JAPANESE E + G EB434 ENTERPRISE + GOVERNANCE

Transcription

1 JAPANESE E + G 20 EB434 ENTERPRISE + GOVERNANCE

2 finance in Japan Bank financing (debt) was the main source of corporate finance Equity financing was significantly underdeveloped Firms in big keiretsu groupings were typically characterized by significant cross-shareholdings between group companies Few shares traded and takeovers made near impossible This model developed with the break-up of pre-war zaibatsu industrial conglomerates under the Allied Occupation which abolished holding companies (and banned them until several years ago) and ended an era of founding families as controlling block-holders

3 main bank system With reliance on bank finance for corporate growth for the firms in a large keiretsu grouping this was dominated by a main bank The main bank might also take shares in borrowers (up to a legal limit of 5%) The main bank might provide some input into governance through having a representative on the board but was generally passive Greater governance was provided if the firm became distressed and needed a work out

4 labour in Japan Lifetime employment practice in Japan was first evident in industries in the interwar period as a response to high skilled labour turnover (eg. shipbuilding) Lifetime employment and seniority based wages evolved as systems in the aftermath of WWII Seniority-based wages reflected difficulties of discerning individual productivity on production lines and firms preferences for deferring compensation Enterprise unionism grew out of wartime patriotic industrial associations as they were a ready bargaining unit These recent 3 pillars may had some cultural resonance

5 post-war political economy In late 1945 and 1946 there were over 250 takeover strikes where workers took control of factories and ran them without managers Toshiba had a militant labour dispute and later led a managerial backlash to purge communist radicals Lifetime employment promises were often a direct response to labor militancy, to restore employee morale Managements commitments to not go to the external labor market to dilute organized labour weakened that market and lifetime employment compounded it Large firms also had long had covert no-poaching agreements in place

6 labour & governance Core employees then become a privileged constituency within many Japanese firms at the expense of shareholders and those workers who did not have core employee status temporary workers, women and suppliers provided shock absorbers to firms with the high fixed costs of core employees Reliance on internal labour markets (which provide some efficiencies in terms of human capital formation) led to dominance of firms by managerial insiders Combined with a very weak market for corporate control, led to increasing influence of labor over management

7 brakes on excess What factors attenuated the adverse selection and moral hazard problems associated with the Japanese model?: Government monitoring when governments were responsible for rationing capital or distorting markets Competition in product markets The monitoring and other periodic governance provided by main banks/ shareholders Some monitoring by firms involved in cross-shareholdings because of their exposure Meritocratic education and recruitment systems

8 problems Firms became growth rather than profitability-oriented Hoarding of capital rather than returning it shareholders This often took the form of investing in assets such as land etc that ultimately were far less rewarding than experienced during the high-growth period! Changing age-wage profile with aging labor force Myopia from internal recruitment Resistance to corporate control events that are not brokered by top management...as per recent cases

9 inbound FDI Japan has the lowest stock of foreign direct investment (FDI) as a % of GDP, around 3.4%, of all OECD countries (average 30.6%) public policy was once restrictive in response to domestic firms that feared foreign takeovers or new competitors from abroad For at least two decades Japan has officially encouraged inward FDI in general, with only modest success some sensitive sectors remain but are limited

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11 resisting control events

12 domestic control events Hostility to Japanese outsiders? Fuji-Livedoor controversy Rakuten- TBS Oji Paper Hokuetsu Paper Hoya-Pentax Hoya s bid for Pentax was solicited, but a management coup saw resistance then submission after institutional investors reacted badly to Pentax management plan for independence

13 constructing defences mid-2000s: Japanese companies became more fearful of being a takeover target (weak yen, low share price etc) Rebuilt cross-shareholdings eg. Nippon Steel in strengthened arrangement with Sumitomo Metal Industry & Kobe Steel in the wake of Mittal Steel s takeover of Arcelor in Friendly domestic M&As to gain larger market capitalization, making acquisition more costly (unpalatable?!) Buttressed by national champion ideas Poison pill defences: some abolished five years on

14 Steel Partners: Bogeyman in? Targeted for higher dividends/capital returns or TOB: Steel Partners, led by US activist investor Warren lichenstein, it made bids around 2007 for control of a number of prominent Japanese companies & was accused of gre Yushiro Chemical Sotoh Co. Brother Industries Ltd. Denki Sangyo Co. Tenryu Saw Mfg Co. Sapporo Breweries Aderans

15 shareholder responses Shareholder support for anti-takeover measures aimed at Steel Partners at: Bull-Dog Sauce (including support for defenses from shareholder Toppan Printing Nikkei, 22/6/07) Sapporo Breweries Steel Partners proposals at shareholders meetings rejected at: Brother Industries Ltd, Denki Sangyo Co Some shareholders (at least) motivated by long-termism, loyalty to management or nationalism?

16 Bulldog Sauce Case Steel Partners held some 10% of shares TOB made, then offer price raised Poison pill defence accepted by about 80% of shareholders (on June 24th 2007) 3 equity warrants issued per share, when Steel Partners TOB was not withdrawn Steel Partners receive warrants but not permitted to convert them, instead having them bought back for a total of \2.3 billion Steel Partners contested the defenses at all legal levels, losing each time Steel Partners was judged an abusive acquirer in 2nd case

17 Yomiuri editorialised.. An overwhelming majority of general stockholders decided in favour of longterm stable growth of companies, not immediate profits. We believe this may highlight the soundness of Japan s capital market (27/6/07) The backlash from shareholders of Bull Dog against Steel Partners said its intrusive attitude toward a company with a history of more than a century was unforgivable.. But some recognition of firms need to be responsive to shareholders, in return for their loyalty to management in the face of foreign TOBs

18 international standards? The now-common poison pill defense in Japan conforms with international standards and is legal in the country then Vice Economy, Trade & Industry Minister Takao Kitabata While Delaware Supreme Court upheld poison pill mechanisms in 1985, leading to some 380 firms incorporated in the state to adopt them soon after, the practice is in ill-repute eg. News Ltd backlash Jensen (2000) reports studies showing negative impacts on shareholder wealth of Delaware poison pills

19 stakeholder capitalism Fuji-Livedoor dispute was illuminative: the Fuji staff union s opposition, as evidence of inappropriateness of the Livedoor bid, was widely treated as selfevident. Issues of agency slack & rent seeking rarely were raised in response Yomiuri Shimbun in the context of Rakuten-TBS conflict: Some deep-pocketed investment funds have come under fire for hostile takeover bids that make no concessions to the wishes of their target companies employees and their corporate clients

20 perceptions & interests No distinction made in discussions between fully compensated parties & involuntary creditors suggesting core employees not seen as the former Deferred compensation still embedded in the firm few arms-length retirements incomes/superannuation arrangements Firm-specific human capital? Or rent-extracting core employees? Cross-shareholdings resulting in shareholders not acting as shareholders but rather mutual defence core employee arrangements? Hostility to foreigners, or outsiders Japanese or foreign?

21 voluntary M & A activity

22 mergers & aquisitions since late 2000s pessimism took hold in Japanese business about future growth prospects of the domestic market led to growing wave of foreign acquisitions by Japanese firms to grow business abroad & voluntary domestic mergers for scale economies, strategic rationalisation BUT inbound FDI has grown much more slowly, despite government encouragement

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