hme.t Economic Development Institute I^;7 of The World Bank The Privatization of Ex-Zaibatsni Holding Stocks and the Emergence of Bank-Centered Corporate Groups in Japan Hideaki Miyajima EDI WORKING PAPERS * Number 94-52 STUDIES AND TRAINING DESIGN DIVISION D CIY EDI Working Papers are intended to provide an informal means for thepreliminiary dissemination of ideas with the World Bank and among EDI's partner institutions and others interested in development issues. Thebacklist of EDI traininlgmaterials and publicationsis shown in the annual Catalogof Training Materials which is available from:. Training Materials Resources Center, Room M-Pl-010 Economic Development Institute The World Bank 1818 H Street NW Washington, DC 20433, USA Telephone: (202) 473-6351 Facsimile: (202) 676-1184 The Privatization of Ex-Zaibatsu Holding Stocks and the Emergence of Bank-Centered Corporate Groups in Japan Hideaki Miyajima The Economic Development Institute of The World Bank Copyright i 1994 The Interiationial Bank for Reconstruction and Development/Tlhe World Bank 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. The World Bank enjoys copyright under protocol 2 of the Universal Copyright Convention. This material may nonetheless be copied for research, educational, or scholarly purposes only in the member countries of The World Bank. Material in this series is subject to revision. The findings, interpretations, and coinclusioins expressed in this document are entirely those of the author(s) and should not be attributed in any mannler to the World Bank, to its affiliated organizations, or the members of its Board of Executive Directors or the countries they represent. If this is reproduced or translated, EDI would appreciate a copy. Foreword This EDI Working Paper will be published as one of 12 chapters in a forthcoming book entitled: Corporate Governance in Transitional Economies: Insider Control and the Role of Banks edited by Masahiko Aoki and Hyung-Ki Kim. The book will have three parts: Part 1: Generic and Comparative Issues: Theory and Policy Implications (chapters 1-3) Part 2: Country Studies in Comparative Perspectives (chapters 4-8) Part 3: Relevance and Lessons of the Japanese and German Experience (chapters 9-12) A list of titles is provided on the inside back cover of this paper. The book presents the results of a research project on corporate governance issues in transitional economies from a new perspective based on comparative institutional analysis. A concern with three issues-the emergent phenomena of insider control, the possible role of banks in corporate governance, and the desirability of the comparative analytic approach-sets the common ground for the research presented in this volume. The coexistence of the alternative models of corporate control in the developed countries suggests that the possible "lessons" for the transitional economies may not be so obvious. It makes little sense to judge the merits of each corporate governance model and its applicability to the transitional economies without taking into account a country's stage of development and the history of its institutions and conventions. In designing corporate governance structures for the transitional economies, economists are required to identify the specific conditions under which each corporate control model (or combination of models) works, the availability of these conditions in the transitional economies, and the most efficient approach to achieve these conditions. By pooling rich individual country studies and cross-examining and comparing their implications, we may be able to avoid premature generalizations or theorizing based on the observation of a single economy. By comparing the workings of diverse systems, we may also be able to uncover latent factors that are conducive to, or constrain, the workability of particular governance structures. Comparative analysis may thus serve in the social sciences as a kind of proxy for laboratory experiments. This work was prepared as part of EDI's multiyear Program for the Study of the Japanese Development Management Experience which is financed by the Policy and Human Resources Development Trust Fund established at the World Bank by the Government of Japan. The Program is managed by the Studies and Training Design Division of the World Bank's Economic Development Institute. Hyung-Ki Kim, Chief Studies and Training Design Division Economic Development Institute . . 10 The Privatization of Ex-Zaibatsu Holding Stocks and the Emergence of Bank-Centered Corporate Groups in Japan Hideaki Miyajima The task of this chapter is to investigate the economic reform of postwar Japan-the zaibatsu dissolution and the resulting changes in Japanese corporate governance structure. The implications of this process for the current economic reform in Central and Eastern Europe are then considered. There are many differences between the Japanese postwar experience and current Central and Eastern European reform. Apart from dissimilar external circumstances, it is clear that the internal structure to be reformed and the purpose of the reform are quite different in the two cases. It has often been pointed out that the period of wartime national planning in the operation of the Japanese economy was relatively short, and that this planned economy was based on private ownership (Teranishi and Kosai 1993, p. 6). Although the problem of establishing a new corporate governance system is the crucial issue in Central and Eastern Europe, the main purpose of economic reform in Japan was to eliminate war potential, at least before 1948, when the purpose of rapid construction of the Japanese economy began to be emphasized.' It is also important to pay attention to the similarity of the two cases: although Japanese postwar reform was small in magnitude, zaibatsu dissolution had some of the same characteristics as the privat- ization of state-owned companies. The number of companies targeted for zaibatsu dissolution reached approximately half of big businesses (as I will explain in detail, using a new data set composed of the 100 mining and manufacturing companies that were the largest in either 1937 or 1955). On average, nearly 50 percent of the issued stock of these ex-zaibatsu companies was transferred to the Holding Company Liquidation Commission (HCLC) as the liquidation agency. Furthermore, these companies' behaviors were strictly controlled by the government and the ownership rights of these stocks were held by HCLC. Thus, during postwar reform Japanese ex-zaibatsu companies were somewhat similar to state-owned companies. In addition, top Japanese management during wartime-and even during postwar reform-tended to operate companies inefficiently because of the soft budget constraint under the planned economy. That is, insider control prevailed. Therefore, economic reform in postwar Japan faced a similar task to that of economic reform in Central and Eastern Europe: to create an effective monitoring system. It is true that the creation of a system of corporate governance, in the sense of the system disciplining top management, was not an explicit goal of GHQ/SCAP (General Headquarters, Supreme Commander for the Allied Powers, hereafter GHQ) officials, in comparison with the clear goal of economic reform in Central and Eastern Europe. Nevertheless, the measures entitled "economic democratization," general- ly designed to eliminate war potential in Japan, affected the corporate governance of Japanese companies. Instead of the former zaibatsu model-holding companies with a central, hierarchical ownership struc- ture-the corporate governance system the GHQ tried to establish in Japan eventually amounted to an Americanization of the Japanese corporate system. An Anglo-Saxon style of corporate governance struc- ture-that is, market corporate control-was seen as the most desirable system, and the "radical" idea 1 of employee control for management was added to it. In this sense, the Japanese case was the first large- scale experiment of the privatization of state-owned companies modeled by an Anglo-Saxon form of corporate governance structure. The corporate governance structure that emerged in the mid-1950s was quite different from what GHQ originally intended. It was the bank-centered corporate group system, although in an early, formative stage. Thus, the questions this chapter investigates are: * When an individual-centered ownership structure with employee ownership, equity finance, and a market corporate control were viewed as the most desirable corporate system by GHQ, why and how did a drastically different system of institution-centered ownership with cross- shareholding, debt (keiretsu) financing, and a main-bank-delegated monitoring system emerge in Japan? * Who played a positive role in forming this structure in the postwar reform period? * What functions did this corporate governance structure play in the reconstruction and early rapid growth period through monitoring of management and the provision of proper incentives? The first section of this chapter discusses the GHQ's concept of a desirable corporate system, comparing it with the corporate governance structure and government policy that existed in Japan both before and during World War II. The second section examines major measures of postwar reform, focusing on the dissolution of the holding-company-centered ownership structure and the purge of top management. The effects of these measures on Japanese corporate structure will be clarified. The third section examines the privatization of ex-zaibatsu stock, focusing on the liquidation policy of HCLC. The fourth section clarifies the drastic changes that occurred in ownership structure after the stabilization policy in early 1949. From this time on, the original policy had to be changed, and institution-centered ownership, including cross-share- holding, gradually emerged. The task of this section is to outline the process and clarify the causes. The fifth section briefly sketches corporate finance. Based on previous research and using a new data set, the reasons for the emergence of the main bank system will be summarized, and several new facts about main bank competition will be offered. Last, I will summarize the corporate governance structure of 1955, when rapid growth of the Japanese economy began. Through an investigation of the correlation between turnover of top management and firm performance, it will be demonstrated that the newly established bank-centered corporate governance structure had an effective function in disciplining the top management team from the viewpoint of shareholders as well as debtholders. ;aGHQ's Design for Japanese Corporate Governance Structure GHQ had no clear sense of the agency problem in corporate governance, which is being considered explicitly in regard to the recent economic reform in Central and Eastern Europe. It is also true that there were contradictions between GHQ and the State Department in the United States-and even within GHQ-about zaibatsu dissolution policy. Nevertheless, it is possible, and necessary, to rebuild GHQ's idea for corporate governance. I will summarize this idea using the reference documents supplied to GHQ officials when they designed concrete measures.2 The view of GHQ was that dispersion of stock to individuals (widespread ownership of securities) should be a pillar of economic democratization, because they understood that the concentration of ownership in zaibatsu families or with other large shareholders