Case Study: Keiretsu

Nearly six months since Japan established its first corporate governance code, the country's three largest banks have set accelerated targets for selling down their estimated Y10tn "strategic" stakes in corporate clients. The move, which has seen Mizuho, Sumitomo Mitsui and Mitsubishi UFJ all pledging to speed up the sale of so-called cross-shareholdings, is a timely fillip for Prime Minister Shinzo Abe and a growth program that some have accused of running out of steam. The corporate governance code, which came into force in June and requires companies to disclose and justify their policies regarding cross-shareholdings, is part of Mr Abe's broader effort to entice Japanese to move their cash from deposits into riskier assets. The cozy, opaque relationships locked into the cross-shareholdings, say analysts, are among many turn-offs for would-be investors. The banks are among the worst offenders. Mizuho, which had just under Y2tn of domestic equity holdings in March, said that it would reduce its cross-shareholdings by 40 per cent over the next few years. The bank's president, Yasuhiro Sato, vowed on Friday to "constantly reduce" the crossshareholdings by gaining understanding from the companies involved. Mitsubishi UFJ, which holds over Y5tn in domestic equities, said over the summer that it had tested those holdings against undisclosed new criteria and found that about a fifth did not make the grade. The bank has since said it will cut the total value of its cross-shareholdings to 10 per cent of tier one capital from about 19 per cent now. Sumitomo Mitsui's new target is to reduce its current ratio of crossshareholdings to tier one capital by half over the next five years. Its cross-shareholdings stand at around Y1.8tn. The move by the banks replies to a demand in the Japan Revitalization Strategy drafted earlier this year. Both foreign and domestic investors have long condemned the maintenance of extensive crossshareholdings by Japanese banks and other companies as a heavy drag on corporate governance. The cross-shareholdings, which were originally intended to strengthen business ties between bankers and clients, or suppliers and customers, are seen as a key Reason why Japanese company managements are so rarely held to account for failure to deliver higher return on equity (ROE). Japan's most recent round of annual general meetings saw the median support rate for the managements of the country's 500 largest companies standing at 97 per cent despite nearly a third of those firms delivering an average ROE below 5 per cent. Analysts at Nomura calculate that while the cross-shareholding ratio across corporate Japan, excluding insurers, was at its lowest ever level of 10.8 in the most recent financial year, the pace of reduction is slow. The brokerage estimates that the ratio will drop to around 9.9 percent by the end of the 2017 financial year. In a recent research report on the subject, Nomura's Kengo Nishiyama, warned that the huge cross-shareholdings of Japan's megabanks were a potential problem beyond the corporate governance issues and that the banks "need to reduce risk stemming from share price fluctuations to enable them to fulfil their role as financial mediators at times of market stress".

Questions:

• What is a conglomerate and how does it relate to a Keiretsu?
• What are good examples of cross-shareholdings from the case?
• What is the main goal of minimizing cross-shareholdings according to the case?