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Family Businesses and IPOs: The Case of Idemitsu Kosan

Family Businesses and IPOs: The Case of Idemitsu Kosan. Minoru SHIMAMOTO Hitotsubashi University. A Venerable Firm. Idemitsu Kosan. Headquarters. 2. A Venerable Firm. Idemitsu Kosan. Founded in 1911 The 2nd largest petroleum company in Japan

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Family Businesses and IPOs: The Case of Idemitsu Kosan

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  1. Family Businesses and IPOs:The Case of Idemitsu Kosan Minoru SHIMAMOTO Hitotsubashi University

  2. A Venerable Firm Idemitsu Kosan Headquarters 2

  3. A Venerable Firm Idemitsu Kosan • Founded in 1911 • The 2nd largest petroleum company in Japan • Sales: nearly 4,000 billion yen (38 billion dollars) • Non-listed until 2006 3

  4. A Well-Known Firm Idemitsu Kosan Service Station 4

  5. A Well-Known Firm Apollo mark 5

  6. Debt Reduction A Serious Financial Crisis Nearly 2,500 billion yen (30 billion dollars) 6

  7. Debt Reduction Repayment & Recovery Nearly 2,500 billion yen (30 billion dollar) Recovery plan & planned repayment IPO Return from the crisis 7

  8. Debt Reduction Repayment & Recovery What happened during this period? IPO 8

  9. Excellent Performance: V-shaped Recovery after 2000 Idemitsu Sales and Profit(Excluding Subsidiaries) 1999 2006 1993 IPO Recovery Plan Peak of the debt 9 (Source) Nikkei NEEDS Financial Quest.

  10. Maintaining Profits Idemitsu Sales and Profit(Including Subsidiaries) 2006 IPO 2002 President Tenbo 10 （出所）Idemitsu株式会社『ファクトブック2010』2010年6月11日。（注）2010年度の営業利益は予想値。

  11. Japan’s Second Largest Oil Company Gasoline Market Share (March 2011) 11

  12. Summary Founder Sazo

  13. Summary 1885-1981 Founder Sazo Founder’s Son Shosuke

  14. Summary Debt 1885-1981 Bubble Economy in the 1980s Sazo Shosuke

  15. Summary Debt Globalization in the 1990s 1885-1981 Sazo The Big Bang and Financial Crisis Fear among Banks Shosuke

  16. Summary 1885-1981 Sazo Tenbo Shosuke

  17. Summary 1885-1981 Idemitsu’s IPO Plan Sazo The Recovery Plan Tenbo Shosuke

  18. Summary Sazo’s Principles of Management Sazo Tenbo The Recovery Plan

  19. Summery Debt Sales & Profit Tenbo

  20. Sazo Idemitsu (1885-1981) 20

  21. A Communitarian Firm History of Idemitsu • 2011 is the firm’s 100th anniversary • Idemitsu: • Is one of Japan’s pre-WWII international firms • Is a latecomer to the oil market that eliminated its late-starter disadvantage • Has a No-layoff Policy • Implemented an extremely difficult oil recovery project • Imports “Apollo” brand gasoline • Was the instigator of the Nishomaru Affair, competed against the Oil Majors • Withdrew from the Petroleum Association of Japan when opposed to regulation by the Government 21

  22. Sacred and Inviolable Sazo’s Principles of Management 人間尊重 • Respect • Paternalism • Independence & Empowerment • Denial of the Greedy Pursuit of Wealth • Consumer-Centered Business Mindset 大家族主義 独立自治 黄金の 奴隷たるなかれ 生産者から 消費者へ 22

  23. Idemitsu is a Big Family The Seven Wonders of Idemitsu 馘首なし 1. No firing 2. No forced retirement 3. No labor union 4. No time card 5. No announcement of salary 6. No peddling of labor for money (The value of labor is greater than mere wages.) 7. No overtime pay 定年なし 労働組合なし 出勤簿なし 給料公示なし 給料は労働 の対価でない 残業代 受け取らず 23

  24. Idemitsu's Financial Crisis Expansive Growth Policy in the 1980s • Omni-directional expanding growth policy • Collapse of Bubble Economy • Runaway growth of interest-bearing debt 24

  25. Omens of a Crisis Idemitsu as an Entrepreneurial Enterprise • (1) Inviolable Management Philosophy • (2) Paternalistic Personnel System • (3) Freewheeling Corporate Strategy 25

  26. Idemitsu’s Governance Structure under Sazo (through the 1970s) • Each department chief negotiated directly with the founder • The founder was responsible for all major decisions • This arrangement was not rare (e.g. GM in the early 20c.) Only the Founder Knows Everything 26

  27. Only Founder Knows Everything Governance as an Entrepreneurial Enterprise （until the 1970s） Founder Proposal Proposal Approval Oil Idemitsu Kosan Petrochemicals Idemitsu Petrochemicals Idemitsu Petrochemicals was a wholly-owned subsidiary, but operated independently 27

  28. After the Founder’s Passing Governance after Sazo (in the 1980s) Founder’s Son Negotiation for Investment Negotiation for Investment Oil Idemitsu Kosan Petrochemicals Idemitsu Petrochemicals Investment for measures against Oil Liberalization Investment for development into a General Chemical Firm 28

