the university of belgrade world rectors conference april 4, 2010 what will become of the...
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The University of BelgradeWorld Rectors Conference
April 4, 2010
WHAT WILL BECOME OF THE CORPORATION ?
- A Comparative Perspective -by
Katsuhito IWAIThe University of Tokyo
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Important Strategic Goals (1988) • ---------------------------------------------------------------------------------------------------
• (%) America Japan Europe• ---------------------------------------------------------------------------------------------------
Rate of Return on Investment 78.1 35.6 64.2Capital Gains of Shareholders 63.0 2.7(!) 10.6Expansion of Market Share 53.4 50.6 61.8Product Portfolio 28.8 11.5 26.0 Maximizing Sales Volume 15.1 27.9 17.9Ratio of New Products 11.0 60.8 14.6Corporate Social Image 6.8 18.6 18.7 Retention of Employees 1.4 3.8 6.5Employees' Benefits 0.0 7.7 0.8……………………….. …. …. ….• -----------------------------------------------------------------------------------------------------------------------------------------------------Source: 1988 White Paper on Corporations, (Keizai Doyu Kai, 1988: Tokyo, Japan). Note: Number of Corporations responding to questionnaire: 73 in America, 724 in Japan and 123 in
Europe (58 in Italy, 33 in Germany, 18 in France and 14 in Great Britain.
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Two Corporate Systems?
American Corporate System
Maximization of Shareholders’ Return
Manager as Agency of Shareholders
Japanese Corporate System Growth and Survival of Corporation
as Organizational Entity
= Manager as the Leader of Organization
<at least until 1980s>
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A Theoretical Puzzle?
America and Japan : Both Capitalist Countries
Based On Private Property System
• How Can These Seemingly Contradictory Systems of Corporation Coexist Within
the Same Capitalism ? • My Theme:
The Legal Nature of CORPORATIONAllows Two Systems to Coexist
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Two Opposing Views on The Nature of Corporation in Law
‖Corporate Personality Controversy
· Corporate ‘Nominalism’= Corporation as
A Name for an Association of Individuals
· Corporate ‘Realism’= Corporation as
A Entity Independent of Indiv. Members
(Also in Philosophy: Nominalism vs. Realism)
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Two Opposing Views on The Nature of Corporation in Economics
Contractual Theory of the Firm“Private corporations" as "simply legal fictio
ns which serve as a nexus for a set of contracting relationships among individuals.“
(M. Jensen and W. Meckling)
Evolutionary Theory of the Firm or Organizational Capability Approach
Firms as "organizations that know how to do things, … while individual members come
and go." (Sidney Winter)
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The Same Opposition Both in Reality and in Theory !
WHY?My Answer:
The Very Legal Nature of
CORPORATIONIs Responsible for the Co-Existence of
Two Forms of Corporation
• What is CORPORATION?
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A Mom & Pop Grocery Shop (= A Firm NOT INCORPORATED, or
A Textbook Model of the Firm).
The Shop Owner
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The Single Ownership Structure of a Textbook Firm
EmployeesSuppliers
Customers Creditors
Owners
Assets (Apples, Oranges, etc)
Ownership Relation
Contractual Relations
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A Big Super-Market Chain Inc.(= Incorporated Firm or
Business Corporation)
A Shareholder
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WHY?
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Who Owns Corporate Assets?The Shareholder
Is NOT The Legal Owner of
Corporate Assets
Who is Their Owner ?
CORPORATION as
Legal Person!
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Corporation as Legal Person“Every corporation has the same power as an individual to do things necessary or convenient to carry out its business
and affairs…” (§3.02 of ABA’s Revised Model of Business Corporate Act)
Toyota is a Corporation, NIS is a Corporation, U. of Belgrade & U. of Tokyo are also.
A Corporation Owns Property, Make
Contracts With Others, and Become a Litigant in Law Suit
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A CORPORATION is A Thing Treated as a Person in Law
Person/Thing Duality
of Corporation
It is Not the ShareholdersBut the Corporation
as a Legal PersonThat Owns Corporate Assets
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What Does a Shareholder Own?
The Corporation as a Thing (!)
Shareholder = Holder of a Share of the Corporation as a Thing,
Distinct from Corporate Assets
(Note: The Stock Market is the Market for Corporations as Things, NOT Corp. Assets)
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Two-Tier Ownership Structure
of Business Corporation
Ownership Relation
Contractual Relations
Corporate Assets
(Thing)
Corporation (Person) Employers
Suppliers Customers Creditors
Sh
arehold
er
Sh
arehold
er
Sh
arehold
er
・・・・・・
Ownership Relation
Ownership Relations Cf. Single-Tier
Ownership Structureof Classical Firm
Owners
Assets
EmployeesSuppliers Customers Creditors
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We Can Now END the Controversy Between
Corporate ‘Nominalism’
( Shareholder Supremacy)
vs.
