By: Sarah Klim, RBFL Student Editor
In the U.S., a corporation is made up of many different constituencies, often including its shareholders, managers, creditors, and employees. Most large companies are publicly-traded and widely-held. Large institutional investors, such as Vanguard and Fidelity, are also common. The majority of shareholders are typically not managers, although management may own some shares in the company. In turn, this can create costs associated with separating ownership and control.
In stark comparison to the U.S., the predominate shareholding structure in Japan has traditionally been the keiretsu, or families of companies that have invested in one another. There are two predominant varieties of the keiretsu: horizontal and vertical. In the horizontal keiretsu, dozens of companies in different industries own shares in one another, with a major financial institution at the center. The Studies in Systems, Decisions and Control book series has provided an excellent diagram of this type of cross-ownership group (Figure 1, below).
In the vertical keiretsu, large companies (often associated with the automotive industry) own shares in manufacturers, suppliers, and distributors. The Studies in Systems, Decisions and Control book series has again provided an excellent diagram of the vertical keiretsu (Figure 2, below).
Japan and the U.S. developed drastically different predominant ownership structures due to their distinct corporate histories. Prior to World War II, the Japanese economy was dominated by the zaibatsu, or “financial cliques” run by wealthy families who controlled massive business groups financed by major banks. After the War, Occupation authorities enacted regulations in an effort to “democratize” Japan and dissolve the zaibatsu. Ultimately, these regulations were relaxed as the political and economic landscape shifted once again and the U.S. turned to Japan for supplies during the Korean War. The zaibatsu reestablished their cross-shareholdings, forming the modern keiretsu we see today.
Subsequently, Japan emerged from the destruction of World War II to rapidly become the world’s second-largest economic superpower (after the U.S.), in what was dubbed an “Economic Miracle.” Western observers credited this unprecedented transformation, at least in part, to the keiretsu, which allowed “individual companies to gain financial strength and connections necessary to undercut foreign and domestic rivals” and “gain market share rather than accumulate short-term profits, and … aggressively enter high-growth sectors with long-term potential.” Unfortunately, Japan’s economy swelled into a bubble in the 1980s which ultimately burst in the 1990s, leading to a decades-long economic stagnation Japan’s press termed, “The Lost Decades.”
In an effort to counteract the downturn, Japan enacted significant economic and regulatory changes which stressed the viability of the keiretsu for the first time, including threatening the keiretsu’s close banking ties, globalizing the financial markets, and deregulating the Japanese securities markets. Nevertheless, in 2003 researchers found “little evidence that economic and regulatory changes in the early 1990s influenced the Japanese inter-corporate network, and in particular keiretsu organization,” suggesting that economic efficiency and effectiveness incentives alone could not dismantle the keiretsu’s cross-held shares.
The next major threat to the keiretsu came in the 2000s in the form of sweeping corporate governance reform. Critics of the keiretsu have long-argued that cross-shareholdings lead to “notoriously poor” corporate governance characterized by entrenched and underperforming management, excessive corporate loyalty bias (i.e., when faced with a problem, corporations may choose a familial choice over an economic or rational solution), and excessive group think that has occasionally led to scandal and fraud. In particular, foreign and institutional investors have pressured companies to reduce or sell-off their cross-shareholdings. In light of these circumstances, both Japan’s revised Corporate Governance Code and Stewardship Code adopted a “comply or explain” based approach, mandating that companies either reduce cross-shareholdings, or explain their economic rationale for failing to do so. The results have been dramatic — cross-held shares dropped to less than 10% of all holdings for the first time in 2017, and the Tokyo Stock Exchange speculates that this trend will continue.
In conclusion, the keiretsu are no longer the predominant ownership structure in Japan, and are on-track to disappearing altogether. Although the keiretsu have deep historical roots in Japanese corporate history (stemming from the pre-War zaibatsu), helped the country experience an “Economic Miracle” in the mid-to-late 20th century, and have several benefits, moves to reduce cross-shareholdings will likely accelerate due to continued corporate governance reform, increasing pressure by foreign and institutional investors, and the enhancement of disclosures in securities reports.
 Ken Auletta, American Keiretsu, The New Yorker (Oct. 13, 1997), https://www.newyorker.com/magazine/1997/10/20/american-keiretsu.
 Peter Simon Sapaty, Real Network Processing Examples, in Holistic Analysis and Management of Distributed Social Systems 137, 138 (2018).
 James R. Lincoln, et al., Keiretsu Networks and Corporate Performance in Japan, 61 Am. Socio. Rev. 67, 68 (1996).
 Sapaty, supra note 2, at 139.
 David Flath, Shareholding in the Keiretsu, Japan’s Financial Groups, 75 Rev. Econ. & Stat. 249,249 (1993).
 Robert J. Crawford, Reinterpreting the Japanese Economic Miracle, Harv. Bus. Rev. (Jan.–Feb. 1998), https://hbr.org/1998/01/reinterpreting-the-japanese-economic-miracle.
 J. McGuire & S. Dow, The Persistence and Implications of Japanese Keiretsu Organization, 34 J. Int’L. Bus. Stud. 374, 374 (2003).
 Id. at 384.
 See Ken Kobayashi, Effects of Japanese Financial Regulations and Keiretsu Style Groups on Japanese Corporate Governance, 43 Hastings Int’l & Comp. L. Rev. 339, 356 (2020).
 Tokyo Stock Exchange, Inc., TSE-Listed Companies White Paper on Corporate Governance 24-25 (2019).
 Shinya Oshino, Japan’s Cross-Held Shares Fall Below 10% of All Holdings, Nikkei Asia (July 16, 2017), https://asia.nikkei.com/Business/Japan-s-cross-held-shares-fall-below-10-of-all-holdings2.
 Tokyo Stock Exchange, Inc., supra note 10, at 35.