  29. Idemitsu Group’s Over-investment in the 1990s • Each division competed for investment funds in the 1980s • Altogether, the amount was enormous • Idemitsu Group’s investment was not managed systematically 29

  30. Akihiko Tenbo 30

  31. Akihiko Tenbo • 1939: Born in Tokyo • 1964: Graduated from the University of Tokyo • 1988: President, Idemitsu Europe • 1991: Accounting General Manager • 2002: President • 2009: Chairman 31

  32. Rough Assumption of Continuously Growing Economy • Idemitsu continued investing in refineries and land procurement on the scale of 100 billion yen per year – entirely financed with debt. • One senior executive said to Tenbo: “An Idemitsu accounting general manager should simply collect money without a word.” 32

  33. Land Prices 1989-91 Stock Land 33

  34. Idemitsu Petrochemical’s Losses (1993) • Ordinary loss of 27 billion yen (270 million dollar) in 1993 due to over-investment • A Prompt re-structuring was necessary. • Idemitsu Kosan supported Idemitsu Petrochemicals Financial Institutions Began to Hesitate to Lend 34

  35. The Origins of Idemitsu’s IPO Idemitsu’s IPO Plan (1995) • Tenbo began to seriously think about an IPO • In 1995, with President Akira Idemitsu, Tenbo tried to convice Chairman Shosuke of the necessity of an IPO • Chairman Shosuke’s reply: “No.” 35

  36. Sazo rejected public capital markets. Shosuke was his son. Sazo's Stand Against Public Financing • “After all, zero capital is ideal.” • “A public offering could cause the fall of Idemitsu.” • Shosuke waited for five years to approve the IPO. Sazo Shosuke 36

  37. Globalization & The Big Bang The Big Bang (1996) • Collapse of the “Convoy System” (Banks had been protected by the MOF) • Deregulation by the government • Reform toward Free, Fair and Global Finance • Intensified Competition between the Banks • This led to a credit crunch as bank’s struggled to meet BIS capital-adequacy requirements 37

  38. Unwanted Credit Rating(1998) AAA Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 • Moody's assigned a “B2” to Idemitsu in 1998 • It was a kind of surprise attack 38

  39. Fear Among Banks • The interesting-bearing debt still reached about 2,000 billion yen in 1998. • Banks were afraid that Idemitsu might not repay borrowed money. • In 1998, Tenbo began to contact banks to discuss debt repayment. 39

  40. Idemitsu’s Recovery Plan • In 1999 Tenbo decided to start the Idemitsu Recovery Plan • Tenbo gathered leading middle managers from each department cross-functionally • These middle managers used their area expertise to help Tenbo formulate the grand plan Tenbo Nakano 40

  41. Idemitsu’s Recovery Plan • Reduction of fixed costs • Debt load reduction by selling non-core assets • Sale of non-core businesses • Enhancement of competitiveness through alliance 41

  42. Tenbo’s Campaign of Persuasion • Tenbo had to convince both the Idemitsu Family and Employees of the gravity of the crisis with actual data and figures Idemitsu Family Idemitsu Employees Internal Conflict about IPO? Tenbo kept silence about IPO internally? 42

  43. Idemitsu Family Pro- IPO Anti- IPO Sazo Keisuke Shosuke Akira Chairman President Tenbo 43 General Manager

  44. Persuading Shosuke Tenbo’s Point of View • An IPO is a tool, not a philosophy • If Sazo was alive he would permit an IPO, in view of the now-mature stock market • A company’s role is not only to create profits for stockholders but also to fulfill it’s social responsibility. This is possible even after listing on an exchange. 44

  45. Sosuke’s Acceptance • In 2000, Shosuke admitted the necessity of an IPO • Tenbo’s Words: “It was not a one-shot meeting, we discussed it many, many times. It was a five-year meeting.” • In 2001 Shosuke resigned 45

  46. The Recovery Plan and Sazo’s Principle of Management(1) • A 10% pay cut for employees was implemented between 1999 and 2002 • The decision was to not to cut jobs but rather to share the pain together (→ Respect, Paternalism) 46

  47. The Recovery Plan and Sazo’s Principle of Management(2) • Idemitsu formed an employee stock society in 2001. • 80% of employees hold shares (→ Rejection of the Greedy Pursuit of Wealth) 47

  48. The Recovery Plan and Sazo’s Principle of Management(3) • The Seven Wonders of Idemitsu were restricted by an internal control system implemented in 2002. (→ Independence & Empowerment) 48

  49. The Recovery Plan and Sazo’s Principle of Management(4) • An effective production/distribution system was established though the closure of refineries and the reform of distributors (→ Consumer-Centered Business Mindset) 49

  50. Inviolable Management Philosophy Sazo’s Principle of Management 人間尊重 • Respect • Paternalism • Independence & Empowerment • Denial of the Greedy Pursuit of Wealth • Consumer-Centered Business Mindset 大家族主義 独立自治 黄金の 奴隷たるなかれ 生産者から 消費者へ 50

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