Corporate ‘Realism’
( Organizational Autonomy)By
Declaring Victory for Both Sides!
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Corporate Assets
Thing CORPORATION
Person Employees Suppliers Customers Creditors
Shareholder
Shareholder
Shareholder
・・・・・・ ・ ・ ・・
・ ・ ・ メ ・・・・・・ ≈ Corporate Nominalism
≈ American SystemShareholder Supremacy
≈ Corporate Realism≈ Japanese SystemOrganizational Autonomy
Both Within the Same Capitalism Double Use of Private Property Sys.!
Upstairs/Downstairs
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We Can Go Further
Two Legal Mechanisms
- One Turning Corporation into
A Mere “Thing”
- The Other into
A Full “Person”
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How to Make a CorporationPurely 'Realistic‘
(i). Self-Owning Corporation= Corporation as a Person
Owns Itself as a Thing
( Convergence (?) to Non-Profit Corporation)
Legal Restrictions Prohibition of Share Repurchase Even If allowed, Repurchased Shares Cannot Vote in Mtng
(Thing)Corporation
(Person)
Natural Persons
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Corporation A
(Person/Thing)
Corporation B
NaturalPersons
(ii). Mutually Holding Corporations
Drawing Hands by M.C. Escher
(Thing/Person)
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(iii) Cross-Shareholding Among 12 Corporations
A Solution:
5%x(12-1) = 55% > 50%
A Majority !
A L B
K C J D I E H F
G
NaturalPersons
Reality?
Legal Limits onCross-shareholdings Japan (U.S.) : 5% rule Subsidiaries
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Cross-Shareholdings among Core 20 Corporations of Sumitomo Group, 1993
HOLDER
S. B.
S. T. B.
S. L.I.
S.M.I.
S. Co.
S. C.M
S. Con
S. F..
S. Ch.
S. Ba.
J. G.
S. Ce.
S. Met
S. M. M.
S. L. M.
S. E.
S. H. I.
NEC
S. R. E.
S. S.
TOTAL
%
ISSUER
Sumitomo Bank ---- 2.8 6.1 1.8 1.7 0 0 0.1 1.1 0.2 1.1 0.2 1.3 0.4 ---- 0.9 0.2 1.1 0.1 0.2 19.3
S. Trust Bank 3.3 ---- 4.2 1.5 2.5 0 0 0.2 1.2 0.5 1.4 0.5 2.3 1.2 0 1.7 0.4 2.8 ---- 1.5 25.3
S. Life Ins. ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
S. Marine Ins. 4.4 6.3 4.6 ---- 2.3 0.1 0.1 0.1 1.2 0.3 1.2 0.3 1 1 ---- 0.9 0.6 1.8 0.1 0.8 27.1
S. Corporation 4.8 5.8 5.1 2.9 ---- 0.1 0 0.3 1.6 0.3 1 0.4 2.7 1.7 ---- 1 0.8 3.7 0.1 0.4 32.8
S. Coal Mining 4.8 4 2.5 2.4 3.4 ---- 0.8 ---- 2.5 ---- 0.4 1 4.9 2.1 ---- ---- 1.7 4.2 ---- 0.2 34.8
S. Construction 4.4 2.9 5.8 1.4 ---- 3.1 ---- 0.6 1.1 ---- 0.6 2.3 ---- 3.3 ---- 1 ---- ---- 0.4 0.2 27.0
S. Forestry 4.3 7 7.2 ---- 2.6 0.1 0.4 ---- ---- 0.4 ---- 0.3 ---- 7.3 ---- ---- 0.2 1.4 ---- ---- 31.1
S. Chemical 4.7 5.3 8.9 1.4 1.3 0 0.1 0.1 ---- 0.1 0.4 0.3 ---- 0.2 ---- 0.3 0.2 0.5 0 0.2 23.9
S. Bakelite 4.8 7.1 5.9 1.3 2.1 ---- 0.3 0.4 21.6 ---- 0.3 0.5 0.9 ---- ---- 0.3 ---- 1.3 0.4 0.1 48.2
Japan Glass 5 6.8 5.5 2.3 1.6 ---- 0.1 0.1 1.2 0.5 ---- 0.8 ---- 0.3 ---- ---- 0.6 ---- 0.5 0.2 25.6
S. Cement 4.6 5.4 8.5 1 2.3 1.9 0.6 0.4 1.1 0.4 0.8 ---- 1 1.1 ---- 0.3 2.2 0.8 0.2 ---- 32.8
S. Metals 4 6.2 5.5 ---- 1.6 0.1 0 ---- ---- 0.1 0.1 0.1 ---- 0.5 ---- 0.3 0.2 0.6 0 0.1 19.2
S. MetallMining 4.6 10 4.8 1.5 2.5 0.1 0.2 0.3 ---- ---- 0.3 0.7 0.8 ---- ---- 1 0.3 2.4 0.1 0.1 29.6
S. Light Metals 4.7 5.8 4 1.4 4 ---- ---- ---- 1.3 ---- ---- 0.4 23.3 0.9 ---- 0.8 0.6 0.8 ---- 0.2 48.2
S. Electrics 3.8 5.4 7 ---- 0.8 0 0 ---- ---- ---- ---- 0.1 ---- 0.8 ---- ---- 0.1 2.4 ---- 0.1 20.6
