku” (“The Magical Power of the Nova Business”), has tracked Nova’s rapid expansion in the 1990s, when it took advantage of the burst in the bubble economy and consequent land price plunge to acquire and rent classrooms at low cost. Then came another economic slump, but the chain continued to pursue expansion and splurge on ads, as Sahashi pursued his extravagant lifestyle.

Nova was investing huge amounts of its resources on TV commercials.

The firm’s advertisement fee rose from �4.6 billion in business 1996 to �8.9 billion in business 2002, according to Kuji.

In the business year to March, Nova spent �7 billion on ads, or about 12 percent of its total sales of �57 billion.

Kuji wrote how Nova attracted new students with eye-catching commercials, talked them into paying tens of thousands of yen for lesson tickets for up to three years in advance and then short-changed refunds to students who grew dissatisfied with what they had paid for.

This prompted students to sue Nova for reimbursement.

In April, the Supreme Court ruled Nova’s contract cancellation policy as illegal and ordered it to repay about �310,000 to a man who canceled his English lesson contract in 2004 but was offered a much smaller refund than promised.

Nova, however, was not the only company whose business suffered due to sloppy management.

There was a time in the early 1990s when many language schools went bankrupt, prompting an industry group to draw up regulations.

In 1994, the Japan Association for the Promotion of Foreign Language, which has 66 language schools or chains as members, came out with a regulation stipulating that only a year’s worth of lessons could be prepaid for.

“In many of those bankruptcy cases, companies used prepayment money to invest in real estate and golf course memberships, causing them to (run out of cash and) go bankrupt,” said Mihoko Fujimoto, the association’s spokeswoman.

Member companies are obliged to comply with the regulation. But Nova, Japan’s biggest language school chain, did not join.

Now rival language schools fear the Nova collapse may trigger a bankruptcy domino effect or a considerable drop in sales as distrust of the industry mounts.

There is speculation that Nova’s downfall, which was set in motion by the Ministry of Economy, Trade and Industry’s partial business suspension order, contributed to the bankruptcy of the ABC Language School chain.

Osaka-based ABC Language, a small English-school chain, filed for court protection from creditors in July.

Gaba Corp., listed on the Mothers market for startups, said its net profit for the business year to December is expected to plunge 53 percent to �387 million.

Gaba said it has not been able to attract as many new students as expected this year because of the Nova meltdown.

But according to Yano Research Institute Ltd, the language school business has been declining since 2003 as the market became saturated.

The market peaked in 2003 with �375 billion in combined sales but it shrunk to �346 billion in business 2006, according to Yano Research.

The market is expected to drop 4.7 percent to �330 billion by the end of March, it said.

In 2003, the Ministry of Health, Labor and Welfare began to slash grants for vocational education, including language courses, causing the market to shrink, said Mika Fukuoka, a researcher at Yano Research.

Grants for such courses started in 1998, allowing those who had paid job insurance premiums for five years or more to apply for the grant to cover 80 percent of lesson fees � up to �300,000.

In 2003, however, the ministry limited the grant to 40 percent, or up to �200,000, after it determined some grant recipients had not been entitled to them.

The grant cut led to a decline in students and the industry began to shrink.

“Frankly speaking, I don’t think there is any language school whose business is on solid footing,” Fukuoka said.

Language school chains Gaba and Berlitz Japan Inc., which target high-end customers, are the few still relatively successful, Fukuoka said.

“During the bubble economy, many housewives who had time and money took English lessons as a hobby,” she said. “But now, only those who really need to study English will take lessons.”

http://search.japantimes.co.jp/cgi-bin/nn20071106f1.html

The Osaka Labor Bureau has decided to send documents to public prosecutors accusing collapsed English school NOVA and its former president, Nozomu Sahashi, of violating the Labor Standards Law by failing to pay workers’ wages.

The bureau has obtained information on NOVA’s financial status from a preservation administrator for the firm, and is continuing an investigation into the company.

Bureau officials have already questioned teachers over the company’s actions. They questioned Sahashi over the allegations against him on Oct. 29. Sahashi reportedly admitted that salary payments remained outstanding.

“We tried to somehow raise the funds, but we couldn’t gather the money together,” Sahashi was quoted as saying. It is believed that the labor bureau investigated the circumstances surrounding the unpaid wages, and concluded that it was able to question his criminal liability.

NOVA’s financial situation has plummeted since June this year, when the Ministry of Economy, Trade and Industry handed the firm a partial business suspension order. The company has not made salary payments that were supposed to be delivered to foreign teachers and Japanese employees in September and October. The amount of unpaid wages is over 2 billion yen.

The General Union to which teachers and other NOVA workers belong earlier requested that a case against NOVA and Sahashi be formed, saying that the continued delayed payment of wages violated the Labor Standards Law.

http://mdn.mainichi.jp/national/news/20071106p2a00m0na020000c.html

The Education, Science and Technology Ministry will launch a program to help the increasing number of foreign students at public primary, middle and high schools to acquire Japanese language skills.

Currently, local governments handle Japanese language education for foreign students at public schools.