was a characteristic of the prewar 2 economic system and had a close relationship to militarization. Therefore, GHQ designed an individual- centered, widespread ownership system that could monitor management through the market and general meetings of shareholders. The kind of "market corporate control" conceived by GHQ, however, was not the same as the current practice of takeover bids playing a significant role (Fama 1980; Jensen and Ruback 1983), although stock price fluctuation was given an important role. Rather, GHQ programs implied that top management would be disciplined by competition with other companies in the product market, since a market of top management as well as deconcentration policy were emphasized. Not only was the ownership structure dispersed into the public, but also insider ownership, especially employee ownership, was highly recommended. The expected function is twofold: employee ownership motivated employees to commit to a company's activities, and it also made it possible to prevent top management from abusing their powers over labor conditions. This indicates that GHQ originally thought not only of external control, or a market for corporate control, but also that a certain kind of internal control should exist as a desirable ownership pattern. At the same time, large shareholders were excluded in order to avoid the reconcentration of control rights. This was not only true for family ownership, but also for ownership by entities such as banks or other financial institutions, as well as manufacturing companies. These institutions were originally excluded from the list of desirable owners. For this purpose, the Anti-Trust Law enacted in 1947 prohibited industrial companies from holding stock and restricted financial institutions from holding more than 5 percent of the stock of a given company. The Securities Trade Act of 1947, modeled after the Glass Steagall Act in the United States, prohibited banks from underwriting or holding and dealing in corporate securities, either directly or through securities affiliations. The concern behind this exclusion was that direct commercial bank involvement with corporate securities was detrimental to the stability of the financial system. The position of top management would be occupied by salaried managers, who were promoted from within companies and engaged in nonmilitary industries. Large shareholders, or zaibatsu family members, were eliminated from the executive boards. Imperial Ordinance No. 567 stipulated that a shareholder who owned more than 10 percent of a company had to resign. The theory behind this provision is "any large shareholders should not have any definite influences on a company's decision" (GHQ/SCAP 195 lb). The corporate governance structure summarized above corresponded to "equity-based corporate finance." The model of the desired corporate financial structure envisioned by GHQ was that of a company that raised its investment funds through the securities market and retained earnings; thus, the capital structure was mainly composed of equity. These ideas were institutionally complementary to a financial system that separated commercial banking from investment banking. From the viewpoint of three stages of monitoring (Aoki 1993), this division of labor among financial institutions following the GHQ model could be summarized as follows: "ex ante monitoring" about a project was delegated to an investment bank, "interim monitoring" was delegated to the commercial bank, and "ex post monitoring" was delegated to the equity market. In short, the concept behind GHQ's idea of corporate governance encompassed widespread ownership, with internal ownership, equity finance, and the market for corporate control. What relationship did the GHQ policies have with previous government policies and existing corporate governance structure in Japan? Although this point is often neglected, the corporate governance structure of Japanese companies and related government policy was transformed during World War II. As a result, there was some consensus between GHQ and the Japanese concerning what the desirable corporate governance structure should be.3 This contrasts sharply with views of the policy of deconcentration of economic power, which led to contradictory opinions among the Japanese government, Japanese business circles, and the GHQ. 3 In wartime there was a broad consensus among business leaders and government officials about the appropriateness of autonomy for professional managers and the restriction of shareholders' rights. The new economic movement begun in the mid-1940s, which was intended to reform firms to change their goal from the maximization of profit to the maximization of production, suggested setting companies free from shareholders' control. In 1940 the restriction of the dividend was introduced to aid in the transformation. The Munitions Companies Law enacted in 1943 officially declared the appropriateness of managerial autonomy instead of the control of large shareholders and authorized the restriction of shareholders' rights through exceptional treatment of commercial law (Okazaki 1993a). It is important that this policy was also supported by big companies' top management, who had been salaried managers independent on the large shareholders' control. The Juy6 Sangy6 Ky6gi-kai (Association of Important Industries), a trade association of big companies in wartime, investigated corporate control and requested the restriction of shareholders' rights (Miyajima 1993). Furthermore, this idea developed after World War II. The Ministry of Commerce and Industry (MCI) proposed to introduce employee ownership to get a positive commitment from employees to rebuild the companies. This idea was shared by a part of the business circle. Keizai Doyu-kai, a managers association newly established in the early postwar period by young top management, suggested the participation of employees in management, suggesting that the corporation be seen as a cooperative body of labor and shareholders, intermediated by management (Keizai Doyu-kai 1951). There were also crucial differences in views about the corporate governance to be created. The first concerned the rights of shareholders. GHQ tried to stress the rights of small shareholders, suggesting various devices for protecting shareholders' rights, while the Japanese preferred to restrict the rights of shareholders in general. The individual-centered ownership designed by GHQ conflicted with the ideas of the Japanese government in this area, although they shared a similar view of the desirability of the elimination of zaibatsu family control. There was another conflict concerning institutional ownership. GHQ wanted to minimize institutional ownership to eliminate undesirable intercorporate security ownership, while the Japanese thought that ownership by institutions was desirable, or at least inevitable. Corresponding with this point, the third difference of opinion concerned corporate finance. GHQ favored corporate finance based on the equity market, while the Japanese were skeptical about equity fi- nance, and thought that intermediation by banks was inevitable for the rapid revival of production. ;aThe Zaibatsu Dissolution: Transfer of Ex-Zaibatsu Stock and the Managerial Revolution ;bDissolving the Hierarchical Ownership Structure Considering the views of the GHQ and the contradictions between GHQ and the Japanese, how did the process of zaibatsu dissolution advance? The main step toward zaibatsu dissolution was to eliminate family control through dissolving its hierarchical ownership structure.4 This process was accomplished through HCLC. The procedure was to designate zaibatsu families, holding companies, and subsidiary companies to be dissolved and to transfer their stock to HCLC. The process has been described in detail in previous research (Hadley 1970; MOF 1982). It included the following steps. Ten families, such as Mitsui, Sumitomo, Iwasaki (Mitsubishi), and so on were designated as zaibatsu families and their holding stock was transferred into HCLC on the basis of SCAPIN 1363. The amount of stock held by these ten families, and fifty-six persons, was estimated at 0.5 billion yen (Hadley 1970). The designation of holding companies dissolved the hierarchical holding relationship between holding companies and subsidiary companies. The important point is that this designation of holding companies 4 was drastically enlarged after Edward Mission's report in mid-1946.5 Originally, applying a narrow definition of zaibatsu, which focused on the family concern and therefore the ownership relationship of family holding companies and their subsidiaries, GHQ tried to dissolve only the original ten family concerns. Edward's report, however, suggested enlarging the dissolution by applying the broader definition of zaibatsu as the holding-company-centered hierarchical ownership structure in general. As a result, the number of holding companies to be dissolved was enlarged from the original ten family concerns to eighty-three companies by mid-1947. These eighty-three companies included several kinds of companies, as is shown in table 10- 1: (a) pure holding companies, which were composed of not only holding companies of big family concerns, but also holding companies of relatively small, local family concerns, (b) large subsidiary companies of the big-ten zaibatsu, such as Mitsubishi Heavy Industry, Inc., and Sumitomo Metal, Inc., (c) relatively independent big companies such as new zaibatsu and the textile companies. The stock owned by these designated holding companies was a major part of the transfer in zaibatsu dissolution, estimated at 7 billion yen. These shares were transferred into HCLC on the basis of the decree of HCLC. At the same time, thirty-one companies out of the designated eighty-three holding companies, including Mitsui, Mitsubishi, and Sumitomo Honsha (holding companies), were dissolved. The control center completely disappeared. In November 1946, the imperial ordinance known as the Ordinance of Restriction of Companies' Stockholding severed the stockholding relationship among subsidiaries. Designating the zaibatsu subsidiaries, the ordinance required the transfer of their shares to HCLC and prohibited them from holding the affiliated companies' stock in the future. The number of companies designated by this ordinance totaled 615, and the transferred stock to HCLC based on this ordinance amounted to 1.5 billion yen. The amount of shares transferred as a part of zaibatsu dissolution to HCLC totalled 9 billion yen, which was estimated to be 21 percent of the economy's capital.6 Including the stock disposition of other institutions, 14.4 billion shares were to be dissolved, which amounted to 34 percent of paid capital (MOF 1986, p. 379). Because these figures were aggregate figures of transferred stock, it is important to figure out to what extent each company's issued stock had to be transferred. For this purpose, table 10-2 examines large companies, which are ranked as the top one hundred either in 1937 or in 1955. In this table, the companies whose issued stock was held by designated holding companies are defined as big ex-zaibatsu companies. The number of big ex-zaibatsu companies is 62 out of 127. These are composed of (a) subsidiaries of the big-three zaibatsu, (b) subsidiaries of big-ten zaibatsu, (c) the big companies with stock held by a local family and operating companies with a holding function. The percentage of transfer- red stock out of whole issued stock according to these categories is summarized in table 10-2. It shows that the average of all categories of ex-zaibatsu is nearly 50 percent, while the independent companies' average is under 10 percent. Therefore, it is safe to say that zaibatsu dissolution targeted more than half of the big companies for reform, and these companies were forced to disperse nearly 50 percent of their issued stocks. 