Rapid growth saw Nova’s troubles balloon

The decision Friday by Nova Corp., the nation’s largest foreign language conversation school chain, to file for court protection can be put down to the growing stress on its operations caused by its rapid growth.

The bigger the Osaka-based company grew, the more obvious were its weaknesses under the leadership of its former president, Nozomu Sahashi. Although the company became the market leader with its combination of eye-catching TV commercials and extensive network of classrooms, Nova could not escape the fact that it was a one-man show.

About 40 billion yen in advance payments from more than 300,000 students have gone missing.

In autumn 2004, Nova executives gathered at the company’s general headquarters in a high-rise building near JR Namba Station, to hear Sahashi’s strategy for overcoming the problems the company faced.

Sahashi is said to have told the executives, “We’ll get through this crisis by rapidly increasing the number of schools.”

Within a year, the number of Nova schools rose from a little more than 600 nationwide to more than 900. But Nova still struggled financially and in March 2006 fell into the red for the first time since its shares were listed.

Nova achieved such rapid growth because of its system of booking as sales 45 percent of the advance payments for future lessons, meaning the company was opening new schools on the basis of future revenues.

It should have been clear that if the number of new students signing up declined, the firm’s financial situation would deteriorate rapidly. However, no one in the company dared to express opposition to Sahashi’s plan.

“Even if we thought it was irrational, the culture at the company made people reluctant to speak out,” one former Nova executive said.

Nova was established in 1981 as an English conversation school by Sahashi, then 29, and a number of people he became acquainted with during his time studying in Paris. The company grew rapidly by utilizing striking TV commercials and introducing hourly lesson fees that were 20 percent to 50 percent less than its rivals’.

Though Sahashi is said to have disliked being referred to as “president” within the company, decision-making powers were heavily concentrated with him.

A former Nova executive recalled: “We needed the president’s direct approval even if we were just buying 10 personal computers. The company was like a shop being run by an individual.”

Nova’s dramatic growth meant there was a shortage of instructors, and consumer consultation centers across the country received more and more complaints about the chain, such as extreme difficulty in booking lessons.

Around 2005, Nova executives began suggesting the company should consider hiring more instructors, but Sahashi is said to have dismissed such talk. “I won’t provide schools with instructors who have poor sales performances,” he said at the time, according to company sources.

Since July, when delays in salary payments began, Sahashi has reportedly sent fax messages to boost employee morale, though many of these are said to have ended up straight in trash cans.

In the past six months, nearly 15 billion yen in new advance payments were made by students. Yet while Sahashi hesitated to act, the damage to the company was ballooning dramatically.

Nova collected a huge number of advance payments for long-term contracts, lasting up to three years, up until June, when the Economy, Trade and Industry Ministry ordered the company to stop this practice.

Unlike the country’s other five major language school chain operators, Nova failed to separate the deposited money from its own assets, and did not keep these advance payments separate in a financial institution.

This approach will be particularly damaging to students who paid in cash, as those who made advance payments with credit contracts can stop payments when they are no longer able to receive the service, in accordance with the Installment Sales Law.

According to the ministry, about 80 percent of the advance payments to Nova were made in cash, and it will depend on Nova’s corporate rehabilitation plan, which is yet to be drafted, as to how much the students will be able to get back.

With unpaid salaries, taxes and public insurance premiums prioritized by law, it is possible that in a worst-case scenario the students will get nothing back.

The Specific Commercial Transactions Law designates foreign-language conversation schools as a business obliged to continuously offer specific services. This type of contract is often problematic as it is difficult for consumers to judge whether a service is good in advance, despite having to cough up a big lump sum.

But the law only obliges such companies to explain whether the money is kept separately on contract sheets, but does not require the money to be stored separately.

As one executive at a major English conversation school chain commented dryly, “Because students have no way of knowing how the deposited money is handled, the law effectively offers tacit approval for misappropriation.”

Nova’s contracts with students stated clearly that no specific measures were taken to keep the deposited money separate. But it did say students’ money was protected by the company’s various financial assets.

Other businesses handling advance payments, such as travel agencies and firms that issue shopping coupons, are obliged by law to set aside a certain amount as a way of guaranteeing protection for consumers.

Seiji Ikemoto, a lawyer who specializes in consumer affairs, said: “Even if a contract states measures have been taken to keep deposited money separate, most consumers gloss over these details when they sign. Nova’s collapse just proves that this clause in the law doesn’t help protect consumers.”

Ikemoto suggested a change in the law that would prohibit advance payments for long-term contracts and allow industrial associations to set up funds to prepare for possible corporate failures.