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Important Strategic Goals (1988)

The University of Belgrade World Rectors Conference April 4, 2010 WHAT WILL BECOME OF THE CORPORATION ? - A Comparative Perspective - by Katsuhito IWAI The University of Tokyo. Important Strategic Goals (1988)

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Important Strategic Goals (1988)

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  1. The University of BelgradeWorld Rectors ConferenceApril 4, 2010 WHAT WILL BECOME OF THE CORPORATION ? - A Comparative Perspective -byKatsuhito IWAIThe University of Tokyo

  2. Important Strategic Goals (1988) • --------------------------------------------------------------------------------------------------- • (%) AmericaJapan Europe • --------------------------------------------------------------------------------------------------- Rate of Return on Investment 78.1 35.6 64.2 Capital Gains of Shareholders 63.0 2.7(!) 10.6 Expansion of Market Share 53.4 50.6 61.8 Product Portfolio 28.8 11.5 26.0 Maximizing Sales Volume 15.1 27.9 17.9 Ratio of New Products 11.0 60.8 14.6 Corporate Social Image 6.8 18.6 18.7 Retention of Employees 1.4 3.8 6.5 Employees' Benefits 0.0 7.7 0.8 ……………………….. …. …. …. • ----------------------------------------------------------------------------------------------------------------------------------------------------- Source: 1988 White Paper on Corporations, (Keizai Doyu Kai, 1988: Tokyo, Japan). Note: Number of Corporations responding to questionnaire: 73 in America, 724 in Japan and 123 in Europe (58 in Italy, 33 in Germany, 18 in France and 14 in Great Britain.

  3. Two Corporate Systems？ American Corporate System Maximization of Shareholders’ Return Manager as Agency of Shareholders  Japanese Corporate System  Growth and Survival of Corporation as Organizational Entity = Manager as the Leader of Organization <at least until 1980s>

  4. A Theoretical Puzzle? AmericaandJapan: Both Capitalist Countries Based On Private Property System • How Can These Seemingly Contradictory Systems of Corporation Coexist Within the Same Capitalism ? • My Theme: The Legal Nature of CORPORATION Allows Two Systems to Coexist

  5. Two Opposing Views on The Nature of Corporation in Law ‖ Corporate Personality Controversy · Corporate ‘Nominalism’ = Corporation as A Name for an Association of Individuals  · Corporate ‘Realism’ = Corporation as A Entity Independent of Indiv. Members (Also in Philosophy: Nominalism vs. Realism)

  6. Two Opposing Views on The Nature of Corporation in Economics Contractual Theory of the Firm “Private corporations" as "simply legal fictions which serve as a nexus for a set of contracting relationships among individuals.“ (M. Jensen and W. Meckling)  Evolutionary Theory of the Firm or Organizational Capability Approach Firms as "organizations that know how to do things, … while individual members come and go." (Sidney Winter)

  7. The Same Opposition Both in Reality and in Theory ! WHY? My Answer: The Very Legal Nature of CORPORATION Is Responsible for the Co-Existence of Two Forms of Corporation • What is CORPORATION?

  8. A Mom & Pop Grocery Shop (= A Firm NOT INCORPORATED, or A Textbook Model of the Firm). The Shop Owner

  9. The Single Ownership Structure of a Textbook Firm Owners Contractual Relations Employees Suppliers Customers  Creditors Ownership Relation Assets (Apples, Oranges, etc)

  10. A Big Super-Market Chain Inc.(= Incorporated Firm or Business Corporation) A Shareholder

  11. WHY?

  12. Who Owns Corporate Assets? The Shareholder Is NOT The Legal Owner of Corporate Assets Who is Their Owner ?  CORPORATION as Legal Person!

  13. Corporation as Legal Person “Every corporation has the same power as an individual to do things necessary or convenient to carry out its business and affairs…” (§3.02 of ABA’s Revised Model of Business Corporate Act) Toyota is a Corporation, NIS is a Corporation, U. of Belgrade & U. of Tokyo are also.  A Corporation Owns Property, Make Contracts With Others, and Become a Litigant in Law Suit

  14. A CORPORATION is A Thing Treated as a Person in Law  Person/Thing Duality of Corporation It is Not the Shareholders But the Corporation as a Legal Person That Owns Corporate Assets

  15. What Does a Shareholder Own?  The Corporation as aThing (!) Shareholder = Holder of a Share of the Corporationas a Thing, Distinct from Corporate Assets (Note: The Stock Market is the Market for Corporations as Things, NOT Corp. Assets)

  16. Two-Tier Ownership Structure of Business Corporation Shareholder Shareholder Shareholder ･･････ Ownership Relations (Thing) Corporation Owners Ownership (Person) Relation Employers Employees Suppliers Customers  Creditors Contractual Suppliers Ownership Relations Relation Customers Assets Creditors Corporate Assets Cf. Single-Tier Ownership Structure of Classical Firm

  17. We Can Now END the Controversy Between Corporate ‘Nominalism’ ( Shareholder Supremacy) vs. Corporate ‘Realism’ ( Organizational Autonomy) By Declaring Victory for Both Sides!