5 Table 10-1. Designated Holding Companies Securities transferred to Designation HCLC (million) Company type First (5 companies) 2.231 Second (40 companies) 2.914 Third (20 companies) 1.637 Fourth (2 companies) 66 Fifth (16 companies) 183 All designations Total 7,026 Pure holding companies 23 Trading companies 4 Mining companies 9 Heavy industries 13 Textile 14 Communication 10 Others 10 Total 83 Source: Hadley 1970; GHQ/SCAP 1951b. In addition, the following two points are important in the understanding of corporate governance under postwar reform. First, the voting rights of transferred stock were also delegated to HCLC. Imperial Ordinance No. 233 not only authorized HCLC to exercise supervision over the disposal of the securities, but also to exercise voting power of such securities until their disposition (GHQ/SCAP 1951c, p. 146; HCLC 1951, p. 259). As a result, HCLC became the largest shareholders in these ex-zaibatsu companies until its share was liquidated. Second, the companies designated as "restricted concerns" by Imperial Ordinance No. 657 of November 1945 were widely restricted by GHQ and government in such matters as dividends and rewards.' The number of designated restricted concerns reached 1,350 companies, which included all the big businesses mentioned above.8 As a part of the restrictions (which included increases of capital and borrowing money), the restricted concerns were prohibited from paying dividends to shareholders and rewarding executives over the level prevailing in June 1945. These dividend and reward regulations were slightly relaxed later-for instance, the former was revised to allow a 5 percent dividend (payment of the dividend by borrowing, however, was consistently prohibited), and the latter was altered according to subsequent inflation (GHQ/SCAP, 1951b, p. 71). Thus, the regulations affecting stockholders and management were much more severe than in wartime. In short, the half-stock of ex-zaibatsu companies was held by a quasi-government agency and their financial decisions, including disposition of profit, were completely restricted by government. Further- more, because ex-zaibatsu companies' operational decisions were restricted in all spheres-including their 6 purchasing, production, and marketing-they were in some ways similar to state-owned or nationalized companies. ;bThe Managerial Revolution from above Zaibatsu dissolution included the goal of eliminating the top management appointed by the zaibatsu family and the interlocking relationships between holding companies and subsidiary companies. Severing of personnel relationships was mainly realized through the "economic purge," originally different from zaibatsu dissolution. Technically, the purge resulted from the expansion of the January 1946 directive calling for the removal of "militarists and ultra-nationalists." This category included all those who occupied key positions in 245 major companies before September 2, 1945.9 As a result of the economic purge, at least 2,000 executives resigned from their former positions. Another measure that was closely related to the zaibatsu dissolution program was the Law for Termination of Zaibatsu Family Control, enacted in January 1948. This law called for the removal of affected officers of the big-ten zaibatsu companies. In addition to the officers removed by the economic purge, 145 additional officers were forced to resign through this law (MOF 1982, pp. 312-20; Miyajima 1993b). Thus, the top management of big businesses had to be changed. As for big businesses, in 112 out of 122 cases, top management was changed through these measures. Especially in the case of the big-ten zaibatsu subsidiaries, not only the president but also every executive member had to resign, because they were all regarded as zaibatsu appointees who were influenced by zaibatsu families. Instead of former executives, the salaried and professional managers now took over top management. The economic purge and the elimination of zaibatsu control brought Japan "managerial revolution from above. " The new man- agers were promoted from within the companies. There were only four cases of new managers recruited from outside. This trend was more pronounced for board members. All the members of the executive board were professional managers promoted from within companies, and even among auditors at least one position was occupied by a salaried manager promoted from within the company. The majority of new top management came from former factory managers who were qualified as engineers. This happened in 56 out of 122 cases, compared with 21 out of 98 cases in 1937 (Miyajima, forthcoming). There were several reasons for this pattern. The relative position of engineer was improved during wartime. The skill needed by new top management at that time was not marketing or financial skill, but the ability to maximize the production level. Government also encouraged companies to give decisionmaking rights to factory managers and to raise their position in the management team. Thus, while the power of board members as the representatives of the shareholders decreased, the factory managers began to take part in the board's decisionmaking. A more important reason for this trend is that the appointment of new top management after the purge required the approval of labor unions and HCLC as the largest shareholder, and the new top management was chosen according to the preference of these groups. As an agency of zaibatsu dissolution policy, HCLC disapproved of the top management represented by shareholders, unlike a regular shareholder. If a company did not appoint an appropriate person, HCLC intervened. For instance, despite being a relative of the founding family, Mori, who was the president of Showa Denko, Inc., was asked to resign by HCLC. At the same time, HCLC asked the Reconstruction Finance Bank (RFB) to select an appropriate candidate (HCLC 1951, p. 249). During a time of frequent labor strikes, it was relatively easy to get labor unions to agree to the promotion of former factory managers. For instance, in Mitsubishi Electric, Inc., after former top management was purged, board members selected two candidates for president, one of whom was a former factory manager and the other from Mitsubishi Bank. The board then asked the labor union who 7 was appropriate as the top manager. The labor union preferred the first candidate, and he undertook the rehabilitation of the company (Nihon Keizai Shinbun-sha 1980). Table 10-2. The Impact of Stock Disposal (1, 000 units) Issued stock transferred Average to HCLC (percent) Number of issued Simple Weighted Standard Category companies stock average average deviation Big-three zaibatsu 23 3,251 44.1 44.4 26.5 Big-ten zaibatsu except big three 22 2,522 47.8 32.8 30.0 Other companies (quasi-zaibatsu) 17 2,684 41.0 35.0 31.6 Ex-zaibatsu, total 62 2,837 44.6 38.5 29.1 Independent 65 1,905 7.2 4.8 9.8 Total 127 2,360 26.1 24.6 28.7 Note: Top one hundred companies in mining and manufacturing industries either in 1937 or 1955 a= picked up according to assets. Big-three means first-line subsidiary companies of Mitsui, Mitsubishi, and Sumitomo. Big-ten zaibatsu means subsidiary com- panies of Nissan, Yasuda, Furukawa, Asano, Okura, Nomura, and Nakajima. Other companies (quasi-zaibatsu) are companies whose issued stock was held by designated holding companies, such as Kurashiki Spinning, Inc., held by the Ohara family and Kokusaku palpu, Inc., held by Oji Paper, Inc. Mitsui line investment companies such as Toshiba, Maruzen Oil, and Onoda Cement are also included here. Source: HCLC 1951. This turnover under zaibatsu dissolution exerted two important influences on the corporate governance structure of Japanese big businesses. First, it completely eliminated the outside director, who played an important role in the control of the manager in the Anglo-Saxon system (Fama 1980). As business historians have noted, the managerial enterprise that emerged in the 1930s and 1940s in the United States had representatives of large shareholders and investment companies as board members (Chandler 1977; Lazonick 1992). In prewar Japan, salaried managers were monitored by executives of holding companies in big zaibatsu or by large shareholders in independent enterprises. There were no longer outside directors who could play the important role of monitoring the top management team and replacing it when necessary. The postwar managerial revolution from above was associated with elimin- ating the internal control of shareholders. Second, new top management did not have much managerial experience. The number of new top managers who had served as president, vice president, or managing director before World War II was only 16 out of 122. The top management who did not have any prior management experience numbered 26 (Miyajima, forthcoming). The remaining 80 were new top managers who had taken part in the 8 executive board as "plain" directors in the last phase of war or immediately after the war. As "plain" directors they did not normally take part in strategic decisions, but engaged in operational decisions at the factory or branch level and attended general board meetings once a month; they did not have a great deal of management experience." ;bLiquidation Process: Privatization of Ex-Zaibatsu Stock The liquidation of zaibatsu-related stocks began in early 1948. The liquidation was carried out by the Securities Coordinating and Liquidation Committee (SCLC), the liquidating agency established in 1947. According to the original policy, designed to create the individual-centered ownership structure, the priorities and procedures of stock disposal were decided in April 1948. The established priorities were as follows: * The first priority of purchase of liquidated shares was given to employees of the company and then to the residents of localities in which the company operated. * No individuals were allowed to purchase more than 1 percent of a given company's shares (MOF 1979; HCLC 1951). * In addition, the reconcentration of ownership was strictly avoided. If zaibatsu-affiliated companies, either manufacturing companies or financial institutions, were designated as restricted concerns, they were prohibited from buying stock of affiliated companies on the basis of Imperial Ordinance No. 567. The manufacturing companies were prohibited from holding stock by the Anti-Monopoly Law in 1947, although they were not restricted companies and were former stockholders or creditors. Concerning sales procedures, the three most important methods of transfer were public tender, underwriting sales, and employee sales. The appropriate sale price was carefully considered in all cases. Using public tender, securities were auctioned off to the highest bidder, down to a minimum price set by the agency. Through underwriting sales, large blocks of securities were offered to underwriting groups of securities dealers on a competitive bid basis for resale to the public at a fixed price. In the case of employee sales, including local residents in the area of the head or factory office, the sales price needed to be approved by SCLC-in practice, the sales price was set by SCLC." The liquidation of stock through these methods advanced smoothly. By July 1949, 80 percent of the stocks transferred to HCLC were liquidated, although the liquidation of big ex-zaibatsu companies, which were targeted by deconcentration policy, was not accomplished yet. This progress was greater than GHQ and SCLC had expected. It is therefore important to examine the reasons for this smooth liquidation, when we consider the current economic reform in Central and Eastern Europe. One of the important factors was the inflationary macroeconomic situation. Rapid inflation raised the advantage of stocks as an inflation hedge. Small investors preferred stocks to savings deposits in spite of their high transaction costs and risk. Securities companies also positively underwrote stocks, expecting their price to increase. The measures taken by government to promote widespread ownership also contributed to smooth liquidation. A kind of educational movement, called "securities democratization," was promoted. This movement, which began at the conference for "Promoting Securities Democratization," held in December 1947, disseminated information to small investors who had no knowledge or experience of securities investment. Along with this movement, financial assistance for purchasing funds was introduced. One of these measures was to allow the payment of frozen deposits for the purchase of stock disposed by SCLC in August 1947; another was to enlarge the supply of loans to securities companies (MOF 1979, p. 356). 