S. Heavy Ind. 4.6 6.4 7.8 2.5 3 0.1 0.1 0.1 ---- ---- 0.5 1.3 ---- 0.7 ---- 0.7 ---- ---- ---- 0.3 27.9
N. E. C. 5 4.8 6.8 2.6 2.2 0 0 0.1 0.4 0.1 0.2 0.1 0.7 1 ---- 2.2 0.1 ---- 0 0.2 26.4
S. Real Estate 3.4 5.1 2.3 1.6 0.5 0 0.2 ---- 0.4 0.2 0.7 0.1 0.5 0.3 ---- 0.5 ---- 0.7 ---- 0.5 17.2
S. Storage 4.7 6.7 8.4 5.4 2.4 ---- 0.3 ---- 1.5 0.1 0.8 ---- 2.2 ---- ---- 0.9 0.9 3.9 0.3 ---- 38.5
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How to Make a CorporationPurely 'Nominalistic‘
Or, Mere Possibility of Hostile Takeovers May Discipline Managers to Maximize Share Value
= Stock Market as Market for Corporate Control
\.
CORPORATION
DominantShareholder
Corporate Assets
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Legal Menu of Corporate FormsWithin Capitalism
Nominalistic Realistic
Textbook Firms | NPO
U.S.A. Japan (UK. etc.) (Germany etc.)
( ?) ( ?)
The Controversy Resolved!
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The Eclipse of the Japanese Corporate System ?
Unwinding of Cross-Shareholdings% of Cross-shareholdings
27.7%(1991)9.0%(2007)
6 Large Keiretsu Groups 3 Groups + Reshuffling
An Increase in M & As
Transaction Values of M&A (Billion of US $)
Frequencies
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Is the Long-Run Tide in the ‘Nominalistic' Direction?
OrConvergence to American System?
No!There is Also a Counter Tide
A Transition fromIndustrial Capitalism
to Post-Industrial Capitalism
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Moral Hazard ‖
Employees’ Covert Pursuit of Their Private
InterestsAt the Expense of Shareholders(E.g., Sharking,
Toy-Making, Perks-Building)
Two Sources of Inefficiency in Corporate Organization
Hold-Up Problem‖
Employees’ Reluctance to Make
a Commitment to Organization-Specific
Human Capital For Fear of Being
Exploited By Myopic Shareholders After its
Investment is Sunk
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Nominalistic Co.
Monitoringby
Shareholders(or Stock Market)
Moral Hazard
Hold-Up
Realistic Co.
De Facto Owner of Organization-
Specific Human Capital
Hold-Up
Moral Hazard
Cost/Benefit of Two Co. Systems
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Skills, Capability, Vision of Core Workers,
Engineers, Managers= Knowledge-Based
Human Capital
From Industrial Capitalismto Post-Industrial Capitalism
= A Shift of Major Source of Profits
Scale Economy of Large Factory
= Physical Capital
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MONEY CAN Buy Physical Capital
(= ALIENABLE)
Suppliers of Money= Shareholders
In Industrial Capitalism
Human Capital is Secondary to Physical Capital
Supremacy of Shareholders
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MONEY Can NOT Buy Human Capital(= INALIENABILE)
In Post-Industrial Capitalism
Waning of the Power of Money
Shareholders
vs. Knowledge-Based Human Capital
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The Above Story is NOT ONLY about
the Japanese Corporate System BUT ALSO about
the Corporate System in General, including
the European System, the Asian System,
and even the American System.
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What Will Become of the Corporation?
In this NEW Era of
Post-industrial CapitalismToo Much Shift to
Nominalistic Form of Corporation Could be Counter-Productive, Because Human Brains Matter
More Than Shareholders’ Money