In Japan, where intercorporate strategic shareholding is widespread, management often takes an active role in managing company ownership. This column describes how Japanese management manages ownership of their companies to promote and preserve strategic investments. The stock market reacts positively to this process and the transfer of blocks of shares from one strategic investor to another, indicating that shareholders welcome the engagement by management. The Japanese experience may have important lessons for businesses, owners, investors, and policymakers in other countries.
The ownership of companies is a subject of much controversy. The standard textbook description of companies listed on stock markets is that they are owned by dispersed shareholders, typically through asset managers who diversify their portfolios across many companies. But, as has been recognised, this is not by any means the only or indeed the most common type of ownership, and it may not be the best (see Hill 2025). Even amongst the largest listed companies, dominant shareholdings by families are commonplace.
More significantly, the textbook description assumes that management maximises the financial value, i.e. stock price, of their firms, taking their shareholding structure as given. There are many transactions in which management engages that affect their ownership – for example, in relation to takeovers, stock issuance, and private equity – but these are presumed to be in the context of promoting the interests of their existing shareholders.
Japan: The dominance of intercorporate shareholding
There is, however, one country where this issue of management involvement in their company ownership is particularly controversial, namely, Japan. In much of the post-WWII period, and most notably since the beginning of this century, there has been concern about the degree to which Japanese management has entrenched their position through cross-shareholdings – reciprocal shareholdings by companies in each other. These have been widely regarded as mechanisms for protecting management against risks of hostile takeovers and interventions by outside, especially foreign, investors.
A belief that this was contributing to the low growth and investment malaise of the Japanese economy prompted corporate governance reforms a decade ago, which sought to make management more accountable to outside shareholders. Cross-shareholdings diminished but, as we document in our paper (Franks et al. 2024), they were replaced by another form of intercorporate shareholding, namely, strategic shareholdings by one company in another. As a result, the proportion of shareholdings of Japanese listed corporations held by other corporations has remained very constant at just over 20% since the beginning of this century, despite the very substantial increase of foreign institutional shareholdings over the period (Figure 1).
Figure 1 Ownership of Japanese corporations listed on the Tokyo Stock Exchange, 1986-2020
Source: Tokyo Stock Exchange.
Management is involved in forming the strategic partnerships because shares must be sold at a discount to market prices to reflect the cost of the investment made by the purchasing company. There is a positive externality associated with the investments made by the strategic investor that accrues to other shareholders in the target company. This is equivalent to the free rider problem in takeovers documented in Grossman and Hart (1980). The discount on shares sold to buyers of stakes allows them to share in the value of the strategic partnership.
Three stages of Japanese ‘management managing ownership’
In our paper (Franks et al. 2024), we describe three stages of Japanese management managing ownership of their companies to promote and preserve strategic investments. First, they undertake stock repurchases to buy blocks of shares that would otherwise be sold and dispersed in the market. They then hold the shares in treasury stock, and finally when an appropriate strategic investor is identified, they place shares with that purchaser at a discount to market prices.
Companies can also place shares issued from authorised share capital, where there is no need for shares to be repurchased to prevent them from being dispersed in the market. However, what the three-stage process emphasises is that much stock market activity, which is currently associated with financing – to distribute excess cash in stock repurchases and to raise finance in share placements – is used in Japan for ownership and control purposes. This is what we term the phenomenon of ‘management managing ownership’.
The question this raises is whether managerial control of ownership has similar features of managerial entrenchment and financial value destruction that were previously associated with cross-shareholdings. We answer this by examining the reaction of Japanese stock markets to the stock repurchases, holding of shares in treasury stock (as against their cancellation), and their placement with strategic investors.
We find that the stock market reacts positively to all three stages and the overall effect of the transfer of blocks of shares from one strategic investor to another is positive. In other words, the preserving and transferring of strategic blocks of shares by management is welcomed by shareholders.
The reason for the marked distinction between this result and the one previously found in relation to traditional cross-shareholdings is that the corporate governance reforms have encouraged management to respect their shareholders’ interests and not just their own (see Miyajima and Saito 2021). There is therefore an important complementarity between external governance by outside shareholders and internal management of the ownership of companies.
Lessons for other countries
We suggest that the Japanese experience may have important lessons for businesses, owners, investors, and policymakers in other countries. Shareholders employ directors to manage companies on their behalf as their agents. They give the directors discretion to determine how best to do that and refrain from intervening unless there is evidence that management is failing to respect shareholder interests. In that regard, the ownership of companies is just one aspect of the decisions over which management should arguably have discretion.
Provided that shareholders have mechanisms to intervene and discipline management who fail to uphold their side of the bargain, then there is no case for regulatory restrictions to be imposed on management. Indeed, the imposition of such restrictions might be detrimental to the performance of companies and economies.
One country where such restrictions have been particularly pronounced is the UK. Until recently, there have been extensive limitations on management in terms of their issuance of shares on stock markets, for example, regarding the use of ‘dual-class shares’ with disproportionate voting rights conferred on some classes of shares, the discretion of management to make ‘large transactions’ without the approval of their shareholders, and the defences they can employ (‘frustrating actions’) against hostile acquisitions that are rejected by management.
Over the last few years, UK policymakers have come to appreciate that not only may such regulations be contrary to the interests of companies and their investors, but that they may be unsustainable. In the presence of internationally competitive markets, investors can decide to redeploy their portfolios elsewhere, and companies may also choose to list their shares in less regulated markets.
The decline of listings on the London Stock Exchange has prompted UK policymakers to reassess the merits of restricting management in managing the ownership of their firms. Restrictions on management in the US are significantly fewer than in the UK. There, corporations regularly employ dual-class shares and takeover defences (such as poison pills), and undertake large transactions without seeking shareholder approval.
The Japanese case may have lessons not only for the dispersed Anglo-American stock markets but also for the much more widely observed stock markets with concentrated shareholdings. In most countries, even the largest listed companies have dominant shareholders that have controlling ownership stakes. Many of those dominant shareholders are families – family ownership being the largest form of block holding observed around the world.
Family owners routinely face problems of ownership succession from one generation to the next and family members wishing to relinquish their shareholdings. The succession process is generally managed by a family office or a council of family representatives. However, what the Japanese case emphasises is the importance of engaging management in the process.
Ultimately, the success of changes in ownership depends on the managerial and strategic benefits the new owners contribute beyond their interest in their own financial returns. It is not necessarily the highest bid that determines greatest value creation but an understanding of the complementary skills and assets that different owners bring to the table. That is something which management itself may be particularly well placed to ascertain.
source : cepr.org
