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Monday, June 18, 2007
EXECS SHAPED JAPAN, EUROPE TAKEOVER DEBATE
Governance rules often spun by managers: expert
It is company managers, not politicians or institutional investors, who call the shots on corporate governance, an American scholar said at a recent seminar in Tokyo.
This is evident even in Japan, where business executives — with help from government bureaucrats — recently played a major role in framing the public debate on hostile takeovers, according to Pepper D. Culpepper, associate professor of public policy at Harvard University's John F. Kennedy School of Government.
At a May 29 seminar on "The politics of corporate control: European developments and their implications for Japan," organized by the Keizai Koho Center, Culpepper explained how changes in the concentration of corporate ownership in Europe often just reflect a change in management interests.
Culpepper listed France, Germany and Italy as examples of countries that use systems based on concentrated ownership — something he calls "patient capital" — to protect against oversights caused by reactions to stock prices and short-term earnings results. But ownership ratios change over time for various reasons, he said.
In 1996, for example, the average stake of companies' largest single shareholders was 37 percent in France, 32.9 percent in Germany and 32.4 percent in Italy. By 2005, that figure had fallen to 22.4 percent in France but remained about the same at 34.8 percent in Germany and 33.2 percent in Italy.
The change in France, Culpepper said, was not caused by legal changes favoring minority shareholders, but by a change in managers' interests.
Some managers in France have been trying to turn their companies into global leaders or European champions since the mid-1990s, but their German and Italian counterparts chose to focus on retaining control of their companies instead, he said.
Another case in point is the Netherlands, where the nominal ownership concentration in 2005 appeared to be lower at 19.1 percent. But the real concentration, which reflects managers' effective voting power in takeovers, is roughly 45 percent, Culpepper said.
There is a unique Dutch system called "trust office" that allows managers to relegate their voting power to a third party, which can be activated to fend off hostile takeovers. The system has been attacked twice since the mid-1990s, but both attempts to change it failed, he said.
The second attempt, in 2003, was triggered by the Enron, WorldCom and other huge financial scandals in the United States. With local media awash in the scandals, critics began charging that highly paid Dutch managers should be exposed to a more Anglo-Saxon environment where greater transparency is required and hostile takeovers are easier, he said.
The Dutch managers responded to the heat by dragging out public discussion on the issue until the storm subsided. They then seized control of the debate on corporate governance by framing it in their own way.
When an influential Dutch business leader gave a series of nationalistic media interviews in 2006 warning against the "franchising of Dutch companies" and the specter of Dutch firms being sold off to foreigners, what he and his colleagues were really doing was overturning public discourse on corporate governance, Culpepper said.
"Corporate governance was no longer about restraining managers. It was about protecting the national interests of the Netherlands by keeping Dutch companies Dutch," he said.
And while the Dutch liberal-right VVD party was pushing for changing the trust office system, the business community won support from the Socialists, who ultimately did not care much about corporate governance "because their voters did not care all that much" about the issue, he said.
Corporate governance, Culpepper noted, "does not matter to most voters most of the time" unless they are repelled by high-profile scandals like Enron. But it is an issue of "tremendously high stakes" for corporate managers, he said.
What do these developments in Europe say about what Japan's corporate development since 2000?
Like the Netherlands, Japan is a country where the concentration of ownership has been low but stable for much of the postwar period. The market for corporate control didn't come to life until the unwinding of cross-shareholdings began accelerating in the late 1990s, Culpepper said.
Unwinding was not the result of a political attack against the system, but a voluntary response to the prospect of a financial crisis occurring in Japan, he said. It was mainly driven by the banking industry's problem with nonperforming loans and its need to keep capital-to-asset ratios within international standards.
It is interesting, Culpepper said, that most major companies appeared unconcerned earlier this decade when shareholder activists like Yoshiaki Murakami began using ownership stakes to demand reforms or higher dividends. But the Ministry of Economy, Trade and Industry was concerned.
In 2004, the ministry launched the Corporate Value Working Group. The purpose of the group was to consider what sort of rules Japan might want to adopt given the decline of cross-shareholdings and the rising possibility of hostile takeovers, he said.
Interest in METI's forum grew dramatically in February 2005 when Internet firm Livedoor Co. launched a takeover bid for Nippon Broadcasting System, he said. It was the "fundamental moment" that caused major Japanese firms to think seriously about how to defend against hostile takeovers, he said.
The Livedoor bid and the loopholes it exposed quickly prompted the Financial Services Agency to change the rules on takeovers. While the move "could have been an important legislative moment in the politics of corporate control" in Japan, the revisions were quite limited in scope and did not result in sweeping changes, Culpepper said.
Meanwhile, the 2006 law that paved the way for triangular mergers between Japanese and foreign companies — which had nothing to do with hostile takeovers because triangular mergers require the consent of the board of the acquired firm — was used as a tool by the business community, METI and perhaps the mass media to raise the specter of Japanese companies being taken over by larger, foreign firms, he pointed out.
"So at the time following Livedoor's bid for NBS, when corporate governance and corporate control has moved to the very front pages of Japanese newspapers, there is a lot of discussion about big companies swallowing up small companies, the small companies being Japanese and big companies being largely foreign competitors," he said.
The outcome of these discussions, Culpepper argued, was a shift from the norm of "no hostile takeovers" in Japan to the norm of "only good hostile takeovers" — which meant that greenmailers or corporate raiders were unwelcome.
This shift is not embodied in any legal document, but in the report issued by METI's Corporate Value Group, which did not have a legislative mandate but was merely a working group.
The result represents an effort by the business community and METI to shift the debate to an informal forum rather than a legal venue, where results would have come under more public scrutiny, he said.
This format gave METI more control over who would have a say in the takeover debate, he said.