  18. Upstairs/Downstairs ≈ Corporate Nominalism ≈ American System Shareholder Supremacy • ≈ Corporate Realism • ≈ Japanese System • Organizational Autonomy Both Within the Same Capitalism  Double Use of Private Property Sys.!

  19. We Can Go Further • Two Legal Mechanisms - One Turning Corporation into A Mere “Thing” - The Other into A Full “Person”

  20. Natural Persons (Thing) Corporation (Person) How to Make a CorporationPurely 'Realistic‘ (i). Self-Owning Corporation = Corporation as a Person Owns Itself as a Thing Legal Restrictions  Prohibition of Share Repurchase  Even If allowed, Repurchased Shares Cannot Vote in Mtng ( Convergence (?) to Non-Profit Corporation)

  21. (ii).Mutually Holding Corporations Natural Persons Corporation A (Person/Thing) (Thing/Person) Corporation B Drawing Hands by M.C. Escher

  22. Natural Persons A L B K C J D I E H F G (iii) Cross-Shareholding Among 12 Corporations Legal Limits on Cross-shareholdings Japan (U.S.) : 5% rule Subsidiaries  A Solution: 5%x(12-1) = 55% > 50% A Majority ! Reality?

  23. Cross-Shareholdings among Core 20 Corporations of Sumitomo Group, 1993

  24. How to Make a CorporationPurely 'Nominalistic‘ \ . Dominant Shareholder CORPORATION Corporate Assets Or, Mere Possibility of Hostile Takeovers May Discipline Managers to Maximize Share Value = Stock Market as Market for Corporate Control

  25. The Controversy Resolved! Legal Menu of Corporate FormsWithin Capitalism Nominalistic Realistic Textbook Firms|NPO U.S.A.Japan (UK. etc.) (Germany etc.) ( ?) ( ?)

  26. The Eclipse of the Japanese Corporate System ?  Unwinding of Cross-Shareholdings % of Cross-shareholdings 27.7%(1991)9.0%(2007) 6 Large Keiretsu Groups  3 Groups + Reshuffling  An Increase in M & As Transaction Values of M&A (Billion of US $) Frequencies

  27. Is the Long-Run Tide in the ‘Nominalistic' Direction?OrConvergence to American System? No! There is Also a Counter Tide  A Transition from Industrial Capitalism to Post-Industrial Capitalism

  28. Two Sources of Inefficiency in Corporate Organization Moral Hazard ‖ Employees’ Covert Pursuit of Their Private Interests At the Expense of Shareholders (E.g., Sharking, Toy-Making, Perks-Building) Hold-Up Problem ‖ Employees’ Reluctance to Make a Commitment to Organization-SpecificHuman Capital For Fear of Being Exploited By Myopic Shareholders After its Investment is Sunk

  29. Cost/Benefit of Two Co. Systems Realistic Co.  De Facto Owner of Organization- Specific Human Capital  Hold-Up  Moral Hazard Nominalistic Co.  Monitoring by Shareholders (or Stock Market)  Moral Hazard  Hold-Up

  30. From Industrial Capitalism to Post-Industrial Capitalism = A Shift of Major Source of Profits  Skills, Capability, Vision of Core Workers, Engineers, Managers = Knowledge-Based Human Capital Scale Economy of Large Factory = Physical Capital

  31. MONEY CAN Buy Physical Capital (= ALIENABLE)  Suppliers of Money = Shareholders  In Industrial Capitalism Human Capital is Secondary to Physical Capital  Supremacy of Shareholders

  32. MONEY Can NOT Buy Human Capital (= INALIENABILE)  In Post-Industrial Capitalism  Waning of the Power of Money  Shareholders  vs. Knowledge-Based Human Capital 

  33. The Above Story is NOT ONLY about the Japanese Corporate SystemBUT ALSO about the Corporate System in General, including the European System, the Asian System, and even the American System.

  34. What Will Become of the Corporation?  In this NEW Era of Post-industrial Capitalism Too Much Shift to Nominalistic Form of Corporation Could be Counter-Productive, Because Human Brains Matter More Than Shareholders’ Money

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