9 To encourage employee ownership, provision was made for the financial support of stock purchases by employees. The ordinance of May 1948 (No. 83) specified that funds could be supplied to the em- ployee by the bank that handled their companies' transactions up to a limit of either 70 percent of the purchase or 2,500 yen (MOF 1979, p. 369). This financial support was ineffective; the percentage of pur- chasing funds borrowed from financial institution was very low (see table 10-3). More important support for promoting employee ownership was the company's support. In this context, the important point is that new top management of ex-zaibatsu companies was very active in promoting employee ownership to stabilize their companies. For instance, Tokyo Kaijyo (marine insurance, former Mitsubishi line) allotted 30-150 shares for each employee, according to their length of service, and wholly financed their purchases (Tokyo Kaij6 1982, p. 226-30). These activities were very common, because stock to be sold to an employee was normally transacted between HCLC and the company, as the agent of employees, and the company temporarily paid purchas- ing money to HCLC instead of employees (MOF 1982, p. 370-73). According to SCLC's sample survey, it was estimated that less than 30 percent of the purchase funds came from companies (table 10-3). As a result of these promotion measures, coupled with the inflationary macroeconomic situation, the stock disposition advanced much more smoothly than expected. Who, then, became the new shareholders of liquidated stock and what kind of ownership structure was established? Table 10-3. Sample Research, Employee Stockholding Item Percent Purchasing funds Own funds 53.4 Borrow from company 22.5 Borrow from financial institution 2.4 Own funds plus borrow from company 5.8 Others' 15.9 Will continue to hold 50.8 Will sell whenever price goes up 6.9 Will sell 17.2 No idea 16.7 Unknown 8.4 Do you think that production or business efficiency increase when employees become stockholder of the company? Yes 61.6 No influence 32.6 It decreases 1.9 Unknown 3.9 a. Others includes unknown. Source: SCLC Registration Office: 'Democratization of Securities Holding after the War," National Archives. According to table 10-4, which summarizes the percentage of stock disposal by marketing methods in September 1949, 27 percent of whole disposed stocks were sold to employees and 7.5 percent to local 10 residents."2 Securities companies also played an important role. Through the underwriting sales of securities companies, approximately 30 percent of disposed stock was held by securities companies, and then sold to the public. It was reported that "in the case of listed stock the disposition was made mainly through dealers and broker;" this is especially true of big companies (GHQ/SCAP 1951b, p. 158). As a result of this securities democratization, the ownership structure completely changed. Instead of a holding-company-centered hierarchical ownership structure, an individual-centered widespread ownership structure emerged as a result of zaibatsu dissolution. Nearly 70 percent of stocks were owned by individuals, and 13 percent were owned by securities companies (see table 10-6). At the same time, when the liquidation of zaibatsu-related stocks was nearly completed, the constraints on "restricted concerns" began to be relaxed. In March 1949, the Supreme Commander of Allied Powers (SCAP) relaxed the restrictions, including restraints imposed on dividends and executive pay (MOF 1982, p. 213). Thus, the privatization of ex-zaibatsu companies was accomplished and new top management was in charge, representing the interests of widespread (small) shareholders again. Table 10-4. The Figure of Disposition, 1 September 1949 Method 1,000 units Percent Employee sales 41,762 27.1 Public tender (nationwide) 41,543 27.0 Local tender 11,617 7.6 Fixed price sales, public 12,080 7.8 Fixed price sales, local 711 0.5 Consignment sales 673 0.4 Underwriting sales 45,285 29.5 Off-market sales 35 0.0 Total 153,706 Source: U.S. National Archives, Economics and Scientific Section, "History of the Securities Branch." ;aEmergence of Institution-Centered Ownership Structure ;bThe Stock Market Collapse and Price Stabilization Policy In early 1949, Japanese economic reform entered into the next stage. Real gross national product (GNP) recovered 85 percent of the prewar level (1934-36 = 100) in 1948, and inflation settled down from the peak level of late 1948. At this time, a series of stabilization programs was introduced. Three principles of enterprise operation released at the end of 1948 prohibited (a) provision of subsidies, (b) increases in controlled prices, and (c) raising wages through loans. The Dodge Line of 1949 required the establishment of fixed exchange rates to replace the former multiple exchange rate and the suspension of new loans from the RFB (Reconstruction Financing Bank). This policy represented a great change from the previous operations of companies; thus far, top management had accepted the requests of labor 11 unions, expecting increases on controlled prices and subsidies that mainly depended on loans from the RFB, while they avoided real reconstruction (Okazaki 1993b). Hence, top management of companies was required to reconstruct their businesses on a free market basis, instead of the soft budget constraints of a controlled economy. In the adjustment process from a planned economy to a market economy, the new corporate governance structure, regarded by GHQ as desirable, confronted several difficulties. The most noteworthy challenge was the stock market collapse in August 1949. There were several reasons for the stock price collapse. On the supply side, an excess of stock existed. In addition to the zaibatsu-related stock to be redistributed, there was the increased capital of the "special accounting companies" (explained by Hoshi, in this volume).'3 This increase in capital began at the end of 1948 and reached a peak in 1949.'4 Because the increased capital under the reorganization plan would be sold with the same priority as the liquidation of zaibatsu-related stock, "special accounting companies issuing new shares were competing for buyers with the SCLC" (GHQ/SCAP 1951b, p. 64). Furthermore, company profits and dividends were still low. Only 250 of 453 listed companies paid dividends in 1949 (BOJ 1970). At the same time, as real interest rates went up under tight fiscal-monetary policy and simultaneously inflation was brought down, the preference of the small investor shifted from securities to deposits. The stock price collapse caused by these events exerted a great influence on the ownership structure that emerged through the liquidation of ex-zaibatsu stocks. Employee ownership decreased, because employees sold their stock during the stock market collapse (how long employees held their companies' stocks is illustrated in table 10-5). It is noteworthy that the percentage of stocks held for more than five months or one year decreased rapidly after mid-1949, when the stock market collapsed. In average, only 50 percent of employees who bought their companies' stocks from January 1948 to June 1949 continued to hold their stock for more than two years. According to table 10-3, employee shareholders had a willingness to sell their stock, while they did not seem to realize a positive effect from holding their companies' stock, such as increasing production. Quoting this sample research, a document of SCLC noted that "disposition of stocks to employees may have a different result from what had originally been designed."'5 The securities companies, which played a significant role in securities disposition, also suffered from serious problems. They were immobilized by their high inventories and precarious financial condition. Large capital and operational losses were experienced by securities companies that depended on purchasing funds using high-interest, short-term loans.'6 At the same time, the stock market collapse created two critical problems for the new top management of big business, while it induced them to take care of shareholders by giving up their previous management policy, which had placed too much stress on the insiders' (employees') interest. First, the companies faced serious difficulties in increasing capital. Former munitions companies were especially obliged to raise large amounts of capital to gain approval of their reorganization plans. Moreover, they had other needs to increase capital. They faced a liquidity crisis and their high debt-equity ratio made it difficult for these companies to borrow from banks, because their capital composition was showing undercapitalization because of decreasing capital under the reconstruction plan. 12 Table 10-5. How Long Did Employees Hold Liquidated Stocks? (1,000 units) 1948 July 1948-July 1949-July 1950- Wole Item Jan. -June June 1949 June 1950April 195pl period Number of companies 161 727 249 80 1,217 (13.2%) (59.7%) (20.5%) (6.6%) (100.0%) Disposed stocks 3,688 27,846 15,702 19,359 66,595 Two months 3,440 25,610 14,359 17,721 61,130 (93.3%) (92.0%) (91.4%) (91.5%) (91.8%) Five months 3,185 22,791 13,210 (4,995) 44,141 (86.4%) (81.8%) (63.4%) - (80.1%) One year 2,775 18,890 10,939 - 32,605 (75.2%) (67.8%) (69.7%) - (69.0%) Two years 2,166 14,010 - - 16,177 (58.7%) (50.3%) - - (51.3%) - Not available. Note: Concerning five-month disposition, total figure is only available until December 1950. Source: SCLC. "Democratization of Securities Holding after the War." Second, a decline in price heightened the threat of takeover bids and buyouts. This was especially valid for ex-zaibatsu companies, whose issued stock was heavily liquidated. Several forner zaibatsu companies suffered from takeover bids (Miyajima 1994). These takeover bids, however, did not target the poorly performing companies, but those such as real estate companies whose market