The ministry plans to provide financial and other support to the local governments to employ part-time instructors, who are proficient both in Japanese and a foreign language, with the goal of enhancing students’ understanding in classes and Japanese lessons.

According to the ministry, foreign nationals at public primary, middle and high schools throughout the country numbered 70,936 as of May 2006.

Of those students, 22,413 at a total of 5,475 schools did not understand Japanese sufficiently to absorb their lessons.

The number of these students increased by 8.3 percent from the previous year, and had been increasing annually.

Since the Immigration Control Law was revised to permit the employment of ethnic-Japanese foreign nationals for unskilled jobs in 1990, a growing number of people have come to Japan from South America.

Portuguese, spoken in Brazil, is the most common language among foreign students at 38 percent, followed by Chinese at 20 percent and Spanish at 15 percent.

Because these students do not speak Japanese, some have had trouble fitting in with classmates, which has led to behavior problems or even crimes.

The ministry is taking the increase in problems associated with Japanese language ability seriously and decided the central government needs to support local governments in this concern.

It has included 1.96 billion yen in its budget request for the next fiscal year for hiring about 1,600 bilingual instructors around the country by the end of that year.

http://www.yomiuri.co.jp/dy/national/20071106TDY03104.htm

When Natasha Steele came to Japan from her native Australia earlier this year to teach English, she was looking forward to immersing herself in a foreign culture while earning a little money on the side. Now, after the spectacular collapse of her employer, Japan’s biggest English language school chain, Steele has found herself jobless, threatened with eviction and hungry. “I was taken out and afterward, she took me to a bakery and told me I could have anything I wanted,” she says of one charitable student. “She just wanted to know I had enough food for at least two weeks.”

For many college graduates from English-speaking countries, spending a few months in Japan teaching English is a time-honored tradition. But after Nova shut the doors of its more than 800 locations worldwide last week, that tradition is looking precarious. The closure has left over 300,000 Nova students deprived of their prepaid English lessons, and many of its 5,000 foreign language teachers, like Steele, unlikely charity cases.

Nova, started by CEO Nozomu Sahashi in 1981 upon his return from studying in Paris, grew into a publicly listed chain with over 900 locations at its peak. But things started to unravel for the company in April, after Japan’s Supreme Court sided with a former student who sued the school over tuition refunds. Its rapid expansion had been funded largely through a prepaid credit system, where students bought thousands of dollars worth of lessons up front and received only partial refunds in the event of midterm cancellations. A subsequent government investigation led to a partial suspension of Nova’s operations, at which point hundreds of thousands of students demanded a refund on their prepaid tuition. The result was the equivalent of a bank run: as students rushed to close their accounts, the company fell some $380 million in debt and in October filed for corporate rehabilitation, the Japanese equivalent of chapter 11 bankruptcy. This has made it impossible for Nova’s creditors � mostly students and teachers demanding tuition refunds and unpaid wages � to collect their money. For the unsuspecting teachers, this has meant a crash course in Japanese labor law. Several have taken to the streets, leading demonstrations against Nova and Sahashi, while others have held press conferences accompanied by teachers’ union representatives � Kristen Moon, a freshly arrived American, even appeared dressed as Nova’s corporate mascot, a pink bunny rabbit that has become famous through Nova TV commercials aired across Japan. Some airlines have offered discount flights home for cash-strapped teachers, while embassies have opened hotlines to aid their near-homeless citizens. Former Nova employees last week announced a “lessons for food” program, which would allow students to pay for lessons in meals and food items. Meanwhile, the sheer number of out-of-work teachers have glutted the local labor market for English instruction, causing other language schools to stop accepting applications.

The troubles for Nova don’t end there. A report by court-appointed lawyers investigating the case alleges that founder Sahashi � since fired by the board and currently in hiding � had turned his company into something of a personal piggy bank, lining his pockets through such ruses as buying teaching equipment from affiliated companies and selling them to Nova students at grossly inflated prices. He is also suspected of insider trading, misappropriation, and aggravated breach of trust. (Sahashi’s representative has filed a petition refuting such claims.) On Oct. 30, one government lawyer invited reporters to check out the lavish office at Nova’s Osaka headquarters � complete with a fully stocked wet bar and a hidden bedroom and sauna. “Sahashi is still attempting the sell company shares in hiding. I wanted to show the extent of his misdeeds,” said Osaka attorney Toshiaki Higashibatake, who organized the event. Under Japanese corporate law, Nova can stay intact if it can find sponsors to underwrite its current business. But the company is losing money so rapidly � its market value has been halved since filing for bankruptcy � that the search for financial sponsors has been rushed, with proceedings expected to conclude later this week. If it fails to find sponsors for a bailout, Nova faces liquidation.

It’s unlikely that the scandal will put an end to Japan’s $1.2 billion foreign language education industry. Despite a widespread appetite for learning and an educational system that mandates six years of English study, Japan ranks below North Korea on standardized English proficiency tests, according to the U.S.-based Educational Testing Service. All that is small comfort, however, for teachers who share Steele’s plight. Said Moon, the bunny rabbit at the press conference: “I love this country, but I’m in limbo and my life is on hold.”

http://www.time.com/time/world/article/0,8599,1680652,00.html