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>

4

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

11

WHY?

12

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