value was much lower than the actual resale value of their assets because of undercapitalization. At the same time, this stock price collapse gave the top management team strong incentives to keep their managerial autonomy. Top management teams tried to maintain their stock price, eventually through measures similar to the "company buyout," which was prohibited under Japanese commercial law. The first step companies took in stabilizing their stockholdings was to delegate securities companies to hold their stocks. In this case, the purchasing fund camne from the company, and securities companies just lent their names to it as stockholders. It is reported that these activities were fairly common (FTC 1955; Suzuki 1992). Second, the management asked people outside the company to hold their company's stock through an unofficial contract. Although this activity was not verifiable, the case of Mitsui Real Estate, Inc., was famous in regard to the practice (Mitsui Real Estate 1986). Third, top management delegated other financial institutions to hold their issued shares and affiliated companies' shares they once held, in exchange for deposits to these financial institutions. These stabilizing activities prevailed in late 1949 and early 1950.17 Seeing that Japanese companies' behavior was undesirable from the viewpoint of the original plan, GHQ and HCLC began to strengthen surveillance over sales as well as to warn of the illegal actions. For instance, beginning in May 1949, a report system was introduced to prevent companies from retaining their control power (GHQ/SCAP 1951b, p. 156).18 13 The Japanese government simultaneously suggested various ways to maintain equity prices. GHQ also realized that it was not relevant for rapid rehabilitation of the Japanese economy to continue to push the original plan. Table 10-6. Ownership Structure of Postwar Period, Listed Companies (percent) Category 1945 1949 1951 1953 1955 1960 Number 631 677 714 774 786 785 Government 8.3 2.8 1.8 0.7 0.4 0.2 Financial institution 11.2 9.9 18.2 22.9 23.6 30.6 Trust bank - - 5.2 6.7 4.1 7.5 Securities companies 2.8 12.6 9.2 7.3 7.9 3.7 Other companies 24.6 5.6 13.8 13.5 13.2 17.8 Foreign - - 1.8 1.7 1.7 1.3 Individual 53.1 69.1 57.0 53.8 53.2 46.3 - Not available. Source. BOJ 1970. As a measure to avoid an excess supply of securities, SCLC decided to indefinitely postpone the selling of zaibatsu-related stocks by public tender after October 1949, and this measure was continued until SCLC dissolved (MOF 1979, pp. 381-83, 408). In concert with this action, adjustment of the mandated schedule of the capital increases was introduced through establishing a "Conference on Adjustment of Capital Increases" in December 1949. This adjustment could be seen as restrictive, since the actual increased capital of early 1950 was only 40 percent of proposed increased capital (MOF 1979, p. 409). The original program of the reorganization plan was also modified. In April 1949, the Ministry of Finance (MOF) announced that it would give up maintaining the original priority principle, which stressed individual and employee ownership. In the summer of 1950, the standard for Approval of Reor- ganization Plan, which required a high equity level, was revised (GHQ/ SCAP 1951c, p. 71). More important, several positive measures for maintaining stock prices were also introduced. In this process, GHQ officially began to admit the significance of institutional ownership. First, the financial institution's shareholding was encouraged by the Japanese government. By the end of 1949, life insurance companies purchased substantial numbers of stocks, using funds supplied by the Bank of Japan (BOJ), which purchased national bonds from the life insurance companies. At the same time, BOJ requested that "the city banks cooperated in the financing of security purchases and encouraged purchasing for their own account. 19 Second, various plans of stockholding institutions were proposed both within and outside the government for the purpose of raising the price level of shares. These plans, however, were halted because of GHQ opposition. Instead of such a stock-price-stabilizing organization, the Investment Trust Act was enacted in 1951. The Investment Trust was developed as a group of trust banks that would act as trustees engaged in securities operations according to the circumstances of the securities companies that 14 represented their entrustees. In this case, the restrictions on shareholding by financial institutions no longer applied to trust banks if they gave up their voting power. This institution allowed the funds of small investors to flow to the equity market by decreasing the high transaction costs and risks of securities (MOF 1979, pp. 495-502). Last, the original antitrust statutory framework was revised. In 1949 the prohibition against industrial companies' shareholding in antitrust law was revised. Although the primary purpose of this revision was to promote the inflow of foreign capital into the Japanese market, it also made it possible for industrial companies to hold other companies' stocks, if it were not judged to substantially restrain competition. When the Japan-United States Peace Treaty went into effect, a series of laws and orders, which restricted ex-zaibatsu companies' shareholding, were repealed. The abolition of Imperial Ordinance No. 567 was especially important, because it made cross-shareholding among ex-zaibatsu companies possible. In 1953 the substantial revision of the Antitrust Law included the revision of article 13, which raised the limit of a financial institution's ownership from the previous 5 percent to 10 percent. ;bEmergence of Institutional Ownership With this policy change, ownership structure drastically changed from individual-centered ownership to institution-centered ownership. The ownership structure of 1955 is shown in table 10-6 for listed companies and table 10-7 for big businesses. From 1949 to 1955, the percentage of individual owners decreased from 69 percent to 53 percent, and the securities companies holding shares, which was partly a temporary holding prior to reselling to the public, also decreased, from 13 percent to 8 percent. Financial institutions increased their share. Ex- zaibatsu stocks, which had been held completely by individuals, were now held by institutional owners again. Another important point is that the ownership structures of Japanese companies were extremely homogenous after economic reform. In prewar Japan, ownership structures of big businesses were quite heterogeneous, ranging from the concentrated zaibatsu form of ownership structure to a more diffused structure, such as the managerial enterprise structures represented by the big cotton spinning companies (Miyajima, forthcoming). Through ownership dispersion of ex-zaibatsu companies, both independent and ex-zaibatsu companies' ownership structures became quite similar in the share of the largest ten shareholders, as well as the composition of shareholders, as is shown in table 10-7. It is already clear that the motivation of the share-issuing side was to preserve the stock price to promote the increase of capital, stabilize stockholding, and thus maintain management autonomy. Then what is the incentive of the stockholding side? The largest contributors to this change in ownership structure were financial institutions, especially insurance companies and trust banks. The top ten shareholders of big businesses were generally insurance companies, trust banks, and securities companies. The investment policy of trust banks was: (a) the market value of a purchased company should exceed its face value over the previous three years, (b) an actual dividend was paid or a dividend was certainly expected, and (c) 8 percent yield rate was expected (Okazaki 1993b). The insurance companies' investment policy was similar (Yamanaka 1986, pp. 330-40). This investment policy is confirmed in table 10-8, which demonstrates the correlation between the shareholding of each institution and the dividend rates of companies controlled by industry average (dividend) in order to measure to what extent investment was driven by simple profit maximization. There is a positive, significant correlation between dividend and the share of trust banks, including insurance companies (SH-TR/INSU). 15 Table 10-7. Ownership Structure of Big Business in 1955 (percentage) Category Total Ex-zaibatsu Independent Number 122 63 59 Issued stock (1,000 units) 38,614 40,515 36,306 Standard deviation 31,788 29,562 33,802 Financial institutions 28.5 26.9 30.0 Securities companies 7.9 8.7 6.9 Industrial 7.0 7.6 6.2 Foreign 2.9 2.9 2.8 Individuals 53.7 53.9 53.6 Ten large shareholders 25.6 26.1 25.4 Standard deviation 12.8 14.4 10.7 Bank 3.0 2.2 3.9 Trust bank 7.5 7.9 7.1 Insurance 6.2 6.3 5.9 Financial institutions, total 16.7 16.4 16.9 Note: Definition of ex-zaibatsu companies and independent is the same as in table 10-2. The share of trust banks included Daiwa Bank, since it engaged in the operation of an investnent trust. Source: TEC 1956, Yamaichi 1956. It is also important that the cross-shareholding of ex-zaibatsu companies advanced during 1949-55. The cross-shareholding ratio of three big ex-zaibatsu companies and Furukawa line companies in 1954 were: Mitsubishi (twenty-three companies), 14.8 percent; Sumitomo (twelve companies), 15.8 percent; Mitsui (twenty companies), 7.9 percent; and Furukawa (ten companies), 20.9 percent, and the number of companies that experienced takeover bids was high (Miyajima 1994; T6yo keizai 1955). This rise was primarily the result of the transfer of stocks stabilized by the measures described above back to the same line companies. In these cases, the financial institutions, especially banks, played the core role of cross- shareholding through supplying purchase money to the same line companies. The residents' clubs of corporate groups played a coordinating role in defending against takeover bids by coordinating member companies' repurchases. These intentional stockholder stabilizing policies are also detailed in table 10-8. An ex-zaibatsu dummy, which denoted the big three and Furukawa line companies, has a positive significant correlation with all institutions' shareholding (SH-INS). The management team of the big- three ex-zaibatsu and Furukawa companies, which suffered from large- scale liquidation and faced hostile takeovers, tried to defend their management autonomy. 