![\"\"](\"\/rbfl\/files\/2021\/05\/Picture1.png\")
<\/p>\n<\/p>\n
In the vertical keiretsu<\/em>, large companies (often associated with the automotive industry) own shares in manufacturers, suppliers, and distributors.[3]<\/span><\/a> The Studies in Systems, Decisions and Control book series has again provided an excellent diagram of the vertical keiretsu <\/em>(Figure 2, below).[4]<\/span><\/a><\/p>\n 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<\/em>, or \u201cfinancial cliques\u201d run by wealthy families who controlled massive business groups financed by major banks.[5]<\/span><\/a> After the War, Occupation authorities enacted regulations in an effort to \u201cdemocratize\u201d Japan and dissolve the zaibatsu<\/em>. 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<\/em> reestablished their cross-shareholdings, forming the modern keiretsu<\/em> we see today.<\/p>\n Subsequently, Japan emerged from the destruction of World War II to rapidly become the world\u2019s second-largest economic superpower (after the U.S.), in what was dubbed an \u201cEconomic Miracle.\u201d Western observers credited this unprecedented transformation, at least in part, to the keiretsu<\/em>, which allowed \u201cindividual companies to gain financial strength and connections necessary to undercut foreign and domestic rivals\u201d and \u201cgain market share rather than accumulate short-term profits, and \u2026 aggressively enter[] high-growth sectors with long-term potential.\u201d[6]<\/span><\/a> Unfortunately, Japan\u2019s economy swelled into a bubble in the 1980s which ultimately burst in the 1990s, leading to a decades-long economic stagnation Japan\u2019s press termed, \u201cThe Lost Decades.\u201d<\/p>\n In an effort to counteract the downturn, Japan enacted significant economic and regulatory changes which stressed the viability of the keiretsu <\/em>for the first time, including threatening the keiretsu<\/em>\u2019s close banking ties, globalizing the financial markets, and deregulating the Japanese securities markets.[7]<\/span><\/a> Nevertheless, in 2003 researchers found \u201clittle evidence that economic and regulatory changes in the early 1990s influenced the Japanese inter-corporate network, and in particular keiretsu<\/em> organization,\u201d suggesting that economic efficiency and effectiveness incentives alone could not dismantle the keiretsu<\/em>\u2019s cross-held shares.[8]<\/span><\/a><\/p>\n The next major threat to the keiretsu <\/em>came in the 2000s in the form of sweeping corporate governance reform. Critics of the keiretsu<\/em> have long-argued that cross-shareholdings lead to \u201cnotoriously poor\u201d 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.[9]<\/span><\/a> In particular, foreign and institutional investors have pressured companies to reduce or sell-off their cross-shareholdings. In light of these circumstances, both Japan\u2019s revised Corporate Governance Code and Stewardship Code adopted a \u201ccomply or explain\u201d based approach, mandating that companies either reduce cross-shareholdings, or explain their economic rationale for failing to do so.[10]<\/span><\/a> The results have been dramatic \u2014 cross-held shares dropped to less than 10% of all holdings for the first time in 2017[11]<\/span><\/a>, and the Tokyo Stock Exchange speculates that this trend will continue.<\/p>\n In conclusion, the keiretsu<\/em> are no longer the predominant ownership structure in Japan, and are on-track to disappearing altogether. Although the keiretsu<\/em> have deep historical roots in Japanese corporate history (stemming from the pre-War zaibatsu<\/em>), helped the country experience an \u201cEconomic Miracle\u201d in the mid-to-late 20th<\/sup> 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.[12]<\/span><\/a><\/p>\n <\/p>\n <\/p>\n [1]<\/span><\/a> Ken Auletta, American Keiretsu<\/em>, The New Yorker (Oct. 13, 1997), https:\/\/www.newyorker.com\/magazine\/1997\/10\/20\/american-keiretsu.<\/p>\n [2]<\/span><\/a> Peter Simon Sapaty, Real Network Processing Examples, in <\/em>Holistic Analysis and Management of Distributed Social Systems 137, 138 (2018).<\/p>\n [3]<\/span><\/a> James R. Lincoln, et al., Keiretsu Networks and Corporate Performance in Japan<\/em>,\u00a061 Am. Socio. Rev. 67, 68 (1996).<\/p>\n [4]<\/span><\/a> Sapaty, supra <\/em>note 2, at 139.<\/p>\n [5]<\/span><\/a> David Flath, Shareholding in the Keiretsu, Japan’s Financial Groups<\/em>, 75 Rev. Econ. & Stat.\u00a0249,249 (1993).<\/p>\n [6]<\/span><\/a> Robert J. Crawford, Reinterpreting the Japanese Economic Miracle<\/em>, Harv. Bus. Rev. (Jan.\u2013Feb. 1998), https:\/\/hbr.org\/1998\/01\/reinterpreting-the-japanese-economic-miracle<\/a>.<\/p>\n [7]<\/span><\/a> J. McGuire & S. Dow, The Persistence and Implications of Japanese Keiretsu Organization<\/em>,\u00a034 J. Int\u2019L. Bus. Stud.\u00a0<\/strong>374, 374 (2003).<\/p>\n [8]<\/span><\/a> Id.<\/em> at 384.<\/p>\n [9]<\/span><\/a> See <\/em>Ken Kobayashi,\u00a0Effects of Japanese Financial Regulations and Keiretsu Style Groups on Japanese Corporate Governance<\/em>, 43 Hastings\u00a0Int’l &\u00a0Comp.\u00a0L. Rev. 339, 356 (2020).<\/p>\n [10]<\/span><\/a> Tokyo Stock Exchange, Inc., TSE-Listed Companies White Paper on Corporate Governance 24-25 (2019).<\/p>\n [11]<\/span><\/a> Shinya Oshino, Japan\u2019s Cross-Held Shares Fall Below 10% of All Holdings<\/em>, Nikkei Asia (July 16, 2017), https:\/\/asia.nikkei.com\/Business\/Japan-s-cross-held-shares-fall-below-10-of-all-holdings2<\/a>.<\/p>\n![\"\"](\"\/rbfl\/files\/2021\/05\/Picture2.png\")
<\/p>\n