Bill Totten's Weblog

Monday, August 07, 2006

Time to rethink capital-management relationship

by Masakazu Yamazaki

The Yomiuri Shimbun (July 16 2006)

I often recall the demise of a publishing company that, though small, was known for producing an excellent magazine. The president was an elderly man who owned and ran the publication, which had several directors and other staff on the payroll. He had a grown son, but excluded him from handling managerial affairs and editing jobs because he was incompetent at both.

When the president suddenly died, the directors took charge of carrying on the publishing house, while its capital, through an inheritance, fell into the hands of the son.

After this, the company's capital and management split along divergent tracks.

Although the son was presumably not confident enough to take the helm of the company, he was apparently very bitter that he had not being allowed to steer the firm in the past. Shortly after the president's memorial service, the son unilaterally announced the company's liquidation.

Killing the goose that laid the golden egg earned him tens of millions of yen. However, the directors, editor and employees were set adrift, and the country lost a quality magazine that had enthralled readers for half a century.

Philosophical thinking needed

This is, of course, an incident that might seem exceptional only when seen in light of the son's motive for his conduct.

Considering that capital and management are generally separated in Japanese companies, the two often conflict, and the publisher's tale may well be indicative of the far-ranging problems with modern capitalism. The recent dispute between Livedoor Co and Nippon Broadcasting System Inc, and that between the so-called Murakami Fund and Hanshin Electric Railway Co reiterate the fact that modern society has yet to completely resolve this problem.

Although laws and economics can provide some answers, the philosophy regarding the rightful owner of a company remains incomplete.

Japan was once said to be an unusual country in this respect, with management wielding overwhelming authority compared to shareholders. As the number of individual shareholders remained low and the cross-holding of shares among business affiliates kept stock prices stable, corporate executives were rarely subject to criticism at general shareholders' meetings.

Can ownership be all-powerful?

As a result, corporate executives could be criticized for lacking the killer instinct needed to take the fight to their rivals. Proponents of the Japanese way of doing business were also part of the equation - this was said to be conducive to mapping out a business strategy from a long-term point of view.

The phrase "structural reform" is heard everywhere these days. Calls are growing for the tables to be turned on the conventional relationship of management vis-a-vis shareholders.

Some pundits are pushing "activist investors" to find fault with corporate executives and to expel the lazy ones by making hostile takeover bids. A body of opinion seriously maintains that the main priority for corporate managers should be to secure short-term profits and pass them quickly on to shareholders.

The thinking behind such arguments is based on "logic of ownership", which stresses that companies belong to their shareholders.

Indeed, the right to private property is one of the foundations of a free society, and respecting this right is of tantamount importance to those championing structural reforms. Existing laws seem to leave little room for doubting the fact that companies are owned by shareholders.

But, if we step back for a moment, it is perhaps worth pondering whether the right of ownership should always be considered all-powerful.

Even if we admit the right of ownership is sacrosanct and inviolable, we cannot help but ask whether proprietary rights should be regarded in the same way as the right of a person to dispose of possessions at their own discretion.

While we own our bodies, we, as individuals, are not allowed to dispose of them on our own account. We are prohibited from selling ourselves as slaves or selling our organs.

I remember when the owner of a world-famous painting came under fire for saying that, because of his ardent attachment to the masterpiece, he would like it incinerated with him when he died.

Leaving the purely legal perspective aside, common sense tells us that cultural assets should be deemed to belong to everyone. Thus, the right to discard such assets should be limited.

A sense of mission

The great majority of corporate entities are the product of their founders' aspirations - or sense of mission - to manufacture something or provide some service to the public.

Only those who support the founder's vision are prepared to fork out money to help the company get on its feet and chase its avowed mission. Most employees choose to work at the company not only to earn a living, but because the job appeals to them.

Former Nippon Steel Corp Chairman Yoshihiro Inayama was quoted as saying that, should he be born again, he would still choose to make steel.

People who have seen the movie "Pretty Woman" will realize that Inayama's view of running a company is shared by both Japanese and Americans.

In the 1990 film, a successful corporate raider falls in love with a woman and is awakened to the preciousness of humanity, simultaneously losing faith in the wisdom of economic rationalism. This causes him to gain the respect of an aged shipbuilder who wishes to build ships simply for the joy of building them.

Shouldn't a company - an organization generated by an entrepreneur's wisdom and sensibility combined with a sense of mission for society - be considered a kind of cultural property?

I believe a company that keeps its employees happy while satisfying its customers should be deemed, at the very least, a sort of organic entity.

What we are witnessing recently, however, is the emergence of a horde of speculators who don't care about the sense of belonging that employees have toward their firms, or consumers' attachment to their favorite companies and products. Instead, their overriding concern is ensuring that the shares they hold go up in price.

The emergence of fund managers, who wield power in the market on the strength of collecting small sums of cash from investors, is reminiscent of how, in days gone by, real estate agents bought up small plots of land for consolidation and resold them at a handsome profit. This "new wall" has sapped the vigor of day-to-day corporate activities and the humane aspects of companies, making investors increasingly indifferent to corporate management.

Making a profit is, of course, one of the major purposes of doing business. Disputes will inevitably arise between shareholders and company management over the allocation of profits. If company bigwigs are immune to criticism from shareholders and become slack in their duties, preserving the vigor of the nation's economy as a whole would be difficult.

But, is it proper that management-shareholder conflicts are settled by a majority vote at a general shareholders meeting, or solely on the basis of the logic of ownership?

Company management, when on the defensive, are keen to make shareholders' meetings a mere formality, while shareholders often resort to any possible means to win the game - sometimes resorting to measures that could eventually lead to self-incrimination.

Long history of labor rights

Thinking back, the relationship between capital and labor has a long history. Humans have racked their brains for centuries to ensure labor rights are adequately protected. Efforts to protect these rights date back to the Luddites, a social movement of English workers in the early 1800s opposed to changes brought about by the Industrial Revolution. The Luddites believed that these changes threatened their jobs.

The result of such struggles is that legal systems and practices for labor dispute arbitration have been firmly established.

By contrast, the history relating to the separation of company ownership and company management is still very short. The annals of investment funds and hostile takeover bids are even shorter.

In my opinion, the time is right for mankind to rethink its philosophical fundamentals so as to deal with the new pattern of conflict between capital and management.

Politicians, scholars and those engaged in the day-to-day business of management should all reassess their fixed ideas. Politicians and scholars should investigate ways to protect the rights of business management, and business managers should pursue the reformation of shareholders' general meetings.


Yamazaki is a playwright and critic, and a councillor of the Suntory Foundation and the Hyogo Arts and Culture Association.

Bill Totten


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