16 Table 10-8. Factor Analysis of Shareholding Ratio (N= 122) SH-TR/INSU SH-BANK SH-INS SH-SEC Dispos - - - 0.056 (3.788) Dividend 0.003 0.000 0.003 -0.006 (3.088)a (0.820) (1.882)c (-1.202) Ex-zaibatsu - - 0.059 (2.156)b Borrowing 0.031 0.045 0.202 - Ratio (0.538) (1.717)c (1.934)c Profit -0.076 -0.081 - -0.009 Ratio (-0.697) (-1.629) (-0.142) Adjusted R2 0.07 0.05 0.05 0.32 - Not available. a. Significant at the I percent level. b. Significant at the 5 percent level. c. Significant at the 10 percent level. Note: Dependent variable is share of each institution. Numbers in parentheses are t statistics. Dependent variables are defined as follows: SH-TR/INSU = Share of trust banks and insurance companies in large ten shareholders. Daiwa Bank is included (see table 10- 7, note). SH-BANK = Share of bank in large ten shareholders. SH-INS = Share of all institutional holdings, including financial institutions and other companies. SH-SEC = Share of securities companies. Independent variables are defined as follows: Dispos denotes the percentage of the transferred stock to HCLC out of total issued stock in 1945. Dividend is calculated as follows: Di - Dij; Di = average dividend rate from 1951-54 of i companies; Dij = average dividend rate at same time ofj industry that i company belongs to, based on the three-digit industrial code. Profit ratio is calculated the same way as dividend, using average profit rate (net profit after tax/sales), 1951-54. Ex-zaibatsu is dummy variables, if the companies belongs to former Mitsui, Mitsubishi, Sumitomo, and Furukawa zaibatsu. The number of these companies is twenty-seven. Borrowing ratio is borrow- ing/assets in 1955. SH-TR/INSU and SH-BANK are based on ten large shareholders, while SH-INS and SH-SEC are based on all shareholders. All regressions are controlled by issued stock, foreigner shareholding, and subsidiary companies dummy, which is two companies. Source: HCLC 1951, TSE 1950-56. Last, although the percentage has been decreasing, the share of securities companies (SH-SEC) cannot be neglected-8 percent in listed companies and 9 percent in ex-zaibatsu companies. There is no significant correlation between the dividend and SH-SEC, while there is a positive, significant relationship between the percentage of the transferred stock to HCLC out of issued stock (Dispos) and SH-SEC. It indicates that ex-zaibatsu companies still depended on securities companies for stabilizing their shareholders. In other words, the stabilized ownership structure was not completely redesigned according to ex-zaibatsu management views. 17 ;aEmergence of Main Bank System as Delegated Monitor New money for reconstruction, which companies no longer raised from the equity market, was supplied by city banks. The percentage of money supply coming from bank loans increased after 1950 in contrast to the rapid decline of equity finance. These loans came exclusively from private financial institutions because of the suspension of RFB loans. The city bank loans were supported by BOJ loans. The loans from BOJ to private institutions increased three times in 1949-50 (table 10-9). The loans from city banks had a unique lending pattern, which is often called keiretsu financing. Keiretsu financing is an expression of one aspect of the main bank system, that is, loan behavior of city banks. It means the big six (Mitsui, Mitsubishi, Sumitomo, Fuji, Daiichi, and Sanwa) banks and the Industry Bank of Japan (IBJ) supplied nearly half of the monetary demands of affiliated companies by borrowing large sums of money from BOJ, with the rest being supplied by the (de facto) syndicate loans of other banks. As already has been demonstrated, this loan promoted reconstruction of ex-zaibatsu line companies in early the 1950s (Miyajima 1994). As for how and why these relationships between city banks and companies-that is, the main bank system-emerged in Japan, excellent research has already been done. It is sufficient to mention the following points, using table 10-10, which summarizes the emergence of the main bank system by focusing on its four features (Aoki, Patrick, and Sheard 1993). First, it was through the syndicate loans of 1939-41 that these relationships began to form. As money demands from munitions companies increased, it became difficult and risky for city banks to lend to them individually. City banks began to organize syndicate loans, with a manager bank in each syndicate that was responsible for monitoring the munitions companies. Second, when the designated financial institution (hereafter DFI) system was introduced in 1943, the close ties between banks and companies were established. Under the DFI system, city banks were design- ated to exclusively supply money to certain companies. In this phase, the close relationships between companies and banks concerning loans and settlements emerged, while the monitoring of companies by banks was diminished because of the guarantee of debt by government. Third, after World War II, GHQ realized that the banks held powerful "interrelated solvency" over affiliated companies.' GHQ, however, was not willing to dissolve the bank-firm ties as it had dissolved the ties between holding companies and firms. The reason for this was that GHQ feared a financial crisis if it pursued such policies. In addition to that, it is important that the bank-firm ties were strengthened at that time through banks collecting borrowers' information, because city banks as the largest debtholders of "special accounts" companies supervised their reorganization (MOF 1983, pp. 740-44). 18 Table 10-9. Money Supply to Industries Composition (Percentage) Money supply Private financial RFB JDB Loan from BOJ Period (billion yen) Equity Bonds Borrowings institutions (percent) (billion yen) 1937-45 123.4 21.3 8.6 72.0 70.0 -- 1946 59.2 7.6 -2.1 94.4 94.8 - 50.4 1947 133.3 6.8 0.0 93.2 60.1 33.1 32.3 1948 437.7 13.6 0.0 86.4 71.3 15.3 51.9 1949 491.8 22.1 3.0 74.9 73.8 -0.1 88.6 1950 512.9 6.2 8.5 85.3 72.6 -3.6 114.5 1951 857.8 8.1 4.2 87.7 74.7 1.5 223.0 1952 1,021.3 12.0 3.6 84.4 78.0 2.6 223.2 1953 1,063.3 15.6 3.9 80.5 69.2 7.8 298.8 1954 612.0 23.2 2.9 73.8 66.2 16.3 243.4 1955 676.5 14.1 3.9 82.0 68.9 11.0 32.0 - Not applicable. Source: MOF 1978. 19 Table 10-10. Broad Concept of Emergence of Main Bank System I 11 III IV 1939-43 1944-45 1946-49, 1950-55, Element Syndicate DFIS Special supervisorMain bank Payment settlement 1** Shareholding --- 11 + ++ 111 Loan relations Close ties, or correspondent relations 1** Reciprocal monitoring system 111 +++ /// Dispatching managers --- --- --- Note: --- Did not exist; 111 formation; *** establishment; ++ + diminishing. DFIS means the designated financial institution system. Source: Teranishi 1994; Hoshi 1993; Aoki, Patrick, and Sheard 1994. Fourth, under this precondition, it was quite natural that loans were mainly supplied by former designated financial institutions, ex-zaibatsu banks, which organized de facto syndicates again for risk diffusion and efficient money allocation. The emergence of keiretsu financing was institutionally supported by BOJ policy. BOJ organized the Loan Coordinating Committee, composed of nineteen city banks and BOJ officials in July 1948. The committee coordinated syndicate loans, particularly to companies suffering from low liquidity (BOJ 1959). GHQ permitted the bank loans because it seemed a necessary measure for economic rehabilitation, although it warned against too great a concentration of loans to affiliated companies (MOF 1976, pp. 427-28, 570-71). It is worth noting that main bank status was not firmly established at that time; instead, there was severe competition for this designation. This point is clear in table 10-11, which follows the relation between a DFI and the largest private debtor in 1948 and 1955. The change of largest private debtor between 1948 and 1955 was more frequent than that of DFI in 1948. This is the case of non-ex-zaibatsu companies, while ex-zaibatsu companies, especially Sumitomo; Mitsubishi; and, to a degree, the Daiichi line companies, showed unchanged relationships. The following situation existed during this frequent changing of largest private debtor. On the one hand, Sumitomo Bank and Mitsubishi Bank tried to enlarge their client lists beyond former affiliated companies (same line companies) in order to maximize their loans and diffuse loan risk. On the other hand, Fuji (former Yasuda), Sanwa, and Daiichi, which had relatively small numbers of big companies as clients thus far, tried to look for large clients. For this purpose, Fuji enlarged its inspection division in 1949 and so did Sanwa (Fuji Bank 1982; Sanwa Bank 1974). Both companies were enthusiastic about making close ties with new clients, suggesting a new policy that stressed big clients. Mitsui Bank suffered from a relative shortage of loan money and had difficulties in supplying the money needed by formerly affiliated companies, because Daiichi Bank was split again during the postwar reform. 20 As a result, severe loan competition, or main bank competition, began after the Dodge Line, with former Mitsui-affiliated companies as one of the focal points (see table 10-11, parentheses). Thus, keiretsu financing prevailed among ex-zaibatsu and non-ex-zaibatsu companies. Similarly, just as the ownership structures of ex-zaibatsu companies and non-ex-zaibatsu companies began to converge, the corporate finance pattern of both became convergent. In this emergence of a main bank system with severe loan competition, a monitoring system by a main bank was established. This system, in which a main bank had an informational advantage through loans and payment settlement, was also supplemented by two elements. Table 10-11. The Relations of the Largest Private Debtholder DFI and largest Largest debtor, Category debtor in 1948 1948 and 1955 N 61 108 Unchanged 54 88.5% 52 75.0% Unchanged - 29 Change 7 27(13) Ex-zaibatsu N 38 55 Unchanged 35 92.1% 29 90.9% Unchanged' - 21 Change 3 5(4) Non-ex-zaibatsu N 23 53 Unchanged 19 82.6% 23 58.4% Unchanged' - 8 Change 4 22(9) Note: This table investigates the continuous relationships of the largest private debtholder. Therefore, the government financial institutions (RFB and JDB) are excluded. Unchanged' is the case that the largest debtholder of a private financial institution in 1948 is the same as that of 1955, except long-term financial institutions (industry Bank of Japan and Long-Term Credit Bank). In this case, the city bank is the second or third largest debtholder of private financial institutions. DFI means designated financial institution. Parentheses in 1955 signify that the Teikoku Bank as a largest debtholder in 1948 was taken over by the other city bank without the Mitsui and Daiichi Bank. Source: FTC 1948; TSE 1956. First, dispatching executives from banks to manufacturing companies prevailed during 1949-52. There was a clear tendency for the big-six banks and IBJ to send their executives to the boards of com- panies whose borrowing ratio was high and to whom it lent large amounts of money (Miyajima 1994; T6y6-keizai 1953, 1955). This is in contrast with the practice of insurance companies and trust banks, which rarely sent their members to companies they had lent a large amount or in which they had invested. Using Aoki's definition of the three types of monitoring (Aoki 1993), this dispatching of executives to 21 the boards contributed not only to "ex ante" monitoring, which means evaluation of the project to be loaned, but also "interim monitoring," which means supervising the advancement of the project and correcting the clients' behavior when necessary. Second, the big-six banks had a tendency to hold their client companies' stocks, although they were not the largest shareholder of client companies. It has been shown that for the big-three ex-zaibatsu com- panies there was a significant positive correlation between the loans and shareholding (Miyajima 1994).2' This point is confirmed by a positive significant correlation between the borrowing ratio and share of banks (SH-BANK), although the coefficient of determination and t statistics are still low, because this regression is biased by only picking up the ten largest shareholders (table 10-8). At the same time, there was no significant positive correlation between dividend and SH-BANK, as seen in the trust bank shareholding. Furthermore, a negative correlation between the profit ratio and SH-BANK exists. In short, the higher the default risk was, the more the bank held their client's share. This tendency indicates that the purpose of a bank's investment was not to maximize the dividend or to realize portfolio profitability in the normal sense, but to maintain close relations with borrower companies-in other words, to prevent an opportunistic action by a large borrower. It is consistent with the behavior of banks that a city bank calculate its loss and profit from each client comprehensively, including the transaction commission, loan interest, compensation deposit, dividend of holding shares, and so on (Prowse 1990). Therefore, the apparently low profits realized by the main banks could be adjusted by the compensation ratio and loan interest. ;aEffective Monitoring through Bank-Centered Corporate Groups The corporate governance structure established in the postwar era was not the same as GHQ originally planned. The institutional combination of an individual-centered ownership structure with employee ownership, equity finance, and a market for corporate control with employee control was replaced by a drastically different system. Internal corporate control was not realized because of the exit of employee- shareholders during the stock market collapse. The market for corporate control through market price and takeover bids did not correctly evaluate the companies' performance, although it functioned to discipline management that neglected shareholder interests. Furthermore, individual-centered ownership had to be changed through the shareholder stabilization operation by the top management team. A corporate finance system depending on internal funds and equity finance was almost impossible with the stock market collapse and the low income level. Thus, instead of the institutional set designed by GHQ, a new system-including institution-centered ownership with cross-shareholding among ex-zaibatsu companies, debt financing with keiretsu financing, and a corporate monitoring system by main banks-emerged after the Dodge Line. The main organizer in this process for a new institutional combination was the city bank. It supplied rehabilitation money to ex-zaibatsu companies as well as non-ex-zazbatsu companies by organizing syndicate loans as a manager bank. It held client companies' stocks according to default risk, and regardless of yield level. It also contributed to the supply of money to purchase stock, increasing ex- zaibatsu companies' cross-shareholding in the case of the big-three ex-zaibatsu and Furukawa. At the same time, it is important to note that banks played an exclusive monitoring role for their client companies. The main bank, which was the large debtor as well as one of the largest shareholders, sent its executives to client companies. By doing so, it monitored its clients' behavior not only ex ante and ex-post, but also interim. Last, I should ask whether this corporate governance structure based on bank-centered corporate groups was effective for monitoring top management teams. As I mentioned before, the new top manage- 22 ment team of big businesses, composed of salaried managers promoted within companies, had a potential tendency to represent their employee's interests. Some individuals may not have enough appropriate managerial capability to reconstruct their businesses. Did the main bank effectively discipline these management teams promoted within companies? Whose interest did the main bank represent? In order to answer this question, we investigate the correlation between management turnover and firm performance, using a method developed by recent research (Kaplan 1992). Here turnover is identified as the case in which the top management (president) in 1955 was different from the top management of 1950. During 1950-55, management turnover occurred in 35 out of 122 companies. These turnovers were of two kinds. Turn 1 denotes turnover by new management promoted within companies. Out of our sample of 122, 20 cases belong to this category. Turn 2 denotes the turnover by new management who came from outside companies. This is divided into two subtypes. One includes (TURN 2) nine cases in which the new top management came from outside companies such as banks or other companies. The other case (TURN-2') is TURN 2 plus cases of turnover by a new president who was purged during the postwar reform period and returned as president after the Peace Treaty was in effect. Table 10-12 tries probit regression analysis, using TURN 1-2 as independent variables and selecting the growth rates of assets and sales, dividends, and profit control for industry as firm performance variables. From table 10-12, several points are clear. While relative sales and relative assets did not necessarily have a significant correlation with management turnover, in all categories of turnover it has a negative significant correlation with relative dividend rate. Wrong performance in terms of dividend encouraged the turnover of top management. It indicates that an effective monitoring system functioned in the interests of stockholders in the early 1950s. It is interesting that even TURN 1 has a significant negative correlation with dividend rate. Top management who did not care about dividends had to resign earlier and were taken over by other board members promoted within companies. Monitoring systems under bank-centered corporate groups functioned according to the shareholder interest, although in TURN 1 some cases could not be confirmed by bank intervention, while the other cases could be. Examples (TURN 2) of top management being taken over by persons outside companies have a significant negative correlation with profit rate as well as dividend rate. Because bank intervention was confirmed in almost every case of TURN 2 and TURN 2', this negative correlation indicates that, if the default risk increased because of the management teams' bad performance, the bank clearly intervened in personnel matters.22 23 Table 10-12. Probit Analysis of Turnover and Company Performance (N= 122) TURN 1 TURN 2 TURN 2' TURN2" TURN TURN Item PROMOTION OUT +RECOVEWCHAIR 1+2' 1 +2" Number of turnovers 20 9 15 22 35 42 Relative -0.047 -0.075 -0.064 -0.576 -0.074 -0.080 Dividend -2.614a -2.829a -2.806a -2.997a 4.114a -4.371a Relative 1.261 -12.8 -11.96 -9.156 -2.049 -2.310 profit 0.507 -2.839a -2.986a -2.703a -1.192 -1.354 Relative -0.301 -0.717 -0.813 -0.053 -0.604 -0.218 sales -0.982 -1.293 -1.672b -0.208 -0.984 -0.929 Relative -0.529 0.075 -0.285 -0.062 -0.553 -0.396 assets -1.066 0.134 -0.545 -0.132 -1.271 -0.954 Note: All variables are calculated on relative terms, vi - vij; vi = i companies vari- ables; vij = the average v of j industry at same time, which i companies belong to. Relative dividend and relative profit are the same as in table 10-7. Relative sales is calculated by using sales in 1955/sales in 1951. Relative assets is calculated by using assets in 1955/sales in 1951. Lower row is t statistics. a. Significant at 1 percent level. b. Significant at 10 percent level. Source: TSE 1951-56; Yamaichi 1956. For example, IBJ intervened in the personnel matters of Nihon Yakin (Metal Company), which suffered from financial distress in 1953. An experienced person who had run other smaller companies was appointed as president by IBJ as part of a rescue package (T6y6-keizai 1953). When Mitsui Chemical, Inc., faced serious liquidity problems under the new top management in 1951-52, Mitsui Bank intervened in personnel matters. Ishida ken, who was a former Mitsui Mining executive and was purged during the postwar period, was appointed as the new president (T6y6-keizai 1951). It is noteworthy that, as is shown in the Mitsui Chemical case, the former purged top management as well as bank members or outside companies' candidates were recruited as new top management by main banks immediately after the Peace Treaty was effected. Generally speaking, the cases in which purged former presidents or executive board members could return to their positions after the peace treaty were rare (Miyajima 1993). If the companies showed bad performance from the viewpoint of debtholders, however, banks considered the former purged top manager as a possible candidate. This point is strengthened because TURN 2" also had a negative significant correlation with profit, if the case of the former purged manager returning as a chairman is included in the regression. It has been pointed out that the main bank was delegated to monitor their clients' companies by debtholders such as nonmain banks, insurance companies, and trust banks, as well as shareholders (Aoki 1988). The result in table 10-12 that turnover correlated to profit level as well as dividend ratio historically supports this view. Instead of the originally expected monitor-the market and the employees-the main bank, which dispatched executives to clients' companies and at the same time 24 remained one of the large shareholders, exclusively monitored the top management team, being delegated by other debtholders as well as shareholders. Thus, the bank-centered corporate groups that emerged in the mid-1950s had an effective monitoring system for disciplining the top management team. 25 ;aReferences Aoki, M. 1988. Information, Incentives, and Bargaining in the Japanese Economy. Cambridge, U.K.: Cambridge University Press. . 1993. "Monitoring Characteristics of the Main Banks System: an Analytical and Historical View." In M. Aoki and H. Patrick, eds., The Japanese Main Bank System: Its Relevancy for Developing and Transforming Economies. Oxford, U.K.: Oxford University Press. Aoki, M., H. Patrick, and P. Sheard 1993. "The Japanese Main Bank System: An Introductory Overview," In M. Aoki, and H. Patrick, eds., The Japanese Main Bank System. Its Relevancy for Developing and Transforming Economies, Oxford, U.K.: Oxford University Press. BOJ (Bank of Japan) 1970., Meiji-ik6 Honpd Shuy6 Keizai Tokei (Economic Statistics since Meiji Era). Tokyo. . 1959. "Yushi Atsusen no Enkaku (Brief Summary of Loan Syndication)." In Nihon Kinyu- shi Shiryo (The Document of Japanese Financial History). Tokyo. Chandler, A. 1977. The Visible Hand: The Managerial Revolution in American Business, Cambridge, Mass.: Harvard University Press. Fama, E. 1980. "Agency Problem and the Theory of the Firn." Journal of Political Economy 88. FTC (Fair Trade Commission) 1948. The Record of the Elimination of Law of Excess Economic Power. National Archives, Box 8520-8535, Washington, D.C. . 1955. Shoken Shizj6 ni okeru Kinyu-shihon no Shihai to Shatyu (Control and Concentration of Financial Institution in Security Market). Tokyo. Fuji Bank, 1982. Fuji Ginko Hyaku-Nenshi (Fuji Bank Centennial History). Tokyo. Jensen, M. and R. Ruback. 1983. "The Market for Corporate Control." Journal of Financial Economics 11. GHQ/SCAP (General Headquarters, Supreme Commander for the Allied Nations). 195 la. History of the Nonmilitary Activities of the Occupation of Japan (1945 through September 1949), Money and Banking. GHQ. . 1951b. History of the Nonmilitary Activities of the Occupation of Japan. Vol. 24. Elimination of Zaibatsu Control. GHQ. . 1951c. History of the Nonmilitary Activities of the Occupation of Japan. Vol. 25. The Reorganization of Enterprise. GHQ. Hadley, E. 1970. Antitrust in Japan. Princeton, N.J.: Princeton University Press. HCLC (Holding Company Liquidity Commission). 1951. Nihon-zaibatsu to Sono Kaitai (Japanese Zaibatsu and its Dissolution). Tokyo. Hoshi, T. 1993. "Evolution of the Main Bank System in Japan," University of California at San Diego. Mimeo. Hyuga, H. 1975. "Kigy6 Hihan ni Kotaeru (The Answer to Company Criticism)." Shfukan T6y6-keizai, March, 22. 26 Kaplan, S. N. 1992. "Internal Corporate Governance in Japan and the USA: Difference in Activities and Horizons." University of Chicago. Mimeo. Keizai Doyu-kai. 1951. Keizaidoyu Kai 5 nen-shi (Five-year History of Keizai Doyu-kai). Tokyo. Lazonick, W. 1992. "Controlling the Market for Corporate Control: the Historical Significance of Managerial Capitalism." Industry and Corporate Change 1: 445-88. Mitsui Real Estate. 1986. Mitsui FudBsan Yonjfi Nen-shi (Mitsui Real Estate 40 Years History). Tokyo. Miwa, R. 1989. "Sengo Minshuka to Keizai-saiken (Postwar Democratization and Economic Reconstruction)." In T. Nakamura, ed., Nihon-Keizai Shi 7 Keikakuka to Minshuka (Japanese Economic History 7). Tokyo: Iwanami-shoten. Miyajima, H. 1993a. "Senji Keizaika no Jiyushugi Keizai-ron to Tosei keizai-ron (Liberalism-based Policy versus Control based Policy in the Wartime Economy)." In Shirizu Nihon Kin-gendai shi 3: Gendai Shakai e no Tenkei (The Transformation to Contemporary Society). Tokyo: Iwanami-shoten. . 1993b. "Postwar Reform in Enterprise Management: Managerial Revolution from Above and the Emergence of the "Japanese-type" Firm." Japanese Yearbook on Business History 10: 53-82. . 1994. "The Transformation of Zaibatsu to Postwar Corporate Groups: From Hierarchical Integrated Group to Horizontally Integrated Group." Journal of the Japanese and International Economies 8: 293-328. . Forthcoming. "Nihon ni okeru Keieisha Kakumei (The Managerial Revolution in Japan)." In H. Yamazaki and T. Kikkawa, eds., Nihon Keieishi Koza (The Series of Business History in Japan). Tokyo: Iwanami-Shoten. MOF (Ministry of Finance). 1976. Shdwa Zaiseishi-shi Shuisen kara K6wa made: 12 Kinyu (1) (Financial History of Shkwa: War's End to Peace Treaty, Vol. 12: Finance). Tokyo: T6y6-keizai Shinp6- sha. . 1978. Sh6wa Zaisei-shi Shasen kara K6wa made: 19 Tokei (Financial History of Sho6wa: War's End to Peace Treaty, Vol. 19: Statistics). Tokyo: T6y6-keizai Shinp6-sha. . 1979. Showa Zaisei-shi Shasen kara K6wa made: 14 Hoken/Shoken (Financial History of Sh6wa: War's End to Peace Treaty, Vol. 14: Insurance and Securities). Tokyo: Toy6-keizai Shinp6-sha. . 1982. Sh6wa Zaiseishi-shi Shksen kara K6wa made, 2 Dokusen-Kinshi (Financial History of Sh6wa: War's End to Peace Treaty: Anti-Trust). Tokyo: T6y6-keizai Shinp6-sha. Nihon-keizai Shinbun-sha, ed. 1980. Watashi no Rireki-sho; Keizai-jin (My Personal History; Businessman). Nihon-Keizai Shinbun-Sha. Okazaki, T. 1993a. "The Japanese Firm under the Wartime Planned Economy." Journal of the Japanese and International Economies 7: 175-203. . 1993b. "Kigyo (Corporation)." In T. Okazaki and M. Okuno, eds., Nihon Gata Keizai Shisutemu no Genryu (The Origin of Japanese Economic System). Nihon-Keizai Shinbunsha. 27 Prowse, S. 1990. "Institutional Investment Patterns and Corporate Finance Behavior in the U.S. and Japan." Journal of Financial Economics 27: 43-66. Sanwa Bank. 1974. Sanwa Ginko no Rekishi (The History of Sanwa Bank). Osaka. Suzuki K. 1992. "Zaibatsu kara Kigyo-shudan, Kigyo-keiretsu he (From zaibatsu to Corporate Groups)." Tochi Seido Shigaku 135: 1-18. Teranishi, J. 1993. "Emergence of Loan Syndication in Wartime Japan-An Investigation into the Historical Origin of the Main Bank." In M. Aoki and H. Patrick, eds., The Japanese Main Bank System: Its Relevancy for Developing and Transforming Economies. Oxford, U.K.: Oxford University Press. Teranishi, Juro, and Yutaka Kosai, eds. 1993. The Japanese Experience of Economic Reform. London: Macmilan. Tokyo Kaij6-Cessio. 1982. Tokyo Kaijq Cessio-kabushiki Kaisha Hyakunen-shi (History of Tokyo Marine and Fire). Tokyo. TSE (Tokyo Stock Exchange). 1950-56. J6j6-Kaisha Soran (The Yearbook of Listed Companies). Tokyo: T6y6-keizai Shinp6-sha. Toy6-keizai. 1953. "Ginko-shihai no Ky6ka to zaibatsu Saihensei no H6k6 (The Control of Banks and Direction of zaibatsu Reorganization)." T6y6-keizai Shinp6, Oct. 24. . 1955. "Zaibatsu no Saihensei to Kin-yut Shihairyoku no Jitsutai (Reorganization of Zaibatsu and their Financial Control)." T6yo-keizai Shinp6, June 1. Yafeh, Y. 1993. "Corporate Ownership, Profitability and Bank-Firm Ties: Evidence from American Occupation Reforms in Japan." Harvard University. Mimeo. Yamaichi Sh6ken. 1956. Kabushiki Kaisha Nenkan (The Yearbook of Companies). Tokyo. Yamanaka, H. 1986. Seimei-hoken Kinyu Hattenshi (The History of Life Insurance Institutions). Tokyo. 28 Footnotes Chapter 10 The author thanks Jishay Jafeh, Lee G. Branstetter, Ernst-Ludwig von Thadden, and Takeo Hoshi for helpful comments on an earlier draft. 1. About the reorientation of occupation policy, see Miwa 1989 and Hadley 1970, Chapter 9. 2. This summary is based primarily on the following documents: JCS (Joint Chiefs of Staff) 1380/50 in November 1945, SCAPIN (Supreme Commander of Allied Powers, Instruction to Japanese Government) No. 244, "Dissolution of Holding Companies"; and FEC (Far Eastern Commission) 230, "Policy on Excessive Concentration of Economic Power in Japan" in May 1947. I will also use "Edward Mission Report" of 1946. 3. Former officer of the Ministry of Commerce and Industry and the wartime Planning Agency (Kikakui- in), Yoji Minobe reviewed that "our purpose was somehow realized by zaibatsu dissolution measures of GHQ" ("Senji Keizai no Kaiko" ["Retrospect of Wartime Economy"], Minobe Papers, Tokyo University Ga-1). 4. The percentage of the economy controlled by the big-ten zaibatsu-affiliated companies in capital was estimated at 35 percent. Affiliated companies were defined as the companies with more than 10 percent of issued stock held by designated holding companies. 5. Edward Mission was sent to design the zaibatsu dissolution and deconcentration policy. Although GHQ criticized the recommendations' too academic tone, it accepted the basic ideas (GHQ 1951b, pp. 23-27). 6. The estimate of Bank of Japan (BOJ) is somewhat different from Hadley' figure, slightly larger. The transferred stock held by designated family was listed at 0.9 billion; designated holding companies, 7.9 billion; the restricted concerns, including related companies, 0.9 billion. 7. The purpose of this designation was to maintain the status quo for zaibatsu dissolution. When companies were designated as the "restricted concerns," their property and assets were frozen, their security records impounded, and the sale or transfer of securities, as well as their participation in stock ownership of nonrestricted companies, were prohibited (MOF 1982, pp. 181-90). 29 8. The number included 1,203 companies designated as "restricted concerns" and 147 "related companies." The latter is a second-line subsidiary of a restricted first-line subsidiary, which was designated by Imperial Ordinance No. 567 of November 1946, based on SCAPIN 1238. 9. These major companies were defined as (a) companies over 100 million yen in capital, (b) companies designated as having an "excess concentration of economic power," and (c) companies with monopoly power and so on. 10. Yafeh (1993) reports a negative effect of the economic purge on firm performance in this period. 11. United States of America, National Archives, Economic and Scientific Section, Antitrust and Cartel Division, "Policies and Procedure of Securities Program." File (F.) 28, Washington, D.C. 12. The percentage of stock sold to employees out of whole disposed stock increased slightly later, because public tender was postponed from the end of 1949. Final composition according to sales method in 1950 was as follows: employees, including local residents, 42.7 percent; competition bids, 26.9 percent; fixed price sales, including underwriting, 30.4 percent (HCLC 1951, p. 455). 13. At the same time, they were pressed to decrease their capital on behalf of disposing of the special loss in old accounts. This increase in capital was particularly needed at the former big zaibatsu companies (see Miyajima 1994). 14. The criteria for approval of a reorganization plan mandated that companies keep "the financial soundness." It means that the amount of paid in capital could not be less than the total amount of fixed assets and operating funds, which were also normally fixed (GHQ/SCAP 1951c, p. 41). 15. SCLC Registration Bureau, "Democratization of Securities Holding After the War," September 30, 1951. 16. The loss of securities companies, which was composed of capital loss of holding securities and operational loss, reached 1,189 million yen and their bank loans were 2,633 million yen, compared with their securities holdings of 2,989 million yen (ESS/AC, "Provision of Capital for Japanese Enterprise," December, 1949). 30 17. GHQ admitted that manufacturing companies "illegally acquired their own shares" in late 1949 and early 1950 to support the market and complete their capital composition. U.S. National Archives, ESS/AC, "Brief Report of Current Stock Market Activities," 21 July, 1950. 18. Legislation required that all joint companies capitalized at more than 100 million yen must report to the SCLC all stockholders that were holding more than 5,000 shares on 31 May 1949. 19. U.S. National Archives, ESS/AC, "Measures Taken to Encourage Stock Purchase." 20. Interrelated solvency was defined by GHQ as follows: arising from the fact that a large part of the banks' investment and loans went to their affiliated enterprises, while the major part of the affiliates' deposits resided in their related banks (GHQ/SCAP 195 1c, pp. 111-13). 21. Initially, this increase of shareholding by city banks advanced through so-called debt-equity swaps, although the magnitude is still unclear. The former president of Sumitomo Bank stated that "zaibatsu related shares were naturally allotted to concerned financial institutions according to their credit amount" (Hyuiga 1975). 22. It is the contingent relationship between the main bank and manufacturing companies that was formalized by Aoki (1993). The influence of banks on companies did not affect the decisionmaking of the borrowers, as long as their management was satisfactory. Banks intervened substantially, however, in the personnel matters of the borrowers and requested changes when the profitability of borrowers decreased and the lack of management ability became obvious. 31 Working Paper Title Number Author(s) 94-43 Controlling Insider Control: Issues of Corporate Governance in Transition Economies Masahiko Aoki 94-44 Political Economy Issues of Ownership Transformation in Eastern Europe Gerard Roland 94-45 Corporate Governance in Transition Economies the Theory and Its Policy Implications Erik Berglof 94-46 Corporate Governance, Banks, and Fiscal Reform in Russia John M. Litwack 94-47 Enterprise Governance and Investment Funds in Russian Privatization Noritaka Akamatsu 94-48 Evolution of Commercial Banking in Russia and Implication for Corporate Governance Elena Belyanova and Ivan Rozinsky 94-49 Reforming Corporate Governance and Finance in China Yingyi Qian 94-50 Centralized Decentralization: Corporate Governance in the East German Economic Transition Ernst L. von Thadden 94-51 Cleaning Up the Balance Sheets: Japanese Experience in the Postwar Reconstruction Period Takeo Hoshi 94-52 The Privatization of Ex-Zaibatsu Holding Stocks and the Emergence of Bank-Centered Corporate Groups in Japan Hideaki Miyajima 94-53 Savings Mobilization and Investment Financing during Japan's Postwar Economic Recovery Juro Teranishi 94-54 Shareholder Voting and Corporate Governance: The German Experience and a New Approach Theodor Baums and Philipp v. 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